Things You Should Know Before Signing a Commercial Lease Agreement in California
Signing a commercial lease means a huge financial and legal commitment. Once signed, the landlord could come after your business or personal assets if you default on your payment. You should, therefore, only sign the commercial lease once you understand all the terms. Seeking legal advice is highly recommended to iron things out and for an understanding of commercial lease jargon.
This content outlines everything you need to know about the California commercial lease agreement for small and large businesses.
What is a commercial lease?
It refers to a legally binding contract created between a lessor (landlord) and a lessee (business tenant). The signed lease gives the lessee the right to use a specific property for commercial or business activities for a specific duration, in exchange for money payable to the landlord. Leases have different terms. Even if you are not new in leasing business space, you must have all the facts right before signing the document. The document is also called a commercial rental agreement, a commercial property lease, or an office agreement.
Which are the main types of commercial rental agreements?
Fully Serviced or Gross Lease
If you agree to a gross or a fully serviced lease, it means that you (the tenant) are only responsible for paying the rent. Gross rental expenses like property taxes, maintenance, and insurance, lie with the landlord. This lease is favorable when you don’t want to worry about the operational costs associated with the space. However, the landlord may include a provision allowing them to charge more or ask the tenant to pay for the unexpected increase in insurance or property taxes. These terms are in the escalation clause, and the terms are negotiable.
In this lease, the tenant is responsible for all or some of the gross rental expenses. It’s highly adjustable, and it falls under three categories:
Triple Net Lease: tenant pays for the property taxes, insurance, and the CAM (common area maintenance costs) on top of the base rent. With this lease, a tenant can review the operating expenses which should not exceed a specific amount. When the expenses reduce, the tenant saves.
Double Net Lease: on top of the base rent, the tenant pays for the real estate insurance costs and property taxes.
Single Net Lease: in addition to the base rent, the tenant pays the property tax as agreed at the start of the lease’s term.
Modified Gross Lease
This is a hybrid of the net and the gross lease. The tenant and the landlord share the property’s operating expenses.
If planning to run a retail business, your commercial lease contract might indicate that the tenant pays a percentage of their gross income on top of the base rent.
The lease is only deemed valid if it includes specifications on:
Names and addresses of the tenant and landlord
The lease term: if you a small business owner, you should be careful with the lease’s term. Most leases run for 3-5 years. However, you are better off with a 2-year lease when starting out.
Fixed end date, the fixed number of weeks, months or years, periodic, and automatic renewal are the common types of leases.
Property specifications: a commercial lease agreement in California is only deemed valid it includes the exact dimensions and location of the business space.
Property use: the commercial property lease agreement must have the exact use that the tenant intends for the space.
Rent and rental expenses: this is where the base rent of the space is indicated, as well as the operating expenses payable by the tenant. In most cases, the triple net lease is used.
Security deposit: this section of the lease outlines the value of the security deposit and the terms of return of the deposit upon termination of the contract.
Option to renew: here the lease cites whether or not the lease is renewable at the end of the lease, and if the terms change.
Arbitration: according to section § 7191 of the statutes, there should be an arbitration clause in the lease. The clause, capitalized and in 8-point Roman, boldface notes that the tenant agrees to resolve disputes arising by neutral arbitration rather than court litigation or resolution through a jury trial. If you refuse to submit to an arbitration hearing after signing the lease, you may be compelled to go through arbitration under the authority of the professionals and business code, or any other applicable laws.
CASp Report: under section § 55.53 of the statutes, the Certified Access Specialist Reports should be provided to new tenants and a request for the report may be placed 48 hours before the tenant signs the lease contract. The CASp specialist inspects the premises to ensure that it complies with the state law’s construction-related accessibility standards.
Repairs: under section1938 of the statutes, the landlord shall be held responsible for the maintenance of the property including the repairs necessary for the correction of violations of the construction-related accessibility standards as per the CASp Report unless the landlord and the tenant come to a different agreement.
Lastly, the lease must have the signatures of the tenant and the landlord against their printed names.
If you are interested in creating a commercial rental property lease today, you may get started with our free commercial lease agreement forms downloadable online easily. You can access the forms online from San Diego, Los Angeles, Sacramento, San Francisco, Fresno, San Jose, Oakland or any other city in California.