Commercial Lease Tips for the Business Owner (the unrequited lease)
Here is an overview of some common issues that arise when a
small (or any) business owner negotiates with a landlord over a lease
agreement. Routinely, landlords write
leases and tenants sign them without negotiating, changing language, or having
their attorneys read over them. Having
an attorney spend a half hour reading a lease can save you tens of thousands of
dollars in losses down the road. Keep in
mind as you read that this is a negotiation and some landlords may not be
willing to budge on some of these issues.
The idea is not to have the upper hand, but for things to be fair
between the parties. Most leases are
written by landlords and are pretty slanted in their favor. Here are some common commercial lease snafus
and how to deal with them.
- Exclusivity
Almost every commercial lease has an exclusivity
clause. However, these clauses are rarely,
if ever, mutual. You move into a retail
shopping center. You operate a smoothie
business. There is a CVS drug store in
the center. You sign a covenant “Not to
compete with, sell, display, or sublease to any business selling or displaying
health, beauty, vitamins, dietary supplements, prescription drugs, or over the
counter drugs.” Sounds fair, right? The problem is that most exclusivity clauses
protect the “Anchor” tenant, but fail to give you protection.
An acquaintance recently ran into this problem. He agreed not to compete with any retail
business currently in place at the date of his lease agreement. However, the covenant was not mutual. The landlord never promised not to lease
space to another tenant competing with him.
A competing smoothie business moved in two doors down from him. Did he have any recourse? Probably not.
He may have a breach of good faith and fair dealing claim, but that’s
tenuous as best.
Make the feeling mutual.
Something like:
“Tenant, and any successor,
assignee, or sublessor covenants not to compete with any other business
occupying the premises, while Landlord covenants not to allow the operation of
any business that would compete with tenant, successor, assignee or sublessor
operating a _______ business.”
- Commencement Date
So many leases set commencement upon, “Substantial
completion of tenant improvements.” What
does that mean? What are
substantial? Which tenant
improvements? Avoid ambiguous language. Set guide-posts that are concrete and in your
control. Lease commences upon grant of
certificate of occupancy? Lease
commences upon clearance with Department of Health? Lease commences upon completion of flooring,
signage, and certificate of occupancy?
Give the commencement date clause something to hang a hat on. Make sure that you don’t pay rent until
improvements are complete—or that rent is reduced at a calculable rate.
- Operating Expenses
Most commercial leases require tenants to pay a percentage
of operating expenses. Many times this is
called “Additional Rent.” Review the
expenses that the landlord will pass on and make sure that they are reasonable
and directly related to the building’s operations. Certain costs should not be passed on to the
tenant. Determine whether the allocation
of expenses is based upon a fully occupied building or, if not, that they are
properly adjusted. You may want to
negotiate a cap on “Additional Rent/Operating Expenses.”
- Common Area Maintenance Charges
Yes, there is rent, additional rent, and now common area
maintenance fees. Sure you want to be a
tenant? Common area maintenance charges (CAM)
are similar to “Additional Rent” except it commonly covers items such as
security costs, painting, maintenance of common areas, etc. You need to review records to determine what CAM
charges are been historically and whether or not they are based on full
occupation or adjusted. If a number of
tenants move out, you don’t want to be stuck with the whole CAM bill. Similar to operating expenses, it’s advisable
to negotiate a cap on CAM charges.
- Attorney Fees
Almost any lease contract is going to mention attorney
fees. Don’t get too hung up on it. California Civil Code 1717 ensures that any
contract provision about attorney fees has to be reciprocal even if it doesn’t
say so. That’s great. However, lawyers have become savvy and write
clauses like, “Any attorney fees or costs incurred in collecting rent or
commissions are payable by the losing party.”
Uh oh. Even if § 1717 demands reciprocal
fees, the clause only applies to actions regarding the collection of rent or
commissions. Tenants are not going to be
collecting rent or commissions, landlords are.
So, although § 1717 demands that if a tenant sues the landlord in an
action regarding commissions, they can also get attorneys fees—the chances are
they would sue about something other than the collection of commissions or rent. Make sure that any attorney fee provision is as
broad or narrow as you want it to be.
Like, “Any costs or attorney fees that arise from this contract
or its enforcement are payable by the losing party.”
- Use Restrictions (and subleases)
Use restrictions are common and are another means of
creating exclusivity. That’s well and
good, but they may be extremely restrictive and prevent subleasing. Common use restrictions sound like, “the
premises may be used for the operation of a retail shoe store and for no other
purpose without the prior written consent of the landlord.” You may want to negotiate a broader clause
like, “the premises may only be used for operations of any lawful retail
business,” or “any lawful professional business practice.” The less restrictive, the greater chance you
will have of subleasing if you have to in the future.
- Recapture/Relocation
Most tenants have trouble understanding recapture. That’s because its economically
ludicrous. Here you have promised to pay
rent, completed improvements on the lease space, for some reason you inquire
about assignment or subleasing and the landlord comes and pulls the rug out
from underneath you, kicking you out.
Permitted? Yes, if there is a
recapture provision. Common recapture
provisions sound like:
“Landlord retains the right of
termination and recapture upon tenant’s inquiry into assignment or sublease or
any other event that gives Landlord reason to believe that due performance will
be impaired.”
The point is that they don’t want you subleasing for a rate
lower than the lease amount. Having a
below-par tenant brings down the value of the property or makes the
anchor-tenant nervous. That makes
sense. That’s why there is probably a
clause that requires any sublease to be commercially reasonable. But, holy cow. Under the language above, if you simply ask
whether or not you can assign the lease to an affiliate-- they can terminate
the lease. Make sure there is no
recapture provision.
- Exit Strategies: Vacancies, Retail Mix, and More
Have an exit strategy.
