Decoding the CA Realtors Commercial Lease
The California Association of Realtors commercial lease agreement is a standardized contract that commercial lessors in California typically use when leasing a property. This standardization provides consistency in the terms and conditions of commercial leases across the state, which can be particularly helpful in negotiations and dispute resolution. The commercial lease agreement covers everything from the names of the parties to the property address and all pertinent details in between, as well as additional items (including lease modifications).
In California, all commercial lease agreements are required to be in writing and contain certain basic information about the parties involved , the property in question, the terms of the lease, potential defaults and remedies available to the lessor in the event of default. Whether the commercial lease is covered by the Commercial Code or the Civil Code, this same level of information is required.
The initial basics of a commercial lease include:
The California Association of Realtors commercial lease agreement also covers extensive details about the rights and responsibilities of both the tenant and the lessor. Some of these provisions may be specific to some types of commercial leases, such as net leases versus gross jump leases (or modified gross leases), but are generally a part of the commercial lease agreement.
Notable Clauses in the Lease Agreement
The California Association of Realtors Commercial Lease Agreement ("CAR CLA") sets forth certain critical provisions and clauses that are important to every commercial landlord and tenant. In addition to those discussed in the "Basic Terms of the Lease Agreement" section of this commentary, other important considerations include:
Common areas
Permitted uses
Management and Maintenance of the Property
Lease Commencement Date and Rent
Lease Term (beginning and ending dates)
Rental License
Sector or Business License
Tenant Alterations and Improvements
Tenant Responsible for Repairs and Maintenance
Waiver of Subrogation
Release of Liability
Attributed Particular Risks
Irradiation of Property
Indemnification
Casualty
Eviction
Removal of Tenant’s Property
General Liability Insurance
Rent Guarantee (if lease is guaranteed by a third party)
Transferability of the lease
Consultation with legal counsel regarding CAR CLA is strongly urged.
Advantages of a Uniform Lease
An obvious benefit of the California Association of Realtors standardized commercial lease agreement is that it promotes consistency between forms, and consistency is an important feature of any contract, particularly in the case of a commercial lease. The terms of the CAR form commercial lease are legal, it is an organized and well researched form, and so there is little need to worry about whether the form you are using covers the important issues. There is no need to waste time and money on an attorney when this particular standard lease agreement has already been legally drafted to cover every possible issue that could arise between landlord and tenant.
It is also, surprisingly, a very simple form that needs no major rewording or customization to match the parties’ needs. As a simple sales contract, the CAR form commercial lease agreement is no more than a single piece of paper and just a few lines. For many commercial leases, all that is required are the term of lease, the rented space, and the price. The CAR form commercial lease keeps that simplicity without leaving anything to chance. It has all the necessary terms for almost any standard occurrence in a commercial lease, allowing both parties to have a complete and legally binding written document for any future disputes.
Typical Modifications to a Commercial Lease
Commercial leases are often even more customized than residential leases, as commercial tenants have a larger variety of needs, and landlords have different requirements for each different property, and for different tenants. The California Association of Realtors Commercial Lease Agreement is intended to be a form that allows parties to fill in the blanks in order to provide enough information to go forward with leasing a property, but does not attempt to cover every possible situation that may arise.
Common customization requests include shifting some or all of the operating expenses or common area expenses from the landlord to the tenant, so that the tenant bears more of the risk of fluctuating costs. It can also be preferable to a tenant to establish the expenses at the outset and have them included in the rent rather than subject to adjustment by the landlord in the future. Rental agreements are commonly net of such expenses so that the tenant pays those items directly, but that is not always the case. These are all issues that can be negotiated.
One area that can also be important is alterations to the leased space that are not part of the regular maintenance of the property. A tenant may want to make alterations to the space to better fit its needs, and want to have the right to remove those alterations at the end of the lease if it wishes to do so. However, a landlord will have an interest in protecting the property to maintain its value. It will often be in the interest of both the tenant and the landlord to have the tenant request permission to make the alterations and have the landlord have some right of first refusal should the tenant wish to leave such alterations in place at the end of the lease.
