What is a Commercial Lease Agreement?
Leases are contracts that establish the rules of the relationship between a landlord and their tenant. These contracts give the tenant the right to occupy the real property, pay rent (and sometimes common area maintenance fees or utilities) in exchange for that right. Leases can be written or oral, for a set time or open-ended until one of the parties moves on. Regardless, leases grant the tenant the right to use the property for whatever the lease specifies whether for a retail store, a restaurant, an office or distribution center.
Commercial leases are long-term typically five, seven or ten-year leases to allow the tenant to amortize the cost of building out (to suit their specific needs) or the cost of improvements (such as tenants finishing an open space) . For the landlord, a term of five or more years ensures the expense of buildout/improvements can be paid off in the rental payments. The tenant wants a long enough lease to eliminate the cost of moving within 2-5 years and find a suitable new location.
While there are many similarities, commercial leases are much different than residential leases. Commercial lease agreements are transactional agreements because the contractual risk is largely dependent upon the integrity of the tenant. The fact that a tenant is a sophisticated business generally gives the landlord some confidence to not push for detailed provisions to protect it from issues that would be covered under a residential lease. A commercial lease is generally drafted for a real property that is or can be made suitable for the tenant’s specific needs.
Commercial Lease Types in Georgia
When parties enter into an agreement to lease commercial space, the first question is usually, "What type of lease do we want?" There are three main types of commercial leases that you’ll encounter in Georgia. The type of lease ultimately depends upon the level of risk you are willing to assume as the tenant or landlord. As a general practice, the greater the risk the landlord assumes in owning the property, the more money that will be required from the tenant at the outset of the lease. Now, obviously, at some point the landlord is going to have to look out for his or her own best interest, which is where a good attorney can help. Let’s start with the gross lease. In this type of agreement, the tenant pays rent and nothing else. This is:
a. a good option for a new business
b. bad for a landlord
In this scenario, all of the costs are channeled to the tenant at the outset, so the tenant knows exactly how much will be required. A gross lease, however, places all of the costs on the landlord. The landlord will then have to determine the amount of rent he will demand, ensuring that all of his costs are covered, including a cushion for emergencies, on top of being able to afford his own business expenses. The next type of commercial lease is the net lease. This is where the tenant pays the base rent plus all or some of the costs associated with maintaining the property. This type of lease gives the landlord an increased amount of certainty regarding property maintenance and allows the landlord to plan for potential costs. However, it does push the risk to the tenant for unplanned expenses, such as when the roof blows off a building (Unfortunately, it happens.) The third type of lease is the net lease. In this type of lease, the monthly rent includes the taxes, fees, and maintenance expenses for the property. The tenant and landlord may negotiate over how much of the property’s depreciation, maintenance, etc., will be covered under the lease. It is in the tenant’s best interest to consult with an attorney to ensure that they understand what an "acceptable amount" is for depreciation, maintenance, etc.
Key Commercial Lease Clauses in Georgia
When it comes to commercial lease agreements in Georgia, there are certain essential clauses that you have to make sure are included. These clauses will help protect your interests as a business and offer a layout for how your property will be used and for how long.
The most important clause for any tenant or property owner in Georgia is the lease duration clause. With this statement, you can define how long you will be leasing the space for. Without this clause, there’s a chance that the property owner could try to reverse the agreement early, which could cause headaches for you if you have all of your equipment installed and your employees working there.
The next important clause to discuss is the rent amount contained within the agreement. This section should specify how much rent is expected on a monthly basis and whether or not you have to pay any utilities. It is also good practice to put in language to the effect that rent cannot be raised beyond a certain threshold without your permission. Depending on the lease duration, rental costs could change drastically over the course of the contract.
One of the most costly mistakes that Georgia business owners make regarding their commercial lease agreements is failing to specify the security deposit amount in the agreement. The security amount for commercial properties is not restricted by law like those for residential properties. A common mistake is neglecting to set the security amount in the agreement, which could have the landlord attempting to charge a greater amount than what is allowed by the law in the event of a dispute.
