Overview of Commercial Lease Forms
Commercial lease forms are contracts that govern the agreement between a landlord and a commercial tenant. They outline the responsibilities of both parties with respect to a commercial space, including how long the lease will run, the amount of rent required, maintenance and repair obligations, and rights in the event of lease termination. These forms are important not only because they specify the amount of money and services to be delivered in the relationship but also because the terms are legally enforceable during the life of the lease .
For the lessor, commercial lease forms allow you to retain some control over some aspects of how certain property either is used or is treated. Tenants who violate its provisions can face fines or even eviction, depending on the severity of their actions. However, even though commercial lease forms can grant you certain protections, they should not be written without the guidance of an attorney. Mistakes in how they are drafted can leave you vulnerable to unexpected problems that can be very expensive or even devastating for your investment property and business relationships.
Essential Provisions of a Commercial Lease Form
A well-written commercial lease form will include specific information, including but not limited to:
(i) Legal description of property and/or street address
(ii) Lease commencement date
(iii) Renewal dates
(iv) Rent or payment information i.e. base rent, rent review methods, including CPI increase options
(v) Lease Term
(vi) Charges or additional sums due
(vii) Security deposit
(viii) Permitted use of property
(ix) Master Lease
(x) Insurance and indemnity clauses
(xi) Security provisions
(xii) H&S Notice
(xiii) Assignment Notice
(xiv) Default and Distress clauses
(xv) Indemnification and/or waiver of subrogation clauses
(xvi) Rights on Sale and Recovery of Possession
(xvii) Estoppels
(xviii) Subordination of Mortgage
(xix) Option to purchase terms
California’s Legal Requirements
California imposes certain unique legal requirements and regulations for commercial leases that both landlords and tenants must be aware of. For example, the California Civil Code establishes a number of repair and maintenance obligations for commercial landlords. In this regard, Civil Code Section 1938 requires that landlords provide prospective tenants with a written statement regarding the property and mold prior to executing a lease. This requirement is particularly noteworthy because it usually does not apply to residential leases and requires the landlord to provide a disclosure that includes the existence of any mold at the property.
Another California-specific compliance issue relates to accessibility for the disabled. California’s access law is contained in California Government Code Sections 4450 to 4461 and prohibits discrimination on the basis of disability at places of public accommodation, thereby superseding CAADA and establishing accessibility requirements for both the interior and the exterior of buildings. Accessibility requirements can also arise under other California codes such as the Fair Employment and Housing Act, the Unruh Civil Rights Act, various provisions of the Business and Professions Code, and the state Department of Transportation requirements, among many others.
Parties to a commercial lease also need to be aware of the requirement that all commercial leases must be in writing and signed by the parties to the lease under California Civil Code Section 1624(a)(3). Oral or implied contracts may be recognized in other states, but not in California. Further, there are California-specific statutory limitations on the time period for which leases may be entered into. For example, a one year lease may not be enforceable if not in writing, a five-year lease may be unenforceable if not in writing, a 10-year lease may not be enforceable if not in writing, and a 50-year lease may not be enforceable if not in writing.
Typical Provisions in California Commercial Leases
Common clauses found in California commercial leases should address the following:
- Rent. It really goes without saying that without a rental provision, there is no commercial lease to speak of. This clause should reflect the base rent due, as well as any common area maintenance and other miscellaneous charges that will be due from tenant to landlord. It should also state how and when rent will be paid, including where payment is to be delivered.
- Use. Landlords typically strive for a broad description of permitted use of the premises in order to facilitate their ability to fully lease space and charge higher rents. However, these types of clauses heavily favor the landlord. Tenants, on the other hand, strongly desire specificity as it pertains to permitted uses so that no other tenants – or their customers, for example – can encroach upon their operations. Therefore, a mutual compromise must be reached regarding use and operation of the premises as outlined in the lease agreement.
- Term. The term of the lease outlines exactly when the leasing period begins and ends and may also include additional options, such as an option to renew. The terms and related rental amounts are often subject to escalation clauses based upon a scheduled increment, which may relate to the Consumer Price Index (CPI) and other consumer indices. A term may last for one year, five years, 10 years, or longer, depending upon the specific needs of both parties.
- Deposit. This clause notifies tenant what form of deposit is required and how much will be held in order to ensure that the lease is executed. The deposit will also ensure that the landlord will be compensated for any and all tenant damages or holdover conduct and/or mitigation of damages. Necessary repairs made by the landlord upon tenant’s termination may be deducted from the deposit amount.
- Maintenance and Repairs. In most instances, commercial leases will include clauses that require tenants to maintain and repair the premises, including all building systems, equipment, fixtures, and personal property. There are some exceptions to this rule, mostly for healthcare facilities, industrial buildings, manufacturing facilities, and certain retail centers.
- Indemnification. On an indemnification clause, it is important for the injured party to notice that there is no express intent of liability or indemnity for one party to indemnify the other for its own negligent acts, errors, or omission. However, generally speaking, an indemnification clause protects that party from any loss, liability, damage, cost, or expense for third-party claims.
- Access. Access clauses benefit the landlord in that they allow access to the premises for purposes of maintaining the property, so long as the tenant receives prior notice. Landlords may also stipulate that tenants have no claim against the landlord for damages caused by building materials, products, and perform work to the premises.
