Tips On Negotiating California Commercial Leases

June 10, 2013

There are a variety of terms that may be written into a commercial lease that benefit either the lessor, lessee, or, in certain circumstances, both. As the provisions contained in a commercial lease can drastically impact the rights and obligations of the parties, it is of particular importance that each individual effectively negotiate his position so as to obtain the most favorable terms possible. Although it is always advisable to consult with an experienced commercial lease lawyer, the following are a few tips to keep in mind throughout the negotiation process. It is not by any means a comprehensive list of issues, but these tips address some of the major concerns. Preliminarily, keep in mind the parties' relative bargaining positions. In most cases, landlords have the upper hand. Understanding relative bargaining power helps a business decide where and when to use its bargaining chips.

536818_key.jpgDecide What Terms Are Important to Your Business
The most obvious terms that need to be considered when negotiating a commercial lease are the length of the agreement and the amount of rent to be paid. It is generally advisable not to commit to a lease more than two to five years in duration, with an option (or options) to renew the agreement at the time of expiration. The length of the lease is significant because businesses need flexibility to move and expand as they grow. Entering into a longer lease may leave a business that has outgrown its current space with little recourse.

The amount of rent is probably the most important factor during the negotiation process. A fundamental understanding of what the business can afford in the short and long term is critical. It's important to factor in the annual rental increases and any common area maintenance expenses (CAM expenses) when making this determination. A well drafted business plan with realistic projections is the best way to ensure success.

In addition to these key terms, determine any other specific issues that are of concern to the business. Try and consider all eventualities. Every business has different needs resulting in different priorities. For instance, a yoga school may require more parking spaces than other tenants in a particular strip mall. If this is the case, be sure to address the issue of parking in negotiations with the landlord.

Determine Which Party Is Responsible For Maintaining And Repairing The Premises
Unlike residential leases, where the responsibility of conducting repairs and maintenance generally falls on the landlord, commercial leases typically allocate this burden to one party or the other. Most commercial leases require the lessee be accountable for all upkeep of the premises, while others specify that the tenant is only responsible for certain items such as utilities, plumbing and air conditioning. In the triple net lease (the most common type of commercial lease especially in the retail context), all CAM expenses are passed on to the tenants. It's important to have a clear understanding of which expenses will be allocated to the landlord and which expenses will be allocated to the tenant. There are often CAM exclusions specified in the lease. During lease negotiations consider whether additional CAM exclusions are worth negotiating for. See "Understanding Your Lease - Common Area Expenses".

Be Clear On The Terms Of Default
No one enters into a lease intending on defaulting, however, the reality is that many companies fail and are unable to satisfy their obligations. Accordingly, it is imperative that the terms of the lease be clear as to what constitutes default and as to the remedies available to the non-breaching party. If the tenant falls behind on rent, how long before the landlord can initiate eviction proceedings? If the tenant fails to maintain required insurance, what are the landlord's options? Will the tenant have time to cure the problem before eviction proceedings are instituted? Are there incurable breaches in the lease? Are there limitations on the tenant's remedies for landlord breaches? It is common for commercial leases to restrict tenant's remedies to actual damages (no punitive damages or lost profits) and to prohibit termination of the lease without legal action. Negotiating the terms of default and available remedies up front provides both landlord and tenant with clear dividing lines which in the long run helps avoid future head-ache and unnecessary costs.

Build In Provisions To Protect The Business
There are a variety of different clauses designed to protect the lessee that can be included in a commercial lease, such as:
Permission to Assign or Sublease:  Including a provision giving permission to sublease the premises lends a measure of flexibility to the lease.  If, for instance, the lessee wants to move six months into a two-year lease, it could assign the lease to another business and not incur any additional obligations.  In most cases, however, landlords severely restrict the tenant's rights to assign or sublease and they are reluctant to negotiate away any of this power.  Typically, commercial leases set forth strict guidelines for assignments and subletting: tenants must follow specific procedural rules including making the request in writing; landlords retain the right to reject the proposed assignment or sub-lease; landlords require fees for considering the proposal; and often landlords retain the right to terminate the lease merely for being asked in writing (recapture clause).   If a business owner anticipates selling the business, assignment and subleasing language is even more important.  Try and negotiate to limit these restrictions where possible.  It makes good sense to request lower fees for the consideration, to require that the landlord will not reasonably withhold consent to the assignment or sublet and to ask that any recapture clause be removed.  

Exclusivity:  An exclusivity provision precludes the lessor from renting any other part of the premises to a company with which your business is in competition.  If a tenant is opening a frozen yogurt shop in a small strip mall, it's a good idea to include an exclusivity clause in the lease prohibiting the landlord from leasing to any other frozen yogurt shops during the term of the lease (and any option periods thereafter exercised). 
Be Sure it Is in Writing
Almost all leases these days contain a clause disclaiming the existence of any agreement, verbal or otherwise, not included in the written terms of the agreement and requiring that all modifications to the lease be made in writing (called an "integration clause").  This means that if a lessor orally promises to provide free rent for the first 90 days or promises not to lease to any similar business during the term of the lease, the promise will not be binding.  Any time the landlord promises something, be sure that the promise is incorporated in the lease in writing.  

Negotiating a commercial lease in California can be particularly complex and, if not done properly, can lead to unfair advantage.  Consult with an experienced commercial lease attorney to ensure that you fully understand your rights and obligations.