The next clause is concerning maintenance responsibilities. This could be a contentious issue depending on how much wear and tear occurs in the facility over the term of the lease. It’s important to remember that maintenance on the property is ON the owner, not the tenant. You cannot be forced to correct issues with the building’s structure, plumbing, or electrical systems.
A renewal option is another important element to include in your commercial lease agreement in Georgia. There are many properties that make excellent investments, and some property owners will try to take advantage of a contract ending by seeking a new lease that costs much more. A renewal option allows you to elect to stay on with the existing terms for a new period once the old agreement expires.
Legal Requirements and Law Between Landlords and Tenants
In Georgia, the legal requirements for a commercial lease are generally straightforward and similar to other states. The Uniform Commercial Code governs leases in which the tenant has the right to possession of personal property for a period of time in exchange for payment of rent. Georgia has not adopted the Uniform Residential Landlord Tenant Act, but Georgia law allows landlords of residential rental property to charge tenants a reasonable lock-out fee for rekeying locks or other security devices whenever a tenant creates a lock-out situation (e.g., a tenant has locked himself out of the apartment and requests rekeying). In addition, the law prohibits a landlord from using "self.help" measures. Georgia law does not require that a commercial lease be in writing, unless it involves property of over $500.
In Georgia, there are no state-imposed limits on the duration of a commercial lease. However, a lease that is for a term of three years or more must be in writing to be enforceable. If there are shortfalls in the minimum requirements for a lease to be valid, a lease may still be enforceable if the terms can be inferred from the conduct of the parties. Georgia law allows for unlimited contractual freedom, to the extent the obligations imposed under the lease in question are not illegal, against public policy, against morality, or conditions precedent for a right of action to exist. In addition, lease contracts are deemed to be unconscionable if one party uses its economic power to compel an agreement.
While there are no specific Georgia laws regarding the surrender of leased commercial property, Georgia law provides that a lease that gives the tenant an option to purchase real property requires an order of precedence or priority for liens for rent due, or a provision extending the landlords lien to the property or fixtures acquired by the lessee at any time during the lease. When a landlord makes repairs to a leased premise, the landlord has a lien against the property, furniture, stock, or other effects of the tenant. A deed to the leased property by the tenant can not be considered an assignment of interest in the lease in the absence of a provision in the lease to the contrary. In leasing arrangements where the tenant is concurrently the purchaser of the property, the tenant is not liable for improvements made prior to taking possession of the property. Arrangements with a commercial tenant as a sale/lease to purchase arrangement must be carefully structured to avoid triggering real estate transaction disclosure requirements.
Tips for Landlords and Tenants:
Landlords and tenants must draft an enforceable lease that is clear and unambiguous, and avoid oral agreements. Ambiguous clauses must be construed in favor of the tenant.
Securing a Commercial Lease in Georgia
From both the tenant and landlord perspective, negotiating a commercially reasonable lease is an important first step that can have long-standing effects. Whether you represent a tenant or landlord, or if you do it yourself, each negotiating party needs to be mindful about a commercial lease and the importance of leasing space in Georgia.
Rent
The rent increase clause is typically the biggest point of contention between tenant and landlord. A common method for determining "market rent" is to base it on a 5% increase every three years. This seems arbitrary because 5%, compounded every three years, increases rent by about 15.8% at the end of the initial term. If the landlord is willing to accept market rent increase, then the landlord should be entitled to some sort of cost-of-living-increase increase.
Exclusive Use Clause .
This will almost always be a sticking point for the tenant. The tenant will want to specify as broad a category as possible, i.e. "women’s clothing," whereas the landlord wants the exclusive use clause to be very specific, i.e. "women’s shoes." And the tenant will want to include things like "handbags," and "accessories." It is important for both tenant and landlord to understand that this clause can have lasting effects.
Most importantly, the landlord will not want to have the type of retail outlets that are competing with stores in a similar pre-existing identity category selling the same category of products in its shopping center. The tenant, on the other hand, is typically looking to expand its’ brand. Make sure that tenant and landlord understand each other’s negotiating positions going into this clause.
