As a landowner or property developer, engaging in a build-to-suit (BTS) lease agreement can be a strategic plan to attract high-quality tenants. It is crucial to understand the legal and contractual complexities involved in this type of leasing arrangement to protect your interests and ensure a successful lessor-lessee relationship. 

What is a Build-to-Suit Lease?

A build-to-suit (BTS) lease is an agreement where the landlord constructs a customized building to meet the specific needs of a tenant. This arrangement differs from standard commercial leases, typically involving a longer lease term, the tenant’s design and specification input, construction works, and provisions governing the construction process and the lease. Unlike traditional leases, the tenant has an active role in the design process, ensuring the leased property aligns with their operational requirements, whether that be for a school, hospital, or other commercial use.

The BTS leasing model in Cambodia encompasses two principal elements: the construction component and the leasing component. As such, it is crucial to work closely with an experienced real estate attorney to ensure the lease terms comply with applicable laws, are fair, and comprehensively address all relevant considerations.

Key contractual aspects

Due Diligence Consideration: Thorough due diligence on the land or building ownership is essential for prospective tenants. As the landowner, it is crucial to prepare proper documentation, such as a certificate of ownership of immovable property. For the developer acting as the leaseholder, the condition is to have an executed main lease agreement in place. Under Cambodian law, a lease with a term of not less than 15 years is considered a perpetual lease, which can be registered to obtain a certificate of perpetual lease. If the underlying land or leasehold interest is not yet registered, the tenant may require this registration as a condition precedent to the BTS transaction.

Tenant’s Operational Requirements: Understanding the tenant’s business plan and operational needs is crucial in determining the BTS lease terms, including design, construction, lease duration, and rental fees. In this case, tenants should provide detailed information on space utilization, improvement plans, and infrastructure requirements.

Financing Structure and Construction Agreements: Maintaining transparency on the financing of the construction project and any encumbrances on the land or leasehold will help outline the transaction timeline, such as construction loans and pre-leasing requirements. This will provide important context around the project’s feasibility and delivery timeline, avoiding potential delays or complications.

The landlord or property developer will typically be involved in the construction agreements. Engaging experienced construction professionals, such as architects and contractors, allows the landlord or developer to collaboratively determine and manage the overall transaction timeline, from the design phase to the anticipated delivery date and rent commencement.

Key Commercial Terms and Default: The BTS lease should clearly outline the comprehensive responsibilities, timelines, and financial obligations of both the landlord and the tenant. This includes details around the security deposit, rental fee structure, tax liability, default and compensation provisions, liability and insurance requirements, as well as any restrictions on sublease or assignment. BTS leases typically have longer lease terms to allow the landlord or property developer to recover their investment in the built property. The BTS lease agreement should clearly define what constitutes breaches by either party and the available remedies, such as the remedy period, the mechanism to terminate the lease, and the claim for damage compensation.

Regulatory Aspects

The landlord or property developer should ensure that the design and construction fully align with all applicable zoning regulations and that all necessary permits, particularly those related to construction, are properly obtained. Additionally, the landlord or developer should work closely with the tenant to ensure the tenant obtains all necessary permits and approvals for its intended business operations within the BTS premises.

A perpetual lease, which has a term of not less than 15 years, cannot be asserted against a third party unless the leasehold right is registered. Typically, the tenant will require the registration of the perpetual lease as a condition to the BTS transaction, so the landlord or property developer should be prepared to submit the necessary documentation for this registration.

By thoroughly understanding the legal and contractual aspects of BTS leases and adopting industry best practices, landowners and property developers can position themselves to negotiate more favorable lease terms, attract high-quality, creditworthy tenants, secure long-term rental income streams, and minimize the risk of disputes. Seeking the guidance of experienced real estate attorneys and professionals can be instrumental when dealing with the BTS transaction.

For additional information, please contact our legal expert NEM Ratana.

The content shared here is for informational purposes only and should not be interpreted as a legal advice. Legal matters can be complex and may vary based on individual circumstances. For personalized guidance on specific legal issues, we recommend consulting with our qualified legal professionals.