Navigating Commercial Leases

Before we begin, I do want to make a disclaimer that this is legal information, not legal advice. Please consult with an attorney before making any major business decisions. Today's discussion will be structured as follows. First, we'll discuss commercial leasing basics, then we'll go into choosing a location and regulatory issues.

Next, we're going to discuss common lease clauses, then we'll discuss how to protect your small business, and we will wrap up with some final thoughts. Moving into commercial leasing basics. In this section, we'll first discuss key distinctions between a commercial lease and a residential lease. Then we'll go into discussing bargaining power and your rights as a tenant.

To structure our discussion on commercial leasing basics, we first will discuss the difference between a residential lease and a commercial lease. Next, we will discuss your rights and remedies as a tenant, as well as your bargaining power. Then we'll move on to costs and fees and different types of commercial leases. Key distinctions.

Before we discuss commercial leases, it's important to understand the key differences between a residential lease and a commercial lease. A commercial lease is a contract between a landlord and a tenant to use the space for commercial business activities. A residential lease is a contract between a tenant and a landlord to use the space for living. Another key distinction is the purpose between these two leases.

A commercial lease, the purpose is to use for commercial business activity, while for a residential lease, the purpose is to use the property for living, housing, and shelter. A commercial lease tends to be more complex and individualized per the terms of the agreement, while a residential lease is a bit more standardized and often comes in a form that is repeatedly used. A commercial lease can be anywhere from 3 to 5 years or even 10 years, while a residential lease is for a shorter term period. It could be anywhere from a month-to-month, 6 months, a year, sometimes 2 years.

Another distinction is that a commercial lease often requires a personal guarantee. A personal guarantee is when the individual business owner agrees to be on the hook for any payments should the company fail. There are two types of personal guarantees, unlimited versus limited. A limited guarantee is when the signer is guaranteeing they will pay the full financial obligations of the lease unconditionally, while a limited guarantee is specified for a certain amount and often referred to as rolling.

Next, let's discuss bargaining power and tenant rights and remedies. It's important to understand that the assumed bargaining power of a tenant differs between a commercial and a residential lease. In commercial leases, the tenant is assumed to be a sophisticated business person, meaning they are on equal footing with the landlord and are able to advocate and negotiate for a favorable lease. In contrast, a residential lease tends to assume that the tenant has less bargaining power than the landlord.

This means state and federal laws often dictate implied rights and remedies in a residential lease that commercial leases often lack. The rights and remedies available to a tenant differ depending on the type of lease. In a commercial lease, the rights and remedies a tenant may pursue in a court of law are limited to the terms of the lease contract. In contrast, a residential lease incorporates state and federal laws where there are implied rights that cannot be waived and that will automatically be read into a lease agreement.

Another important aspect to understand in a lease is called the duty to mitigate. When a tenant breaks a lease, a landlord may have imposed obligations to try and limit their financial loss should this occur. However, this duty varies by state and by type of lease. In residential leases, landlords always have a duty to mitigate.

However, in commercial leases, it depends on the state. For example, in New York, landlords do not have a duty to mitigate, while in California, they do. Another key concept is the implied warranty of habitability. This applies only to residential leases and not commercial leases.

It means that the landlord will maintain the property in a manner that is fit for living and habitable to a human. Some states have rent control stabilization laws such as New York. Those will only be imposed on residential leases and not commercial leases. Another right a tenant has is called use and quiet enjoyment.

This is a right that a tenant maintains regardless of the lease, so it can be a commercial or residential, and it means that the tenant has the right to use the property without interference from the landlord. In terms of the negotiability of a lease, commercial leases are a bit more flexible, while residential leases are not. There are less terms that you can negotiate with the landlord, such as rent period, rent price, and what it looks like when you get your security deposit back. Next, we'll discuss costs and fees of a commercial lease versus a residential lease.

In a commercial lease, a tenant is usually responsible for maintenance and operating expenses, while in a residential lease, that is an obligation that falls on the landlord. Examples of expenses in a commercial lease that a tenant may be on the hook for include property taxes, common area maintenance, and insurance. Now, let's discuss the different types of commercial leases. The first kind of commercial lease is a gross lease.

