Knowledge of federal, state and local law, of the changes to those laws, and of local forms and customs is essential in practising real estate law. Alabama land records are handled on a county-by-county basis. Many probate offices have implemented technological improvements for better filing and access to recorded documents, though these developments can still vary significantly between counties. Closing commercial deals involves standard forms and requirements for both state law compliance and title insurance.

All Sections referenced herein are Sections of the Code of Alabama (1975). 

Trends in 2025

In 2025, the US real estate market demonstrated resilience. Despite the effects of increased tariffs, stabilised interest rates by year-end generated optimism for 2026. Developers nationwide embraced adaptive reuse, and Alabama mirrored this trend. In Birmingham, one of the state’s largest malls is being considered for conversion to a multifamily development, and developers have repurposed vacant warehouses into entertainment venues. Demand for data centres has also surged, and Alabama has emerged as an attractive location for data centre development and expansion. With these trends and nationally recognised companies seeking land in the state, Alabama’s real estate market is well positioned for continued growth. 

Significant Deals in 2025

In 2025, prominent companies commenced or announced significant developments in Alabama. A leading steel and mining company announced plans for a USD1.2 billion specialty electrical steel facility in Mobile County, while a major pharmaceutical company announced a USD6 billion manufacturing facility in Huntsville. Data centre growth continued as a prominent social media company expanded its Montgomery investment from USD800 million to USD1.5 billion.

Birmingham experienced a range of developments, notably in adaptive reuse. The century-old Eyer-Raden Building welcomed new hospitality and retail tenants, while Up-Down Birmingham launched an arcade bar in a renovated warehouse. The multifamily sector saw activity with the completion of Colina WeHo, a USD51 million development in West Homewood.

Anti-Money Laundering Regulations for Residential Real Estate Transfers

In 2025, the US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) proposed the Anti-Money Laundering Regulations for Residential Real Estate Transfers (the “Final Rule”), which would impose a nationwide reporting requirement for certain non-financed (all-cash) transfers of residential real estate to legal entities or trusts. Under the Final Rule, certain parties involved in the closing or settlement of qualified transactions – including but not limited to the title company/agent, licensed attorney, broker, real estate salespersons, or any other person providing closing or settlement services in relation to the transaction – must file a Real Estate Report with FinCEN, generally within 30–60 days of the closing. Reporting obligations began on 1 March 2026.

The Real Estate Consumers Agency and Disclosure Act

Following the USD418 million National Association of Realtors (NAR) settlement in 2024, Alabama Act No 2025-59 reformed the Real Estate Consumers Agency and Disclosure Act (RECAD), taking effect on 18 April 2025. 

Key changes in RECAD include that:

• buyers are not required to sign an agreement before viewing properties;
• a written RECAD disclosure form and early disclosures of brokerage services and compensation are required to protect both the consumer and real estate professional; and
• referral agreements between real estate licensees are required in writing to protect against referral scams and unfair brokerage practices.

See Ala. Code Section 34-27-80 through 34-27-88. 

Alabama’s Military Land Use Planning Legislation

Effective 1 October 2025, a developer may not commence the construction of any structure that is 200 feet tall or more within two miles of a military installation without approval from the local governing body. This presents a potential hurdle for developers interested in areas such as Huntsville, given its concentration of military defence and research facilities.

See Ala. Code Section 11-106-6.

Zoning Appeals in Circuit Court

Effective October 2025, an aggrieved party may now appeal the final decision of a municipal zoning board of adjustment in the county circuit court by filing a notice of appeal with the board within 15 days and then filing the appeal in circuit court within 45 days after the final decision. Ater serving the board, the board must then transmit the certified record to the court within 45 days of service. The board’s decision will remain in effect during the de novo appeal process unless a stay is granted based on standard factors such as likelihood of success on the merits and irreparable injury without a stay. 

See Ala. Code Section 11-52-81.

Unless the conveyance specifies otherwise, when real property is conveyed, granted or demised, it is transferred as an absolute fee simple estate (Section 35-4-2). Alabama law also permits life estates, easements and servitudes. A fee simple owner may grant a leasehold estate or licence to permit others to occupy and use the owner’s real property. See 6. Commercial Leases.

A conveyance of real property must generally be written and signed by all parties, with witnesses to the signatures (Section 35-4-20), and must contain a valid property description. Conveyance instruments must:

• provide the instrument preparer’s name and address (Section 35-4-110);
• list the grantor’s marital status and conveyed property’s homestead status (Section 35-4-73); and
• provide ad valorem tax notice, typically using Real Estate Sales Validation Form RT-1 (Section 40-22-1).

See also 8.1 VAT and Sales Tax.

Residential conveyances require special disclosures, but generally there are no special laws regarding the transfer of real property based on use. However, the parties to a transaction or locality rules may require additional provisions to be included in the deed or in a separate document recorded with the deed at closing.

Buyers should still take additional precautions to ensure that the property’s proposed use complies with relevant local rules (see 2.8 Permitted Uses of Real Estate Under Zoning or Planning Law).

Transfer of title is generally effectuated by a deed, usually taking the form of a general warranty deed, statutory warranty deed (Section 35-4-271) or quitclaim deed. In commercial transactions, the most common form of deed is the statutory warranty deed. Other forms of conveyancing and/or transfer or occupancy instruments include:

• ground leases;
• leases;
• judicial decrees vesting title to real property;
• foreclosure deeds;
• tax deeds;
• sheriff’s deeds; and
• deeds in lieu of foreclosure.

