How Commercial Tenants Should Protect Themselves When Leasing a Property
For brick-and-mortar businesses, the commercial space they rent is not only one of the key components in their operational costs, but it also plays an important role in the success of their business. Several commercial landlords and tenants in California get into disputes over issues related to the condition of the property, upkeep and maintenance, and various other matters.
There are a number of things you should consider before signing a lease because every legal clause and paragraph has the potential to impact your company. This makes it important to have a consultation with a qualified real estate attorney in California, who can review the terms and conditions of the commercial property lease, make appropriate recommendations, and provide the right legal advice to protect your interests.
Review All Terms of the Lease Carefully
The overall value of the commercial real estate sector in the US is around $16 trillion as per the National Association of Real Estate Investment Trusts (NAREIT). Businesses can easily become overwhelmed when searching for a commercial property with so many options. Commercial tenants often focus on rental rates and locations when searching for a new property.
Based on this, it’s as crucial to review the lease agreement. In fact, you should get an experienced attorney to carefully review the specific details of the lease agreement. The lease is what controls your rights and interests if a dispute or problem arises. These are a few terms to pay attention to:
- Late payments: Commercial leases should clearly mention the terms of late rent. It should specify the amount of interest and an additional charge for late payments. This gives you a clear idea of what will happen on nonpayment of rent.
- Use clauses: These clauses will list out the things you can and cannot do with the commercial space as a tenant. It will also dictate the manner in which any disputes are to be handled if multiple tenants lease the same building. There may be a limited use clause that permits you to use the space for specific purposes till authorized capacity.
- Assignment and subletting: Commercial tenants are typically allowed to sublet or assign space as per the terms of the lease unless the commercial lease specifies otherwise.
- Non-Waiver provisions: This is actually a protection for the landlord to enforce any terms that they may have allowed to slide in the past. For instance, your landlord may not enforce a late payment charge if you are late on the rent the first time, but does it the second time.
- Security deposit: California law places no restrictions on the amount of security deposit a landlord can request for a commercial space. Your attorney will negotiate with the landlord to come up with a fair amount.
- Repairs and maintenance: Commercial landlords are not required to maintain or repair a commercial property, except as required by the lease. Tenants should negotiate the repair and maintenance clause to obligate the landlord into making repairs.
- Insurance: These clauses dictate whether you, the landlord, or both of you are required to obtain insurance for the space, the minimum amount of insurance required, and the type of insurance needed.
Pay Attention to the Clauses on Liability Risks
Your liability risk is a key factor to investigate when evaluating a commercial lease. Commercial landlords often try to shift a large share of the risk onto their tenants. You may end up accepting a far greater liability risk if you fail to review the specific terms and clauses of the lease agreement. Common Area Maintenance (CAM) charges are an important thing to look out for.
This is also known as NNN or triple net lease. CAM charges are basically in the form of a fee paid to the landlord. It’s designed to cover the expenses of running day-to-day operations. The CAM fees are usually proportional to the total rental obligations where the common space is shared with other commercial tenants.
CAM charges can be used for paying for landscaping, trash removal from common areas, and elevator upkeep. Repairs and improvement to the commercial property is another critical provision to look out for. You should check if the landlord can pass on repair and improvement costs to your business.
You should also clarify how the expenses are charged if the costs do get passed on to you. The cost may be in the form of a lump sum payment or get amortized over several years.
Negotiate the Terms and Conditions of Your Commercial Lease
In general, commercial lease agreements can be negotiated. Based on this, there are a few take-it-or-leave-it options as well. It’s vital that you consult with a seasoned real estate attorney and have them review the lease terms. Your attorney will give you specific advice on the meaning and implications of the different terms and clauses.
You may be able to talk your landlord into certain amendments that reduce your overall risk. Your attorney will help you decide on a lease agreement that offers a fair rental rate and ensures that your business is protected from unreasonable liability risks.
Get Legal Representation from Skilled Real Estate Attorneys in California
The seasoned real estate attorneys at Peterson, Martin & Reynolds LLP have the legal experience and skills to draft, review, and negotiate commercial lease agreements. If you are renting a commercial property and have questions about the lease, our informed attorneys are here to help. To set up your free consultation with us today, call us at (415) 849-2564 or write to us online.