This is when the tenant pays the base rent and the landlord pays all other operating and maintenance expenses. Another type of lease is called a modified gross lease. This is when the tenant agrees to pay the base rent and the landlord and tenant negotiate on how they're going to split operating expenses. In a net lease, a tenant pays the base rent plus some other operating expense.

There are different kinds of net lease going from single, double, to triple. Each lease increases the operating expense that the tenant assumes. So, in a single lease, the tenant is going to pay base rent and property taxes. In a double lease, the tenant also assumes insurance costs.

In a triple lease, the tenant also pays common area maintenance fees. Next, we have a percentage lease, which is when a tenant will pay their base rent based off of the number of sales the business makes each month. Lastly, we have a ground lease, which is a lease purely for the land, not for the property on the land. And as we wrap up this discussion on commercial leasing basics, here is a chart you can refer back to that has the key distinctions between commercial and residential leases, as well as the rights and remedies available to them. >> Now, we're going to be moving on to choosing a location and regulatory matters.

There are many important factors to consider before signing a lease that could have an impact on your business before you even begin. Many of these factors might not be at the top of your mind when you're looking to start your business, but ignoring them could have negative impacts on your business in the future if you ignore them. The main factors that we're going to be looking at are zoning, a certificate of occupancy, ADA compliance, licensing and permits, and taxes. Because many of these vary by location, we're going to be looking at New York City and Fresno as our two examples.

We're going to be starting with zoning. So, zoning dictates how land and buildings can be used. These are typically local government regulations. Some of the most common zoning designations are commercial, residential, and manufacturing.

Before you sign a lease, you're going to want to make sure that the building you're looking in is in an area that is zoned for your needs. The most common types of zones are commercial, which is for shopping centers, restaurants, commercial activity, residential, which is for housing such as houses and apartments, industrial, which is for warehouses, manufacturing, distribution centers, mixed-use, which is a combination of commercial and residential activity, and agriculture, which is used for things like farming or land preservation. And on the screen here, you will see a common example of a zoning map. Many of them will look like this where they are color co-coordinated based on the zone that they are in.

This is the New York City zoning map. To find it, you'll look up New York City zoning map, and you'll click on the Zola link, and you'll be brought to a page like this. As you can see, it's color coordinated based off the type of zones that are in New York City. And it's very easily navigable.

You can scroll around on the map and look at different zones to see what type of activity is permitted there. If you already have a location for your business, you can use the search function to type in the address, and it will tell you what zone that address is in. Here you see the Fresno zoning map. It's similar to the New York where it's color co-coordinated based off of the zones that are in it.

To [snorts] find it, you'll look up Fresno zoning map, and then go to the result titled GIS and mapping on the Fresno government website. From there, you can go to the Fresno zoning comparison map. Similar to New York, you'll be able to scroll around or type in the address of the location that you're looking at to see what type of area it is zoned for. >> [snorts] >> As a quick example, if I want to open up an ice cream shop, I would go to my city's zoning map. Say it's in New York.

And if I didn't have a location in mind already, I could scroll around on the map and look for areas that are designated for commercial or mixed-use activity. Or if I had an address in mind, I could use the search function to type in that address and make sure that it's either commercial or mixed-use. Now we'll be moving on to a certificate of occupancy. A certificate of occupancy is a document that states a building's legal use or type of permitted activity.

They're typically issued to protect the health and safety of a building's occupants. They're issued when a building is completed or it undergoes significant renovations that alter its use, the safety, the exits, or its functionality. The responsibility to obtain these falls on the property owner or the building's general contractor. What this means is that any building that you are looking at should already have a certificate of occupancy on file.

To find the certificate of occupancy in New York, you'll search for certificate of occupancy NYC. You'll click on the government website where you'll be brought to a page like this, and then you can enter in the address of the building that you are looking at. And then you'll be able to see the certificate of occupancy and what the building is allowed to be used for. >> [snorts] >> As a note in New York, buildings built before 1938 might not have a certificate of occupancy unless they have undergone those significant renovations. If that's the case, you can contact the borough's Department of Buildings office to obtain a letter of no objection. >> [snorts] >> To find a certificate of occupancy in New York, you could reach out to the building inspection and permits at that phone number or the email or you can go to the plan check and building code at the phone number and email listed on the screen.

