Business legal services in Silicon Valley

How Commercial Tenants Should Protect Themselves When Leasing a Property

Lease Agreement

The National Association of Real Estate Investment Trusts (Nareit) reports that the total value of the commercial real estate market in the United States is approximately $16 trillion. With so much competition, it is easy for businesses to get overwhelmed when looking for commercial property. Whether you are renting space for retail, an office, manufacturing, or distribution, it is imperative that you sign a fair lease agreement. In this blog post, our Fremont business law attorney explains how commercial tenants can protect themselves when leasing a property in the San Francisco Bay Area.

Review the Lease Agreement Carefully

When commercial tenants search for a new property, they often focus on the location and the rental rate. This is not surprising — price and location are extremely important in business. In too many cases, business owners overlook the importance of carefully reviewing their lease agreement. The specific details of your commercial lease agreement matter. The lease will control your rights if a problem or dispute arises. Your commercial lease agreement should be reviewed by an experienced business lawyer before you sign on the dotted line.

Be Aware of the Liability Risks

In evaluating a commercial lease agreement, one of the key things to investigate is your liability risk. Often, commercial landlords try to shift a large share of the liability risk onto their tenant. If you fail to carefully review the specific terms of your lease agreement, you could be accepting a far greater liability risk than you are comfortable with.

An important thing to watch for is ‘common area maintenance’ (CAM) charges. Also referred to as triple net lease (NNN), CAM charges are fees paid by the tenant to the landlord that are designed to cover the expenses related to certain day-to-day operations. If you share common space with other commercial tenants, your CAM fees will generally be proportional to your total rental obligations. CAM charges may include things like common area trash removal, landscaping, and elevator upkeep.

Another critical contract provision to watch for relates to repairs and improvement to the commercial property—but in your unit and in the common areas. Make sure you know whether the landlord has the right to pass on repair and improvement costs onto your business. If repair and improvement costs are passed on, you should clarify how those expenses are charged. It may be lump sum payments, or the costs may be amortized over multiple years.

Know Your Right to Negotiate a Commercial Lease

When a commercial landlord presents you with a lease agreement, you have the right to take some time to review the specific terms of the contract. Some commercial leases can be negotiated, others are “take it or leave it.” Regardless, it is imperative that you consult with a California attorney who can help you review the lease and advise you on the meaning and implications of the terms.

You may be able to propose amendments to reduce your total level risk. Alternatively, you might want to purchase a supplemental insurance policy for additional liability protection. Your lawyer can help you come to a final lease agreement that offers a fair rental rate, while also ensuring that you and your company are protected from unreasonable liability risks.

Call Our California Commercial Landlord-Tenant Attorney for Immediate Help

Attorney Lynette Ariathurai has the skills and legal experience to negotiate, draft, and review commercial lease agreements. If you are renting property and have questions about commercial leases, we are here to help. Contact us today to learn more about our business law services. With an office in Fremont, we provide representation to businesses and organizations throughout the region, including in Union City, Hayward, Castro, Valley, Newark, and Milpitas.

landlord, leases, tenant

Business legal services in Silicon Valley

Things to Consider for Commercial Real Estate Leases – for Landlords

Lynnette Ariathurai, Bay Area Business Attorney, Fremont, Hayward, CA

Owning commercial property in California can be lucrative, especially when that property is located in an area that is highly trafficked and desirable for businesses in the region. At the same time, it is important to recognize that the value of a commercial property investment depends on having a strong, well-drafted lease agreement.

The lease is the basis of your relationship with a commercial tenant. It is crucial that a lease effectively protects your interests in all possible scenarios. Here, our Fremont commercial real estate lawyer highlights six important issues that landlords should consider when negotiating and drafting a commercial lease in California.

Commercial Rent (Base Rate, Utilities, Percentage Leases)

It is no secret that the most important thing for landlords is collecting rent. Rental payments are the lifeblood of commercial real estate investment. A well-drafted commercial lease will help you ensure that you are in the best position to get full and fair market value rent for your property and that you can actually collect the rent.

A commercial lease should clarify exactly who is responsible for all costs—it should specify the amount of base rate, the date it is due, and payment of utilities. In some cases, commercial rent is based, in part, on business revenue. Often referred to as a “percentage lease”, it may be a good option for some California landlords.