Conveyancing instruments must be recorded in the office of the judge of probate for the county in which the property resides (Section 35-4-50). Alabama uses a hybrid “race-notice” system where a purchaser takes priority over all prior purchasers of which they have no notice at the time they record their conveyance – eg, see Nelson v Barnett Recovery Corp, 652 So 2d 279, 281 (Alabama Court of Civil Appeal 1994) regarding Section 35-4-90.

In commercial transactions, due diligence typically involves:

• review of title and survey matters;
• physical property inspection;
• financial and other property records inspection; and
• review of relevant zoning, permitting or platting requirements.

It may also include an examination of the property’s environmental condition.

Lawyers are typically assigned review and/or cure of title and survey matters, and are often involved in addressing permitting and platting requirements as well as the resolution of environmental matters, if applicable. The allocation of attorney versus client responsibility continues to vary considerably based on the client’s size and needs.

Purchase and sale agreements (PSAs) may vary from those providing for the sale of property in its “as is, where is” condition, with no representations to PSAs containing significant representations and warranties, such as the following:

• the seller’s ownership of title;
• the seller’s authority to sell the property;
• that no violations of law are present on the property;
• that the property has no tenants in possession (except as noted);
• the seller’s warranty to satisfy mechanics’ liens;
• environmental matters;
• zoning and permitting status; and
• the absence of pending litigation and condemnation.

Alabama law provides for an implied warranty of fitness and habitability for the sale of new residential property; however, the doctrine of caveat emptor generally applies – see Sims v Lewis, 374 So 2d 298, 303 (Alabama 1979).

A buyer’s customary remedies for a seller’s misrepresentation are based on the contract’s terms. The seller’s liability for such a breach can be negotiated and is often capped at a specific dollar amount, which varies.

Foreign companies are not required to register with the state unless they are considered to be transacting business in Alabama (Section 10A-1-7.01). Foreign companies must, however, comply with all federal laws relating to the transfer of property to a foreign investor, including the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA), etc. Additionally, foreign investors should consider the tax implications of such a transaction when purchasing real estate (see 8. Tax). Recent changes to Committee on Foreign Investment in the United States (CFIUS) regulations have had some impact in Alabama.

Alabama’s laws generally conform to federal environmental laws. Because environmental statutes often hold the current owner strictly liable for the costs of remediation, commercial real estate buyers and sellers may contractually allocate environmental liability. Buyers and sellers will negotiate the terms of any “as is” language, indemnification for environmental matters, and any release of environmental claims between the parties.

Negotiated terms vary between contracts, with sellers favouring caps on their liability and buyers preferring a complete indemnification from sellers. Additionally, many buyers wish to limit their liability by satisfying the requirements for the “innocent landowner defence” against CERCLA liability (discussed further in 3.8 Lenders’ Liability Under Environmental Laws).

An interested buyer can request a zoning verification letter from the applicable jurisdiction’s planning department. Some departments will include statements of compliance or non-compliance, but many counties in Alabama do not have the staff capacity to do so. In those cases, if a buyer or its lender requires a compliance certificate, consultants are available who will provide such a compliance report or certificate for a fee. Local municipalities may enter into a development agreement to facilitate a specific project use, depending on the municipality and project type.

Governmental taking of property by eminent domain and condemnation actions may occur if the property is taken for a “public use” and payment of “just compensation” is made (Alabama Constitution of 1901, Article XII, Section 235). In addition to state and federal constitutional limitations, Alabama has adopted the Alabama Eminent Domain Code, which sets procedures for eminent domain cases (Section 18-1A-1 to -311). If a landowner rejects an offer to purchase from the state, the state will file a complaint for condemnation with the probate court for the county where the relevant property is located.

The deed tax is triggered by any real estate conveyance and is typically allocated to the purchaser, unless otherwise agreed by the parties. The purchase of an interest in a property-owning company is not considered a conveyance of real estate and, therefore, does not trigger the deed tax. The deed tax is USD0.50 for every USD500 (rounded up) of the conveyed property’s value. If a mortgage is recorded simultaneously with the deed, a credit is provided by statute, such that the deed tax due is calculated on the value of the real property not securing the mortgage only (Section 40-22-1(c)).

For example, if a property is purchased and sold for USD2 million and the deed is recorded simultaneously with a mortgage of USD1.5 million secured by the property, the deed tax would be calculated only against the USD500,000 portion of the property’s value not already subject to the mortgage tax.

Statutory deed tax exemptions exist for certain instruments made for agricultural purposes (Section 40-22-4), farm loans (Section 40-22-5) and certain conveyances by religious organisations (Section 40-22-5.1).

Under Alabama law (in addition to FIRPTA), upon the sale of any real property, 3% (if the buyer is an individual) or 4% (if the buyer is an entity) of the purchase price must be withheld; or, if the gain recognised on the sale is less than the purchase price and the seller provides the buyer with an Affidavit of Seller’s Gain (see Alabama Department of Revenue (ADOR) Form NR-AF2), the buyer may withhold 3% or 4% of the amount of the gain (Section 40-18-86). Transferors may be exempt from these withholding requirements under Section 40-18-86(d) (see 8. Tax).

The Alabama Property Protection Act (APPA) prohibits foreign principals (as defined in the APPA) from China (excluding Taiwan), Iran, North Korea and Russia from owning:

• agricultural and forest property; or
• property within ten miles of a military installation or critical infrastructure facility.

See Section 35-1-1.1. A list of what qualifies as a critical infrastructure facility is provided in Section 35-1-1.1(b)(2), and Section 35-1-1.1(d) provides an exception for existing owners.

The acquisition of commercial real estate is generally financed with indebtedness secured by a mortgage lien on acquired property. Depending on the type of real estate, financing may be available through bank debt, conduit loans or government-sponsored enterprises.