When you reach out to them, they should be able to provide you with a certificate of occupancy for the building you are looking at. So, after you have checked the zoning and the certificate of occupancy for the building, a next consideration would be ADA compliance. The ADA is the Americans with Disabilities Act. It is passed to ensure that people with disabilities can fully participate in all aspects of life.

This may affect you because businesses must provide people with disabilities the opportunity to access the goods and services that they offer. What this means in practice is that after you have your business running, you may have to make reasonable modifications to practices, policies, and procedures where needed. For [snorts] instance, in my ice cream shop, if I were to have a prohibition against animals and then somebody with a seeing eye dog want to enter, I would modify my policy to allow the dog to come in. >> [snorts] >> What this means before you sign a lease is that you're going to want to look at how accessible the business actually is because the ADA requires businesses to remove architectural barriers in buildings when it is readily readily achievable to do so. >> [snorts] >> And the responsibility for this falls on both the tenant and the landlord. In your lease, you could negotiate with your landlord to have them cover the cost of making the building ADA compliant.

However, if you are sued and your building is not ADA compliant, the liability will fall on both you and your landlord. >> [snorts] >> The Department of Justice has published a checklist where you can check everything to make sure your building is ADA compliant. You can find this by searching Department of Department of Justice ADA checklist. Now, we will be moving on to licensing and permits. So, as a general overview, as a general overview, uh you want to check with your local government to make sure that you have all licenses required because these will vary greatly based off of what industry you're in, um, what your business is doing, and where the location actually is.

Some general licenses that may apply to you are things like an operating license, a building permit, health licenses, or signage licenses. So, as I mentioned, the business licensing that you're going to need is going to vary greatly based on your industry. In order to look for it in New York, you can Google New York City business licensing checklist, where you'll be able to go on to the government website, and you'll be able to find a page like this, where from here you'll be able to put in all the specifics about your business, what type of industry you're in, what type of equipment you're using, and it will give you a list of all the different licenses or permits that you may need. Similarly, in Fresno, you can go to the CalGold Permit Assistance Tool, where you can put in your city, Fresno, and then you can select a business type.

And from there, you'll be able to see different licenses and permits that you'll need for your business. Lastly, we'll be discussing taxes. No matter what business that you're in, or no matter where you are, you're going to have to pay taxes. These are federal, state, or local taxes that you may have to pay.

You may have to pay different ones depending what type of industry you're in. In New York City, you can find the taxes for your business on the business section of the New York City Department of Finance website, and you can go to a section for a business and excise tax. Some important taxes to note are the business corporation tax, the commercial rent tax, general corporation tax, or the utility tax. These may or may not apply to you.

However, these are just some general common ones, and it's important to check taxes before you sign a lease because some, like the commercial rent tax for instance, only apply to buildings doing commercial activity south of 96th Street in Manhattan. So, if you want to avoid that tax, you might consider starting your business north of 96th Street instead. The taxes in Fresno are not nearly as comprehensive as those in New York, um but you will need to apply for a business tax certificate on the city of Fresno website. Then you could also check for other taxes on the California Department of Tax and Fee Administration. >> [snorts] >> Ultimately, while some of these topics might not be your first priority, they are all important to consider before starting your business.

For instance, you can invest in a space, you can invest in inventory, and you can invest in building it out only to find that the building that the lease you signed in is not zoned properly for what you need, or the certificate of occupancy doesn't allow your business. Or if your building isn't ADA compliant, you might have to pay extra money that you weren't considering earlier in order to make it so it's compliant. >> [snorts] >> In the end, failing to consider these factors may lead to fines, penalties, or enforced closures that will lead you to losing the initial investment that you made on the lease or the inventory or whatever progress you have made on your business. >> Next, we will be discussing an overview of common lease clauses that you are likely to find in a commercial lease. This section will be structured by first talking about lease clauses generally, and then I will move into talking about common clauses that explicitly waive tenant rights. First, we have a permitted use clause.

