Commercial Lease Issues

California Commercial Lease Issues – For Tenants

Commercial lease agreements tend to be quite different than standard residential lease agreements. In California, commercial tenants are usually held accountable for a greater set of responsibilities, from maintenance and repair to quiet enjoyment of the property. Further, landlords frequently set-up lease agreements that have ambiguous provisions that may later come to adversely affect the commercial tenant’s rights and obligations under the agreement.

When signing onto a commercial lease agreement, it is recommended that you seek the counsel of an experienced real estate attorney so that the agreement can be negotiated to prevent potential conflict down the line. If you have already signed a commercial lease agreement, however, and are curious how the existing provisions of your agreement affect your rights and obligations as a commercial tenant, please read ahead.

So, what important issues should a commercial tenant be aware of relating to their lease agreement?

Property Access – the Premises Clause

In your lease agreement, the premises clause should have specifically delineated the rental space as well as additional areas of the property that the tenant is allowed to access (lobby, storage, parking, hallways, etc.). If you find that your landlord is preventing you from using certain areas of the larger premises, they may be doing so incorrectly – consult a real estate attorney who will assess your lease agreement and determine your true premises access rights.

 

Maintenance and Repairs

In most California commercial lease agreements, the landlord shifts a great deal of the maintenance and repair responsibility to the tenant, who is thereafter required to maintain the premises in a reasonably safe and "good" condition. The wording of the maintenance and repair clause is extremely important. In some agreements, the landlord may have also included replacement language, which not only requires that the tenant use their own resources to maintain the premises and repair any damages, but also requires that the tenant fully replace any particularly damaged items and structures. In other agreements, the landlord may have shifted the responsibility for maintenance and repair to the tenant to such a degree that the tenant becomes responsible not only for general maintenance and repair of the premises (keeping it in a reasonably safe and good condition), but also for ensuring compliance with various building, fire, disability, and safety codes. Shifting code compliance to the tenant can be expensive and demanding on the tenant – as such, it is generally recommended (before the lease agreement is signed) that an inspection of the premises be conducted, that the landlord give written warranties that the premises is compliant with various codes, and, if possible, that the landlord and tenant come to an agreement not to shift code-compliance responsibility over to the tenant.

The Use Clause

As is clear, California commercial tenants enjoy few protections. A lot of responsibility is put on the shoulders of the tenant to determine whether the lease agreement is sufficient for the tenant’s needs. As such, it is actually possible for a commercial tenant to rent from a landlord who has – in the lease agreement – prohibited the tenant from using the premises, or a part of the premises, for a particular commercial purpose. The provision in the lease agreement that outlines certain allowable and disallowed business uses is known as the use clause.

The landlord must specifically prohibit the tenant from using the premises in a particular manner prior to the signing of the lease agreement or written into the use clause of the lease agreement itself. The landlord cannot later decide that the tenant’s use of the premises is disagreeable, and attempt to prohibit such use. Basically, the tenant must be aware of the landlord’s prohibitions at the time the lease agreement is signed. The tenant cannot be held to silent expectations concerning use (assuming that the business use is reasonable).

Importantly, even if the use clause does not restrict the tenant from their intended use of the premises, local zoning regulations may prevent the tenant from doing so. As such, commercial lease agreements often have provisions forcing the landlord to check local zoning bylaws and warrantying that the property can be used for the purpose that the tenant intends throughout the term of the lease. Of course, some landlords do try to contract out of this obligation by making no warranty as to whether the use of the premises by the tenant (as intended) is permitted by local zoning laws.

Remember, if the landlord warranties that the tenant’s intended use of the premises is permitted by local zoning laws, and ultimately, it turns out that local zoning laws do prohibit the tenant’s intended use, then the lease agreement will likely be found invalid. Further, if the landlord made such representations while aware of the reality that the local zoning laws in fact prohibited tenant’s intended use, then the tenant may have a legitimate fraud claim against the landlord.

