Salient Provisions of Commercial Leases
Commercial leases are fundamentally different from residential leases. When drafting commercial leases, counsel should pay attention to specific points that would not be considered in residential lease contracts. Some of these points include, but not limited to: tenants bankruptcy, possession clauses, net leases, etc.
Lease and Option Terms:
Commercial leases have fixed terms. These fixed terms automatically create tenancy for years. Tenancy for years means that the lease term is for a definite period of time. This could be for less than a year. Once the tenancy expires (at the end date) it automatically expires with no notice requirements for either party.
Option terms require extreme caution because they might be unenforceable. When drafting option terms, a problem could arise if a rental price is not specified. If the contract does not have a mechanism to calculate, there is a lack of enforceability and ride with litigation
A net lease is jargon used in non-residential parlance. Net lease is the rent the landlord received without any deductions (property taxes, insurance, repairs, etc). A lease can be partially net, if the tenant is obliged to undertake some of the obligations. Net leases are an investment tool for passive investors with relatively substantial returns.
Gross lease is the opposite of a net lease. In a gross lease, the landlord is obligated to pay for all of the items laid out in the contract: insurance, taxes, improvements, etc.
Applicability of Net Leases:
Net leases are commonly used in freestanding buildings. Multi-tenant buildings are both net and gross leases. For example, a tenant’s fee increases because of the landlord’s operating expenses.
Bankruptcy of Tenant:
The law states that there is no termination of commercial leases due to tenant bankruptcy or insolvency. While federal bankruptcy laws, generally, do not allow landlords to terminate a lease because of bankruptcy, California law allows it. California case law entitles landlords to terminate commercial leases when a tenant becomes bankrupt or insolvent.
Date of Possession Provision
Because there is no guarantee that a dispossessed commercial tenant will in fact move out. Most commercial leases define heavy punitive damages for holdover tenants. These clauses can be detrimental for the dispossessed and new tenants because both could be liable for punitive damages under respective clauses. It is important to weigh the costs of holding over awaiting the dispossessed tenant to move out.