Permitted use clauses strictly define how a tenant can use the property and limit all other uses. Further, using the property in a way that is not permitted allows the landlord to terminate the lease because it can constitute a breach of the lease. Here we have a permitted use clause. The first part is a template for providing for a specific use, and the second part provides remedies that a landlord has available to to if a tenant uses the property in a way that is not specified.

Next, we have a rent escalation clause. These allow landlords to increase rent to keep up with rising operating costs and also inflation. Most often, these increases are annual, but the landlord can decide contractually that these increases will be on other intervals. Usually, the increase is only by a few percentage points, but it does mean that you might be signing a lease for more money than you ordinarily think you are signing for.

Here we have an example of a rent escalation clause, and it states how much the rent will increase and on what dates. Next, we'll discuss maintenance and repair clauses, which states whether the landlord or tenant is responsible for maintenance and repairs to the property. This means that the tenant often takes on more expenses beyond just the payment of the rent. Here is an example of a maintenance and repair clause, but specifically for tenant obligations.

The first part, which is the slide, lists common tenant maintenance and repair obligations, such as interior portions of the premises, electrical equipment, uh plumbing and HVAC, and also safety equipment that are on the premises. This section discusses utilities, and it is common for tenants to pay the utilities to the property, which is exactly what this sample clause provides. Third, this is an example of landlord obligations, such as taking care of external portions of the property, taking care of electrical, plumbing, and HVAC systems that service the property as a whole, as opposed to just the leased premises, and also taking care of common areas. Next are subleasing and assignment clauses.

Subleasing is when a tenant enters into an agreement with a third party to lease the premises from the tenant. Assignment is when a tenant assigns all rights and obligations to a third party. Landlords may prohibit subleases and assignments altogether. However, some lease provisions do state that they will be allowed with landlord approval.

In these cases, the landlord cannot unreasonably withhold consent for assignments and subleases. Here is an example subleasing and assignment clause that prohibits subleasing or assignment without landlord consent, but also provides that the landlord will not unreasonably withhold that consent. Next, we have default provisions. Default provisions define what constitutes a breach of the lease and usually mandate that the other party notify the defaulting party of the issue and that there be a specified period of time in which that party can cure or otherwise fix the defect before it triggers penalties.

Look for whether the cure period is stated in the lease. Examples of defaults by tenant are non-payment of rent, an unauthorized sublease or assignment, failure to have the required insurance, causing damage to the property beyond normal wear and tear, or using the properties in ways that are not authorized by the permitted use clause. And some examples of defaults by landlord are failing to provide the tenant with services that it promised in the lease agreement, also substantial interference with the tenant's ability to operate their business and use the premises. This is known as a violation of the covenant of quiet enjoyment, which can lead to a claim for constructive eviction and ultimately a termination of the lease by the tenant.

Here we have an example of a default provision, which defines many of the aforementioned examples as defaults under the lease, and it also includes a catch-all provision at the end for any other lease obligations that a tenant may fail to carry out. Next is a personal guarantee clause. Some landlords require that the business owner be personally liable for the lease obligations if the business entity cannot fulfill them. This clause allows the landlord to go after that person's personal assets, such as savings or property, if the business cannot pay the rent.

This is more common for new or small businesses as these are riskier tenants for a landlord. Be careful of these. A major advantage of signing a lease with your business entity is to protect your personal assets and a personal guarantee clause can undermine some of these protections. You can also try and negotiate the extent to which you would be personally liable under the lease if there is a default.

This is an example of a personal guarantee clause and it shows one way a lease may obligate you or whoever your guarantor is to cover your business's obligations under the lease. Next is a force majeure clause. These excuse parties from performing some contractual obligations due to unforeseen circumstances outside of their control. For example, natural disasters, war, pandemics, government actions, or other emergencies.

Force majeure event, I'm sorry. The force majeure event must be outside of either parties' control and must be due to no fault of either party in order for the provision to take effect. For example, the COVID-19 pandemic. Additionally, these clauses usually do not excuse timely rent payments even though they might excuse other obligations such as maintenance obligations.

