Duration of rental agreement

Dariusz Frelik

Phone 525 230 470

Doradca ds. nieruchomości komercyjnych

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The duration of a rental agreement is one of the purely business components of each contract. Why? Because the length of the lease has a direct impact on all business decisions that can be expressed in numbers and amounts, and are reflected in flows in a certain period of time. In this case both parties, the landlord and the tenant, need to determine their needs and possibilities regarding the duration of the agreement. For landlords, the longer the term of the agreement, the better for them. The other party, or the prospective tenant, is in a more complicated situation, because the analysis of rental duration must take more factors into consideration.

Business Plans

From the business point of view, two approaches can be distinguished depending on the intended use of the rented space. For income generating space, such as retail or industrial facilities, the term of the agreement is reflected directly in business plans and investment projects (production). Depending on the business plan, and, above all, on the condition of the company, the business owner will be willing to contract for 5-10 years or 2-3 years.

In the case of typical office space, which is "just" an expense of the business owner, the selection process and the length of the lease term are slightly different in nature and have other consequences. However, even in this case there is a group of companies that contract for 5 years and longer, while other tend to sign the rental agreement for 1 to 3 years.

Turning to the question of duration of the lease, we have two options: a fixed-term agreement and an open-ended agreement.

Open-ended agreement

The open-ended agreement is, unfortunately, risky for both the landlord and the tenant, for a fundamental reason: uncertain future. The landlord may be left with vacant premises at any time, while the tenant may find himself without a place to run his business. One measure to secure both parties against those effects is the notice period. For example, by setting a 3 month notice period, both parties are given time to take action to acquire a new tenant or to secure a new place of business. There is, of course, a possibility of providing for a longer notice period, such as 6 to 9 months, which further eliminates the potential risk of uncertainty about the future, both on the part of the property owner and the tenant. There are, however, positives - if the tenant's business is doing well and, therefore, rental fees are paid in a timely manner, both parties can feel safe and remain in a relationship for a long time.

Fixed-term agreement

On the other hand, there are agreements with a specific lease term. Depending on the business decisions of both the landlord and the tenant, the term may be fixed between 1 year and even 30 years. In this case, we have the opposite situation (compared to an open-ended agreement): both parties try to ensure maximum security and certainty by specifying the duration of the agreement. The real estate owner receives regular cash inflows throughout a given period, which is significant for return on investment. The tenant, on the other hand, is given a guarantee to stay at the given premises for a specified period of time under specified conditions. This is particularly important for the tenant as it often involves large investments (furniture, machinery or process lines) that require a specific period of depreciation or return on investment.

Termination of fixed-term agreement

Generally speaking, a fixed-term agreement may not, in principle, be terminated before its expiry. However, there are exceptions to every rule. The parties may specify in the agreement the situations in which the contract may be terminated. However, both the landlord and the tenant will have to bear the consequences of those decisions, which must also be included in the agreement.

There are also statutory provisions for termination of agreements without notice. For the landlord, these include: if the tenant uses the premises in a manner inconsistent with the agreement or its purpose, if the tenant grossly or persistently violates the applicable house rules, if the tenant has subleased or lent the premises, or part thereof, for gratuitous use without the consent of the landlord, or if the tenant is late with the payment of rent for at least two full reference periods. Importantly, in the case of rent arrears, the landlord, before terminating the rental agreement, should notify the tenant in writing and give him an extra month to pay the outstanding rent.

For the tenant, on the other hand, these include: the premises were defective at the time of their handover to the tenant, preventing their contractual use, the premises became defective after their handover to the tenant and the landlord has failed to remove the defects, or the defective premises are a risk to the health of the tenant or the occupants or his employees.

Summary

The length of the lease and other aspect of the rental agreement are closely related and have financial implications for each party. On the supply side of the market, there is a number of real estate that will be able to meet the length of the lease criterion. However, depending on the type of space, the predominant majority will be fixed-term agreements for 3 to 5 years.

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