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What Do You Know About the Commercial Lease Agreement in Alabama?
Anyone with a business knows that leasing commercial property is cheaper than buying an entire floor. Other than the low initial capital requirement, leasing offers more fluidity, and you have better access to otherwise unavailable amenities. But, there’s one catch: the costs could go up in a few months or years if you fail to read through all the terms of your commercial lease agreement in Alabama. As the landlord, renter or lessor, spelling out all your terms saves you future legal trouble.
What is a commercial lease agreement?
It is a legal contract agreed upon by a landlord and a tenant or the lessor and the lessee. It is also called a commercial real estate lease, a business lease, or a commercial property lease. Once signed, this document will give the tenant the right to use the specific property for named commercial or business activity, for a specific duration and in exchange for money. The lease will also outline the responsibilities and the rights of both the landlord and the tenant in the entire duration of the lease, as well as other pertinent information like rent and the name of the tenant’s guarantor.
As a business owner interested in that prime office space, you need to ensure that you read and even question the terms of your Alabama commercial lease agreement. You also need to know the specifics of a standard commercial property lease agreement. However, before we look at the details, let’s understand which are the main types of lease contracts for commercial property in the market?
Types of commercial leases
Gross / Full Service Lease
Under this lease, the tenant’s responsible for the rental rate which includes all the operating expenses or the real estate taxes. Note that the landlord could reserve the right to pass down future increases in operating expenses.
Under this contract, the tenant bears all the costs associated with the property, on top of the rent. So, the tenant also pays the pro rata portion of the property tax, common area maintenance (CAM), and property insurance.
There are three types of net leases: Triple Net Lease, Double Net Lease, and the Single Net Lease.
Triple Net Lease: the tenant pays the property taxes, CAM, and Property Insurance
Double Net Lease: tenant pays property taxes and the property insurance
Single Net Lease: the tenant only pays the property taxes in addition to rent.
Modified Gross Lease
This is a hybrid between the gross and the net lease, and the operating expenses are shared/ negotiated between the landlord and the tenant. The tenant covers the base rent and the CAM, and the landlord covers the rest.
Here, the tenant will pay the base rent and a percentage of gross revenue the business’ operating expenses associated with the use of the space.
Note: these types of leases bear different terms. The terms of your commercial lease agreement in Alabama will include:
Fixed end date lease: this lease specifies the exact date that marks the end of the tenancy period. With the predetermined lease duration, the rent cannot be raised during that time, and no other changes can be made to the lease unless stated in the lease.
Fixed number or Years/ Months/ Weeks: this lease will specify the lease duration as weeks, years, or months. The tenancy period lasts for as long as the tenant, and the landlord agree. Rent increase cannot be initiated during that period unless mentioned in the document.
Periodic lease: this lease could run for weeks, months or even years and will run until either party decides to terminate the lease. Month-to-month leases are the most common types of periodic leases.
Automatic renewal lease: with this kind of agreement, the duration of the lease will continue running as per the agreed terms until the tenant or the landlord issues a notice for the termination of the contract. Here, the contract runs under the terms agreed upon when initiating the contract.
Statutory Requirements for a commercial real estate lease in Alabama
The agreement must be created according to the state laws under Title 7 and Article 2A. Also, it is a requirement to have a rental application which should be prefilled by the potential tenant for verification of their business credit, the finances of the business principal, as well as the source of income.
For new businesses or the ones with few assets, the state requires that the lessee has a personal guaranty making the business entity’s owner the entity that shoulders all the responsibility for the performance of that lease contract.
Elements of the complete commercial property lease agreement
First, you should reach a verbal consensus on critical issues like the term of the lease, base rent, and renewal options.
Next up, in the header area of the document, input the legal names and addresses of the lessor (landlord) and the lessee (tenant/ renter). Once you have these details, you need to input these other details in the sections outlined in the statutes.
Section 1: The description of the leased property
Section 2: The use of the leased property
Section 3: The Terms of the lease
Section 4: The option to renew – this is optional
Section 5: Rent and Other expenses. This is one of the most important parts of the contract, and you need to identify the type of lease you agree to. The type of lease could be gross, triple net (NNN), or modified lease.
Section 6: this covers the security deposit.
Section 7: Leasehold improvements – incorporate the changes that the lessee can make.
Section 13: Default (actions to be taken and penalty charged for late payment
Section 17: Miscellaneous like the details of the municipality
Section 22: Tenant and landlord contact information for all legal notices
Other essentials of the lease include parking, the addition of signs, terms of assignment and subleases, utilities, entry allowances, condemnation, quiet possession, notice, and subordination.
Lastly, the lease must bear the signatures of the landlord and the tenant. If the lease is for a large-scale lease, you should have the document notarized at the notary public, with both parties present.
It’s important to note that both parties should have an original copy of the document after signing or notarization. After execution, the lessee has to pay the security deposit to receive access to the space.
Wondering if you can skip the agreement and agree verbally?
No, you shouldn’t. In the absence of the agreement, both the landlord and the tenant will suffer immensely, financially and mentally.
If you are interested in a professionally drafted commercial lease agreement form in Birmingham, Mobile, Huntsville, Montgomery, Tuscaloosa, Auburn, or any other city in Alabama, get started with our free commercial lease form today!