A purchaser or developer of commercial real estate generally grants a mortgage to secure borrowed funds used to acquire and/or develop the real estate. Most commercial lenders also incorporate a security agreement into the mortgage (in addition to separate UCC filings made locally and in the borrower entity’s domicile state) to cover personal property attached to or used in connection with the mortgaged real estate and proceeds. Lenders can also collateralise (with additional agreements and filings) the borrower’s entity interests or stock and/or deposit accounts.

Financial institutions that are not domiciled in Alabama may be required to qualify to do business in Alabama and may be liable for filing tax returns and payment of annual privilege tax (under Sections 40-14A-21 to 40-14A-29) and excise tax (under Sections 40-16-1 to 40-16-8) if the financial institution is doing business in Alabama within the meaning of the laws.

Under Section 40-22-2, mortgage recording tax is generally USD0.15 per USD100 of the loan amount secured by the mortgage. Mortgages with open-end or revolving indebtedness have two options for paying the recording tax, as follows.

• Paying the recording tax based on the maximum principal indebtedness stated in the mortgage, regardless of the cumulative amount advanced.
• If the mortgage does not state the maximum principal indebtedness, the taxpayer must:
1. pay a recording tax on the actual amount initially advanced;
2. annually report the amount of indebtedness secured by the mortgage; and
3. pay tax on additional advances made.

There are mechanisms, such as obtaining tax orders from ADOR, for allocating recording tax for mortgages covering property in multiple counties or states. Additionally, a nominal per-page recording fee will be collected upon recording.

Other than general contract law principles and granting a mortgage in proper form for recording, with the required information included in the document, there are no specific legal rules or requirements applicable solely to entities. For most transactions, it is recommended to obtain a lender’s title insurance policy insuring the mortgage.

A mortgage must be recorded to maintain priority over subsequent liens granted on the property. Section 35-10-1 to -98 deals with state requirements for foreclosure. There is a homestead exemption pursuant to Section 6-10-2 and a one-year statutory right of redemption under Section 6-5-248(b).

Existing secured debt can be subordinated to newly created debt if the parties execute and record a subordination agreement.

Unless the lender is deemed to be a partner in the transaction, it cannot be held liable under environmental laws for merely holding security (ie, a mortgage) unless it directly causes the pollution or contamination. Nonetheless, most Alabama lenders typically require an environmental indemnity agreement from the borrower and one or more beneficial owners.

If the lender forecloses and becomes the property owner, the only way to qualify for liability exemptions under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) for existing contamination is to conduct all appropriate inquiries (AAI), according to the ASTM E1527-13 standards, in a timely manner prior to the date the loan is made. AAI must be conducted no more than one year prior to the loan closing.

Any report more than one year old is of no value in establishing an innocent purchaser defence under CERCLA. Certain portions of the AAI are only good for 180 days. If AAI is not performed or completed in a timely manner, a lender can be liable once it takes possession of the property for contamination it did not cause.

In addition to AAI, most mortgage lenders in Alabama require the borrower (and other indemnitors) to agree to indemnify the lender against potential environmental liability.

Lenders should consider the general principles of US federal bankruptcy law. Typically, loan documents will include provisions dealing with a borrower’s potential bankruptcy, though such provisions are of limited or no value in a bankruptcy proceeding.

Borrowers Filing Bankruptcy Petitions

When a borrower files a bankruptcy petition, there is an automatic stay of all actions against a borrower’s property, including foreclosure. If a security interest is foreclosed prior to the bankruptcy filing, then, in the absence of some defect in the foreclosure process, the foreclosed property does not become part of the borrower’s bankruptcy estate, and the lender is free to exercise its state law rights regarding the property (including taking possession). Even in that scenario, a lender may be forced to ask the bankruptcy court for permission via a motion for relief from the automatic stay. In addition, the foreclosing lender may have an unsecured claim (a deficiency claim) to assert against the borrower in bankruptcy.

Alternatively, if a secured lender fails to foreclose its lien prior to a borrower’s bankruptcy filing, the lender will be forced to assert its rights in the borrower’s bankruptcy case. Typically, a lender will file a proof of claim and, depending on which bankruptcy chapter the borrower files under (eg, Chapter 7 (liquidation), or Chapter 11 or 13 (business or consumer reorganisation, respectively)), will participate in the confirmation process as to the borrower’s proposed plan of reorganisation. While in bankruptcy, the lender may assert the rights granted to it under the relevant loan documents.

Petitioning the Court

Prior to taking many actions that would otherwise be allowed outside bankruptcy, a lender must petition the court for relief from the automatic stay. In addition, as to non-residential property that is not a borrower’s homestead, a lender’s secured lien can be “valued” – ie, bifurcated into secured and unsecured portions after a valuation hearing with the bankruptcy court. Likewise, a wholly unsecured junior lien may be stripped off the property and treated as completely unsecured in certain circumstances.

Defaults

A borrower’s insolvency will ordinarily lead to a default under the terms of the relevant loan documents and subsequent foreclosure of the secured collateral. In the commercial context, and depending on the commercial loan and property’s size and characteristics, a borrower’s insolvency might lead to a receiver being appointed under Alabama law; see Section 6-6-620 to -628 and Section 6-6-780 to 6-6-807 (the Alabama Uniform Commercial Real Estate Receivership Act).

There are no real property or ad valorem taxes related to loans besides taxes due on interest and income therefrom, and other doing-business taxes and fees applicable to lenders.

