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COMMISSION ON AUDIT CIRCULAR NO.

88-282A
TO

SUBJECT:

All Heads of Departments, Chiefs of Bureaus, Agencies and Offices of the


National Government; Managing Heads of Government-Owned and/or
Controlled Corporations, Board and Commissions; Chief Accountants/Corporate
Treasurers; All COA Auditors and Others Concerned.
Uniform Standards/Guidelines to Determine the Reasonableness of the Terms
and Rental Rates of Lease Contracts for Private or Government
Buildings/Spaces.

Supplementary to COA Circular No 87-282, dated December 22, 1987, decentralizing


action on government negotiated contracts, Lease Contracts, and records disposal, quoted
hereunder is the full text of the Uniform Standards/Guidelines to Determine the
Reasonableness of the Terms and Rental Rates of Lease Contracts for Private or Government
Buildings/Spaces which was issued by the Department of Public Works and Highways in
pursuance of the provisions of Section 6, Executive Order No. 301, dated July 26, 1987:
"Republic of the Philippines
DEPARTMENT OF PUBLIC WORKS AND HIGHWAYS
OFFICE OF THE SECRETARY
Bonifacio Drive, Port Area, Manila
UNIFORM STANDARDS/GUIDELINES TO DETERMINE THE REASONABLENESS
OF THE TERMS AND RENTAL RATES OF LEASE CONTRACTS FOR PRIVATE
OR GOVERNMENT BUILDINGS/SPACES
Pursuant to Section 6 of Executive Order No. 301, dated 26 July 1987, the
following uniform standards/guidelines are hereby formulated:
1.

PARTIES TO THE CONTRACT


1.1

LESSOR. - The lessor is the absolute owner of the building/place


to be leased. The lessor may be a private individual, a corporation, or
government agency. If a private individual, he may personally enter
into contract or authorize somebody, thru a special power of attorney,
to represent him. If a corporation, the representative should be duly
authorized by a resolution of the governing board. If a government
agency, it shall be represented by the official having custody and
administration of the building/space, who is duly authorized by law to
enter into this contract, and the lease contract shall be subject to
approval by the official concerned.

1.2

LESSEE. - The lessee is the party who rents the building/space.


The lessee may be a private individual, a corporation or a government
agency. If a private individual, he may personally enter into a contract
or authorize somebody, thru a special power of attorney, to represent
him. If a corporation, the representative should be duly authorized by
a resolution of the governing board. If a government agency, the head
of the agency shall be represented by the official having control of the

appropriation against which the contract shall create a charge, and the
contract shall be subject to approval by the head of the agency
concerned.
2.

TERMS AND CONDITIONS


The contract of lease shall be embodied in a public instrument and shall
integrate all the covenants, understanding and agreements of the LESSOR
and LESSEE. Such terms and conditions shall include, but not limited to, the
following:
2.1

Duration of the Lease


As a general rule, the duration of the lease shall not exceed one (1)
year and, as far as practicable, shall not go beyond the end of any
given calendar year.

2.2

Rights and Obligation of Both Parties


The rights and obligations of both parties shall be clearly defined to
preclude ambiguity and shall be fair and equitable to both parties.
Such rights and obligations shall include:
2.2.1

2.2.2

Obligations of the Lessor


a.

To undertake major repairs including damages due to


fortuitous events during the effectivity of the lease and to
complete such repairs within a specified time frame.

b.

To provide and make available, whenever called for or as


may be agreed upon in the contract, such facilities like airconditioning units and telephone system, and maintain
these facilities in operating condition during the lease
period.

c.

To maintain the premises of the building/space in good


and tenantable condition during the term of the lease.

Obligation of the Lessee


a.

To pay promptly and regularly the rentals agreed upon in a


manner specified in the contract.

b.

To pay the monthly billings for facilities like electric, water


and telephone during the period of lease.

c.

To surrender the building/space upon expiration of the


lease contract and to shoulder damages which the
LESSOR may suffer for his failure to surrender the same.

d.

To faithfully comply with the terms and conditions of the

agreement.
2.2.3

2.2.4

3.

Rights of the Lessor


a.

In the event the building/space is deserted by the


LESSEE before the expiration of the lease without
justifiable cause, the LESSOR shall have the right to enter
the relet the same and receive the rentals corresponding
to the unexpired period of the lease.

b.

To terminate the lease contract and eject the LESSEE for


failure or refusal of the latter to pay the rentals agreed
upon during the period stipulated in the lease contract or
for violation of contract conditions by the LESSEE.

Rights of the Lessee


a.

To withhold payment of rentals in the event the LESSOR


fails to make the necessary repairs of damaged facilities
or damage to any portion of the building which is its
obligation to repair under the agreement within a
reasonable time and to undertake such repairs applying
the rentals due to cover the cost thereof.

b.

To occupy and use exclusively the building/space leased


to the exclusion of the owner or his relatives.

c.

To introduce improvements in the building/space, subject


to prior consent of the LESSOR under such terns and
conditions as may be agreed upon.

TERMINATION OF THE CONTRACT

Except for causes expressly stipulated in the contract, neither party shall have the
authority to unilaterally terminate the contract.
Termination not due to causes
provided in the contract shall be mutually agreed upon.
4.

