Negotiating the terms of a commercial lease can be tricky — for both the landlord and the tenant. While commercial leases must follow California’s Commercial Code, there is plenty to negotiate before signing a lease.
Commercial leases are different and more complex than residential leases, partly because there is more to negotiate. Landlords usually set a target rent price and then negotiate terms like maintenance of the leased space, costs of maintaining common areas shared by several tenants, the length of the lease, renewal terms, annual rent increases and even attorney fees for drawing up the lease. And naturally, landlords and tenants will seek the terms that most benefit them in passing on property costs to the other party.
It’s typical for plenty of back-and-forth between the two parties while negotiating the terms of a commercial lease. Landlords usually use attorneys to draw up lease contracts or use a standard or amended lease prepared by the Industrial Real Estate Association, while often tenants may try to navigate the lease process themselves. This may avoid attorney costs to the lease signing process, but those savings can disappear if the lease terms favor the landlord.
In addition, standard commercial leases can be risky for both landlords and tenants because the language can be unclear and inconsistent on some major lease terms. These leases can be revised to better address landlord and tenant concerns.
Whether you’re a commercial property owner seeking to rent space or a prospective tenant, before entering into any commercial lease agreement, you should be aware of all that’s involved.LawPLA offers expert legal advice for commercial property landlords and prospective tenants, and offers the following tips on leasing commercial space in Los Angeles.
There are three types of commercial leases available in California, depending on which party is responsible for property expenses, including real estate taxes, insurance and common area maintenance :
- Gross Lease, where the landlord pays all property expenses and the tenant pays a set, monthly rent.
- Triple Net Lease or an “NNN” Lease, where the tenant pays all property expenses in addition to the monthly rental cost.
- Modified Gross Lease, where the tenant and landlord split the cost of property expenses.
The type of lease entered into can be part of the negotiating process, along with several other concerns beyond the basic lease terms of rental cost, annual increases, security deposit, length of time, and renewal options. Here’s some specific tips to follow when entering into a commercial lease agreement:
- Parties to the Lease: It’s important that the landlord and tenant names are correct on the lease. Therefore, both parties should confirm the correct entities and legal names used in the lease. Make sure you know whether you’re negotiating with an individual or a corporation or LLC.
- Permitted Uses: The lease should clearly state what the property may be used for and specifically how it may not be used.
- Who is responsible for property costs, including:
- Real estate taxes.
- Operating expenses.
- Attorney’s fees.
- Maintenance of the lease premises.
- Maintenance of shared spaces if a multi-tenant property.
- Tenant’s Right of Access: Are there times when the tenant may not access the leased property? Are there specific hours of operation for the property? What are the HVAC hours of operation? This should be clearly stated in the lease terms.
- Landlord’s Notice to Enter Premises: When and for what reasons may the landlord enter the rented premises should be spelled out in the lease, along with notification requirements to the tenant of the landlord entering the leased property.
- Dispute Resolution: Increasingly, commercial leases call for arbitration, mediation or judicial reference to resolve lease disputes, which means neither party can file a lawsuit in court but must use mediation.
- Attorney’s Fees: If there is a dispute, which party pays legal fees, whether for an alternative dispute resolution or a lawsuit decided in court? It’s typical that legal fees are reimbursed to the party that wins the dispute but this is also a matter of negotiation.
- Default Provision: If the tenant defaults on rent required under the lease, California Civil Code lays out the tenant’s legal obligation and the required eviction notice. However, the lease contract must include this in a default provision for it to be legally valid. In addition, the default provision in the lease may be stricter than the state code and still be legally valid. And it’s important to note that terms may differ for defaults on rent and defaults on other lease provisions.
- Force Majeure Clause: In addition to the default provision, landlord breaches of contract, such as failure to properly maintain the premises (if that is part of the lease agreement) must be spelled out in detail within the lease. Most commercial leases include a force majeure clause, which stops the tenant from terminating the lease or reducing its rent if certain events arise — usually described in a force majeure clause — to include, strikes, national emergencies, war, tornadoes, hurricanes, acts of God, or other natural disasters. One way for a business to protect itself if the lease contains this clause is by carrying business interruption insurance.
If you’re a property owner or a business entering into a commercial lease agreement, call LawPLA to speak to one of our expert business and real estate attorneys before you sign. Having one of our lawyers on your side while negotiating the lease terms can protect your legal rights if any problems later arise.
Call LawPLA at either of our Los Angeles offices or schedule a consultation through with our online scheduling tool.