Under Title 11, Counties and Municipal Corporations, Alabama regulates land use, development, design and construction primarily through zoning ordinances and subdivision regulations. Property owners and developers should research applicable planning and zoning regulations by ordering a zoning report and communicating directly with the relevant municipality. Alabama business licence fees may also vary depending on the property’s location and use. See 8.3 Municipal Taxes.

Regulatory Authorities

At the local level, municipal corporations (cities and towns) may enact zoning laws and regulations through the creation of a comprehensive zoning ordinance, which must be compatible with the enabling statute (Section 11-52-1 et seq). Zoning laws generally designate areas into business, industrial and residential districts, and control the type, character, kind and use of structures and improvements in such designated zones or districts (Section 11-52-70). County governments may also enact zoning ordinances and building codes for flood-prone areas outside municipalities (Section 11-19-3).

Zoning laws typically control:

• the permitted shape, proportion and dimensions of lots and structures located thereon;
• the use of such structures;
• setback requirements; and
• parcels uses in designated zones or areas.

Private restrictive covenants in the property’s chain of title may impose additional controls on development or refurbishment of property. For certain redevelopments, the Alabama Department of Environmental Management (ADEM) may have recorded use and development restrictions into the chain of title. These ADEM-imposed controls operate alongside local zoning laws, which are administered by the local municipal planning commission and must be consistent with the local comprehensive plan (Section 11-52-3).

Developers typically begin the process of applying for permits by engaging consultants and civil engineers for guidance on local customs, contacting the local planning department, and reviewing applicable zoning laws before applying for permits.

Municipal Approvals, Public Hearings and Third-Party Participation

Depending on the project, approval from various municipal departments may be required. If a project requires a change to the zoning code or road vacation, etc, public hearings are held where third parties may comment and object. Planned unit developments are sometimes used to facilitate project development. The process of obtaining permits and approvals varies between local authorities, and interested parties should consult the relevant authority for further details.

Planning and Zoning Restriction Enforcement

The first governmental enforcement mechanism used is refusal by the local planning department to issue a building permit. After issuance, restrictions are enforced by an inspector appointed by the designated zoning official.

Private parties may also restrict development or use through restrictive covenants that run with the land, being agreements or “promises relating to real property that are created in conveyances or other instruments" (Collins v Rodgers, 938 So 2d 379, 385 n 15 (Ala. 2006)). 

Restrictive covenants are typically memorialised through restrictive language in a conveyance instrument, an express declaration of covenants, conditions, and restrictions created by a single property owner, or an agreement for covenants, conditions and restrictions agreed to by two or more property owners. Any of these may be recorded in the probate office of the county where the encumbered property is located. Such covenants may be enforced by the parties or their successors in title; however, Alabama follows the general rule that courts “strictly construe restrictive covenants are not favoured in the law and, therefore, that they will be strictly construed, with all doubts resolved, in favour of the free and unrestricted use of land and against the covenants” (Whaley v Harrison, 624 So 2d 516, 518 (Ala. 1993)).

Alabama law authorises the formation of corporations, general partnerships (GPs), limited partnerships (LPs), limited liability companies (LLCs) and real estate investment trusts (REITs) for the purpose of holding real estate.

The most frequently used ownership entities in Alabama are LLCs and LPs (including limited liability limited partnerships). Generally, LLCs are preferred to LPs as investment vehicles because none of an LLC’s owners (“members”) is liable for the entity’s debts and obligations, while an LP is required to have at least one partner (the “general partner”) liable for such debts and obligations. LLCs also have a potential tax basis advantage over LPs in qualifying for non-recourse basis treatment for an entity-recourse debt. Alternatively, an LP may be preferable if certain owners are not US citizens and if the requirements of their home country’s tax laws would impose additional tax burdens upon them otherwise.

LPs and LLCs are usually preferred over corporations (other than REITs, as described below) because corporate income is taxed at the corporate level, and then the dividends paid to the corporate owners (“shareholders”) are taxed again.

Corporations that own real estate often do so in connection with their trade or business (eg, factories). Other entity types can be used to hold real estate assets as well, such as S corporations and general partnerships, but their use is infrequent due to taxation and liability concerns, respectively. 

Regarding LPs and LLCs, almost all features of their operations are negotiated among the partners or members in an LP’s limited partnership agreement or in an LLC’s limited liability company agreement, including how and by whom decisions are made as well as how the economics are divided. Major decisions typically require the consent of the partners or members, and often include:

• a sale or refinancing of the principal asset;
• certain major leases;
• construction matters, such as budgets and hiring of contractors; and
• decisions affecting the continuation of the entity, such as merger, termination and bankruptcy.

These agreements also establish the priorities of economic distributions and the payment of agreed-upon fees among the partners or members, providing for how and when additional capital may be called from the partners or members. It is important that these agreements properly address income tax considerations, as the allocation of economic benefits and tax liabilities of ownership must comply with detailed US tax code regulations or risk unintended tax outcomes. Both agreement types will generally have provisions allowing for certain owners to buy the interests of other owners or to have the assets sold under certain circumstances.

Corporate Statutes and Judicial Decisions

Many activities of corporations, including REITs, are governed by Alabama corporate statutes and judicial decisions. In closely held corporations, the owners (shareholders) may enter into a shareholders’ agreement, which establishes, among other things, how votes are cast and how interests in the corporation may be bought and sold or otherwise transferred.

Economic distributions within corporations are generally less flexible than distributions within LPs and LLCs. Each share in the same class of ownership shares is entitled to the identical economic distribution as each other share in that class. In order to allocate economics in a corporation differently among shareholders, multiple classes of shares must be created with different priorities of payments and claims on a corporation’s distributions.

