There are a number of ways in which a business attorney or real estate attorney can assist his client in connection with the leasing of real estate in Georgia. In the preliminary stages, a business or real estate attorney may be asked to participate in lease negotiations. A client’s business lawyer may be involved in drafting or reviewing a letter of intent. A business or real estate lawyer can prepare or review the lease agreement. Below you will find some general information about leasing real property. While some of the information also applies to the leasing of residential real estate, the primary focus of this material is on the leasing of commercial real estate. First, the various elements of a real estate lease agreement will be presented. Second, some typical provisions found in a landlord’s standard commercial lease form that a tenant would like to change are discussed.
The key document in connection with the leasing of real estate is the lease agreement. The rights and obligations of the parties flow from the lease agreement. It is not uncommon for a prospective landlord or tenant to be told that a standard contract will be used. It certainly is true that there are forms of lease agreements. However, there is no one standard form of lease. The issue is not whether you, as landlord or tenant, have been presented with a “standard form,” but whether the document accurately sets forth the terms upon which you are willing to agree. There are a number of provisions typically found in agreements to lease real estate. A brief outline of some common provisions follows.
Parties. The lease agreement should accurately identify the parties. The correct legal names of the landlord and tenant should be set forth. If an individual is identified as the contracting party, it is the individual (rather than an entity owned or controlled by the individual) who will be responsible for performing the obligations set forth in the lease agreement.
Identification of the Property. The property should be identified so that there is no confusion as to what property is the subject of the transaction.
Agreement to Lease the Demised Premises. Every lease of real estate should contain a provision specifically requiring the landlord to lease to the tenant, and the tenant to take from the landlord, the demised premises. The lease may contain a separate section regarding the obligation of the landlord to deliver possession of the property to the tenant. The tenant may wish to include a provision that permits the tenant to terminate the lease if possession is not delivered by a certain date.
Term. The lease should set forth its term (i.e., how long the lease will last). This provision should set forth the commencement date or specify how the commencement date will be determined. If the tenant is to have an option to extend the term of the lease, this right should be specified in the lease. An option to extend is sometimes found in the term section of the lease, and sometimes found in a separate section of the lease.
Rent. A provision stating the amount of the rent should be included in the lease. Often the lease will specify the annual rental and how the rental is to be paid (e.g., annual rental of $120,000, to be paid in equal monthly installments of $12,000 in advance on the first day of each month during the term of the lease). Some leases contain provisions for a pass through of operating expenses. Such provisions are commonly found in leases of premises in strip shopping centers. Operating pass through provisions may be included in the rent section of the lease or in a separate section or sections. A prospective tenant should analyze a pass through provision carefully, as provision may substantially increase the total rent over the base rent. The lease may require the tenant to pay a late payment fee if tenant pays rent late. Such a provision may be found in the rent section or in its own section.
Security Deposit. Most commercial leases require the tenant to give a security deposit to secure payment of its obligations under the lease. Generally, the tenant’s liability will not be limited to the amount of the security deposit.
Use and Occupancy. The lease usually will contain a provision which limits the purpose for which the tenant may use the property. The tenant should make sure that its intended use of the lease is permitted by the lease, as well as applicable local law.
Quiet Enjoyment. The lease should provide that the tenant shall peaceably and quietly have the leased premises during the term of the lease.
Repairs. The lease should specify the repair obligations of the parties. Typically, the repair section will identify the portions of the premises which each party must repair.
Services. The lease may contain a provision which specifies what services will be provided by the landlord (e.g., cleaning services).
Utilities. The lease may specify which parties are responsible for the payment of various utilities.
Insurance. The insurance section of the lease sets forth the respective obligations of the parties regarding insurance. Most leases require the tenant to maintain public liability insurance. Often the tenant must have the landlord named as an additional insured of such policy.
Requirements of Law. Most commercial leases will require that the tenant shall comply with the applicable requirements of law.
Waiver of claims and Indemnification. A commercial lease may provide that the tenant waives any claim against the landlord. It further may require the tenant to indemnify the landlord against certain matters. It is less common to find a provision that requires the landlord to indemnify the tenant against anything or matter related to the lease.
Alterations. Commercial leases often state whether the tenant may alter the premises.
Destruction of premises. The lease may contain a provision which addresses the obligations and rights of the parties in the event of a partial or total destruction of the premises.
Assignment and Subletting. Most commercial leases contain provisions which limit the tenant’s right to assign or sublet the premises.
Subordination, Non-Disturbance, and Attornment. This provision addresses the rights of tenants and the landlord’s lenders. For example, if a lender forecloses the landlord’s interest in the property, whether the lease will remain in effect may be controlled by the terms of the subordination, non-disturbance, and attornment provision.
Estoppel Certificate. The lease may contain a separate section which requires the tenant to give an “estoppel certificate” under certain circumstances.
Default. The events of default will be specified in the default section of the lease. Whether the tenant has a right to cure an event of default may be found in this section. In some leases, the default does not occur until the time to cure a particular matter (e.g., last payment of rent) passes.
Remedies. This section specifies the rights of the parties in the event of a default.
Condemnation or Eminent Domain. A section on condemnation or eminent domain will address the rights of the parties in the event that some or all of the premises is taken in an eminent domain proceeding.
Other common provisions. Other provisions often found in a commercial lease include: (a) end of term provisions (e.g., how the tenant is to return the premises at the end of the term); (b) holding over provisions (i.e., what happens if the tenant remains in the premises after the end of the term of the lease; (c) agency and brokerage provisions; (d) rules and regulations; (e) fixture provisions (e.g., whether fixtures remain the property of the tenant at the end of the lease term); (f) construction of the premises or improvements on the premises; (g) conditions precedent to the obligations of the parties (e.g., that the tenant be able to obtain a certificate of occupancy); (h) environmental provisions.
