Key Aspects of Commercial Lease Agreements for Legal Practitioners
Commercial lease agreements differ significantly from their residential counterparts, necessitating a distinct approach by attorneys. Lawyers should be vigilant of certain elements not commonly found in residential leases, such as clauses addressing tenant bankruptcy, possession stipulations, and the specifics of net leases.
Fixed and Option Terms in Lease Agreements:
Unlike residential leases, commercial ones tend to have fixed terms, leading to a tenancy for a specific duration. This duration can be less than a year, and once it elapses, the lease naturally terminates without requiring any formal notice from either party.
Option terms, however, warrant careful scrutiny due to potential enforceability issues. Challenges might arise when a rental rate is not explicitly stated or if there’s no method for determining it within the contract, creating potential legal ambiguities and opening the door for legal disputes.
Understanding Net Leases:
In commercial leasing language, a net lease refers to the landlord’s rent receipt without any deductions, such as property taxes, insurance, and repairs. Leases can be partly net, with the tenant assuming some of the responsibilities. Net leases often serve as a lucrative investment strategy for passive investors looking for significant returns.
Contrasting Gross Leases:
On the other end of the spectrum is the gross lease, where the landlord bears the responsibility of all contractual expenses, including insurance, taxes, and property improvements.
When Net Leases Apply:
Net leases are typically associated with standalone buildings, whereas multi-tenant buildings might use either net or gross leases. For instance, a landlord’s operating expenses could lead to increased costs for the tenant under a net lease.
Addressing Tenant Bankruptcy:
Commercial lease agreements are not automatically terminated upon tenant bankruptcy or insolvency. While federal bankruptcy laws generally prohibit landlords from terminating a lease due to bankruptcy, California law provides an exception. According to California precedents, landlords can terminate commercial leases when a tenant becomes insolvent or declares bankruptcy.
Navigating the Date of Possession Provision:
Assuring that a commercial tenant will vacate as agreed upon is not guaranteed, prompting many commercial leases to incorporate strict penalties for holdover tenants. Both the outgoing and incoming tenants could potentially face these punitive damages, making it vital to evaluate the potential costs of waiting for the former tenant to vacate.
