I. About This Article
A lease agreement is one of the most common and practically important contracts in business relations. It is often used for the temporary use of commercial premises, land plots, production facilities, agricultural property or other business assets.
Legally problematic issues related to lease agreements are directly connected with business operations, income generation, payment of lease rent, stability of the contract, contractual penalties, damages, return of property and the burden of proof in case of a dispute.
In practice, disputes related to lease agreements often arise not only when rent is unpaid, but also where the contract does not clearly regulate the rent review mechanism, grounds for termination, procedure for returning the property, liability of the parties and other important matters.
This article will help you understand what a lease agreement means, how it differs from rental, what main obligations the lessor and lessee have and what risks may arise during a lease relationship.
The article discusses the method of determining lease rent, the possibility of revising rent due to changed circumstances, grounds for terminating a lease agreement, preconditions for imposing contractual penalties, limitation periods applicable to lease rent claims and recent practice of the Supreme Court of Georgia.
II. What Is a Lease Agreement?
Under Article 581 of the Civil Code of Georgia, by a lease agreement, the lessor is obliged to transfer specific property to the lessee for temporary use and, during the lease period, ensure the possibility of receiving fruits or income from the property, provided that such income is obtained as a result of proper economic management.
According to the interpretation of the Supreme Court of Georgia, lease is a bilateral, paid and consensual contract. The lessor’s obligation is to transfer the leased property to the lessee for temporary use in such a way that it is possible to generate income from it. The lessee’s obligation is to pay the agreed lease rent.
Therefore, the purpose of a lease agreement is not only the use of property. In a lease relationship, it is especially important that the property enables the lessee to generate income.
III. How Does Lease Differ from Rental?
Lease is a type of rental relationship, but there is an important difference between them.
In rental, the main element is the use of an item. In lease, the possibility of receiving fruits or income is added to the use of the property. This is what distinguishes lease from rental.
For example, if a person takes a residential apartment for living purposes, this is usually a rental relationship. However, if a business takes commercial premises, a production facility, a land plot or other property for income-generating purposes, the relationship is more often a lease.
In practice, this distinction has significant importance because, in a lease relationship, the lessor’s obligation may not be limited only to handing over the property. The lessor must ensure such legal and factual condition of the property that the lessee can generate income from it.
IV. What Obligations Do the Lessor and Lessee Have?
In a lease agreement, the main obligation of the lessor is to transfer the property to the lessee for temporary use and ensure the possibility of generating income from it.
The main obligation of the lessee is to pay the agreed lease rent, use the property in accordance with the purpose defined by the contract, maintain the property and return it after the contract ends.
In practice, many disputes related to lease agreements begin because the parties generally refer to transfer of property and payment of rent, but do not define in detail the purpose of use, condition of the property, possibility of income generation, current expenses, fate of improvements and return procedure.
Therefore, when drafting a lease agreement, determining only the amount of lease rent is not sufficient. The agreement should clearly reflect the rights, obligations, liability and termination procedure of the parties.
At the same time, the contract should not include provisions that contradict mandatory legal requirements. Otherwise, instead of a valid lease agreement, the parties may face an invalid transaction that does not produce legal effects.
For more information about invalid contracts, see our blog: Unlawful Transaction – When a Contract Does Not Produce Legal Effects.
V. How Is Lease Rent Determined?
Lease rent may be determined as a fixed amount, in kind, as a percentage of turnover or by another method agreed by the parties. The Civil Code of Georgia allows parties to determine the form of lease rent and the payment procedure themselves.
In business relations, both fixed rent and turnover-based rent are frequently used. For example, in the lease of a retail facility, the parties may agree that rent will be calculated as a certain percentage of the facility’s monthly turnover.
However, turnover-based rent does not always exclude future disputes. In one case reviewed by the Supreme Court, the parties linked lease rent to 4% of the turnover of a commercial facility, but the actual rent later became significantly lower than the market lease value. The Court gave this circumstance substantial importance when assessing the issue of adapting the contract to changed circumstances.