Quiet Enjoyment

The term quiet enjoyment refers to the principal that a tenant has a right to use their premises without certain interferences, including but not limited to waste, pollutant, noise, visibility, and spatial nuisances. All leases, both residential and commercial, by default require that the landlord ensure the tenant’s quiet enjoyment of the property, but in California, commercial leases allow landlords to modify and even waive the warranty of quiet enjoyment.

In Fritelli, Inc. v. 350 North Canyon (2011), for example, the lease agreement included a modification wherein the landlord was allowed to renovate and remodel the property as desired. Later, the landlord did in fact remodel the property, but in doing so, interfered with tenant’s use (the tenant was less visible to potential customers). The court found in favor of the landlord, and determined that the landlord’s renovation provision modified quiet enjoyment such that the tenant could not argue that visibility was warrantied.

Exclusive Use – Reducing Potential Competition

Exclusive use clauses are often included in commercial lease agreements for malls and the like. Essentially, exclusive use clauses restrict another tenant of the same landlord from using their premises in a particular manner that would otherwise compete with another tenant’s use.

Imagine, for example, that a landlord leases several storefront properties in his mall. The mall has no music store. A music store tenant is interested in signing a lease agreement with the landlord, but wants to ensure that another music store will not later sign with the same landlord, thus presenting competition. After negotiating, the music store tenant may convince the landlord to add an exclusive use clause to their lease agreement. In order to enforce the exclusive use clause, the music store tenant will have to ensure that the landlord appends a restrictive use clause (preventing music store use) to all future lease agreements in the mall. The lease agreement should also include remedies for potential breach of the exclusive use clause.

Non-Payment and Eviction

In California, commercial tenants may be evicted for failing to pay rent, even if the rent demanded by the landlord is in excess of the actual amount that is due (see California Code of Civil Procedure section 1161.1). This rent demand must be a "reasonable estimate," however, which is defined in section 1161.1(e) as a less than 20% deviation from the actual rent due.

If the tenant does not pay, then the landlord must give some days notice (which depends on the notice requirement written into the lease agreement) to the tenant to correct the violation before facing eviction.

The Landlord’s Right to Enter the Premises

Right-of-entry can be a good or bad thing, depending on how reasonable one’s landlord is. A reasonable landlord will give notice to the tenant well in advance before entering the premises in the case of repairs and provision of other non-emergency services. A reasonable landlord will also make efforts not to enter the premises during business hours. Of course, though an inherently reasonable landlord is ideal, in reality, commercial tenants should negotiate right-of-entry clauses to ensure that the landlord’s right of access is limited to the degree desirable.

Payment-to-Exit Clause

For many businesses, especially small or family-owned businesses with low margins and minimal capital, planning for failure is a must. A well-negotiated commercial lease agreement should include an exit clause that allows the tenant to pay the landlord in order to end the agreement. The landlord, of course, may protect himself from a merely dissatisfied tenant by requiring that the tenant show that some precipitating event has occurred, such as business failure or bankruptcy.

Eviction

A landlord may file a suit against their commercial tenant for eviction if the tenant does not pay rent or otherwise breaches the lease agreement. In an eviction, the tenant is liable for the rent due for the total lease term, as well as additional damages that may have occurred.

The tenant’s potential liability can be mitigated in a number of ways, however:

· The landlord has a duty to look for a replacement tenant. If the landlord did not expend reasonable efforts to find a replacement, then the tenant may not be held liable for rent for months that a replacement should have been paying rent. If the landlord did find a replacement tenant, then the evicted tenant may not be held liable for rent that the landlord is now receiving.

· The landlord may have breached some term(s) of the lease agreement, or may have breached the tenant’s quiet enjoyment of the premises. Such breach will limit the tenant’s potential damages.

--

For a free consultation with an experienced real estate contract attorney, call the Law Offices of Brian O Grady at (650) 318-6131 to set up your appointment today.