But other clauses in the lease might allow for other remedies such as for rent to be abated, which means reduced or paused altogether while the space is unusable. Sometimes these clauses do allow for termination if the force majeure event persists for a set period of time. Here is an example of two portions of a force majeure clause. The first defines what a force majeure event is, including reiterating the fact that it must be due to no fault of either party and that also economic hardship does not constitute a force majeure event.

The second part specifies that operation of this clause does not excuse the rent payment obligation. Now, I will be moving into two clauses that explicitly waive or limit tenant rights that you should be on the lookout for. First is the waiver of covenant of quiet enjoyment. The covenant of quiet enjoyment states that a tenant is allowed the beneficial use and enjoyment of their premises.

If the landlord's actions interfere with this right, the tenant has remedies through constructive eviction, such as seeking rent abatements or terminating lease altogether. Many commercial leases, however, explicitly limit or eliminate this covenant altogether, which can affect tenant remedies against a landlord. Here's an example of a waiver of the covenant of quiet enjoyment, and it explicitly states that the tenant waives any and all claims of constructive evictions along with other related remedies such as rent abatements. Finally, the as is clause.

This states that the tenant accepts the property in its current condition, including any existing issues. This also eliminates all obligations of the landlord to fix any aspect of the property before the tenant takes possession. These clauses demonstrate why inspecting a property is so crucial before signing a lease, because they eliminate the recourse a tenant may have against a landlord for delivering premises that are sub par. An exception to that statement, however, is fraudulent or negligent misrepresentation, in which a prospective tenant asks the landlord about an issue with the premises, and the landlord wrongly asserts that there is no issue, or a landlord has a duty to disclose a certain issue that is not reasonably discoverable by the prospective tenant, but fails to do so.

Here's an example of an as is clause, which explicitly states that the tenant accepts the property as is with all faults, meaning the landlord has no obligation to make any sort of modifications to the property before delivering it to the tenant. Last, I want to cover asking for what you want. New York and California both emphasize the freedom to contract, which is the ability to negotiate and enter into binding agreements with minimal interference from the law. However, the contract must not be illegal or against public policy.

You can always ask to put things in the lease, take things out of the lease, or otherwise edit the lease in ways that will be beneficial to you. It usually can't hurt to advocate for your best interest because the worst that can happen is the landlord says no. And in that case, you can either sign the lease on the original terms, or if you decide that the terms are too unfavorable, you can go look for another property. Changes only get made if you ask for them. >> Up to this point, we've gone over commercial leasing basics as well as a few common clauses to look for when signing your commercial lease.

This section is going to focus on how best to protect yourself as a small business. And to do so, we're going to be looking at two key areas. First, your tenant rights and remedies available to you after you've signed your commercial lease both in New York and California. And then at the end, we're going to touch on a few unenforceable waivers to look for in your commercial lease.

And these are just These are key clauses that are against public policy and are typically not enforceable, and we just want you to be aware of them. And before we get started, a few general considerations. As mentioned, there's very few methods to reform or unwind the lease once you've signed it, so it's important to pay close attention to what you're signing. If you do believe that you have a remedy available to you, please consult with an attorney to discuss the specific facts of your situation.

And finally, please be mindful of those tenant waivers that Sasha mentioned in the previous section, as those can sometimes limit limit your rights and remedies available to you. So, the two key areas that we're going to look for in terms of rights and remedies are contractual and statutory. And again, be mindful of the tenant waivers as they can limit the rights and remedies. First, we're starting with contractual rights in California.

In California, you have the implied right to quiet enjoyment. When this is actionable for you is if you're actually evicted from your premises, and this could look like a landlord ousting you or locking you out of the premises, or a third party with greater title actually evicting you from the premises. This could also look like a constructive eviction, which is available to you when a landlord gets in the way of your substantial enjoyment of the premises. This might look like a landlord failing to maintain or repair the premises for a long period of time.

The other rights available to you are those that are explicitly explicitly written down into the lease. And oftentimes they take the form of landlord obligations, and if the landlord fails to if the landlord fails to perform those obligations, or in other words, defaults on those obligations, then you might have remedy available to you. A few A few key landlord defaults are failing to maintain the premises, failing to abide by the covenant of quiet enjoyment, and failing to deliver the premises at the specified time. If any of those happen to you, you might have recourse available.