What happens when operating expenses and/or common area maintenance
charges exceed what is reasonable for your bottom line? What happens with the anchor-tenant leaves
and you are leasing space in a dead retail shopping center? We have all seen those shopping centers where
there is one lonely video rental store and ten empty units with weeds growing
in the parking lot. Have a clause that
allows termination electable by tenant upon certain events. It can sound something like the following:
“Landlord agrees that tenant and
any successors in interest may terminate this lease without penalty if any one of
the following events occur:
i.
Retail occupancy falls below 65%;
ii.
The Anchor-tenant Ralphs Supermarket terminates
or otherwise fails to occupy retail space within the complex;
iii.
Combined monthly Common Area Maintenance fees
and monthly Additional Rent equate more that 33% of monthly lease rental
payments;
iv.
Landlord fails to accept a commercially
reasonable assignment or sublease;
v.
Landlord leases space to another business who
competes with tenant named on this lease or any successor in interest in a
similar line of business.
vi.
The Retail Mix of the complex is significantly
altered from the Mix at the commencement of the lease. Significant alteration is defined as a change
of more than 25% in any given business category. At the date of this agreement, the Retail Mix
of the complex is 50% professional, 40% consumer retail, 10% industrial.”
Sanctions, Sanctions, Sanctions! (Family code 271)
All too often in family law parties stonewall one
another. They make frivolous requests. They inundate the other side with faxes,
emails, messages, letters, useless interrogatories, and more. They refuse to accept a very reasonable
settlement offer.
What can a poor spouse do, but go to trial or cave and take
a low-ball settlement offer? Family Code
§ 271 is here to help. Basically, § 271
says that if the other side doesn’t play ball or doesn’t play nice the court
can make them pay the other side's attorney fees. Awesome.
It applies even if the paying spouse doesn’t have a lawyer
themselves. Here is the text of § 271:
(a) Notwithstanding any other
provision of this code, the court may base an award of attorney's fees and
costs on the extent to which the conduct of each party or attorney furthers or
frustrates the policy of the law to promote settlement of litigation
and, where possible, to reduce the cost of litigation by encouraging cooperation
between the parties and attorneys.
So,
remember to play nice, or else you be paying for your ex’s legal fees.
Domestic Partnership Summary Termination (Cheaper than divorce with a 6 month rescission period)
California changed domestic
partnership law drastically in 2005.
Many code sections related to domestic partnership were revised, including
the one regarding terminating domestic partnerships. Post-2005 there are two tracks that domestic
partners can take when they want to “divorce” one another. If they qualify and want to, they can
participate in summary termination procedures.
Track One: Summary termination procedures are free to file, there are no
hearings, and it’s relatively easy (yes people—you are getting jealous). Track Two:
Full judicial dissolution of the domestic partnership in a process that
mirrors dissolution of marriage in almost every way (more complicated, more
expensive, more time consuming).
Do I Qualify For Summary
Termination?
Under Family Code § 299, there is
a list of requirements to summarily terminate a domestic partnership. They are incredibly similar to Family Code §
2400, which covers summary dissolution of marriage. Here are the qualifications set out in § 299:
1.
Both Parties Agree;
2.
Neither Party Wants Spousal Support (yes you can
get spousal support as domestic partners);
3.
The Length of the Partnership Was Under 5 years;
4.
Neither Party Owns Real Property or a Lease On
Property Greater Than 1 year;
5.
The Community as a Whole Doesn’t have more than
$4,000 in debt (not counting automobiles);
6.
The Community Doesn’t have more than $25,000 in
assets(not counting automobiles);
7.
The Parties have signed a community property
settlement agreement;
8.
Neither party is pregnant;
9.
Neither party had a child during the
partnership; AND
10.
Neither party adopted a child during the
partnership.
What Next?
If you qualify and have a written
agreement, then you file a simple form with the Secretary of State’s Office. However, and this is a big however: either
party can cancel within 6 months before the summary termination is effective
(it’s like a 6-month rescission period).
That’s right. Five months and 29
days later one of the parties can file a Revocation of Termination with the
Secretary of State. Then it’s off to
court to have the partnership dissolved just like a marriage.
What’s The Big Deal?
The big deal is that California is
making domestic partnership more and more similar to marriage. Now, Federal law hasn’t quite caught up yet,
so the tax and medical benefits aren’t necessarily there yet. So now domestic partners get the protections
offered by the California Family Code (like custody and support provisions),
but at the end of the relationship-- a pair of partners might be looking at a
divorce process very similar to a married couple.
Fatty liver, discrete trial training, salvaged cars, and tattoos (New state laws starting July 1, 2012)
California state laws always start in January or July. This year’s laws going into effect the other
day on July 1 are a strange mix. If you
ever wondered what your state assemblymen were talking about in the green
carpeted hall (that really is some ugly carpeting) in Sacramento—its foie gras, autism, tattoos, and bullying. Of the new laws, I think the bullying law is
my favorite, in that it expands the definition of bullying to include online
behavior. I think there is probably more
bullying on facebook than on the school bus these days.
- SB1520 bans the sale of foie gras, duck or goose liver that has been fattened by force feeding the animals with tubes shoved down their gullets (I don't care how gourmet it is or how depressed your resident gastronome is, foie gras is cruel and wrong);
- AB1215 requires used car dealers to put bright red stickers labeling salvaged or junked cars;
- AB300 requires tattoo artists to be vaccinated against Hepatitis B, get basic first aid training, and follow statewide standards on sanitation (about time!);
- AB1156 provides training for school employees on bullying prevention and expands the definition of bullying to include posting material on social media websites; and
- SB946 requires health insurance carriers to cover behavioral therapy for those with autism, such as discrete trial training, which can be very costly when paid out-of-pocket.
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