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Read further to learn more about commercial lease agreements in California, such as what disclosures are required and what else should be included.
What is a Commercial Lease Agreement?
A commercial lease agreement is a legally binding contract between a landlord who owns a commercial property and a tenant who wishes to rent the commercial property with the intention to operate a business. The commercial property being rented generally falls into a retail, office or industrial space category.
Three basic types of commercial leases exist. Each one has positive and negative aspects for the landlord and tenant. The three variations of commercial leases are defined as:
- Gross Lease – also known as a full service lease, this type of agreement is considered to be tenant-friendly. In this situation, the tenant pays a predetermined amount for monthly rent. The landlord uses these funds to pay for related property expenses, also known as “nets.” Nets include taxes, insurance and common area expenses.
- Triple Net (NNN) Lease – favorable type of lease for the landlord, this type of agreement requires the tenant to pay all taxes, insurance and common area expenses associated with the property, in addition to their base rent amount.
- Modified Gross Lease – this type of agreement serves as a compromise between a gross lease and triple net lease. In a modified gross lease, the landlord and tenant negotiate which nets each party is responsible to pay.
Commercial lease agreements can have a significant impact on the financial well-being of all parties involved. It is important that the landlord and tenant fully understand and agree to the terms of the lease proposed prior to signing it into a legally binding document.
Required Disclosures for a Commercial Lease Agreement in California
Disclosures that must be included in a commercial lease agreement vary depending on individual state regulations. This section lists all disclosures that should be addressed in a commercial lease agreement in the state of California:
- Asbestos Disclosure: The landlord of any property built prior to 1979 must disclose whether asbestos is known to be contained in the structure or on the premises. This notice must indicate the specific location of the asbestos on the property and the necessary procedures to follow to prevent exposure to the hazardous material.
- Disability Access Inspection Disclosure for Commercial Properties: The landlord of a commercial property must disclose whether the premises has undergone an accessibility inspection conducted by a Certified Access Specialist (CASp). A CASp report indicates whether the premises meets accessibility requirements for disabled individuals in accordance with California Civil Code § 55.53. A potential tenant may request a report up to 48 hours prior to signing a commercial lease. If no report is available, the commercial lease agreement must contain a disclosure stating that a Certified Access Specialist may inspect the property in question at the tenant’s request. This disclosure must also state that the scheduling, payment of the CASp inspection and payment of possible repairs required for the property to meet accessibility standards will be agreed upon between the landlord and tenant.
- Material Facts Disclosure: The knowledge of hazardous conditions on the premises must be disclosed if non-disclosure of the condition would be considered a fraudulent act.
- Proposition 65 Warning Notice: This disclosure exists to inform tenants regarding exposure to potentially harmful chemicals in the environment of the leased property, such as in the drinking water. This disclosure is always required when a commercial property employs over 10 people. A similar statement should be stated clearly on a commercial lease, if applicable: “Attention: This premises contains chemicals proven to the state of California to increase the risk of cancer, birth defects or reproductive harm. CALIFORNIA HEALTH AND SAFETY CODE SEC. 25249.6.”
- Smoke Alarm Compliance: This disclosure generally applies to residential property, however, in consideration of utmost safety, the landlord of a commercial property may also decide to include this disclosure. Compliance with this disclosure is often assumed by the tenant. It is important to understand local laws addressing building and safety codes, as these may be more or less restrictive depending on the municipality.
- Arbitration of Disputes: If arbitration is addressed in the commercial lease agreement, then a disclosure must be included that states that the tenant agrees to settle certain disputes by neutral arbitration, rather than in court proceedings or via a jury trial. The tenant may voluntarily agree to this disclosure by providing their initials or signature in a designated space.
Writing a California Commercial Lease Agreement
Commercial lease agreements exist to protect the rights and business interests of the landlord and tenant. Here is a list of all sections necessary to include in a legally-compliant commercial lease agreement in the state of California, along with descriptions of list items as applicable:
- Introduction: State the date of the lease and legal names of involved parties.
