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  F. Signing the Contract

Every country has its own sets of laws and regulations pertaining to commercial lease agreements. As eager as you may be to get started on your project, you need to hold onto your horses and consider the following points very carefully because they might come back and bite you in the ass if you don’t.

  1. Hire a good real estate lawyer - I cannot stress enough on the importance of this step. Laws vary from city to city and a local lawyer (ask around for recommendations first) should be able to guide you through this complex legal maze and prevent you from making a costly mistake that could jeopardize your business in the future.
  2. Duration - The duration of your lease should be greater than the amount of time required to break even. If you are confident about your decision to start a hostel, I would err on the side of getting a contract that is as long as possible (10 years for instance).
  3. Modifications - It would be best to decide all the modifications that need to be made to the property up front as well as deciding whether the property owner or you will be paying for these modifications. Once that negotiation is complete, it would be best to include all the details in your agreement so that there is no room for doubt at a later stage.
  4. License contingency - Decide upfront whether the owner is liable to procure the necessary trade licences or you are. Let’s say you sign the contract and for whatever unknown reason, the licensing authority is unwilling to issue a license for your hostel. The contract should have a clause stating that if the licences cannot be procured before a certain agreed deadline, the deal is void and you are released from the contract.
  5. Buy option - In some countries it is acceptable to include a purchasing option in the lease agreement. This means that if you sign a 10 year contract, the lessee (you) would have the option of purchasing the property from the lessor (the property owner) at a certain premium (for example 10%) above the existing market value determined by an external agency upon the expiry of your 10 year contract. This would serve as an insurance if your business grows exponentially in the next 10 years and you could safeguard yourself from the property owner hiking rent by including this purchase clause.
  6. Termination - This is a double edged sword because if you have the right to terminate the contract, it follows that your property owner would have the same right. However, this is your get out of jail card should the business not perform upto your expectations. Since you are new to this business I would ensure that a termination clause is included in the contract as opposed to a binding agreement for 10 years. You could also have a mix of a binding agreement for the first few years following which a standard termination clause would kick in.
  7. Name of the property - Ensure that the contract clearly captures that the property name (whatever you choose) belongs to you and once you vacate the premises, the owner will have no rights to use this name. This would prevent a scenario where the property owner ejects you from the property and continues to operate a hostel under the same name.
  8. Taxes - Discuss all taxes applicable to this property (property, city, tourism, sales, etc) with the property owner and decide which person will be liable to pay which of the taxes. List all the outcomes explicitly in the contract.
  9. Maintenance - You will probably be responsible for taking care of minor repairs at the property. However, if there is a major problem which requires a fix that exceeds a certain monetary threshold, then the property owner is usually liable for this fix. Please list out how these major maintenance issues will be resolved as well as the timelines and payment procedure.
  10. Utilities - Decide upon and include which person will be liable for the payment of utilities - electricity, waste collection, etc.
  11. Transfer of lease agreement - In the event that you decide to sell your company, please include a clause to transfer the lease agreement to another person. However, if the property owner is against the transfer of the lease, another trick is to register a private limited company and ensure that the company signs a contract with the owner. This would mean that you could sell the shares of your company at any point in time without the buyer having to resign the contract with the property owner. This step will make all the difference in the world if you think of selling your company. However, registering a company means that you will have to deal with the burden of company taxes and company regulations. More about legal entities in Section 3 Lecture B.
  12. Inspection - Since you are in the hospitality business, it would be incredibly unprofessional to have your property owner showing up at the doorstep to check on his/her property every 3 days. Negotiate a protocol to be followed for the inspection of the property - one week notice for instance - and document this in your contract.

Apart from the clauses that are in your favour, the property owner will no doubt have his own list of requirement (a security deposit for instance). Use your lawyer to negotiate an agreement that you are comfortable with adhering to even in the worst case scenario. If you nurture the relationship with your property owner, the two of you will be able to navigate most of the problems or situations that may arise during the period. Ultimately the lease agreement is an insurance against the relationship turning sour. For all practical purposes the property owner is now your biggest stakeholder. Take good care of this relationship so that you are able to focus all your energy on your business, your staff and your customers instead of your property owner.