What Terms And Conditions Should Be Included In A Commercial Lease In Georgia?
Commercial leases outline the rights and responsibilities of tenants and landlords in a tenancy agreement in Georgia. Commercial real estate is potentially lucrative for property owners. At the same time, prospective tenants can also benefit from leasing as it requires less capital to find a desirable location, whether using the property for a retail business, office space or a warehouse.
Commercial leases typically last five to 10 years, but length is one of the terms that may be negotiated depending on the property and usage. Landlords usually offer “standard” leasing contracts for commercial property. But since the needs of each tenant are different, many of the terms and conditions tend to be negotiated.
The stakes are high for both sides. Due to the length of these arrangements and the many nuances involved, it’s crucial for both landlords and tenants to have an experienced attorney specializing in commercial properties review and negotiate lease agreements.
Three Basic Types Of Commercial Leases
Before we examine some important terms and conditions, here are three basic types of leases seen most often in Georgia commercial leasing arrangements. The type determines the primary financial responsibilities of the tenant and landlord:
- Net lease: The tenant pays all associated costs for the space, including rent, taxes, insurance and maintenance. The lease may also include expenses for common areas shared with other tenants.
- Gross lease (full service): The tenant pays rent, which includes the cost of the landlord to operate the building, including insurance, taxes and common area maintenance The landlord may also cover utilities, water and sewer.
- Modified gross lease: The tenant is responsible for the monthly rent and negotiates with the landlord over taxes, insurance and other costs. The contract may also allow for modified payments during the lease due to annual adjustments in taxes, insurance rates or operating expenses. The tenant may also pay a “pro-rata” increase in the landlord’s cost to operate the building from one year to the next.
While these three lease structures appear straightforward, many of the terms and conditions contained within the agreement can make this a complicated process.
The Top 12 Items To Include When Negotiating A Lease
Before executing a commercial lease, it’s essential to understand the fine print. Who is responsible for repairs if the HVAC system breaks down? Who pays if a water pipe breaks in a neighboring tenant’s space and damages your business? These are just two examples. Our firm has a Tenant Issue Checklist containing more than 30 items to review and negotiate. Here are the top dozen:
Maintenance and repairs: What are the duties of both the landlord and tenant? Who pays for repairs to the building and systems? Will a limit (cap) be placed for specific major items, such as HVAC, plumbing or roof repair?
Build-out of premises: Who is responsible for getting the space ready for occupancy? If the landlord is partially or fully responsible for the costs, negotiate the amount and the items included in a tenant improvement allowance (TIA). What happens if there are construction delays or cost overruns?
Default provisions: What constitutes a “default” under the lease? What remedy is available if there is a default? Can the tenant be evicted for the failure to abide by rules and regulations of the building? Should a failure to pay rent be treated differently than the failure to abide by rules and regulations?
Right to cure: Should a party be given notice of a default, and an opportunity to cure before a remedy is exercised? Should a monetary default be treated differently than a non-monetary default?
Signage: Where will the business’s sign be located? Does the landlord bear any related costs? If so, how much? Will additional signage be necessary if the location of the premises is difficult to locate?
Alterations: Does the tenant have the right to make changes to the premises? When is the landlord’s consent to alterations necessary? Should there be limitations on changes a tenant can make, either based on the type of change or based on a specific dollar amount?
Casualty: What happens if the building or premises suffers some type of damage or casualty? Should the parties have a right to terminate the lease if the premises cannot be restored/repaired within a certain period of time? Should the requirement to restore or repair be limited on the amount of insurance available?
Services: What services is the landlord required to provide under the lease? Is the landlord responsible for providing basic utilities, such as electricity and water? Does the landlord provide additional services, such as security or janitorial services? Do tenants share the costs? What happens if the services are not provided?
Personal guaranty: Under what circumstances is a personal guaranty from a person or entity who is not a tenant under the lease appropriate? Should there be limitations on the guaranty, such as either to the amount or duration?
Renewal options: Specify the options for extending the current agreement or negotiating a new lease. Will the new amount be based on the “current” market rate? Will it be pre-determined or set through some other process, such as arbitration if the parties cannot agree?
Right of first refusal: When a nearby space opens up, will the tenant have the first opportunity to lease the property to expand their business? If so, what will be the terms and conditions for leasing the additional space?
Parking: How many spaces are available for the tenant’s business? Are any fees assessed? Are reserved spaces available? Is free parking available for employees?
In addition to placing a cap on repair costs, such as HVAC and other maintenance issues, the parties may also negotiate a cap on additional items and operating expenses. This includes “controllable” costs (including parking lot maintenance, window washing and trash removal) and “uncontrollable” costs (such as taxes, insurance, and utilities). Tenants may also want the right to review the landlord’s records in the event there are substantial increases for common area maintenance (CAM) or operating expenses.
In many cases, tenants tend only to focus on the base rent when looking for a location for their business. However, depending on the company and the type of space they need, a host of other economic factors come into play that necessitate a thorough review of the lease. While residential leases tend to be more of a “take it or leave it” proposition, commercial leases are typically documents that should be scrutinized and negotiated with the help of an experienced attorney.
The answer is intended to be for informational purposes only. It should not be relied on as legal advice, nor construed as a form of attorney-client relationship.
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