REITs are corporations or business trusts that elect for REIT status, allowing them to pass income through to their owners, like LPs and LLCs; however, because of the complex qualifications required of REITs under the US tax code, investments in REITs are normally limited to large income-producing assets or portfolios of assets. Many REITs are formed in Maryland.

REITs must pay the same filing fees as other Alabama entities required under Section 10A-1-4.31. When computing such fees, a REIT should treat its declaration of trust in the same manner as a certificate of formation. See Section 10A-10-1.13.

REITs organised under Alabama law (Section 10A-10-1.01 to -1.24) should file their declaration of trust in the same manner as the certificate of formation of an Alabama domestic filing entity. Section 10A-10-1.06 identifies the requirements of a declaration of trust, and Section 10A-10-1.07 sets forth the division of classes of REIT shares permitted by Alabama law. REITs should follow Section 10A-10-1.11 regarding annual report requirements and submission requirements to shareholders.

There is no minimum capital requirement, though a nominal amount such as USD100 is common.

LP Governance

The governance structure of an LP is set out in the agreement of limited partnership, and generally provides that most decisions be made by the GP. Alabama law allows certain voting rights for the LPs without jeopardising their status as LPs.

LLC Governance

An LLC may be:

• “member-managed”, where the members make decisions by majority, supermajority or unanimous vote, as set forth in the limited liability company agreement; or
• “manager-managed”, where a designated manager holds decision-making rights.

Members who are not managers often retain the right to consent to certain major decisions.

Corporation Governance

For corporations, including REITs, governance is set forth in their articles of incorporation and by-laws. The articles of incorporation are a filed, public document containing certain statutorily required information, such as the name, registered office and registered address of the corporation. The by-laws govern:

• shareholder voting;
• board and officer elections;
• officer duties;
• shareholder/board meeting frequency; and
• other routine matters.

In most corporations, day-to-day decisions are made by the officers. Certain decisions outside the normal course of business will be made by the board of directors. Unless an owner is a director or officer, its only governance right is to periodically vote for members of the board or in connection with certain statutorily required matters, such as merger transactions.

Maintenance and costs are variable and will depend on ownership/accounting structure. Certain entities must pay an annual Business Privilege Tax in accordance with Section 40-14A-21 through -29. The rate will vary depending on taxable income and net worth. See Section 40-14A-22.

A real property’s fee owner may grant a leasehold estate or licence to permit others to occupy and use the owner’s real property for a limited timeframe. Leasehold estates allowing a tenant to occupy and use real estate without buying it outright are generally categorised into the following types.

• A tenancy for years is a leasehold estate “limited to endure for a definite and ascertained period, fixed in advance”. See Waldrop v Siebert, 237 So 2d 493, 494 (Alabama 1970).
• A periodic tenancy is one where the lease has no stated duration and periodic rent is reserved or paid. See Gulf Coast Realty Co, Inc v Prof’l Real Estate Partners, Inc, 926 So 2d 992, 1007 (Alabama 2005). If no time for termination is stated, the law construes the term to be from December 1st to December 1st (Section 35-9-3).
• A tenancy at will or at sufferance is a lease “for an indefinite and uncertain term” and is sometimes called a tenancy from month to month. See Melson v Cook, 545 So 2d 796, 796 (Alabama Civil Appeal 1989). If a lease is specified as a tenancy at will, it may be terminated by either party at will by giving ten days’ notice in writing (Section 35-9-3).

There are no formal, legal distinctions between different types of commercial leases; however, commercial leases are generally divided between “net” leases and “gross” leases.

In a net lease, a landlord charges its tenant a base rent plus additional rent for pass-through items, such as common area maintenance, insurance costs, advertising, etc; such pass-through items will vary based on the terms negotiated by the parties.

In a gross lease, a landlord charges its tenant one flat fee for rent, and the landlord is responsible for the property’s maintenance costs; however, such maintenance costs are typically accounted for in the amount of the gross lease’s base rent. Furthermore, certain categories of commercial leases often contain specialised terms that are unique to the subject matter involved.

There are no restrictions on the type or amount of rent charged under a commercial lease in Alabama. A lease term may not be longer than 99 years (Section 35-4-6). If any portion of a lease term is longer than 20 years, the lease or a lease memorandum must be recorded within one year of signing; otherwise, the portion of the term exceeding 20 years is invalid (Section 35-4-6).

Residential leases are generally more regulated than commercial leases and are subject to the Alabama Uniform Residential Landlord and Tenant Act (Section 35-9A-101 et seq).

Lease terms range from less than one year up to 99 years, depending on the terms of a specific lease.

Landlords typically maintain roof and structural components of leased real estate, while tenants are often required to maintain the leased premises and those systems and improvements serving the leased premises in good working order, although the extent of such maintenance responsibilities varies widely.

Monthly rent payments are typical, but the parties may agree to different terms.

The rent payable may vary between different payment periods during the term, based on the lease’s terms, typically increasing as time passes during the term.

Changes and increases in rent will be determined by the terms negotiated by the parties in the lease.

There is typically no governmental tax collected on rent paid to a landlord. However, transfer taxes are due when a lease (or memorandum of lease) is recorded in the public records in an amount equal to the tax consideration. See 6.20 Registration Requirements.

Costs paid by a tenant at the start of a lease vary by transaction and the parties’ negotiation. Tenants may pay the first month’s rent, a security deposit, broker’s fees or other landlord administrative fees at the start of a lease.

Net commercial leases often pass operating expenses (including common area maintenance and repair) through to the tenant, in accordance with the lease’s terms, typically prorated among the tenants of a specific property based on the amount of square footage leased by each tenant at said property. Gross commercial leases typically require the landlord to pay for common area maintenance and repair, though these costs are also typically priced into the rent paid by the tenant.

