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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.

1. 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.”

2. 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.

3. 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.”

4. 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.

5. 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.”

6. 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.

7. 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.

8. 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.”

Quotes

Divorce is a declaration of independence with only two signers.


Gerald F. Lieberman

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.

Triple threat (tenants rejoice and landlords beware!)

It's a classic story.  You lease an apartment.  Everything is wonderful.  You move out and are supposed to get your deposit in the mail.  What you get back wouldn't buy you a large popcorn in the movie theater.  Accompanying your measly check is an ambiguously worded explanation and a checklist which includes: paint, carpet, carpet padding, cleaning fee, processing, supplies, etc.  The place looked spotless or at least copacetic when you left it.

They have your money.  They have a team of lawyers.  You have a check worth a large popcorn, need the deposit for a new apartment and are up a creek without a paddle.  What is a tenant to do?  Guess what? California Civil Code Section 1950.5 comes to the rescue!  It's a triple threat! 

Section 1950.5 says that if your landlord in bad faith retains your deposit, you can be awarded statutory damages equal to twice the deposit amount, in addition to whatever real damages are awarded.  That means if your real damages are the full deposit, you can be awarded up to three times the deposit amount in all.  Pretty awesome huh?

So next time you get that B.S. list of new paint and carpet don't cash that check!  File a breach of contract suit and ask for real and statutory damages under Section 1950.5.  It might buy a whole lot more than popcorn.