- Description of Premises: Indicate the type of commercial space, square footage and address of the premises.
- Use of Premises.
- Lease Term: State the start and end date of the lease.
- Rent: State the rent amount, initial due date and subsequent due dates.
- Option to Renew: If lease renewal is available, describe any potential rent increases.
- Expenses: State whether the agreement is a gross, modified gross or triple net lease and describe the division of expenses.
- Security Deposit: Indicate the amount required and where these funds will be held.
- Leasehold Improvements: Address the need for the tenant to obtain consent from the landlord to make improvements to the property.
- Licenses and Permits: State that the tenant must maintain required licenses and permits to operate their business.
- Obligations of Lessee: Outline general expectations of the tenant including maintenance and cleanliness of the property.
- Insurance Requirements.
- Subleasing Restrictions.
- Damage to Premises: Address circumstances in which inadvertent damage occurs to the property that prevents the tenant from conducting business.
- Default and Possession: Describe consequences if the tenant does not remit rent.
- Indemnification Statement.
- Bankruptcy Statement.
- Subordination and Attornment Statement.
- Miscellaneous: Address circumstances specific to the premises, such as placement of signs, advertising or a pet policy.
- Estoppel Certificate.
- Payment and Notices: Describe who is responsible to receive payments and communication, and provide instructions for remittance.
- Amendment Statement.
- Binding Effect Statement.
- Signatures of Landlord and Tenant.
- Notary Acknowledgement.
As in residential lease agreements, commercial leases are subject to regulations that vary by state and local government. This section describes some legal considerations of commercial lease agreements that are specific to the state of California.
Prior to subletting their rental property, a commercial tenant must obtain permission from the landlord. If the tenant does not obtain this permission, they may face harsh consequences, including eviction. The tenant’s request to sublease should include:
- The duration of the sublease.
- Sublessee’s name.
- Present address of the sublessee.
- The sublessor’s anticipated address after vacating the premises.
- Signatures of all parties that are requesting permission to enact the sublease.
- A copy of the proposed sublease.
California law dictates that a landlord must not deny permission to sublet without a valid reason. If the landlord has a valid reason to deny subletting, they must document their reason in writing. If it is not properly documented, it is assumed that the landlord is providing consent to sublease.
Key money is a phrase that describes an undocumented payment to a landlord in exchange for the ability to rent a property. While it may be tempting for a landlord to require these extra funds from commercial tenants, it is an inappropriate way for the landlord to take advantage of the competitive commercial rental market. The payment and acceptance of key money is strictly prohibited in the state of California. If a landlord asks a tenant to pay key money, the tenant may receive three times the damages incurred by denial of renting the unit.
Rent Control and Commercial Property
Rent control refers to the practice of enforcing a maximum amount of rent and the regulation of rent increases. In California, rent control is used in the residential properties of larger cities, such as Los Angeles and San Francisco. Rent control does not apply in commercial properties in California. Enforcing rent control restrictions among commercial properties is viewed to limit competition and provide unfair advantages to certain businesses. Although rent control is not enforced at the state level, commercial landlords may still place an upper limit on rent in accordance with certain organizations.
Evictions from commercial property are handled in a similar way to evictions from a residential property in the state of California. Valid reasons for eviction from a commercial property include:
- Nonpayment of rent.
- Failure to leave the property at the conclusion of the lease.
- Causing disruption on the property that prevents other tenants from conducting business.
- Causing significant damage to the premises.
- Conducting illegal activities on the premises.
- Other significant breaches of the commercial lease agreement.
It is important that commercial lease agreements are created in as much detail as possible. In the event of legal action, issues that are not explained in the commercial lease agreement are subject to interpretation. Rights and protections of the landlord and tenant that are not explicitly listed in the commercial lease are assumed to be omitted intentionally.