- Remedies. There are remedies for both landlords and tenants in the event that one party materially breaches the agreement with another. However, it is important that both parties realize that material breach is not defined by a lease agreement. Material breach is a statutory term that may vary according to the specific statute governing the lease.
Commercial vs. Residential Leases
The fundamental differences between residential and commercial leases in California must be considered when entering into any type of lease. While the same basic concepts of renting space are present in both, there are very different structures and consequences in both types of leases that would not be considered in a residential lease. The difference is partly statutory.
California Civil code sections 1942.5 through 1942.15 are a part of the California law that governs residential lease space but do not apply to commercial leases . This area of law provides some significant protections to tenants of residential real estate including security deposit limitations, obligations to provide not only habitability but also warranty work on residential property, limitations on rent control, the ability to pursue an eviction in a judicial form in front of a judge, as well as rights under the Federal Telephone Consumer Protection Act, Government Code 12950.5.
None of this case law applies to commercial leases and that is why before entering into a commercial lease, you want to know what the lease will actually say. The lease is a much more intricate document that simply incorporates tenant rights under statutory law. Not only does the lease contain parts and pieces of the general law but also the specific negotiated terms of the contract. So, you need to know what those terms are and if there are other consequences to signing a commercial lease, you may or may not be aware of.
Negotiating a Commercial Lease
A commercial lease is just as important a legal document as any contract you may enter into with a person or company. Like any other contract negotiation, you will want to negotiate the terms of your commercial lease with the utmost seriousness and attention to detail. Much of the process of vetting the commercial lease will involve consideration of the cost you must pay and the length of time for which you will be making that payment to your landlord.
The first consideration to take into account is the cost of the lease. You will want to ensure that while you are paying reasonable market rates for your commercial space, you are also not overpaying because of some unusual quirk in the lease that makes the cost higher than it should be. You should not necessarily agree to the first offer presented to you by your new landlord. Rather, work with your lawyer to find other comparable commercial properties in your area, then discuss the average cost per square foot of those comparable properties. This will give you an idea of how much rent you can expect to pay over the course of your lease.
However, there are other considerations involved that go beyond the mere cost of the lease. For example, a landlord may offer a relatively low price upfront but build in costs that take effect after the first five years, resulting in substantial increases in cost at the end of the decade. Even a small tacked-on fee of $100 or $200 per month can add up to thousands of dollars over the course of a lease, so you will want to ensure you know about these fees up front.
Another factor to consider is the size of the lease and its holdings. For example, you may need to lease additional space if you plan to build out your office space, or if you hope to expand your business.
Common Mistakes and How to Avoid Them
Navigating the intricacies of a commercial lease form is no small feat. Make one unintentional mistake and you could be paying the price for many years to come. While we have covered extensively the critical provisions of commercial leases, we wanted to address in more detail the common mistakes businesses make when entering into a commercial lease in California and what you can do to avoid these pitfalls.
One of the most common mistakes is not negotiating the deal. Too many times, we see clients that have been approached by a landlord or commercial real estate agent with a commercial lease form already completed by the landlord. It is tempting to just sign the document, but doing so may not even get you the basics in the deal. For example, an often misunderstood provision is the Contingency for Landlord’s Approval. Section 18 of the form NNN Lease (C.A.R. Form) states that the Tenant’s obligation to pay rent is contingent on the landlord’s approval of a Tenant that "is at least as financially responsible as the Lessee/Tenant shown above, who will occupy the Premises for the full term of this Lease . . ." This provision can be incredibly important as landlords inch up on lease rates on the commercial lease form.
Another mistake we see too often is entering into a lease without fully understanding the terms of the lease. There are many provisions in a commercial lease that, while they may appear to be inconsequential, can have a huge impact on a business. This includes the proposed rent rates, the term of the lease, and whether or not the lease is triple-net. Failing to fully understand the lease terms can lead to unintended consequences down the road.
The third mistake is failing to obtain sufficient information about the lease. Before entering into a lease, it is important to do your due diligence by thoroughly reviewing the lease terms and talking with a broker familiar with commercial lease forms (or your business lawyer). Additionally, it is important to understand the property itself, the area in which it is located, and how your business may be affected by things such as zoning or local regulations.
Getting Help
In California, before leasing a space for commercial purposes, tenants should seek legal advice. Legal professionals and real estate experts can help them understand the complexities often associated with commercial leases. These complexities range from zoning laws to state-by-state regulations. There are several ways to find a qualified legal professional to help with such agreements. One way is to ask regional or state bar associations for referrals. Both the Los Angeles County Bar Association and the State Bar of California have online referral services. People who live outside of California can access a similar online service through the American Bar Association. Another option for finding an appropriate lease attorney is to seek referrals from other industries. For example, if you know a landlord or a land developer, ask him or her to provide advice based on his or her experiences with lawyers in the area. Some roles play an especially important part in commercial leases . These experts include real estate attorneys and accountants, along with the real estate agents who assist business owners when searching for potential locations. Professional organizations are another good avenue for exploring available options. Both the California Apartment Association (CAA) and the California Apartment Listing (CAL) offer digital resources. These entities help connect landlords with potential tenants. They also provide articles about property leasing, including helpful information about available professionals who work in related fields. Business owners who are unaware that their commercial leases expose them to liability should first assess whether or not it is in their best interests to seek review by a legal expert. If they have no concerns about the property or the provisions in the agreement, they may be able to simply sign it. However, if they have legal questions, they should consult a professional prior to signing.