For a residential lease, the landlord is required to “keep all common areas of the premises in a clean and safe condition”, along with other requirements for the leased premises’ working order and condition (Section 35-9A-204).

Net commercial leases often include utilities and telecommunications services serving an entire property (not just an individual tenant) in the operating expenses that are charged to tenants on a pro rata basis, while gross commercial leases may include the costs of such services, utilities and telecommunications in the rent charged to the tenant. If such utilities or services are separately metered and service only a single tenant’s leased premises, that tenant is often responsible for the payment for such utilities or services.

The tenant is not obligated to pay real estate taxes and assessments unless the lease provides for the tenant to pay or contribute to such costs. 

Payment of insurance premiums insuring leased real estate is typically done by a landlord, but such costs are often passed through to tenants as an operating expense in net commercial leases. Insurance coverages vary by property, but many commercial landlords carry general liability, casualty, flood and fire insurance, as well as coverage for bodily injury, property damage, lost rents, etc.

Landlords may limit the way that commercial tenants use leased real estate and often prohibit tenants from using the leased premises for certain exclusive uses negotiated with other parties. Applicable zoning laws and private restrictive covenants in the property’s chain of title may impose further restrictions on tenant uses.

The terms of a lease will dictate whether a tenant is permitted to alter or add improvements. Often, tenants may receive a tenant improvement allowance to induce signing the lease, requiring that a landlord either installs certain improvements on the premises or reimburses the tenant for its costs.

Often, a lease requires a tenant to obtain the landlord’s written approval for materials, plans, contractors, etc, involved in such improvements before starting the construction or installation of such improvements. Furthermore, trade fixtures may generally be removed by a tenant, though the tenant may be held liable if they damage the underlying real property in the process of removal. See LaFarge Bldg Materials, Inc v Stribling, 880 So 2d 415, 419 and 424 (Alabama 2003).

The Alabama Uniform Residential Landlord Tenant Act (Section 35-9A-101 et seq) governs any rental agreement (“all agreements, written or oral, and valid rules and regulations adopted under Section 35-9A-302 embodying the terms and conditions concerning the use and occupancy of a dwelling unit and premises”) related to the rental of any dwelling unit (a “structure or the part of a structure, including a manufactured home, that is rented as a home, residence or sleeping place by one or more persons”) to a tenant (“a person entitled under a rental agreement to occupy a dwelling unit to the exclusion of others”); Section 35-9A-141.

This statute includes additional rules and regulations for both landlords and tenants in the residential context. Non-residential real estate leases may include specific restrictions related to the category or use of the leased premises, but such leases are generally not subject to specific regulations or laws due to the use or category of the underlying leased premises.

Leases often contain language stating that a tenant’s insolvency or the filing of any bankruptcy petition, voluntary or involuntary, constitutes a default under the lease. However, if the lease remained in force at the filing of a bankruptcy petition, the leasehold estate is considered an asset of the tenant, which is protected by the Bankruptcy Code’s automatic stay.

Generally, a tenant does not have the right to continue to occupy the leased premises after the expiry or termination of a commercial lease. When a tenancy is for a certain period of time and the term expires under the lease, the tenant is bound to surrender possession without the landlord providing notice to quit or demanding possession (Section 35-9-8).

If a landlord has terminated the lease for a breach or default, the landlord must give the tenant notice of termination at least ten days prior to terminating a commercial lease, unless the lease provides for additional time (Section 35-9-6).

If the tenant does not deliver possession of the leased premises after demand, as described above, the landlord may pursue an unlawful detainer action in the district court of the county where the premises are located (Section 6-6-330). The landlord’s complaint must be served on the tenant at least six days before the hearing date (Section 6-6-332).

If the district judge rules in favour of the landlord, the court will file a writ of execution, which requires the sheriff to restore the premises to the landlord (Section 6-6-337). The tenant may file an appeal of the judge’s ruling within seven days, and a trial on the appeal is scheduled within 60 days of the date of the appeal (Section 6-6-350).

The landlord’s right to possession will not be delayed by a tenant’s appeal, and can only be prevented if the tenant pays all rent payable before the landlord regains possession by a writ of possession (Section 6-6-351).

Typically, the ability to assign the lease or sublease the premises is restricted to a certain extent in the lease, but a tenant generally has the right to sublease the property or assign the lease without the landlord’s consent if the lease is silent about subleases and assignments. If the lease requires the landlord’s consent before subleasing or assigning the lease, the landlord cannot “unreasonably and capriciously” withhold consent (Homa-Goff Interiors, Inc v Cowden, 350 So 2d 1035, 1038 (Alabama 1977)).

In Alabama, provided the remedy is included in the commercial lease, a landlord is typically allowed to terminate the lease for:

• failure to pay rent or other amounts due under the lease in a timely manner;
• default under the lease (sometimes after a required opportunity to cure);
• violation of applicable laws; and
• other terms specified in the lease.

For residential leases in Alabama, by statute, a landlord may terminate a lease by delivering written notice to the tenant specifying the acts or omissions causing the breach in the following cases:

• the tenant’s material non-compliance with the lease;
• the tenant’s intentional misrepresentation of a material fact;
• the tenant’s material non-compliance with any of their statutory obligations; or
• if the tenant does not pay rent when due (Section 35-9A-421(a) and (b)).

If the breach arises from unpaid rent or other curable breaches, the lease shall terminate within seven business days of receiving the notice if not remedied by the tenant. Other breaches are not curable, including intentional misrepresentation of a material fact and certain acts on the premises (eg, possession of illegal drugs or criminal assault). See Section 35-9A-421(a), (b) and (d).

