The Different Forms of Rent Applicable to Commercial Leases in Cambodia

• 15 November 2017
• Local News
• 4576 Views

The commercial real estate market has growth significantly in recent years with the development of various commercial premises and the introduction or planned introduction of many international brands such as Shangri-La, Rosewood Hotels, Nike, Starbucks, Krispy Kreme, and Carl’s Jr.

In this respect, it should be mentioned that there is no specific regulations covering commercial leases in Cambodia. The tenant who decides to operate a commercial premise will be entitled to execute a standard lease or a perpetual lease.

A perpetual lease will be signed only if the landlord owns a hard title and if the term of the lease is between 15 and 50 years. If not, the lease will be considered as a standard lease. In both cases, a main concern for landlords and tenants is the amount of the rent.

Generally, the rent is a fixed amount agreed between landlord and tenant and which corresponds to the rental value of the premises, i.e. the market value.

The Civil Code does not include any definition of the rental value. However, in practice, the parties will generally take into account the location, surface area, characteristics of the premises, type of business operated on the premises, terms, and conditions of the lease and the work that needs to be carried out before being able to open the premises.

Consequently, by signing the lease, the parties agree on the amount of the rent and the rental value as at the execution date of the lease.

While having a fixed rent is a common practice, there are two others forms of rent which can be considered: step-up rent and variable rent.

Step-up rent is rent that will increase progressively with specific amounts on pre-determined dates. The opposite is a step-down rent which provides for specified rent decreases at certain future dates.

Step-up rent is generally granted by landlords who want to grant a rent-free period or to provide a reduction of rent for the first years in order to facilitate the opening of the tenant’s business and, in particular, by contributing to the costs of the tenant’s fit-out work on the premises.

These different forms of rent are purely created by practice and, as the parties are free to determine the amount of the rent, the drafting of the lease will be essential to properly set, calculate and regulate the rent.

Furthermore, instead of having a fixed rent or a step-up rent, the parties can also choose to have a variable rent based on the turnover performed by the tenant within the rented premises.

There are two forms of variable rent: (i) a full variable rent based on a percentage of the turnover or (ii) a minimum fixed rent with a variable rent based on a percentage of the turnover if the turnover of the tenant exceeds a cap agreed to by the parties.

This practice is common especially in shopping malls and hotels. By having a variable rent, the interests of the landlord and the tenant will align as they share the risks and the rewards of the tenant’s business. When turnover increases, rent will increase. When turnover decreases, rent will decrease. It can be a win-win system for tenants and landlords if arranged properly.

In addition, if the parties decide to have variable rent, the lease must clearly mention how to calculate it and which elements are taken into account when calculating the tenant’s turnover.

For example, we saw in recent years that the habits of consumers are changing and that e-commerce (i.e. buying online) is growing quickly all over the world and, of course, also in Cambodia. Indeed, a significant number of sales are now made on the internet compared to even a few years ago where the sales and purchases were made only at shops. Therefore, the lease should clearly state whether or not online sales will be calculated as part of the tenant’s turnover. Generally, e-commerce is not included in the tenant’s turnover even if the customer collects its purchases from the store. Therefore, it is recommended to mention in the lease that the turnover from e-commerce which can be associated with the rented premises will be included in the tenant’s turnover used for the calculation of the variable rent.

Please note that the choice of rent can have other implications as well that must be considered, including tax implications which must be reviewed before signing a lease. While discussion of these other implications is not included in this article, both landlord and tenant should be mindful of all potential implications of any commercial lease.

It is important that the lease includes precise and comprehensive provisions in order to avoid any ambiguity regarding the rent, such as the specific calculations of turnover in case of variable rent. In this respect, it is highly recommended for the parties to request the assistance of a lawyer for receiving advice related to the advantages and disadvantages of different rent choices as well as for the drafting of the lease to ensure that the will of the parties is realized and that each party’s rights will be enforceable under the law.

ON THE AUTHORS ING Sophealeak and Charles AMAR, lawyers at Bun & Associates, advise domestic and foreign clients seeking expert advice and innovative solutions in dealing with significant and complex transactions involving both raw and developed properties. Their work includes advising on all issues relating to real estate investment, project development, construction and asset management. Our real estate team has also hands-on expertise and experience in advising clients on matters related to economic land concessions, special economic zones, agriculture, the environment and mining.

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