Commercial Leases in Israel: How They Differ from Residential
In a commercial lease the agreement is not just about a place but about the ground a business stands on. The tenant invests in fitting out, builds custom at that address, and depends on a business licence. The protections the law gives a residential tenant do not apply here, so the agreement itself is the whole of the protection.
How it differs
The chapter of the Hire and Loan Law that sets a floor of protections, including fitness for residence and a cap on securities, applies to residential tenancies and not to commercial ones. In a commercial lease the parties are free to contract out of almost everything, which means the agreement itself is the only protection.
The second difference is the investment. A commercial tenant spends on adapting the premises, on signage, on equipment and sometimes on a substantial refit, and builds goodwill tied to the location. The cost of leaving early is therefore far higher than in a flat, which is why the clauses on term, option and exit are the heart of the agreement.
Purpose of the tenancy and the business licence
The purpose clause is not a formality. It sets what may be done at the premises, and it is also what will determine whether the tenant can obtain a business licence at all under the Business Licensing Law.
Three checks before signature:
- What the planning position permits. Premises whose planning designation is not commercial require permission for non-conforming use, which is a process in itself, takes time, and is not assured.
- Whether the intended activity needs a business licence, and what conditions it will have to meet.
- Who is responsible for obtaining the licence and what happens if it is not granted. This must be dealt with in the agreement, including a right to cancel if the licence is refused or withdrawn.
A tenant who signs and commits to rent before checking the designation and the licensing can end up paying for premises he cannot trade from. It is the most common failure in commercial leasing.
Term and options
In a commercial lease the length of the term is a commercial question, not only a legal one. Too short a term does not recover the fit-out investment. Too long a term ties the tenant to premises that may not suit him years from now.
The usual solution is a relatively short initial term with options to extend that the tenant may exercise. For an option to be worth anything, the agreement has to state: who may exercise it, by when notice must be given, what the rent will be in the extended period and by what mechanism, and whether the landlord may refuse and on what grounds.
A further point is a right of first refusal if the landlord wants to sell the property, and what becomes of the tenancy if it is sold to a third party.
Rent, VAT and other payments
The first difference that surprises tenants: commercial rent carries VAT, unlike residential rent. Make sure the agreement states expressly whether the figure quoted is before or inclusive of VAT, and who issues the invoice.
Alongside the rent, set out:
- Commercial municipal rates, charged at a different and often much higher tariff than residential.
- Management charges, particularly in a mall or shopping centre, and exactly what they cover.
- Indexation, to an index or a currency, and a cap on increases if one was agreed.
- Electricity, water and gas, and in commercial premises also excess consumption and separate meters.
Securities in a commercial lease are usually higher than in residential and are not capped by statute. It is therefore essential to state expressly when the landlord may call on them, and what is returned at the end of the term.
Fitting out and improvements
Almost every commercial tenant adapts the premises. The agreement has to settle four things:
- What may be altered, and what needs the landlord prior approval.
- Who funds it, and whether the landlord contributes, for example through a rent free or reduced rent period.
- Who owns the improvements at the end of the term: does the tenant remove them, leave them, or receive value for them.
- Who is responsible for permits where the works need a building permit.
An agreement silent on improvements creates a certain dispute at the end. A tenant who spent a substantial sum and is then required to reinstate the premises ends up paying twice.
Assignment and exit
Businesses are sometimes sold, and a tenant may want to transfer the lease to the buyer of the business. Assignment without the landlord consent is not possible under most agreements, so it needs settling in advance: whether assignment is permitted, on what conditions, and what considerations the landlord may take into account.
Alongside that, provide an early exit mechanism: whether the tenant may leave before the end of the term, on how much notice, and at what cost. Without such a mechanism, a tenant whose business closes remains liable for rent to the end of the term.
And finally, the clauses on early termination by the landlord: in what circumstances, on how much notice, and what compensation the tenant receives for investment not yet recovered.
Before you sign, talk to us. Our office drafts the agreement for you, conducts the negotiation and represents you through to completion of registration. Our real estate department has accompanied transactions for over 15 years, alongside an architect, a surveyor and a property valuer. Call 02-5953322, send a WhatsApp message to 050-4411343 or leave your details in the form below, and we will get back to you as soon as possible.
What people ask most often
Does the fair rental legislation apply to commercial premises?
Does commercial rent include VAT?
The premises are not designated for commercial use. Is it still possible?
Who is responsible for the business licence?
I paid for a refit. What happens at the end of the term?
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Before signing a commercial lease
A commercial lease is a business contract in every sense. We draft it for you and conduct the negotiation, for either side. Tell us about the property and the deal, and a lawyer from the department will accompany you through to signature.