If a lease is considered a “conveyance for the alienation of land”, it must be either:

• properly acknowledged by an authorised officer (for example, a notary public); or
• attested by one witness.

See Sections 35-4-20 and 35-4-23.

If a lease term is 20 years or less, including options to extend, a memorandum of lease is not required to be recorded to be enforceable against a third party, if that third party had actual or constructive knowledge of the lease. Leases for more than 20 years, including options to extend, are void for the period of time over 20 years, unless, within one year of the lease’s execution, the lease or a memorandum of the lease is recorded with the probate office in the county where the leased property is situated. See Section 35-4-6.

Transfer taxes are due when the lease (or a memorandum of lease) is recorded in the public records (Section 40-22-1(a)). Each county’s probate office should be consulted to calculate the tax due upon the recording of the lease or memorandum thereof.

The tax consideration is calculated as follows: term of lease (in months) multiplied by monthly rent multiplied by percentage from a lease percentage chart kept by the probate court of the county where the property is located (which is based on the term of the lease), divided by 1,000. See Section 40-22-1(c).

To obtain the proper lease percentage table, attorneys should contact the probate court of the county where the property is located. The tax consideration is rounded up to the nearest USD500 (Section 40-22-1(c)).

Residential Lease

For a residential lease, the landlord must give the tenant seven business days’ notice of default; if the default is not cured, the landlord may file an unlawful detainer action, notice of which must be posted at the leased premises. The tenant then has seven days from the posting of notice to file an answer. Assuming the tenant does not answer, the landlord may file for a writ of execution with the district court for the county where the leased premises are located, which will be issued to the county sheriff, and it may take several weeks to actually serve and evict the tenant.

In total, the process can take several months or longer, based on the case’s specific circumstances; see Section 35-9A-461.

Commercial Lease

For a commercial lease, the landlord must give the tenant a notice to cure if required by the lease, with the cure period also being determined by the lease language. If the lease does not require a notice to cure, it does not have to be served. Before filing an eviction, the landlord must serve a notice terminating the tenant’s lease, or the possessory interest only, as desired, with a statutorily required ten-day notice (or less, if permitted by the lease). If the property is not vacated, the landlord may file an unlawful detainer action, notice of which must be posted at the leased premises. The tenant then has 14 days from the posting of notice to file an answer. Assuming the tenant does not answer, the landlord may file for a writ of execution with the district court for the county where the leased premises are located, which will be issued to the county sheriff, and it may take several weeks to actually serve and evict the tenant.

In total, the process can take several months or longer, based on the case’s specific circumstances; see Section 6-6-310 to -353.

Pursuant to its terms, a lease may be terminated by a third party in the case of condemnation or foreclosure on the part of a lender that pre-dated the lease. In the event that the leased premises are condemned, “the lessee is entitled to share in the total award only in proportion to [its] interest” (State Highway Department v Lawford, 611 So 2d 285, 288 (Alabama 1992)); and, if the fee owner is satisfied with the award for its interest in the property, but the leasehold owner is not, the circuit court can order a separate trial for the leaseholder on appeal (State v SouthTrust Bank of Baldwin City, 634 So 2d 561, 563-564 (Alabama Civil Appeal 1994)). Payment is based on the fair market value of the leasehold interest.

An Alabama landlord may only accelerate rent in a commercial lease if the lease expressly permits this. A landlord may only pursue self-help to retake possession of the premises after a default if the lease permits re-entry on default. Alabama law does not impose on a landlord a duty to mitigate damages in the absence of an express obligation in the lease to do so (Bowdoin Square, LLC v Winn-Dixie Montgomery, Inc, 873 So 2d 1091 (Alabama 2003)). The typical form of an eviction proceeding involving commercial leases is an action for an unlawful detainer. See Section 35-9-1 to -100 and Section 6-6-310 to -353.

The type of pricing structure used for projects depends on several factors, including:

• the current economic climate;
• the owner’s desires;
• financing concerns; and
• public entity status.

In commercial construction projects, there are typically more guaranteed maximum or fixed-price contracts than open-ended cost-plus contracts, while fixed-price contracts are used almost exclusively in the public works sector.

Alabama law requires a registered architect to sign off on plans for the design and construction of a project (Section 34-2-32). For projects of USD50,000 or more, a contractor must be licensed by the Alabama Licensing Board for General Contractors (Section 34-8-9).

If there are engineering requirements, a licensed engineer must be consulted and approve the plans. In addition, most trades are required to be licensed by their respective governing authority, such as plumbers/gas fitters and electrical contractors (Sections 34-37-1 and 34-36-1 et seq). The project’s owner will typically employ an architect and engineer to work with a general contractor to conceptualise the project; the general contractor then delegates subcontracts as necessary, often without being subject to owner approval, unless the owner contractually retains that right.

Owners and general contractors frequently utilise insurance policies and indemnification agreements in their contracts with each other, and with their subcontractors. Since contribution among joint tortfeasors is unavailable, the only method for obtaining contribution is to contractually oblige the counterparty to indemnification. Waivers are generally acceptable, and interim and final lien waivers are highly recommended with each payment application, and the final payment (including retainage) should be accompanied by a final, unconditional lien waiver and hold harmless agreement. Limitations or caps on liability can be negotiated into the contract, in addition to provisions requiring the contractor to post payment and performance bonds from a reasonably acceptable surety.

Delays in construction should always be addressed in the contracting documents. While a penalty is not available, the contract can provide for an agreed-upon “liquidated damages” provision for a certain amount to be allocated for each day, week or month that the project is behind schedule or for each milestone missed. Delay damages can be accounted for as a back charge to the contractor to be deducted from payments due.