Duration of the Lease (Early Termination/Renewal Rights)

A commercial lease should always have a well-defined duration. Both parties need to know exactly how long their current obligations will last. Beyond that, commercial landlords should also consider including provisions that clarify what will happen at the end of the lease. Among other things, you may want to consider:

  • Automatic renewal rights (first refusal rights);
  • The ability to extend the lease; and
  • Early termination options.

At the end of the current commercial lease term, the landlord-tenant relationship will either be extended or it will terminate. It is useful to operate under an initial commercial lease that helps facilitate a smooth transition, whatever the parties decide to do.

Alterations, Improvements, and Maintenance During the Tenancy

Commercial leases should have clear information about the commercial tenant’s ability to make any alterations to the premises during the terms of the lease, as well as information about whether you or the commercial tenant will be responsible for necessary improvements or maintenance during the tenancy.

Insurance and Indemnity

A commercial lease should always prepare for the possibility of unexpected loss—whether because of property damages or a lawsuit from a third party. This starts with insurance. While a commercial landlord will typically maintain their own insurance policy, it is important to consider whether a commercial tenant will be required to have a liability policy or another type of insurance policy as well. Additionally, commercial landlords may also want to consider some type of indemnity clause. As defined by the Cornell Legal Information Institute, an indemnification clause is a contract provision that shifts a liability risk from one party to another.

Collection of Overdue Rent and Evictions for Non-Payment

Unfortunately, not all commercial tenants live up to their responsibilities. You may run into a problem collecting rent. If so, you have the right to take immediate action against the business, potentially including initiating eviction proceedings. Your commercial lease is the basis of your ability to collect rent and evict a tenant for non-payment. A properly drafted commercial lease will ensure that you are in the best position to collect, even if a commercial tenant files for bankruptcy.

Termination of the Lease for Other Types of Contract Breaches

As a tenant, the primary obligation a business owes to its commercial landlord is a timely rental payment. Of course, that is not typically the only obligation. Landlords also need a commercial tenant who will treat their property well. In a commercial lease, you should strongly consider including a clear definition of what constitutes a breach of contract sufficient to justify termination of the lease and removal of the tenant. For instance, a commercial tenant may be removed for creating a nuisance or engaging in unlawful activity on the property.

Contact Our California Commercial Real Estate Attorney Today

Are you planning to rent commercial property to a new business tenant? You should seek advice about your commercial real estate lease from an experienced Fremont business law attorney. Attorney Lynnette Ariathurai is committed to serving commercial real estate landlords in California and can discuss the issues you should be considering in your commercial lease. Contact us to learn more about the services we provide. We serve clients in Fremont, Hayward, Milpitas, Union City, Newark, and throughout the East Bay.

business law attorney, commercial property leases, commercial real estate leases, contract agreements, contract attorney

Business legal services in Silicon Valley

Legal Considerations Before Signing a Commercial Lease

business lawyer

Most entrepreneurs do not understand that in a commercial lease the leasing agreement is whatever the parties decide. There is considerably less legal protection for a business in a commercial lease than in common residential leases.

For example, in a commercial lease, the parties can opt out of many of the protections provided for by California’s commercial landlord and tenant laws, whereas in a residential lease, a tenant cannot. If a business enters a commercial lease waiving some of the statutory protections provided by these laws, a court called in to resolve a dispute between the parties, at a later date, may only consider the commercial lease as it is written and signed by the parties.

1.    Know which lease terms can be adjusted

Just as there are customs and practices in your trade or industry, there are also customs and practices in commercial real estate leasing that are hyper local or specific to the leasing agents or commercial property owners in your area. Make sure you understand which terms in a standard commercial lease can be adjusted before you start negotiating the terms of your own commercial lease.

2.    Be prepared to provide a personal guarantee or walk

Some landlords require new business owners or shareholders to personally guarantee the commercial lease. This typically eliminates the very legal protections obtained by creating a corporate entity in the first place. There is limited room to maneuver an alternative option. Be prepared to walk and continue your commercial space hunt if you’re not comfortable offering a personal guarantee of your business’ commercial lease.

3.    Build in an option to grow

Businesses are formed to make a profit. When businesses are successful, they grow. The initial commercial space needed to launch a business may be quite different from the commercial space needed to maintain and grow it. Make sure your commercial lease reserves the right to relocate if your commercial space no longer works for your business and contains an exit strategy that would allow you to amend or terminate a commercial lease early. However, it may be important to prevent the landlord from having the option of moving you from an ideal space to a less desirable location. Any relocation clause in the contract should provide flexibility but not give too much power to the landlord.

