A retail or commercial lease refers to a contract between a landlord (also known as a lessor) and a tenant (lessee) to rent a property. Generally, leases normally have terms that run anywhere between 12 months to 30 years (up to 50 years for land used with commercial purpose). When talking about a short commercial lease, it refers to a lease term that runs for less than 3 years.
One question commonly asked by Thailand based business owners is whether or not they should sign a short term commercial real estate lease for their business. This mostly happens to small or startup businesses looking to rent an office, retail, or warehouse space. We can all agree to the fact that location always plays a vital role in the success or failure of a business and it is a decision that should be handled with care. Unfortunately, there’s yet no right or wrong answer to this question as every company comes with different needs and requirements for their success.
The 3-year commercial lease comes with both pros and cons which is important you discuss with your commercial real estate agent before you get into any further negotiations with a potential landlord on a short term lease.
This article is aimed at getting business owners ready and well-equipped with the knowledge to make informed decisions when it comes to the success of their businesses. If you own a business and you think what you need is a short term commercial lease, read this article through so you can be able to decide on what’s best for you and your business.
Typically, the maximum lease terms for a commercial real estate lease in Thailand is 3 years. However, this can’t work for all business type. It might work perfectly for a startup or small business where they have to be flexible and study the market where it works best for them.
More to that, such businesses generally don’t need a lot of space, so they normally go after properties with smaller space with the aim of upgrading in the nearest future with the growth of the business. Finding a smaller commercial rentable space for your business sometimes can be hard as most rentable spaces have a minimum of 150 square meters.
Short Term Commercial Lease Considerations in Thailand
Considering substantial issues relating to foreigners owning a freehold interest in Thailand can serve as a better option for those with the aim of having a long term control over their location which can be done through a long term lease agreement (30 to up to 50 years for commercial buildings). However, there is a number of drawbacks to be aware of. Most of which can be mitigated by a carefully structured agreement. A lease can be formulated with agreements that give the foreigner a chance to build or own property through the right of superficies. In most cases, landlords will not accept long term lease agreement for 2 reasons:
Thai landlords will feel they’re losing control of their property for a long period .
Lease will have to be registered at land department which will be a call for extra taxes and duties.
When going for a short term lease
agreement some necessary considerations to be made by the parties involved are
rent payment, penalties for late payment, the event of termination and
assignment of the various taxes involved in the process. The main issue with
short term lease is the renewal.
Things you should consider as a business owner when going in for a short term commercial lease in Thailand:
Enforceability of a Second Term: Short commercial leases are known to come with a lot of contentious issues when it comes to the renewal of the second term. This is the moment where most business owners are troubled with the decision to determine the better option between short term lease vs purchasing the property for your company.
When a short term commercial lease runs out, landlords often make attempts to increase rental values during renewal. In this case, the tenant will either choose to agree to this new values or move out. If you disagree, you’ll have to move out which will be additional problems to your company. You’ll have to move your business to a whole new building. You might end up losing great resources in the process.
Succession and Termination: Succeeding a lease agreement come with a difficult situation. Upon the death of a lessee, a clause linking the succession will only be promissory in nature and cannot simply transfer through a will. The death of the lessee will eventually lead to the termination of the agreement, and re-registration of the property would be a very difficult task for the successor of the lessee to retain an interest in the property.
A lease contract termination should also be carefully drafted in a commercial lease agreement. Termination might take place via a certain breach of contract or through death of the lessee.
Tax and Fee Arrangement: The process of a short term commercial lease will normally encounter several taxes along the line and should be dealt with within the contract to avoid having informally negotiated them as they come. An example of such tax is a 12.5% tax levied on the rental value of the property in relation to commercial buildings.
The problem with Short Term Commercial Lease Agreements
When businesses start searching for office space to rent, they later realize that they have limited options. Generally, every landlord would prefer long-term leases, but as we explain before this is not the case in Thailand. Finding a perfect leases space for your business requires extensive searching, which you may end up not finding what you need.
Just in case you happen to find a landlord willing to rent a space to you, you find yourself at a distinct disadvantage during tenant negotiations. This may come with little or no leverage where you may have to take higher rent than your neighbors with similar properties. Not only that, once your lease term is over, you are particularly vulnerable to a spike in rent in case you want to renew your lease.
Disadvantages of Short Term Commercial Leases
Less Predictable Future plans: When you go or a short term lease agreement, you typically do not have the ability to negotiate renewal or do certain upgrades for your business as the landlord can lease the space to someone else after your term expires.
Higher Rent: Short term commercial lease agreement generally gives the landlord the chance to charges a premium on rent especially on a hot market.
Less negotiation leverage: Short term rental deals won’t come with much tenant leverage to negotiate concessions such as free rent, or tenant improvement allowance.
From the information provided above, we can clearly see every potential problem you’ll come across in case you decide to work with the short term lease. To go through with this, you need to think of your business and take every consideration needed to succeed and what happens in the long run of 4 to 5 years.
There’s every sign that it is an unsecured option for tenants and business owners. The greatest thing you can think of is buying a property in order to survive all the stress and achieve a permanent location for your business and grow with your target audience.
Contact us today if you need any assistance.