As additional security for paying material suppliers or remedying defects and delays in construction, owners and general contractors are entitled to hold back retainage; see Section 8-29-3.

An owner or general contractor may retain 10% of payments to the general contractor or subcontractor, respectively. The retainage may only be taken from the first 50% of the payments for completion, after which “no further retainage shall be withheld”. See Section 8-29-3(i) and (j).

Depending on the project’s size, payment and performance bonds are the most common form of security to guarantee a contractor’s performance on a project. As a general rule, the larger the project, the more likely it is for an owner to require more expensive security on a project. Public works are required to be bonded (see Section 39-1-1), but there is no requirement for any security or bonding to be posted by a contractor on private work.

The most common method is for the owner to require both a payment and a performance bond from a reputable surety. Other layers of security may be negotiated into the relevant contract if risk is increased.

Any party who contributes work to the property that improves the property is eligible for a materialman’s lien (Section 35-11-210 et seq). The work provided must be a lasting improvement, not temporary. For example, an architect’s work in providing plans would be lienable, whereas a surveyor’s work would not; Wilkinson v Rowe, 98 So 2d 435 (Alabama 1957).

If the lienor’s work is commenced prior to the “creation” of a mortgage on the property, the lien will take priority over the mortgage; otherwise, the lien will be junior to the mortgage (Section 35-11-211). Liens may be removed from the property by transferring the lien to a bond using the statutory framework found in Section 35-11-233.

Each governmental jurisdiction has a building inspector’s office, which must issue a certificate of occupancy prior to the project being inhabited, and which establishes standards for construction in its respective jurisdiction. Inspections are typically required to be conducted, and passed, prior to each phase of the work.

Recording Tax

Alabama imposes a recording tax upon the filing of a deed or similar instrument conveying an interest in real estate with the county probate court where the real property is located (Section 40-22-1 et seq); the tax is USD0.50 per USD500 (rounded up) of value for the property conveyed. The obligation to pay the recording tax is on the buyer.

However, the parties do commonly negotiate the economic burden in real estate sales contracts. Under Alabama law, a deed or other instrument conveying such property must include a Real Estate Sales Validation Form (RT-1) provided to the county probate court at the time the instrument is presented to the probate court for recording. This form must include either proof of the actual purchase price (if the property is being sold) or the actual value of the property (which may be evidenced by a licensed appraisal or the assessor’s current value for the property).

Income Tax

Alabama imposes an income tax on the gain from the sale of real property (Section 40-18-1 et seq), at a maximum rate of 5% for non-corporate taxpayers and 6.5% for C corporations. Alabama does not provide a preferential rate for long-term capital gains.

Withholding of Income Tax

Alabama requires withholding of income tax on sales by non-resident taxpayers (Section 40-18-86), unless the seller provides an affidavit confirming Alabama residency (AL Form NR-AF1).

Certain limited types of transactions are exempt from non-resident withholding under Section 40-18-86 (AL Form NR-AF3). If the seller is not an Alabama resident, and if the transaction is not an exempt transaction, the buyer is generally required to withhold either 3% (where the buyer is an individual) or 4% (where the buyer is an entity) of the purchase price.

However, if the gain recognised on the sale is less than the purchase price, and the seller provides an Affidavit of Seller’s Gain (see AL Form NR-AF2), the buyer may withhold 3% or 4% of the amount of the gain. If the amount to be withheld, as based on the purchase price or the gain, is greater than the net proceeds of the transfer, only the net proceeds need to be withheld and remitted by the purchaser. Generally, the net proceeds of the sale are the net payments to the transferor as shown on the closing statement, though “net proceeds” may be calculated in other statutorily prescribed manners.

See 5.6 Annual Entity Maintenance and Accounting Compliance regarding Business Privilege Tax.

If the property being conveyed is located in more than one county in Alabama, there is a procedure for obtaining an order from ADOR to allocate the value of the property being conveyed among the relevant counties, so that the proper recording tax in each county can be determined.

Each municipality is permitted to impose an annual business licence tax on business conducted within its taxing jurisdiction, including leasing real estate.

Alabama has two withholding regimes related to income taxes attributable to non-Alabama resident taxpayers, including non-US taxpayers.

Income Tax Withholding Regime

See 8.1 VAT and Sales Tax regarding withholding of income tax. In addition, non-Alabama resident owners of pass-through entities, such as partnerships or S corporations, are subject to a composite payment regime under Section 40-18-24.2 (relating to partnerships and other “Subchapter K entities”) and Section 40-18-176 (relating to S corporations).

Composite Payment Regime

Under the composite payment regime, the pass-through entity files and directly remits taxes to ADOR with respect to the allocable pass-through income of the non-Alabama resident taxpayer, including the share of gain from the sale of real estate by the pass-through entity.

Income tax benefits are provided under Alabama’s income tax law, which is generally consistent with the federal income tax system.

In certain circumstances, Alabama law provides for tax incentives with respect to certain qualifying investments in the state, such as:

• the creation or expansion of industrial or research facilities;
• various job credits;
• data-processing centres;
• the relocation of corporate headquarters;
• investments to rehabilitate certain historic structures; and
• other qualifying projects.

The potential incentives may include abatements related to:

• income tax;
• state and local sales and use tax;
• state and local ad valorem tax; and
• state recording taxes.

To qualify for such incentives, the taxpayer must file the required applications and reports, and must be approved by the proper governmental authorities; the approved investment must also comply with additional compliance requirements. A summary of Alabama’s taxes and tax incentives can be found on the ADOR website.