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Fixed rent, step-up rent and variable rent: the different forms of rent applicable to commercial leases in Cambodia

May 15, 2017, 12:46 p.m.

The question of the rent upon execution of the lease is one of the main concerns for landlords and tenants in regards to commercial premise leasing in Cambodia. Therefore, we will see the different forms of rent that can be chosen by the parties.

The commercial real estate market in Cambodia has growth significantly in recent years with the development of various commercial premises (offices, hotels, retail premises and, in particular, shopping malls) and the introduction or planned introduction of many international brands such as Shangri-La, Alila Hotels and Resorts, 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 depending on (i) the title deed owned by the landlord (i.e. hard title certificate or soft title certificate) and (ii) the term of the lease.

The nature of the premises and the activity operated within the premises will not affect the nature of the lease. A perpetual lease, which is governed by Article 244 and seq. of the Civil Code, will be signed only if the landlord owns a hard title certificate and if the term of the lease is between 15 and 50 years. If not, the lease will be considered as a standard lease governed by Chapter 5 of Book 5 of the Civil Code.

In both cases, when negotiating the terms and conditions of a lease, a main concern for landlords and tenants is the amount of the rent to be paid.

Pursuant to Articles 248 and 610 of the Civil Code, the tenant has an obligation to pay the rent to the lessor at the agreed time. However, the Civil Code does not include any provisions relating to the calculation of the rent upon the execution of the lease. Therefore, the parties are free to agree upon the amount of the rent to be paid.

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

As for the calculation of the initial rent, the Civil Code does not include any definition of the rental value of the premises.

However, in practice, in order to determine the rental value of the premises, the parties will generally take into account the location, the surface area, the characteristics of the premises, the type of business that is to be operated on the premises, the terms and conditions of the lease and the work that needs to be carried out before being able to open the premises for business.

Consequently, by signing the lease agreement, the parties agree on the amount of the rent and on the rental value of the premises as at the execution date of the lease. As the rent is one the main expenses for a company, having an appropriate rent amount will increase the chance of success of a company.

While having a fixed rent is a common practice in Cambodia, there are two others forms of rent which can be considered: step-up rent (i.e. progressive rent) and variable rent (i.e. turnover rent).

Step-up rent is rent that will increase progressively with specific amounts on pre-determined dates. The opposite of the step-up rent is a step-down rent, which provides for specified rent decreases at certain future dates and which
can correspond to a rent-free period.

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 agreement 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 (i.e. turnover rent). Variable rent is based on the turnover performed by the tenant within the rented premises. There are two forms of turnover 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. However, full variable rent is not common as it creates a large amount of risk for the landlord should the tenant not properly run its business or otherwise fail to achieve sufficient turnover. Generally, landlords do not wish to bear such risk.

In addition, if the parties decide to have variable rent, the lease agreement must clearly mention how to calculate the rent and which elements will be taken into account when calculating the tenant’s turnover performed on the rented premises.

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. As online sales can have a big impact on the tenant’s turnover and, consequently, on the amount of the rent owed in case of variable rent, the lease agreement should clearly state whether or not online sales will be calculated as part of the turnover of the business on the premises. 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 agreement that the turnover from ecommerce 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 agreement. 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 agreement.

It is important that the lease agreement 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 agreement to ensure that the will of the parties is realized and that each party’s rights will be enforceable under the law. A lawyer may be help the parties to be aware of other considerations, such as tax implications, to be discussed and agreed upon in the lease agreement.

For further information, please contact us at:

Bun & Associates
#29, Street 294, Phnom Penh, Cambodia, P.O. Box 2326
T: +855 23 999 567 | F: +855 23 999 566
E: ing@bun-associates.com / amar@bun-associates.com
www.bun-associates.com

This publication is for your information only. It is not intended to be comprehensive and it does not constitute and must be not relied on as legal advice. You must seek specific advice tailored to your circumstances. Any use of the information contained in this article or the receipt of this article is not intended to create nor does it create a solicitor-client relationship between you and Bun & Associates. Unless otherwise indicated, Bun & Associates owns the copyright of this article. If you seek to reproduce or otherwise use this article or any part of it in any way, it is your responsibility to obtain approval for such use where necessary.

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