4.    Hire a business lawyer

Commercial property owners, real estate development companies, and leasing agents are very knowledgeable about the power they possess to demand terms from businesses that may not be in their best interest. Seek the advice and legal counsel of knowledgeable commercial real estate lawyers to help you negotiate your commercial space lease, before signing.

If you are a new business in Fremont, Newark, Hayward, East Bay, Milpitas, Union City, San Leandro, Gilroy, San Jose, or Santa Clara, CA venturing into your first commercial space lease you should be aware of the following before you sign your first commercial lease or renew their next one if saddled with unfavorable terms in their current lease.  Talk to The Law Firm of Lynnette Ariathurai when you are reviewing or preparing to sign a lease agreement, you will be glad you did.

business agreements, business lawyer, commercial leases, personal guarantees

Business legal services in Silicon Valley

California Real Estate Company Expands With Business Merger

On behalf of The Law Office of Lynnette Ariathurai, A Professional Corporation posted in Mergers & Acquisitions on Thursday, November 14, 2013.

There are a variety of methods that a company may utilize in order to expand its share of the market. Some of these may include marketing, advertising or strategic property purchases. However, many times the best way to do this is through a business merger. This is what one California real estate company has decided to do in its recent merger with another real estate company.

The company, TRI Pointe Homes, is in the middle of finalizing its merger with Weyerhauser Real Estate Co. The merger is estimated to be a $2.7 billion deal and will give TRI Pointe Homes a larger control of the nationwide real estate market. The deal will bring an additional 27,000 properties into the company’s real estate portfolio. Approximately 16,000 of these properties will be located in California, which will make the company a significant force in the state’s real estate industry.

The merger will give TRI Pointe Homes ownership of Weyerhaueser’s five brands: Quadrant Homes, Winchester Homes, Pardee Homes, Trendmaker Homes and Maracay Homes. Weyehaeuser’s shareholders would account for approximately 80.5 percent of ownership in the newly merged real estate company. The merger is predicted to be finalized by the third quarter of 2013.

However, in order for this business merger to be successful in California, all of the legal terms of the transaction must be properly detailed in necessary legal contracts between the parties involved. The contracts should be carefully drafted in order to minimize any misunderstandings that may lead to future lawsuits. Knowledge of applicable laws regarding contracts and business will be integral. Additionally, it is important to file the correct paperwork with the proper regulatory agencies.

Source: Los Angeles Times, Home builders TRI Pointe, Weyerhaeuser Real Estate to merge, Andrew Khouri, Nov. 4, 2013

business mergers, commercial real estate business law

Business legal services in Silicon Valley

It Is Important to Diversify Commercial Real Estate in California

On behalf of The Law Office of Lynnette Ariathurai, A Professional Corporation posted in Commercial Real Estate on Thursday, September 12, 2013.

Real estate is an important investment for most people. However, this type of investment is subject to the rise and fall of the economy. This is why many people want to diversify their commercial real estate portfolio so they can minimize risk. The founders of the California Family Fitness gym chain decided to diversify their real estate portfolio recently by selling $98.7 million worth of real property.

The founders sold the ten properties, which are currently leased to California Family Fitness, in order to reinvest in other properties which were not solely dependent on only one tenant. Although the one tenant, California Family Fitness, is a healthy and growing company, the founders still wanted to further diversify in order to have a more balanced real estate portfolio. The founders of the gym chain currently operate another company Fit Development which will be used to purchase commercial real estate across multiple Western states.

The two founders of the gym chain, who had sold the chain in 2006 while retaining ten percent each, are currently contracted to purchase 500,000 square feet of properties in four different states, including California. However, the purchase needs to be completed soon, in order to take advantage of Section 1031 of the U.S. Tax Code. The code section allows the founders to purchase the commercial properties without incurring tax liabilities on the sale of their former properties, however they must finalize the purchase of the new properties within six months.

As one may be able to see in this case in California, selling and buying commercial real estate can require some knowledge of applicable law in order to make the transaction financially successful. However, each person will have different goals when making a real estate transaction. Certain tax and real estate laws may only apply in specific circumstances, therefore one’s strategy will have to apply the law to one’s specific situation.

Source: Sacramento Business Journal, California Family Fitness founders sell nearly $99M of real estate portfolio to reinvest in other properties, Kelly Johnson, Aug. 30, 2013

1031, Commercial Real Estate, Purchase

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