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Read further to learn more about commercial lease agreements in Alabama, such as what disclosures are required and what else should be included.
What is a Commercial Lease Agreement?
A commercial lease agreement is a legally binding contract between a landlord who owns a commercial property and a tenant who wishes to rent the commercial property with the intention to operate a business. The commercial property being rented generally falls into a retail, office or industrial space category.
The Alabama state law governing commercial leases is Title 7 – Commercial Code Article 2A – Leases. Landlords in the state of Alabama need to follow these laws when offering commercial property for lease.
Landlords in Alabama will want to use an application that asks questions about a potential new tenant including their contact information, references, financial strength, and rental history. This application cannot ask any questions that would be discriminatory such as questions about age, sex, marital status, race, religion, and country of origin.
There are certain provisions are not allowed in a commercial lease, which include:
- Discrimination: A commercial lease cannot contain any clauses that prevent a tenant from getting the lease based on any kind of discrimination.
- Access for Disabled Persons: A commercial lease cannot reduce or eliminate the requirements under the federal law of the American with Disabilities Act (ADA) to provide equal access to the leased property regardless of a person’s disability.
- Contradictory to Alabama Law: A commercial lease cannot contain any clauses that do not follow Alabama state law.
The lease agreement or a separate document must give permission for a landlord to run a background/credit history check. It must be authorized by being signed by a lease applicant.
Alabama law allows a landlord to charge a fee that is paid by a prospective tenant for running a credit history and background check. It is important to charge this fee to be sure the prospective tenant is serious about wanting to lease the property. The landlord should not profit from charging this fee but past the actual cost on to the prospective tenant applicant.
If a business is new and/or does not have substantial assets, a landlord is allowed under Alabama law to ask a tenant applicant to sign a written agreement that gives a personal guarantee to back up the ability of the tenant to pay the rent. This can be the owner of the business or a third-party that signs the lease as an additional responsible party by giving a third-party guarantee.
Alabama law may be included in a lease contract by simple reference to the Code of Alabama Title 7, 2A; however, the recommendation is to include the exact language from the state law that applies in a commercial lease agreement to help avoid any misunderstandings by a tenant.
Here are the requirements under Alabama law that should be included in a commercial lease:
- Consumer Protection Law: Under Section 7-2A-104 1(c) Alabama Consumer Protection laws apply to commercial leases.
- Jurisdiction : Under Section 7-2A-106, there are limits on the choice of legal jurisdiction for consumer leases that require the jurisdiction to be either 1) where the lessee resides; 2) the leased property is located, or; 3) where the lease is executed within the state of Alabama. Other jurisdictions, even if agreed by the parties in writing, are not enforceable
- Lead-Based Paint Disclosure:The Environmental Protection Agency (EPA) requires a lead-based paint disclosure notification to be given to a prospective tenant about the risk of exposure to lead-based paint on properties built before 1978. This law applies to all residential properties and to any commercial properties that have activities, which may create a lead hazard for children.
Writing an Alabama Commercial Lease Agreement
There are four basic steps to create a commercial lease agreement, which are 1) Lease Application; 2) Negotiations; 3) Lease Agreement Preparation, and; 4) Lease Signing, Security Deposit/Rent Payment, and Move-In.
A prospective tenant fills out a written lease application, gives written permission for a credit/background check, pays the background check fee, and the landlord processes the application to see if the tenant is qualified.
If necessary, the landlord may request a personal guarantee and/or a co-signer on the lease, if the potential tenant is not strong enough financially or the business is too new. The landlord approves or declines the lease application. Negotiations continue if the lease application is approved.
It is common practice for there to be many drafts of a lease agreement and revisions before finally agreeing on the complete terms, which include the rent amount, length of the lease, options to renew the lease, type of lease (gross, modified gross, or triple-net) and other important considerations.
For a gross lease, the landlord pays all the operating costs and utilities for the leased property. A modified gross lease is where the tenant pays part of the operating costs and utilities for the leased property, which may include an allocation for a portion of any common areas. A triple-net (NNN) lease is where the tenant pays all of the operating costs and utilities for the leased property, plus any property taxes.
Negotiations may be conducted verbally, with each written draft reflecting the progress in agreeing on the various terms. The final lease agreement in writing must represent the complete agreement between the parties and the full terms and conditions of the lease. The signed, final, lease agreement supersedes any previous draft agreements or verbal agreements.
The lease agreement should contain the following:
- Landlord’s Name and Contact Information
- Property Manager’s Name and Contact Information (if any)
- Tenant’s Name and Contact Information
- Description of the Lease Property
- Authorized Use of the Lease Property
- Type of Lease (gross, modified-gross, or triple-net)
- Term of the Lease and the Commencement Date
- Option to Renew the Lease (if any)
- Rent and Landlord’s Profit Participation in Operations (if any)
- Penalty for Late/Non-Payment of Rent
- Designation of the Responsible Parties for Certain Expenses and Utilities
- Security Deposit and Refund Policy
- Permissible Leasehold Improvements Allowed by the Landlord
- Additional Terms as Needed (including municipal codes and restrictions)
- Landlord and Tenant Contact Information and Form for Legal Service
- Jurisdiction and Reference to Alabama State Law
- Place for the Notarized Signatures of All Parties
Lease Signing, Rent/Security Deposit Payment, and Move-In
The final lease is signed by all parties in their legal capacity for a party to the agreement with authority to bind the party to the lease agreement. The signatures are notarized. A copy of the original, signed lease is given to all parties. The security deposit is paid to the landlord by the new tenant. The first month’s rent is paid by the new tenant to the landlord. Then, the new tenant may move-in on, or after, the lease commencement date.