While many may be familiar with residential landlord-tenant law, they may not realize that there is a significant difference between what is permissible in the residential lease compared to what is permissible in the commercial lease. Many of the laws applicable to the residential tenant simply do not apply in the commercial setting. Because many businesses lease space from which they conduct their businesses, the location one occupies to conduct that business is every bit as important as any other aspects of the business. Similarly, commercial landlords typically derive their living from leasing space to others in return for compensation. It is important, then, to understand what the commercial lessor can and cannot require of its tenant.
Although in California a number of form lease agreements exist, most commercial leases are either heavily edited forms, or forms created by lawyers and realtors to fit the specific circumstances under which the lease is to be created. Commercial leases are typically drafted to favor the lessor and can be expected to contain, at a minimum, the following provisions designed specifically to protect the rights of the lessor:
- When rent commences – many times parties to a lease assume that the tenant’s obligation to begin paying rent begins on the first day the term of the lease begins. However, in many instances, the parties to commercial leases agree that rent is to begin at some time after the tenant actually takes possession. Make sure that your commercial lease accurately specifies the date on which rent is to commence.
- The exact amount of the base rent and any increases – most commercial leases contain a provision that provides for rent at a certain rate for the first year then increasing every year after that initial period. These provisions must be specific – not only must the date on which the increase is to take effect be specified, but the specific amount (or method for calculating the amount) must be specified.
- The exact amount of additional rent, if any – commercial leases typically have some form of additional rent which, many times, is tied to a tenant’s sales or profits. In these instances the lease must not only provide for the additional rent but, if the additional rent is tied to the tenant’s sales or profits, it must allow the lessor the opportunity to review the tenant’s financial statements to determine the amount of the additional rent.
- Tenant improvement provisions – these provisions typically provide that in the event any alterations of the existing premises is required, the tenant, and not the lessor, is responsible for bearing the cost of those alterations. To ensure the lessor is protected, it is important to be as specific as possible about what alterations are to be made, when they are to be made, who will bear the cost, and allow the lessor to reasonably reject proposed changes.
- Maintenance and repair provisions – unlike residential leases, commercial leases almost always provide that the tenant is responsible for most, if not all maintenance costs. The commercial lease must specify which items of maintenance each party is responsible for and if that maintenance must be performed on a specific schedule. Just as important is a provision specifying what the lessor is and is not responsible for repairing.
- Common area expenses – if the premise is part of a larger complex, tenants are generally required to contribute some amount towards the expense of maintaining the common areas. Make sure that a provision places that burden on the tenant and specifies how the amount attributable to the tenant will be calculated.
- Subletting provisions – will the tenant be permitted to sublet the premises and, if so, under what circumstances? Generally, commercial leases give the lessor the right to require the tenant to seek the lessor’s approval prior to a proposed subletting of the premises, as well as the right to reasonably approve or disapprove the proposed sublessee. These provisions usually are tied to the proposed sublessee’s financial strength and require the proposed sublessor submit financial statements for the lessor’s inspection.
- A strong attorney’s fees provision – the lease should have a firmly drafted attorney’s fees provision which would include all disputes arising out of the lease, whether based on contract or tort law, and whether the dispute results in litigation or is resolved prior to litigation.
The foregoing is but a small sampling of things that should be included in the commercial lease to protect the rights of the lessor. It is by no means exhaustive, and you should consult with an experienced attorney prior to entering into any commercial lease with a potential tenant.
To ensure your commercial lease protects your rights as a landlord, you will need to seek the services of an attorney like Michael Leonard, Esq., named “Best of the Bar” by the San Diego Business Journal in 2016. If you would like to arrange for a consultation to discuss your commercial lease, or if you would like to discuss any other business-related matter with a rising star, Michael Leonard, Esq. of San Diego Corporate Law should be your first call. He has the experience and knowledge to ensure all of your business agreements are enforceable in the California Courts. He can be contacted by visiting San Diego Corporate Law or by telephone at (858) 483-9200.