Common Commercial Lease Pitfalls and How to Avoid Them
Net lease agreements can come with surprises that are hard to swallow, especially for new business owners. Common pitfalls in commercial lease agreements include hidden fees, unclear terms, and inflexible lease agreements. Costs to look out for include maintenance fees, property taxes, and insurance. While these costs may appear to be included in the total rent amount, later on the landlord may attempt to collect them separately as part of a "triple net lease." A triple net lease is where the landlord passes on these additional costs to the tenant. This may seem less like a common pitfall and more like routine business practice, but depending on the tenant’s financial status, it could mean the difference between success and failure. If the tenant is not prepared for these additional expenses then they could go out of business because of it.
It is critical for business owners to read all terms of a lease agreement that may apply to the business. Things that should be clear are: what repairs the tenant is responsible for, how much money to set aside for maintenance fees, who is responsible for property taxes, how much money will be required for the security deposit, what is the due date for the monthly rent, how much notice does the tenant need to provide the landlord before subleasing, and whether or not subleasing is even allowed.
There is no flow on interest in place if the landlord has to take the tenant to court to kick them out of the property. At this point, it could be too late for the business to recover. The process of losing one’s right to occupy a physical space is traumatic enough for the tenant, without having to pay the interest on top of what they owe to the bank. It could also take the business owner years after the court case to be in a position to rent a new space, which could mean another financial blow for the tenant. Setting clear expectations in the lease agreement will be beneficial for both the landlord and the tenant.
How a Commercial Real Estate Attorney Can Help
The nuances in the law may not be so nuanced to the experienced commercial real estate attorney. It is always preferable to consult a qualified commercial real estate attorney prior to executing a commercial lease agreement. Having an attorney review the lease agreement can prove to be invaluable. Lease agreements can be lengthy (50 + pages) and include many unfamiliar blanks. Just because a landlord or commercial broker is including certain verbiage in your lease agreement does not mean you are receiving sound legal advice. It is very common to see tenant’s demise area as "exclusive use" in the lease. In practice, this language would not afford tenant with any exclusive use protection under Georgia laws. Drafting or amending a liquor license with you as a tenet versus opening a wine shop with exclusive use for the same defined use are very different. It is not uncommon to have very little or no time to review a commercial lease agreement prior to closing.
It is also important to hire an attorney to represent your interests at closing. The lender requires that you hire an attorney at closing. If you are not represented by an attorney at closing, the Bank’s attorney will represent the interests of the bank only.
The expenses associated with hiring an attorney are minimal in comparison to the expenses of having to litigate a lease agreement and/or foreclosing on the premises. Legal fees are tax deductible and are just one of the closing cost.
Resources for Georgia Business Owners
Georgia Secretary of State – Business Filing Services Division
This division offers a one-stop resource for starting and expanding a business in Georgia, including information on commercial leases as they relate to forming a business entity. Additionally, the site provides access to resources, services and business filings.
Georgia Small Business Development Center
Backed by the U.S. Small Business Administration and the U.S. Department of Agriculture, this center provides small business assistance and access to experts who can help business owners navigate through commercial lease agreements.
Georgia Department of Economic Development
Explore incentives and other ways to grow your business in Georgia through this state division’s website, with a section on retail, restaurant, and service sector development that covers information on commercial leases .
Atlanta Business League
The state’s largest and oldest business league for African-American entrepreneurs and corporate leaders, offering a host of networking and professional development opportunities that include commercial leasing.
Georgia Trust for Public Land
A national center for land conservation, the Georgia Trust advocates for preserving Georgia’s landscapes, landmarks, and communities and provides valuable resources including guides on marketing space and developing properties to their highest potential.
Georgia Chamber of Commerce
Serving as the leading business network in Georgia, the Georgia Chamber is an objective source for business owners to find top-notch support for establishing and managing commercial properties.
Georgia Department of Revenue
To gain access to forms and information for starting and managing a business, the Georgia Department of Revenue offers this crucial resource for business owners, including expansion and growth phases that may require a commercial lease.