In practice, when defining a lease rent formula, the parties should consider in advance what will happen if the actual rent becomes significantly lower than the market value or, conversely, creates an economically unreasonable result for one of the parties.
VI. When Can Lease Rent Be Changed Due to Changed Circumstances?
The issue of changing lease rent becomes particularly relevant where the contract is long-term and market conditions change significantly.
Article 398 of the Civil Code of Georgia provides for the possibility of adapting a contract to changed circumstances. Under this rule, if the circumstances that became the basis for concluding the contract have clearly changed after the contract was concluded, and the parties would not have concluded the contract or would have concluded it with different content had they taken these circumstances into account, adaptation of the contract to changed circumstances may be requested.
According to the practice of the Supreme Court of Georgia, in such cases the parties should first attempt to adapt the contract. Only if adaptation is impossible or the other party does not agree to it may the affected party have the right to withdraw from or terminate the contract.
The Court explains that several elements are important when assessing changed circumstances: the circumstances must have changed after conclusion of the contract; those circumstances must have formed the basis of the contract; the change must have been unexpected; had the change been taken into account, the parties would not have concluded the contract or would have concluded it on different terms; and the change must be so substantial that one party can no longer be required to remain in the contract or perform it unchanged.
In lease relationships, this is particularly important where lease rent is determined for a long period, but market rent changes substantially. In such a case, keeping the contract unchanged may create a clearly unfair and disproportionate result for one of the parties.
VII. When Can a Lease Agreement Be Terminated?
Termination of a lease agreement may be connected with different circumstances: non-payment of lease rent, material breach of contract, improper use of the property, refusal to adapt the contract to changed circumstances or other grounds defined by the agreement.
If the issue concerns termination of a long-term lease agreement, the party should consider not only the special lease rules, but also the general standard for terminating a long-term contractual relationship.
For more information about this issue, see our blog: Termination of a Long-Term Contract in Georgia – What You Should Know About Article 399 of the Civil Code.
Termination of a lease agreement should not be a rushed commercial decision. If a party wishes to terminate the agreement, it should first assess the contract text, nature of the breach, warning obligation, evidence, rent payment history, existence of changed circumstances and possible dispute risk.
In lease termination disputes, decisive importance often belongs not only to whether a ground for termination existed, but also to how the party prepared the notice, whether the other party was given an opportunity to react and how consistent the terminating party’s conduct was.
VIII. What Happens After Termination of a Lease Agreement?
After termination of a lease agreement, the lessee’s legal basis for possessing the property disappears. Accordingly, the lessor may request return of the leased property.
The practice of the Supreme Court also emphasizes that once a lease agreement has been terminated, there is no longer a legal basis for possession of the property transferred under that agreement, and the factual and legal basis for requesting return of the property arises.
In practice, this means that after termination of a lease, the dispute may continue in several directions: return of property, recovery of property from unlawful possession, claim for unpaid lease rent, contractual penalty, damages or lost income.
For this reason, the lease agreement should define in advance within what timeframe the property must be returned, in what condition it must be returned, how the handover act is prepared and what consequences follow if the return deadline is breached.
IX. What Risks Are Connected with Contractual Penalties?
Contractual penalties are often used in lease agreements to secure performance of obligations. They may be imposed for late payment of lease rent, delay in returning the property, improper use of the property or breach of another contractual obligation.
According to the Supreme Court, a contractual penalty is a means of securing performance of an obligation and has both a preventive function and a function of simple and quick compensation for damage. However, the precondition for imposing a contractual penalty is breach of an obligation assumed under the contract.
This means that the mere existence of a contractual penalty clause in the agreement is not enough. The party claiming the penalty must prove that the other party actually breached the obligation for which the penalty was provided.
