A business tenant in California owns the business but not the building out of which they operate. This is the case for the vast majority of businesses in California and around the country. As a tenant of a larger commercial landlord, there are a number of items that you should consider before signing a commercial lease. In a commercial lease, every paragraph and clause can have a significant impact on your company, which is why having a real estate attorney review the document before you sign is critically important to the success of your business. This is particularly important for a business tenant signing a commercial lease for the first time.
Types of Commercial Leases
There are three main types of commercial leases available for business tenants in California, each with its own unique traits and allocation of property expenses. This is the main issue for business tenants signing a commercial lease – the distribution of property expenses between landlord and tenant. Property expenses include real estate taxes, property insurance, and common area maintenance.
The first type of commercial lease is a gross lease, in which the landlord covers all property expenses and the tenant pays a monthly cost for rent of the space. The second form of commercial lease is a triple net lease, which is also known as an NNN lease. A triple net lease has the tenant paying the property expenses and is common in multi-tenant or retail properties. The third type of commercial lease is a modified gross lease. Under this type of commercial lease, the landlord and tenant split the share of property expenses.
Basic Lease Considerations
The two most basic terms in a commercial lease are the term and the rent. The term of a commercial lease can either be short-term or long-term, with advantages and disadvantages to each. With a short-term lease, tenants can renegotiate terms if the market changes faster than with a long-term lease and are good for newer businesses that are unsure of their initial success. However, if the market changes in favor of the landlord the new terms of a short-term lease can go against a tenant and constantly renegotiating commercial leases takes time and money. Long-term leases work well for businesses that are confident in their continued success and want the stability of commercial lease terms that will not change during the duration of their time in the space.
The term provisions in a lease should also contain the date that the tenant can gain possession of the property, the date that the obligations of the tenant and landlord will begin, whether the tenant can automatically renew the lease, and the termination date of the lease. An experienced real estate attorney can go over the basic lease provisions with you to ensure that all relevant clauses are included in the agreement before you sign a commercial lease with a landlord.
Rent in a commercial lease is set forth either in outright terms or calculated by formula that should be included in the lease terms. Typically, rent falls into one or more of the following categories — base rent, additional rent, and percentage rent. Base rent is a monthly fixed amount paid to the landlord, whereas additional rent is often paid by the tenant for the costs of operating the property. Percentage rent is an agreement by which the landlord receives a portion of the tenant’s sales as rent.
Additional Terms in a Commercial Lease
There are no standard commercial lease forms in California, so it is important to read each one to ensure that it contains all of the relevant provisions that inform you as a tenant. Some of the most common additional terms of a commercial lease are found below, but it is critical that you review a commercial lease with a knowledgeable real estate attorney before signing an agreement to ensure that there are no provisions that take advantage of tenants or subject them to unconscionable terms.
All commercial leases should clearly state the terms of late rent payments. It should include the amount of the late charge and/or interest on the late rent payment. This allows for an alternative to the landlord terminating the lease for nonpayment of rent.
These clauses clearly dictate what the tenant is and is not allowed to use the commercial space for. This also dictates how to handle disputes among commercial tenants if multiple tenants lease in the same building. This could be a limited use clause, which only allows for the tenant to use the space in its authorized capacity or should articulate what specific uses the space can utilize.
Assignment and Subletting
Unless the commercial lease states otherwise, a commercial tenant is allowed to assign or sublet the space per the terms of the lease. This allows the tenant to give the space to another commercial user for a set period of time or for the remainder of the lease term.
A non-waiver provision is protection for the landlord to enforce the terms of the lease that it may have let slide in the past. One common example is if a landlord does not enforce a late payment if a tenant is late with rent the first time but does enforce it the second time. If possible, a tenant should try to ensure that a non-waiver provision goes both ways for the landlord and tenant.
Most commercial landlords require a security deposit, and California law has no restrictions on the amount that a landlord can request for a space. The purpose of a security deposit is so the landlord can pay for any repairs after the tenant moves out or to pay the landlord rent if the tenant fails to do so.
Repairs and Maintenance
Unlike residential properties, a commercial landlord is not typically required to repair or maintain a commercial property for its tenants except as required by the lease. As such, tenants should try to negotiate a repair and maintenance clause in their commercial lease to obligate the landlord to make repairs.
Insurance clauses in a commercial lease dictate whether the landlord, tenant, or both parties must obtain insurance for the space, what type of insurance is required, and what minimum amount of insurance must be obtained.
Alterations to Leased Property
The commercial lease should state in no ambiguous terms about the rights and obligations of the landlord and tenant to make alterations and improvements to the commercial property. Unless specified otherwise, a tenant is not allowed to make alterations to the property without the landlord’s consent.
Laine Wagenseller is a Los Angeles-based real estate litigation trial attorney. He is the founder of Wagenseller Law Firm in downtown Los Angeles which specializes in lawsuits involving properties and partnerships. The lawyers at Wagenseller Law Firm have handled many neighbor disputes involving ownership issues, easements and licenses. For more information please call the firm at (213) 286-0371.