Legal Insights for Lessor and Lessee
In addition to the above issues, landlords and tenants should also consider the following items when entering into a commercial lease agreement:
Disclosure requirements. Most commercial lease agreements require that the tenant investigate and perform due diligence on a property prior to occupancy. California Civil Code Section 1102, et seq. has several disclosure requirements for landlords with regard to commercial leases. The most common disclosure our clients seem to seek guidance on is the Federal Lead-Based Paint Disclosure. However, there are several new disclosure requirements for commercial leases beginning January 1, 2014 such as disclosure for sex offender information or if the premises are in an area of severe risk of flooding. In addition, if the subject property was used from 1979 until 2004 to manufacture or chemical expose firearms, you could be required to provide certain disclosures relating to the potential harmful effects of lead contamination. Under the California Environmental Quality Act (CEQA), certain noticing requirements may be required based on the zoning of the property and changes in use of existing commercial properties.
Dispute resolution. Although most commercial leases contain a dispute resolution clause, you will want to determine if the dispute resolution method is favorable to you . The common dispute resolution methods are mediation, binding arbitration or litigation. If your commercial lease provides for arbitration, be aware that California Arbitration Statutes (California Code of Civil Procedure Sections 1280-1294.2) govern arbitration for cases in California. These statutes state the rules, procedures and requirements for the Arbitration process and apply to both commercial and civil cases. Remember, however, an arbitrator is generally considered a private judge, meaning that the decision of an arbitrator is generally not appealable and the cost of the arbitration is usually split between the parties.
Zoning and land use. When leasing property, the landlord should be cautious to only lease property for purposes that are permitted in the zone. Landlord may also want to determine if the purpose for which the tenant will use the property is consistent with prior uses on the property. The landlord should also determine if the property is part of a redevelopment plan or subject to fees or assessments. For example, if the city improvements were in front of the property a bond may be in place that will collect a special assessment. Also the landlord should check to see if the city has any requirements to keep the property free from graffiti, this could require that the property be painted periodically at the landlord’s expense or subject the landlord to a fine.
Obtaining the CAR Commercial Lease Form
To access the CAR Commercial Lease form, the individual must be a member of the California Association of Realtors. While the lease form can be used by any member of the public, it is not available from CAR without any membership or purchase from their website. It is widely used or given out but this does not mean that you have access to the lease form from any other source. The California Association of Realtors has integrated its lease form with zipForm and one has to be a member to access the lease form or obtain the lease form on zipForm.
Tips from an Expert on Commercial Lease Negotiation
"Have an attorney in your corner. Hopefully, when you’re fairly new at your job and don’t have a lot of experience with leases, you’ll work with a broker who does use his/her lawyer in every transaction."
As you negotiate the answer to these questions, think about the information you’ve compiled. Based on your business needs, your personality and the local market, is the ability to terminate your lease an asset or a liability? If a landlord grants you that ability, are you prepared to pay for the right?
If you’re working on behalf of a tenant, it’s critical that you ask that same question as you review the situation from the landlord’s perspective. Regardless of whether you’re a tenant or an owner, talk to a real estate attorney before signing a lease to ensure you have the expertise necessary to evaluate the terms and conditions. The approach may be different from what you get from the attorney, but look for an attorney who has experience with commercial leases.
Commonly Asked Questions About Commercial Leases
Here are answers to some of the most common questions we receive about commercial leases and the California Association of Realtors commercial lease agreement.
What is the term of the California Association of Realtors commercial lease?
The CAR Commercial Lease Agreement does not provide a standard term – you get to choose how long your lease is for. Whether you want a monthly lease, 5-year lease or a 15-year lease, you are free to set the term of your lease with the landlord.
What happens after the term expiration?
Your lease may still contain provisions that apply after the term expires, such as renewals, obligations after termination, governing law, dispute resolution and others. You can choose whether or not to include these provisions in the lease terms and they may still be in effect after the lease term has expired.
In addition to these, the CAR Commercial Lease does not have any standard language regarding automatic renewal or right of first refusal renewal. Remember, even if it is not in the CAR Commercial Lease , if you have signed a lease with an automatic renewal or right of first refusal, then those terms are likely applicable as well. If you are uncertain, virtually all agreements are negotiable. It is always best to clarify any ambiguities you may have in your lease term when the lease is signed rather than later on down the road.
What happens if I breach my lease?
Like most commercial leases, the CAR Commercial Lease has a provision that allows either party to pursue all other remedies at law. This is a rather broad statement that allows a landlord to sue for any success damages they suffer by the breach, plus attorneys’ fees, which are usually recoverable in commercial lease litigation.
The CAR Commercial Lease also contains a clause that allows the landlord to terminate the lease upon a material breach. This means that your landlord could be entitled to terminate your lease (and kick you out of the property) as a result of any material breach of the lease, such as non-payment.
What should I do if I breach my lease?