In addition, the court may reduce a disproportionately high contractual penalty in light of the circumstances of the case. Therefore, the amount of contractual penalty in a lease agreement should be reasonable, proportionate and connected with the interest it is intended to protect.
In practice, disputes related to contractual penalties often arise where the sanction is formally included in the contract, but it is not clearly defined which specific breach triggers the penalty.
For more information about the nature, functions, determination and court reduction of contractual penalties, see our blog: Contractual Penalty in a Contract — What Businesses Should Know About Penalties, Default Interest and Court Reduction.
X. What Limitation Period Applies to Lease Rent Claims?
The limitation period for lease rent claims is very important in practice, especially where debt accumulates over several years and the lessor raises the claim only later.
According to the practice of the Supreme Court of Georgia, a periodic obligation to pay lease rent is subject to a three-year limitation period. It is not decisive whether the lease agreement concerns movable or immovable property. What matters is the legal nature of the claim: if the claim concerns a periodically performed obligation, the three-year limitation period applies.
The Court explains that non-performance of each periodic payment obligation is treated as a separate violation of the right, and the limitation period begins separately for each claim.
In practice, businesses often delay legal steps related to unpaid lease rent, as a result of which part of the claim may become time-barred. Therefore, in case of non-payment of lease rent, timely written demand, accurate accounting of debt and planning of legal steps are necessary.
XI. What Should a Business Consider Before Signing a Lease Agreement?
Before signing a lease agreement, a business should assess not only the amount of lease rent, but the entire contractual mechanism.
Special attention should be paid to the precise description of the leased property, condition of the property at the moment of transfer, purpose of use, lease rent formula, payment deadlines, rent review mechanism, contractual penalties, termination rules, return procedure, fate of investments and improvements, and dispute resolution rules.
If the contract is long-term, it is especially important for the parties to define in advance what will happen if market conditions change, if rent creates an economic imbalance, if the property is used improperly or if early termination becomes necessary.
In practice, the greatest risk in a lease agreement often lies in the fact that parties are overly optimistic at the beginning of the relationship and do not think enough about how the relationship will end if a problem arises.
XII. How TB Legal Can Help
Within our contract law services, TB Legal assists businesses with drafting lease agreements, legal assessment of existing agreements and development of legal strategies concerning lease rent, contractual penalties, termination of lease agreements, return of property and compensation for damages.
Our approach is based not only on formal analysis of the contract text, but also on assessment of the parties’ real commercial interests, court practice, evidence and potential dispute risks.
If you plan to enter into a lease agreement, amend an existing agreement, negotiate lease rent or terminate a lease agreement, it is important to obtain legal advice before making a decision.
XIII. Conclusion
A lease agreement is not only a document allowing temporary use of property by a business. It creates the legal framework for receiving income, paying rent, maintaining contractual stability, adapting to changed circumstances, contractual penalties, damages and return of property.
A properly drafted lease agreement reduces dispute risk and gives the parties pre-defined rules both during the relationship and in case of its termination.
Contact TB Legal if you plan to enter into a lease agreement, amend an existing contract, negotiate lease rent or terminate a lease agreement. We will help you assess legal risks, choose the right strategy and protect your business interests.
XIV. Sources Used
This article is based on the following sources:
- Relevant provisions of the Civil Code of Georgia.
- Commentaries to the Civil Code of Georgia.
- Leading Georgian and German legal literature.
- Practice of the Supreme Court of Georgia.
- TB Legal’s practical experience in contract, lease and business dispute matters.
Disclaimer
This article has been prepared for general informational purposes only and does not constitute individual legal advice or a legal opinion. Issues related to lease agreements, lease rent, changed circumstances, termination, contractual penalties, damages, return of property and limitation periods may be assessed differently depending on the specific contract, factual circumstances, conduct of the parties, evidence and applicable legal framework.
Before making a decision in a specific matter, it is recommended to obtain individual legal advice from a qualified lawyer.
