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Commercial Lease Agreements

By Amanda Carpo on Monday, September 01, 2008, 8:39 PM

Nine Tenths of the Law

One sided lease agreements in the Philippines are the rule of thumb and don’t imagine for a second that they are in favor of the lessee. Maybe it is because the lessors are paying the legal fees. Foreigners are often shocked by the commercial and legal terms and conditions used in lease contracts in the Philippines. They normally require several months post dated checks, sizeable security deposits and advanced rentals, contain forfeiture clauses, power of attorney clauses to auction property, padlock premises and other “common commercial practices” which are either obnoxious in other countries and perhaps even downright illegal.

Can you blame the lessor who is stuck with unpaid bills whose premises are trashed at the end of the lease period? Are they just responding to their environments? The mutual distrust in local lease contracts is reflective of the lack of sophistication of commercial arrangements in the Philippines and the lack of faith in the judicial system. When your controversies cannot be resolved easily in court or by some arbitrary body, this forces you to lay down the law yourself. It also means that the legal structure and by this I mean-the laws-are not in place to protect both lessor and lessee.

Are the lawyers who draft the contracts to blame? Perhaps. Business is business but at the same time commercial contracts should be entered into in good faith. As officers of the law, lawyers should counsel their clients to be fair and reasonable lest they start a vicious cycle of abusive contracts.

It is extremely difficult to advise foreigners who are lessees to enter into local lease contracts. In the first place, they are forced to lease because of the general prohibition on land ownership. Second, they are used to terms that make business sense. Third, the law in place-the Civil Code- while it contains basic terms and conditions fails to recognize modern commercial practices. Finally, it is hard to find a good lessor. In my view, it’s almost like advising on marriage. Good luck with that.

Businesses are concerned with fair rental value and the ability to relieve themselves of a lease contract without being subject to surprise charges and forfeiture of security deposit at the end of the lease term.

Under the Uniform Tenant Act in the US, which deals with residential property, A rental agreement may not provide that the tenant agrees to waive or forego rights or remedies under the Act. It may not authorize any person to confess judgment on a claim arising out of the rental agreement; agree to pay the landlord's attorney's fees; or agree to the exculpation or limitation of any liability of the landlord arising under law or to indemnify the landlord for that liability or the costs connected therewith. Of course, this is all too common in local contracts.

Further provisions prohibited above if included in a rental agreement are unenforceable. Under the law if a landlord deliberately uses a rental agreement containing provisions known by him to be prohibited, the tenant may recover in addition to his actual damages an amount up to [3] months' periodic rent and reasonable attorney's fees.

Clearly, the law regulates landlord practices and provides teeth to its provisions.

In the matter of security deposits the law restricts security deposits to a maximum of one month’s rent. While the amount varies in different jurisdictions the focus of the law is that the deposit is specifically that and not a fee. Under the law, upon termination of the tenancy security may be applied to the payment of accrued rent and the amount of damages as itemized by the landlord in a written notice delivered to the tenant together with the amount due with a fixed [14] day period after termination of the tenancy and delivery of possession and demand by the tenant. Failure to return prepaid rent allows the tenant to recover the property and money due him together with damages in an amount equal to [twice] the amount wrongfully withheld and reasonable attorney's fees.

The intent of the law versus Philippine laws on leases is clear and does not allow itself to be abused by well, lawyers. Apart from a more responsive legal framework landlords and lessees could resort to using escrow agreements, insurance contracts, and other means to cover their risks. Unfair lease contracts are not just an annoyance when you think of the capital requirements involved. They substantially affect the way businesses is done in the Philippines. As the law and practice now stand for the real estate leasing market it is as if you are just asking for trouble.

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