Hidden Risks of Long-Term Lease Agreements in the Philippines (And How to Avoid Them)

As a workspace leasing expert in the Philippines, I’ve seen promising startups either thrive—or struggle—based on a single decision: their office lease. A long-term lease agreement isn’t just paperwork; it’s a strategic move that shapes your growth, cash flow, and team dynamics.

Long-term office leases can appear cost-effective on paper—but behind the numbers, they often contain hidden risks that limit flexibility and inflate costs. From escalation clauses to unclear maintenance responsibilities and use restrictions, this article uncovers what every founder and business leader needs to watch out for before signing.

Key insight: A “good deal” today can become a costly burden tomorrow if the terms don’t flex with your business’s growth.

Before diving into hidden clauses or legal technicalities, it’s important to understand the fundamentals of what a lease actually is and how it affects your business. This section covers key definitions, the difference between renting and leasing in the Philippine office space context, and common misconceptions that trip up first-time tenants.

What Is a Lease Agreement? (And Why It Matters for Your Business)

A lease agreement is a binding legal contract between a lessor (property owner) and a lessee (tenant). It grants the lessee the right to use a property—often an office space—for a specific period in exchange for rent.

Renting vs. Leasing in the Philippines: Key Differences Every Business Must Know

• Renting typically refers to month-to-month or short-term occupancy (e.g., coworking, hotdesking, pop-up offices).

• Leasing involves fixed, longer terms—usually 1 to 5 years. It's often accompanied by customization, like fit-outs, exclusive use clauses, and security deposits.

Startups often rush into long leases believing it's cheaper. But rigid agreements can stifle growth or cost you more in the long run. Flexible work models—especially post-pandemic—demand rethinking the traditional lease.

The lease term defines how long you're legally tied to the space. While a 3- or 5-year term may offer lower monthly rates, it could become a liability if:

• Your business pivots

• You outgrow the space

• You need to downsize or relocate

Longer leases also impact hiring, logistics, and your office's branding footprint. Your business’s agility must match your lease’s constraints.

The Real Cost of a “Cheap” Long-Term Lease Agreement

Some leases include seemingly small clauses like 5% annual rent increases. Compound that over 5 years and you're suddenly paying 25–30% more.

Case Example:

• Year 1: ₱100,000/month

• Year 5: ₱127,628/month (with 5% escalation)

This doesn’t even account for added costs like utilities, association dues, or common area maintenance (CAM) fees that may also escalate.

Silent Clauses in Long-Term Leases: The Hidden Traps

• Renewal terms that favor the lessor

• Restrictions on early termination

• Hidden charges for aircon, signage, or permits

• No provision for downtime or office closure contingencies (e.g., natural disasters or political unrest)

The "Lessor" is responsible for structural integrity, basic repairs, and delivering the property in a condition fit for lawful use, as implied under Article 1654. The "Lessee" must pay rent on time, avoid misuse, and adhere to space usage clauses. Any breach can lead to costly penalties or even eviction. These terms are as indicated in the Civil Code of the Philippines - Articles 1654-1659.

Don’t Fall for These Myths: First-Time Lessee Mistakes to Avoid

• Believing verbal promises to hold legal weight

• Assuming the lease includes free repairs or utilities

• Thinking the landlord will be lenient during crisis periods without contract backup

When Long-Term Lease Agreements Do Make Sense for Growing Businesses

While long leases have their risks, they can be a smart choice for:

• Businesses with stable growth projections

• Teams that benefit from fixed rental rates during inflation

• Companies investing in heavy space customizations

Some landlords also offer fit-out contributions, rent-free periods, or exclusive-use perks when tenants commit long-term. This is especially beneficial for branding, client-facing offices, or regulatory requirements.

Not all leases are created equal. Many long-term agreements contain built-in risks that aren’t immediately obvious during initial walkthroughs or negotiations. This section breaks down the most common traps—complete with real-world examples—to help you avoid unpleasant surprises after signing.

What to Watch Out for in a LONG-TERM Lease Philippines Contract

A long-term lease can offer stability—but it can also lock your business into costly, restrictive terms if you're not careful. Before signing on the dotted line, it’s crucial to scrutinize the fine print. From rent escalation clauses to hidden repair liabilities, here are the common contract pitfalls that can quietly drain your budget or limit how you operate.

Escalation Clauses That Inflate Costs Over Time

Most PH leases include either a fixed annual increase (e.g., 5%) or a Consumer Price Index (CPI) clause. The latter ties your rent to inflation and is harder to predict.

Limited Exit Options and Lock-In Traps

• No clear early termination clause = full payment liability

• Transfer or subleasing not allowed without written consent

Unclear Maintenance or Fit-Out Responsibilities

• Some contracts push fit-out costs to the lessee

• Air conditioning breakdown? It might be your problem

• Internet wiring, pest control, and signage—ask first

Unexpected repair costs can severely impact cash flow. Ask for an itemized maintenance matrix as part of due diligence.

Use Restrictions That Can Limit Business Operations

• Some buildings restrict 24/7 operations, event hosting, or food-related services

• BPO companies may need specific zoning approval

• Some lessors ban signage or customer foot traffic in professional buildings

Knowing your legal footing can help you make smarter decisions. This section explains the commercial lease regulations that apply in the Philippines, along with key responsibilities, red flags in contract templates, and reasons why landlords often prefer long-term agreements.

What Philippine Law Says About Long-Term Lease Agreements

Security of Tenure

Under PH law, commercial tenants are not automatically protected the way residential tenants are. Everything must be clearly stated in the contract.

