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Commercial lease agreements involve a legally binding contract that may be more complicated than residential lease agreements; this is because commercial properties are used for business activities, which involves a bigger investment on the landlord's behalf and stronger lease commitments.

In essence, a California commercial lease agreement is used by landlords to rent a commercial space to a person or business. These spaces include office spaces, retail stores, and even industrial spaces.

Considering that commercial lease agreements are more complicated than residential ones, commercial landlords may need some help understanding some of the extra terms involved with renting their commercial property.

The following article will outline everything you need to know about California commercial lease agreements and what commercial tenants and landlords must consider before making a deal.

Commercial Agreements

When it comes to a commercial property, there are three types of leases a commercial landlord can consider. These include:

  • Gross Lease: A gross lease is considered to be better for commercial tenants rather than landlords. Here, the commercial tenant will pay a fixed amount of rent each month. The landlord will use these funds to pay for "nets," which involve insurance, area expenses, and taxes.
  • Triple Net Lease (NNN): Unlike a gross lease, this type of legally binding contract is better for the landlord. The tenant pays for all taxes, common area expenses, and insurance of the commercial property. On top of that, the tenant must also pay monthly rent.
  • Modified Gross Lease: In this case, both the tenant and landlord can negotiate which parts of the lease they're going to pay. This is considered the best option for both tenants and landlords.

Regardless of the California commercial lease agreement the landlord decides to use, it's vital that both parties agree on all of the terms to avoid any legal issues in the future.

California Leases

As you may have already guessed, a commercial lease agreement will vary depending on the state in which you currently live. In California, there are some particular rules you must be aware of.

It's important to note that a legally binding document for commercial properties is needed to protect both tenants and landlords. Here is an overview of how you should write these commercial leases:

Introduction | Primary Factors

  • Introduction: In the introduction, you will include the beginning and end date of the lease term. Moreover, you will include the legal names of all the involved parties in this lease term.
  • Description of the Commercial Property: You must include an overview of the commercial property that states what type of commercial space it is, its address, and its square footage.
  • Use of Premises: As this term implies, you must include a brief description of how the commercial property will be used.
  • Lease Term: Include the start and end of the lease. It's important to note that the document should get notarized before the commercial tenant moves in.
  • Type of Lease: Specify the type of commercial lease agreement you will use and whether it's a gross, triple net, or modified gross lease. In the case of a triple net lease, specify how you will divide the property expenses with the tenant.
  • Tenant's Obligations: Describe everything the tenant must do to ensure the proper functioning of the commercial property, including cleaning sessions and general maintenance.

Rent, Security Deposit, and Renewal

  • Base Rent Amount: Specify the due date of rental payments, as well as the initial rent amount.
  • Payments and Notices: Include information regarding who is responsible for receiving rental payments and communication.
  • Default and Possession: Explain the consequences that may arise if the tenant fails to pay/remit rent within the specified period.
  • Renewals: If you're planning on allowing the tenant to renew the lease, you must describe potential rent increases.
  • Security Deposits: The security deposit is used by the landlord to cover any damages and maintenance to their commercial spaces if needed. Here, the landlord must include the required amount of deposit and where they're planning to hold these funds.

Licenses and Permits

  • Licenses/Permits: Every tenant must comply with California law and all of the permits and licenses necessary to operate their business in the state. You must include a section that explains these factors.
  • Leasehold Improvements: There may be some cases where the tenant may want to make improvements to the property. In these cases, you must provide a section stating that the tenant must ask the landlord for consent before making any changes.

Vital Clauses

Below is a list of other factors that every commercial lease agreement should include:

  • Insurance Requirements
  • Subleasing Restrictions
  • Bankruptcy Statement
  • Indemnification Statement
  • Subordination/Attornment Statement
  • Estoppel Certificate
  • Waiver
  • Holdover
  • Amendment Statement
  • Binding Effect Statement
  • Notary Acknowledgement (as mentioned previously)
  • Landlord and Tenant's Signatures

Miscellaneous Information

The following are factors that may not necessarily apply to every property. Consider adding these clauses depending on what you want. Some of these clauses include:

  • Sign Placement
  • Advertising
  • Pet Policies

Considerations

Every state has a particular set of rules and regulations regarding a commercial lease agreement. Here is a list of other applicable laws that are important for both the landlord and potential tenant to know:

Rent Control

Although California applies rent control for residential properties, it doesn't do the same for commercial properties. This is because rent control in the commercial market is seen as something that provides unfair advantages to particular business sectors.

