Commercial tenants and landlords in California are both in the business of making money. However, they have to work together to make both of their goals achievable, and the first step in that process is signing a commercial lease agreement.
There are common commercial lease pitfalls that both tenants and landlords should avoid to protect their interest in the leasing process.
Damage clauses
Damage clauses are clauses (provisions) that explain who pays for fire, flood, earthquake, etc. damages, and gives the tenant and/or the landlord the ability to terminate the lease in the event of such damage.
Here, if adequate insurance is not built into the contract (or monies escrowed), the landlord could be stuck paying for damages they did not cause. Conversely, a tenant could be stuck paying for a lease that is for space that is no longer suitable for their needs.
To avoid either situation, tenants should negotiate for the right to terminate or reduce the rent, should there be catastrophic or substantial damage. And, landlords should mandate that the renters maintain sufficient insurance to cover damages or escrow a preset amount to cover for potential damages.
Assignment clauses
Another potential pitfall occurs with assignment clauses. These clauses give the tenant the ability to assign their rights in the least or sublease to another party.
Most leases include some language that requires the landlord’s consent for such assignments or subleases, but others give the landlord the right to terminate the lease simply for asking for such approval. Such terms can reduce the lease value to the tenant and limit their flexibility, should their business needs change.
To avoid such issues, tenants should negotiate such clauses to allow them some ability to assign or sublease, should the need arise. Of course, the landlord should consent, but such consent should not be unreasonably withheld or delayed, and some language about the approval process could even be added. This is good for both parties.
Building maintenance and repairs
A building repair clause covers who provides for the maintenance and repair of the building and the systems therein, like the HVAC, roof, electrical, etc. Some leases make the tenant response. Some make the landlord responsible, while others have some sort of shared responsibility language.
The allocation of repairs can be a significant cost that could devastate both the tenant and landlord.
To avoid this pitfall, both parties should negotiate building maintenance and repair clauses that are equitable. For example, tenants could be limited to repairing items that they damage or that are within their exclusive control. Landlords could be responsible for building systems and structures. The key is a negotiation that aims for both a successful tenant and landlord.
