The Four (4) Critical Risk Areas When Entering into a Commercial Lease Agreement

Legal Insight

May 2024

Maria Tsoukala, Lawyer

Summary: Special attention is required in practice when drafting a commercial lease, particularly from the prospective tenant's side. Given the typically high rent agreed upon in such leases, the tenant should thoroughly examine all terms of the agreement during the negotiation phase to avoid unpleasant surprises that could lead to significant losses. This article highlights four key points that every tenant should check in a timely manner, before signing the lease agreement and before undertaking any works or expenses on the leased property.

A. Verification of the Description of the Leased Property in the Lease Agreement and Inspection of Its Actual Condition

A crucial point that should not escape the attention of the prospective tenant is the careful verification of the property's description, which should be detailed in the lease agreement. Specifically, the tenant should assess whether the actual condition of the property at the time of the lease agreement aligns with its description in terms of its type (e.g., shop, office, warehouse), exact address, area, constituent spaces, annexes, auxiliary areas, and their descriptions, as well as any exclusive use of common areas. Particular attention is needed regarding the property's details as recorded in the existing horizontal or vertical ownership establishment act, which the tenant should thoroughly review, especially for any modifications. Finally, the tenant must be accurately informed about the ownership status of the property to be leased. To this end, the tenant should conduct a diligent review of the property's ownership titles.

Additionally, the tenant should ensure that the landlord provides a detailed description of the property in the lease agreement to verify whether there are any unauthorized constructions at the time of the lease. Such unauthorized constructions can be identified by comparing the property's actual condition with the documents from the relevant urban planning authority, such as the property's floor plan, the initial or revised building permit, etc., which the tenant should meticulously examine.

B. Verification of the Issued Building Permit and Permitted Land Uses of the Property to Be Leased

In practice, serious issues often arise after the lease agreement is signed, concerning complex matters related to the legal use of the property, negatively affecting the contractual relationship and potentially leading to its termination. This is because violating relevant provisions can result in the prohibition of leasing the property where the violation is found, rendering the lease null and void. Specifically, according to Article 82(1)(b) of Law 4495/2017: “b) Leasing and granting of properties where unauthorized construction has been carried out or unauthorized change of use has been installed is prohibited, according to the provisions of Article 81(1)(a) and (b).” If such illegality is discovered during the lease's operation (resulting in its nullity) and the tenant has accepted terms concerning the building permit and permitted land uses, they will not be entitled to any compensation from the landlord. Moreover, the tenant may face serious issues that could halt their business operations on the property, as the competent urban planning authority may impose sanctions, including hefty administrative fines, disconnection from utility networks (electricity, water, sewage, telecommunications, natural gas), and ultimately sealing of the property, leading to business closure.

Therefore, in commercial leases, to legally operate the tenant's business on the property with the agreed use, the property must meet the legal requirements for that specific use. The prospective tenant should carefully verify both the issued building permit to determine for which use it was granted (e.g., shop, warehouse) in relation to the property's use described in the lease, and the permitted uses (professional activities) in the area where the property is located, i.e., what uses are legally allowed on the property and under what conditions. This includes examining the building block where the property is situated.

Furthermore, beyond the conditions set by urban planning legislation for permitted property uses, it's essential to check whether the intended use is allowed under the building's regulations. If a specific use is prohibited by the building's regulations, modifying this term requires the agreement of co-owners, making it a particularly challenging process in practice.

It's crucial for the tenant to request from the landlord both the documents included in the approved building permit file from the relevant urban planning authority (initial or modified) and the building's regulations (if available), to ascertain whether the landlord has made any unauthorized changes in use. An unauthorized change in use occurs when the property is leased and used differently from the legally approved and urban planning-compliant use (see Article 81 of Law 4495/2017: “Unauthorized change of use is defined as any change in use for which the required building permit has not been issued”). If such unauthorized changes are found, the tenant interested in leasing the property should immediately request the landlord to regularize them according to current urban planning legislation and ensure that the details of the completed regularization (e.g., issued act number) are included in the lease agreement.

C. Verification of the Financial Status and Creditworthiness of the Prospective Landlord in Conjunction with a Check of the Property's Land Registry Sheet

Particular caution is required from the prospective tenant before entering into a commercial lease agreement regarding the financial status and creditworthiness of the landlord to avoid unexpected scenarios involving enforced execution by the landlord's creditors.

If the tenant discovers, through a check of the property's land registry sheet, the registration of encumbrances (mortgages, pre-notations, etc.) on the property they intend to lease, they should immediately contact the landlord for assurances regarding the fulfillment of obligations secured by the relevant encumbrance, such as letters from the landlord's creditors confirming compliance, a copy of the “Tiresias” record, credit score, etc. This allows the tenant to assess the landlord's situation and predict the likelihood of seizure on the property.

Failure to conduct such checks poses a serious risk. If a seizure is imposed on the property and it's eventually auctioned and awarded to a new owner, the tenant may be forced to vacate the property (on which they may have already undertaken works and significant expenses) following lease termination by the new owner and be compelled to find another space for their business within a very short and pressing deadline—either two (2) months from the registration of the award report in the competent Land Registry if the seizure was imposed before the property's lease, or six (6) months from the lease's termination by the new owner if the seizure was imposed after the property's lease. It's noted that the new owner can immediately enforce the award report summary against the tenant without any further legal action.

D. Verification of the Tenant's Responsibility for Property Expenses

The final point the tenant should consider to ensure maximum protection in a potential legal dispute with the landlord is the allocation of property expenses—necessary, beneficial, and especially common expenses. In commercial leases, significant expenses often arise due to the large areas of the leased properties, which typically burden the tenant.CEE Legal Matters

Therefore, before signing the lease agreement, the tenant should carefully examine the extent of expenses related to common services and their maintenance, such as the use and maintenance of professional and large elevators, lighting of common areas, maintenance of common vehicle and pedestrian pathways, garden maintenance, waste collection, security services, etc., to negotiate a reasonable and fair allocation of these expenses.

Conclusion 

In summary, considering the above often hidden risks in drafting commercial leases, the tenant is advised to exercise due diligence and attention from the negotiation stage with the landlord, focusing on the four key points mentioned above. Neglecting these aspects may result in signing a lease agreement whose terms either don't meet legal requirements or are burdensome for the tenant, who may unknowingly accept unfavorable terms without fully understanding their implications.