Commercial leases are complex documents that require meticulous review and rigorous negotiations. Unfortunately, they are often entered into by parties without careful consideration or a thorough understanding of the terms. For both commercial landlords and tenants, a commercial lease is an essential element of their business — and nearly every term is negotiable. The following are some key legal considerations to keep in mind during a commercial lease negotiation.
To comply with California’s Statute of Frauds, a lease must be in writing if the term lasts longer than one year. A written lease is also required in cases where the lease is less than one year, but the end of the lease term is more than one year from the date the verbal agreement was made. For instance, if the parties entered a three-year lease, the terms would need to be in writing to be enforceable. But if the lease was only for six months, an oral agreement between the landlord and the tenant would be enforceable in court.
Nevertheless, it’s always best to have a written lease in place to ensure the expectations and responsibilities of both parties are clearly specified and understood. It can also provide critical legal protection in the event a dispute arises between the parties.
Whether you’re the lessor or the party who will be leasing the property, it’s crucial to consider whether the lease protects your business interests. While there are various clauses that can be used in a commercial lease to help protect the lessee, it’s important for a landlord to shield themselves from certain risks when negotiating a commercial lease.
Common commercial lease provisions that both parties must weigh can include terms that concern the following:
The length of the lease is also an important consideration. While a business may need flexibility as it expands, entering into long-term lease may leave it with few options in the event it has outgrown its space. A landlord may favor a long-term lease for the stability it can provide. Parties must consider their current and future business needs and negotiate commercial lease terms that can help ensure they are met.
In a residential lease, responsibility for maintaining the leased property usually falls on the landlord. But in a commercial lease, this burden is often shared by both parties. For instance, a landlord is usually responsible for repairing structural issues, unless they were the result of a tenant’s negligence or intentional act. Ensuring compliance with building and safety codes usually falls on the landlord.
However, a tenant may have the responsibility of repairing things that could deteriorate because of frequent use. This can include flooring, wallpaper, or paint. A tenant might also have to make repairs for ordinary and routine issues concerning lighting, plumbing, or equipment that comes with the premises.
Maintenance and repair clauses can outline what a party must do — and they can also specify what a tenant cannot do. Failure to clearly allocate responsibility for maintenance can result in a party being responsible for repair expenses that they had not been expecting. These types of provisions should be unambiguous to avoid any conflict, and they should be strategically considered during a commercial lease negotiation.
The casualty provision in a commercial lease sets forth the circumstances under which a landlord or tenant would be obligated to restore the property following a fire, flood, or other natural disaster. It can also establish a party’s right to terminate the lease if a casualty event occurs. While these provisions can be complicated and do not always receive the same attention as other clauses in a commercial lease, it’s vital to ensure that they are not disregarded.
Both parties to a commercial lease should have insurance that protects their legal and financial interests if the property is damaged in a disaster. A casualty event not only can cause a landlord to incur substantial repair costs — but it can render the property unusable for a tenant, causing business disruption. A casualty clause will typically state a tenant does not have to make rent payments while restoration is underway, but this can keep a tenant tied to the property for the duration of the lease.
When engaging in a commercial lease negotiation, parties should think about how a casualty clause may impact their interests and negotiate accordingly. Although a casualty clause may limit a tenant’s right to terminate the lease if such an event takes place, the parties may consider negotiating a threshold restoration cost. A landlord and tenant might negotiate a specific cost threshold that the landlord would pay out-of-pocket before they could assert the right to terminate the commercial lease.
Negotiating a commercial lease can have a lasting impact on the success of your business and its bottom line. A knowledgeable real estate attorney can help you navigate the process of commercial lease negotiations and assist you with resolving any disputes that may arise. At White and Bright, LLP, we work with business owners, commercial landlords, and tenants in California for a wide variety of commercial real estate matters. We welcome you to contact or call us at (760) 747-3200 to learn more about our legal services.