Deposits and Advance Rent

• Typical: 2 months deposit + 2 months advance

• Ensure documentation on when and how refunds are issued

• Include provisions for deductions due to damages, unpaid utilities, or delay penalties

Renewal and Termination

• There’s no automatic renewal unless specified

• Termination must follow notice periods, or you risk contract breach

Subleasing and Sharing Space

Only allowed when:

• Explicitly stated in contract

• Approved by the lessor

Even desk-sharing or temporary pop-ups can be penalized if not permitted explicitly.

Pitfalls in Vague or Generic Contract Templates

Avoid templated contracts from online downloads. Each lease should be reviewed by legal counsel to match:

• Your business model

• Government compliance (DTI, SEC, LGU)

• Industry-specific operating needs

Why Landlords Push for Long-Term Agreements

Understanding your lessor’s motivations helps you negotiate better. Landlords prefer long-term leases because:

• They reduce vacancy risks

• They cut admin costs (less frequent turnover)

• They enable better cash flow forecasting

• They create longer, more predictable landlord-tenant relationships

This is also why some landlords may offer lower monthly rent for 5-year terms over flexible 6-month ones—but at the cost of flexibility.

Now that you understand the risks and legal landscape, how do you protect your business? This section provides a practical checklist and negotiation strategies that any startup, small business, or entrepreneur can apply to get a fairer, more flexible lease agreement. We’ll also cover how to spot red flags early and navigate common post-signing conflicts.

• Review lease duration, escalation, and exit terms: Don’t just skim the contract—run calculations on how much your rent will cost in Year 3 or 5 with escalations. Ask if early exit terms include partial payments, buyouts, or co-termination.

Tip: Check if the contract includes a force majeure clause but be cautious. In the Philippines, such clauses often do not automatically suspend rent obligations during natural disasters or public emergencies. Clarify if rent deferment applies.

• Get legal help if you’re unsure of wording: Have a lawyer or a trusted workspace advisor to review the lease. Even a one-hour consultation can help you spot costly traps.

Legal Tip: Don’t rely on verbal promises. If it’s not in the contract, it doesn’t exist—as stated in Article 1356 of the Civil Code.

• Clarify maintenance and repair obligations: Who handles plumbing? Aircon? Pest control? Put it in writing. Ask for a maintenance matrix to avoid disputes.

Example: In many commercial leases, split-system AC repairs fall under tenant responsibilities unless otherwise stated.

• Ask for expansion flexibility and subleasing rights: If you're scaling fast, include clauses for headcount growth or subleasing unused areas. Negotiate a right of first refusal for adjacent units.

Reminder: Subleasing is only legal if expressly allowed. PH leases default to prohibiting it unless the lessor agrees in writing.

• Demand transparency on taxes, utilities, and CAM fees: Get itemized breakdowns. Are you paying based on actual usage or pro-rata shares? Are taxes passed through to tenants?Ask whether rates are quoted as net (exclusive of VAT and CAM) or gross. Always get this in writing.

• Review insurance requirements and business continuity clauses: Who’s liable in case of fire, flood, theft, or power loss? Ask if insurance is required—and if you need to purchasefire or liability coverage separately.

Note: Landlords often require tenants to carry separate insurance for equipment, inventory, or liability. This is standard in premium buildings in Makati and BGC.

• Confirm zoning compatibility for your operations: Don’t assume your business is allowed. Confirm with the LGU (city hall or barangay) that your intended operations are compliant. Especially relevant for BPOs, fintech, F&B, or medical use cases. Some areas also enforce noise or signage restrictions.

• Build a transparent, cooperative relationship with your lessor: A responsive lessor makes all the difference. Document everything. Keep communication professional, especially during disputes or negotiations.

• Understand that RA 9653 does not apply: The Rent Control Act of 2009 (RA 9653) only applies to residential leases under ₱10,000/month. Commercial tenants are not covered by this law and must negotiate terms clearly in the lease agreement.

If a traditional lease doesn’t suit your business model, you’re not out of options. The Philippine office space market now offers a variety of flexible solutions. In this section, we explore workspace alternatives like coworking spaces and serviced offices—and when they might be a better fit.

Flexible Office Solutions for Growing Businesses

If your company needs a workspace that evolves with you, consider:

• Coworking spaces: Month-to-month, shared amenities, community networking

• Serviced offices: Private suites with managed services and flexible lease durations

• Enterprise work pods: Custom setups that scale with team size

• Short-term traditional leases: 6–12 months with renewal options, often used as transition offices

Why These Alternatives Work for Startups

• Reduce CAPEX (no need for furniture or construction)

• Allow rapid expansion or downsizing

• Minimize risk with short exit windows

• Increase employee satisfaction with modern amenities

Signing a long-term lease is a promise or a commitment that can shape your business’s future, for better or worse. While traditional leases may offer lower monthly rates and a sense of permanence, they often come with hidden costs, rigid terms, and operational constraints that can hinder a growing company’s ability to adapt.

To make smarter decisions, entrepreneurs and startups must go beyond surface-level savings. Read the fine print. Negotiate flexibility. Align your lease with your growth trajectory not against it.

It's applicable to businesses launching or scaling operations, the key is to choose a workspace that grows with you. From understanding legal clauses to exploring flexible alternatives like serviced offices and KMC's proworking space.

Because in knowing the current office landscape in the Philippines, the right space isn’t the one that locks you in—it's the one that lets you move forward.

Explore KMC’s private office options all over Metro Manila and Cebu and see how your business can scale with less stress and more structure.