Miscellaneous provisions. Typically, commercial leases contain a miscellaneous section at their end. Neither the landlord nor tenant should assume that the “miscellaneous” provisions are unimportant. Common provisions found in the miscellaneous section of a commercial lease are: (a) a “time is of the essence” provision; (b) notice provisions; (c) a “no waiver” provision; (d) a choice of law provision; (e) a provision defining certain terms in the lease; (f) an “entire agreement” provision.
Ten Changes a Tenant Would Like to See in a Landlord’s Standard Lease
Typically the landlord or the landlord’s broker or agent will present the “standard lease” of the landlord or broker to the tenant. Often this standard lease has been prepared in a one sided way that favors the landlord to the great detriment of the tenant. Many tenants (or prospective tenants) assume that they must accept the “standard lease” without question or further negotiation. Often this is not the case. Many landlords expect and anticipate that a tenant will insist on modifications to the landlord’s standard lease. Many times a prospective tenant will find it beneficial to engage the services of a business attorney or real estate lawyer to assist in negotiations regarding modification of the more unreasonable provisions contained in the standard lease of a landlord or its broker. Presented below are ten changes a tenant commonly would like to see in a landlord’s standard lease. Please note that there are many other changes which a tenant may desire, and a tenant may find other issues to be of greater significance in the context of its particular business or circumstance.
1. Lease Terms Accurately and Completely Stated. Have the parties been correctly identified? If the tenant is identified as an individual or an individual is required to guaranty the lease, does individual understand that his or her personal assets are at risk in the event of a default of the lease? Does the document accurately describe the leased premises? Is the correct amount of the rent stated?
2. Assignment and Sublease. Typically the standard lease will require the landlord’s written consent to any assignment or sublease by the tenant. Some leases provide that the landlord may terminate the lease if the tenant requests permission to assign the lease. At the very least, the tenant should attempt to obtain a modification which requires the landlord not to unreasonably withhold consent to an assignment or sublease of the lease.
3. Default. Many standard leases provide that the tenant is in default if the tenant is late by only one day in payment of rent or other charges under the lease. Although the default provision may not state this explicitly, this is the effect of the provision. For example, if the lease provides that the rent is due on the 1st of the month and that the tenant is in default if rent is not paid when due, the tenant would be in default if the tenant paid the rent on the 2nd of the month. The section of the lease concerning remedies often permits the landlord to terminate the lease or tenant’s right to possession in the event of default. Therefore, under many standard leases, the landlord may terminate the lease or tenant’s right to possession if the tenant is only one day late in payment of rent. The tenant should attempt to obtain a modification that provides that the tenant is in default only after some specified cure period has passed without payment by the tenant (e.g., 10 days written notice).
4. Cap on Operating Expenses. Many tenants focus only on the base rent and ignore the additional rent which must be paid under other provisions of the lease. Many standard leases provide for a pass through of operating expenses to the tenant. When an operating pass through provision is included in the landlord’s standard lease, there usually will be no limit on the operating expenses included or cap on the amount of the operating expenses. Unfortunately, these provisions can be very complicated and difficult to understand. However, the effect is to increase the tenant’s monetary obligations under the lease. The tenant should seek to modify the operating expense pass through provision so that the amount of the pass through is limited. Without some limit, it is not possible for the tenant to determine its potential liability under the lease.
5. Option to Cancel. The tenant may desire a provision that allows it to terminate the lease before the end of its term. Depending on the relative bargaining power of the parties, sometimes a tenant can obtain an option to terminate the lease after some period of time in exchange for the payment of a certain amount. In the absence of such an option, the tenant remains liable for the full term of the lease. This is particularly important if the tenant is an individual or an individual has guaranteed the tenant’s obligations under the lease. Under Georgia law, the landlord has no obligation to lease the premises in the event of the tenant’s default. Therefore, a tenant should not expect or anticipate that the landlord will mitigate its damages by doing so.
6. Option to Extend Lease Term. If the tenant desires the right to remain in the premises after the expiration of the initial term, it should seek to include the right to extend the term of the lease. An option to extend should specify the rental amount or a precise way to calculate the rent during the extended term. Failure to do so will render the provision too indefinite to be enforced under Georgia law.
7. Environmental Matters. The tenant’s responsibility for environmental matters should be limited to environmental problems caused by the tenant. Under various environmental laws, the tenant may be liable for environmental problems caused by the landlord or a previous tenant. Therefore, the tenant may want representations, warranties, and indemnification from the landlord concerning environmental matters related to the premises.
8. Compliance with Laws. Many standard leases make the tenant responsible for compliance with laws during the lease term. Such provisions could make the tenant responsible for non-compliance with matters that occurred before the tenant took possession of the premises or matters unrelated to the tenant’s particular use of the premises. The tenant should seek to limit its responsibility to compliance with laws related to its particular use of the premises.
9. Relocation. Many leases permit the landlord to move the tenant to a “similar” space. If the particular location is important to the tenant, the tenant may wish to delete such provision or limit landlord’s right to move the tenant.
10. Rent Acceleration. Many standard leases provide as a remedy that the landlord may accelerate the rent for the balance of the lease term in the event of a default by the tenant. For example, the lease may state that the tenant is responsible for the entire balance of the remaining rental payments as the measure of damages. Regardless of whether the acceleration is permitted under the applicable state law, it would be to the tenant’s advantage to delete such provision from the lease.