9 Important Items on Ph Lease Contract Every Tenant Should Pay Attention

By: Garry Pagaspas, CPA

Since putting up our own practice sometime 2011, we have went through various Philippine lease agreements/ rental contracts for each and every office space we occupied and currently occupying – around 20 agreements/contracts through time perhaps . Each contract has common provisions but has its own peculiairities, as well. In most cases, we will just take it for granted and simply sign on the lease contract usually prepared by the lessor without checking related provisions other than the monthly rental and space. Take note that once you sign in, you are most probably bound by the terms and conditions in it.

In our experience, we have proven these risky a number of times and have learned our lesson the hard-way, letting go some amounts (ranging from tens of thousands to hundreds of thousands) for not being conscious about improvement forfeiture provisions, or for not noting the penalty provision on pre-termination, or for missing the 90-day notification period. At times we took for granted renewals as carrying same provisions as originals only to be surprised by the new provisions upon pre-termination discussions. Accordingly, we find it more appropriate sharing these few points that every Philippines tenant practitioner or entreprenuer to be concerned about in entering into a lease contract as follows

1. Do not simply sign, check terms and negotiate too disadvantageous ones

Common misconception is that the lease contract is one of adhession of lessor-prepared pro-forma contract where tenant could simply sign on them. Even if we are interested on their space, it is highly suggested to negotiate for the terms of the lease contract and highlight provisions which you fees is too disadvantageous or unfair to you. If the lessor is not open to such negotiation, that is a red flag for you to re-assess your risks or to look for another equally good space for your practice or business.

2. Advance Rent and Rent Deposit – e.g. 1 plus 3

We are always concerned about the monthly rent but more than than, you need to pay attention to the amount imposed as advance rent and rent deposit as these are the amounts that you need to pay upfront. Advance Rent is a matter of cash flow as it represnets months you need to pay ahead and would start paying again once consumed. Rent deposit is something to be more concerned about as it represents your cash flow sitting on lessor’s pockets aimed at compensating your future damage to the property along with unpaid bills upon termination. In most cases, this rent deposit is forfeited on pre-termination so the more deposit, the more disadvantageous. Common combination is 1 plus 2 (1 month advance, 2 months deposit) up to 2 plus 3, and beyond could seem alarming.

3. Escalation Clauses – e.g. 5 to 10%

On the provision for monthly rental, lessor would usually put an excalation clause – a percentage of increase should you wish to renew the lease contract after its term – say 5% to 10% a year. This would mean that at 10% your PhP100k a month would be PhP110k a month in the next term, PhP 121k a month thereafter, and so on so the longer the term, the higher the monthly rental would be. In one location where we stayed 6 years, upon termination we just discovered that our rental payment was way more than the neighboring units because of the escalation clause. We then realized that longer stay in one location could seems more costly.

4. Lessor’s Tax Compliance – e.g. BIR invoice & 5% withholding

As lease contract is a business-to-business undertaking, we would usually assume that the lessor would issue BIR invoice (previously BIR official receipt) on rental payments and your 5% expanded withholding tax deduction would be smooth. During operations however, you will be surprised running issues after learning that lessor has no BIR registration and could not issue a BIR registered invoice or would not want 5% withholding tax for obvious reasons, or worst at times, you could hardly secure business permit in Metro Manila as the City Hall would ask for lessor’s business permit that does not exist. We would suggest ensuring that the provision on issuing BIR invoice for tax documentation (e.g. rent expense and 12% VAT), 5% withholding tax, and providing copies of business permits along with occupancy permit be included in the Ph lease contract to avoid further headaches.

5. Use of Lessor’s Furnitures & Equipments

At times you could be lucky to spot a fully furnished unit with furnitures and equipment included in the contract that you can just plug-and-play. While this is good as. it would save your pocket from rennovation and other asset costs. In here, please be mindful about the provision on turnover of these after – ensuring that they are properly inventoried at the start to keep them upon turnover termination and to note the normal physical wear-and-tear of these items that you could minimize liability in the future.

6. Renewal & Pre-termination Notices Period – e.g. 30 to 90 days

Ph lease contracts would usually have a provision of period of notification in case you want to renew contract or in case you need to pre-terminate the contract. Please be conscious when to send notice for renewal as the unit might be taken by other should you fail to notify within the period, or that you could plan your cash flow for staying and paying the rent within the notice period of say 90 days should you vacate immediately. At one point, we suddenly notified lessor to pre-terminated and vacated despite the 90 days notice leaving us paying for the next 3 months while the unit was idle.

7. Pre-termination procedures & penalties

This one, you should be very careful because disregarding this before initiating an immediate notice to pre-terminate a lease contract with 3 months pre-termination penalty could impact your cash flow. Before signing, check on this provision and negotiate for a lower term to give you more leeway to decide in the future and avoid wasting your funds on penalties.

8. Rennovation approvals & forfeitures

Contracts would usually provide that major rennovations would require approval or consent of tenants along with your securing permits with the building admin and with city engineering office, and worst, it could provide that any and all rennovations made should be forfeited in favor of the lessor. If you are renting a bare unit and intends to make major rennovations, you can bargain for a longer term so perhaps you could recover the cost from the operational use of the unit and they are fully depreciated upon termination. This could mean that you had those fully deducted for tax purposes to your advantage. If you are on short term, then perhaps you can negotiate using the Civil Code rule on “right of limited removal” where a tenant is given the right to remove improvements to the extent that it would not cause material damage to the leased unit.

9. Restoration upon Termination

Be particular as well with this provision and the usual issue here is what the property looks like when you first set foot – years ago. We suggest you take pictures and videos of the unit upon the effectivity of the contract so you have a reference on how you would restore the unit upon termination. Upon termination, if your rennovation is not that material and you are better off letting go than restore it, then you can just bargain with the lessor for them to keep them in lieu of restoration.

Conclusion

Choosing a good location for your professional practice or business in one thing but ensuring beneficial terms and conditions of your lease contract in the Philippines is another thing. A little effort checking the terms and conditions of the lease could save you some funds and headaches than immediately jumping on to affix your signatures on lessor’s pro-forma lease contracts/ agreements in Philippines. Unit owners and lessors have their lawyers or legal counsels on their contracts but that does not keep you from negotiating to protect your interest. Once executed, be mindful of the salient terms and conditions while enjoying the property so you could plan ahead nect steps without losing funds for penalties and extra payments, specially, when pre-terminating the lease contract in Philippines.

Author’s profile:

Garry Pagaspas, CPA is a currently the Managing and Tax Partner of G. Pagaspas Partners & Co. CPAs (independent member firm of Allinial Global, 2^nd largest accounting association worldwide based on International Accounting Bulletin’s released survey) based in Makati City with Global Outsourcing offices in Kalibo, Aklan. He is likewise the President at Tax and Accounting Center, Inc., the training and consulting company he founded in relation to his passion for teaching and helping out Ph entrepreneurs and foreign investors to Philippines.

Views in this article is personal to the author, not equivalent to a professional opinion and does not represent that of the organizations he is connected with. For your feedback or related concerns on staff leasing or employer of record in Philippines, you may send mail at info(@)taxactgcenter.ph (please exclude open and close parenthesis on the @ sign.