Evictions

The landlord must specify all of the reasons why they could evict the tenant from the office space or rental property in general. Some of the most common eviction reasons included in a commercial lease agreement include the following:

  • Not leaving the property when the lease term ends.
  • Causing disturbances in the property that affect how other tenants conduct their business.
  • Causing damages to the property.
  • Doing illegal activities on the property.
  • Nonpayment of rent.
  • Breaching the commercial lease agreement in any other way.

Key Money

"Key Money" refers to when a tenant makes an undocumented payment to the landlord so that they can rent the property without any additional legal processes. This is seen as inappropriate since it could mean that the landlord is taking advantage of the commercial rental market.

It's vital to note that key money is prohibited in California. In case the landlord asks the tenant to pay key money, the tenant may receive up to three times the damages caused by the denial of the rental.

Subletting

Tenants can sublet the property as long as they get permission from their landlord. Some of the requirements that should be in the sublease agreement include the following:

  • Sublease duration
  • Name of the sublessee
  • Address of the sublessee and its anticipated address once they vacate the property
  • Signature of all the parties involved

Moreover, the tenant must provide the landlord with a copy of the sublease document.

Free Templates

Do the terms of a California commercial lease agreement like this sound slightly complicated? Not to worry: you can download a free form to help you with the process. Here are free lease agreement templates:

Mandatory Disclosure

Regardless of the type of lease agreement the landlord and tenant agree upon, all lease agreements must have the following disclosures so that they comply with state law.

  • Disability Access Inspection Disclosure (Commercial Properties): The property must undergo a disability inspection made by a Certified Access Specialist. In essence, the Certified Access Specialist will report whether the subject premises comply with the California Civil Code § 55.53 and have everything needed to permit access for disabled individuals. If the landlord hasn't provided a report to the tenant, the tenant may request a special clause in the document that states that they can ask for a Certified Access Specialist to inspect the property at any time.
  • Material Facts Disclosure: The lease agreement must include information regarding any hazardous conditions on the property. Otherwise, not disclosing that information will be considered a fraudulent act.
  • Smoke Alarm Compliance Disclosure: This disclosure is optional, but it's recommended to address all building and safety codes required by law. The compliance, in this case, is typically assumed by tenants.
  • Proposition 65 Warning Notice: The following notice will let tenants know about any potentially harmful chemicals around the property. If the property is being occupied by 10 or more people, the landlord must include this disclosure.
  • Arbitration of Disputes: In case the landlord is planning on addressing arbitration, they must include a disclosure that explains the tenant will agree to settle particular disputes by neutral arbitration. A neutral arbitrator is a third-party individual designated by the landlord and tenant, and their responsibility is to settle disputes while being neutral.
  • Asbestos Disclosure: In case the property was built before 1979, the landlord must disclose information regarding the existence of asbestos in the property, as well as the specific location of the asbestos and how tenants can prevent exposure.

If you want to make things as efficient as possible, you may download a commercial lease agreement template today. You can download the template in Word or PDF format. You can also customize the document to fit your needs.

Go into the website and select "Commercial Lease Agreements" from the drop-down menu, and choose the free form that best fits your requirements!

Bottom Line

Drafting a lease agreement may seem difficult, but once you go through each clause carefully, you will ensure that you get a document that both parties will agree upon, avoiding problems. If you want to avoid any issues with the document, consider downloading a commercial lease agreement template and customizing it if you want.

FAQs

Why Is a Commercial Lease Agreement More Complicated Than a Residential Agreement?

The primary reason is that commercial units often come with more state requirements so that the tenant can operate their business correctly. This includes safety measures, disability inspections, and more.

Do Commercial Leases Need to Be Notarized?

Commercial leases must always be notarized in the state of California. In case the landlord makes any adjustments to the document in the future, they must notarize these changes too.

Is Downloading a Free Form Legal?

Absolutely! Downloading a free form can certainly make things easier for you since you will only have to adjust your information and clauses in the way you consider fit for your property.

Free Downloads

David Bitton

David is the co-founder & CMO of DoorLoop, a best-selling author, legal CLE speaker, and real estate investor. When he's not hanging with his three children, he's writing articles here!