And again, it's extremely important to consult an attorney about the specific facts of your situation because the laws can be tricky at times, so it's important to understand where you stand. And a key consideration for landlord defaults, if you think your landlord has defaulted under the lease, it's extremely extremely important to give them written notice as per the lease terms because oftentimes it's only actionable if the landlord was given written notice and a period of time to cure. Next, we're moving on to statutory rights and remedies in California. In California, a landlord has a duty to disclose certain things to a prospective tenant before they take possession of the property.

These include disclosing hazardous substances on the premises, toxic mold, or dangerous conditions. If you think that any of these conditions are present on your premises and you were not given notice of this before you signed your lease, you might have action available to you. >> [snorts] >> And then finally, we turn to a few other key areas where you're allowed to terminate the lease by law in California. We touched upon the top two, and then in addition to those, you might be able to terminate the lease if there's a material casualty such as a fire or if there's partial condemnation when the government takes over part or all of your property for their use. And finally, if you're allowed to sublease or assign your lease under the terms of your agreement and the landlord fails to allow you to do so, you might have the ability to terminate the lease.

So, our key takeaways from the California rights and remedies section is to be mindful of the tenant waivers. If you think that remedy is available for you, please consult an attorney. And if you think that a default has occurred, again, make sure you give written notice as per the lease terms. Now, we move on to our contractual rights and remedies in New York.

And they're the same as in California. So, you still have the implied right to quiet enjoyment as well as explicit rights that are written down into your lease. The statutory rights and remedies in New York differ slightly from those in California. First, you have the right to possess the premises.

If the landlord fails to deliver the premises to you at the specified time and the specified condition, you might have action to rescind the lease or sue for damages for the amount of time that you were without the property. And again, this depends on the specifics of your situation, so consult an attorney. In New York, you also have the right to surrender the premises if damage is caused and makes it untenable or uninhabitable. This is only if you are you haven't signed a waiver saying you are not allowed to have recourse available or you haven't caused the damage yourself.

And then the key takeaways from this section mirror those of California. Make sure to consult an attorney about the facts of your situation. Look for the common tenant waivers in your lease and give written notice of default. And then finally, we're just going to touch on a few unenforceable waivers in New York and California to be mindful of so that if they do show up in your lease, you aren't intimidated by them.

In California, you are not allowed to waive your right to a jury trial. In California, a landlord must give you the option to pay your rent that is not by cash or electronic transfer. So, an example would be by a check. You have that option available to you.

And also in California, if you qualify as a qualified commercial tenant, you have certain rights that are available. A New York qualified commercial tenant if you are a micro enterprise with five or fewer part-time employees and you lack sufficient sufficient access to loans and capital. You might also be a qualified commercial tenant if you are a restaurant with fewer than 10 employees. And finally, you might qualify as a qualified commercial tenant if you are a nonprofit with fewer than five full-time or part-time employees.

If you think you might qualify as a qualified commercial tenant in California, please make sure to give your landlord written notice of this fact. And if you are a qualified commercial tenant, you have the right to have your lease translated for you in another language. And then in New York, we have a few other unenforceable waivers that are against public policy if they show up in your lease. The first is landlord negligence liability.

In New York, landlords cannot waive their negligence liability. And also in New York, while you're not allowed to waive your right to a jury trial, you are not allowed to do so if it is specific for personal injury or property damage. And that concludes our section on rights and remedies available to you in New York and California, as well as a few unenforceable waivers that might show up in your lease. Now, we move to final thoughts on commercial leases and then we can send you on your way to sign your commercial lease.

After you've signed your commercial lease and if you think that you might have recourse available to you, consider a few alternatives to termination. You might want to look to a lease amendment, performing repairs and deducting costs if that's available to you in your lease, as well as assigning or subleasing. Here are a few key resources to look to if you need help understanding your lease, negotiating your lease, or terminating your lease. It's extremely helpful to go to any of these resources to get some information on what you can do.

And then finally, make sure to consult this checklist at the very least to understand what you should do before you sign your lease. Again, it's extremely important to understand what you're signing so you can best protect yourself. And that concludes our presentation for today. Thank you so much and good luck.