REASONABLENESS OF RENTAL RATES


4.1

As a general rule, rental rates are considered reasonable when they


represent or approximate the value of what the LESSEE gets in terms
of accommodation, facility and convenience from the leased
building/space, and the LESSOR gets equitable return of his capital or
investment in the construction and maintenance of the building/space.

4.2

Subject to certain modifications as may be necessary from time to


time, the Department of Public Works and Highways hereby adopts the
BSRPMO Guidelines in Determining the Reasonable Rental Rates,
copy attached, for application to both Private and government
building/spaces for purposes of Section 6 of Executive Order No. 301.

Issued this 3rd day of March 1988 at Manila, Philippines.


(SGD.) J. NERY FERRER
Secretary"
All concerned should be guided accordingly.
(SGD.) EUFEMIO C. DOMINGO, Chairman

BUILDING SERVICES AND REAL PROPERTY


MANAGEMENT OFFICE
1985
GUIDELINES IN DETERMINING THE REASONABLE RENTAL RATES OF PRIVATELYOWNED BUILDING/SPACES RENTED BY NATIONAL GOVERNMENT OFFICES
Rentals of privately owned building varies and most often is treated on a Case to Case
basis. However for purposes of illustration hereunder is one of the approaches being used by
the Building Services and Real Property Management Office in an Outline form.
DEFINITION
UNIT CONSTRUCTION COST - the estimated prevailing and/or current cost of construction
per square meter of comparable building being appraised.
Type of Building Construction
1.
2.
3.
4.
5.

Mixed Materials (Wooden Frame Buildings.)


Brick Encased of Other Encased Buildings.
Building of Solid Construction
Building of Reinforced Concrete & Steel Frame Work
Condominium

DEPRECIATION - Value loss due to physical deterioration (water & tear) and Obsolescence.
Common type of determining depreciation:
1.
2.

Straight Line Depreciation


Observed Depreciation

REPRODUCTION COST - the estimated total cost of replacing the building new same utility.
(Sometimes called "Replacement Cost".)
CAPITALIZATION RATE - the anticipated rate of return. The two (2) elements involved are: 1)
Interest on the cost or value of the property, and 2) Recovery or Recapture of the Capital
or principal invested in the (wasting asset) property.
FACTOR VALUE - the rating factor where locations and site conditions, neighborhood data
and building structural condition, functionality, facilities and other requirements, including
free services and facilities offered by the LESSOR are considered.
RENTAL - amount paid by the National Government Agency (LESSEE) for the use and/or
occupancy of the privately owned building lot to their LESSOR, where payment is usually
on monthly basis.
MONTHLY RENTAL - Floor Area (Rentable) x Rate (per sq.m. per month.)
AREA - the total rentable area of the building in square meters being occupied by the
LESSEE.

Rentable Area implies that area of floor spaces less common areas like lobby, stairwall,
elevator hall, common comfort machine room for aircon and other area of common use
by the public or upper floor occupants.
EXAMPLE
OFFICE BUILDING "A"
Estimated Unit Construction Cost
Depreciation (new Building
Capitalization Rate
Factor Value
Reproduction Cost
Formula Rate
Rental Rate

=
=
=

1,900 x 1
1,900 x .015
28.50 x .98
say

Area Rentable
Monthly Rental

P1,900/sq.m.
=
0070
=
18%
=
98%
=
=
=
=
=
=

P1,900/sq.m.
28.50/sq.m.
P27.93/sq.m.
P27.93/sq.m.
200 sq.m.
200 x P27.90

NOTE:
Above computed rental rate applies to the regular floors, however, ground floor areas
have higher rates it being a premier floor of a building.
OUR METHODS
A.

INVESTMENT BUILDING APPROACH METHOD


Factors to be considered are:
1.
2.
3.
4.
5.
6.
7.

Cost land (Market Value) - the lot where the building will be erected. This includes
the open areas.
Cost of building and/or Equipment/money invested.
Recovery period of the Principal/or Machineries and other improvements.
Income derived from the rate of interest stabilize rate of the money invested in the
property being appraised.
Administrative and /or General Operating Services Expenses.
Real Estate Taxes.
Others
Appraised value of building for rent are more often treated on a Case to Case Basis
and at times depend on the building amenities and/or facilities provided free by the
LESSOR.

ADVANTAGEOUS TO THE LESSEE IN TERM OF MONEY


Savings on the part of the government. To name some are the following:

1.
2.
3.
4.
5.
6.
7.
8.

Electrical consumption of the Aircon system


Electrical consumption of lights (Office)
Janitorial Services and Security of the building
Partition the leased are based on the LESSEES specification and/or requirements
Additional parking space
Bigger actual floor space occupied compared to the area stipulated in the Contract
of Lease
Executive comfort room other than the common toilet usually situated in the lobby
Others beneficials to the tenant

Appraised value of buildings for rent is determine by comparative rentals of space in the
vicinity of the same building condition and/or classification. More often this method is use
to check the computed rental rate (above).
ATTACHMENT: POINTERS IN DETERMINING THE FACTOR VALUE.
I
II
III
IV
V
VI

LOCATION AND SITE CONDITION


NEIGHBORHOOD DATA
BUILDING
FREE SERVICE & FACILITIES
RENTAL RATE FACTOR VALUE
OTHER INFORMATION AND RECOMMENDATION