What Landlords and Tenants Need to Know About Commercial Leases in California

Entering into a commercial lease in California is a significant commitment for both landlords and tenants. Whether you are a business leasing office space, a retail location, or industrial facilities, the terms of a commercial lease agreement can have long-lasting financial and legal implications.

A well-drafted commercial lease is the foundation of a successful landlord-tenant relationship. Unlike residential leases, which are more strictly regulated under California landlord-tenant law, commercial leases offer greater freedom for negotiation. But that flexibility also comes with increased risk if the parties are not fully informed.

What are the types of commercial leases?

In California, the most common types of commercial leases include:

• Gross leases, where the tenant pays a fixed rent and the landlord covers most property-related expenses, such as property taxes, insurance, and building maintenance.
• Triple net (NNN) leases, in which tenants are responsible for rent plus the three “nets”: property taxes, insurance, and maintenance costs. This is common in retail and industrial properties.
• Modified gross leases, which fall somewhere in between, and split responsibilities for operating costs between the landlord and the tenant.

Choosing the right lease structure depends on the tenant’s business model and risk tolerance. Landlords must ensure the lease type aligns with their financial goals and management preferences.

What are key commercial lease terms to include?

Every commercial lease agreement in California should clearly define the following terms to minimize disputes and protect both parties:

• Base rent and rent escalation: The lease should outline the starting rent, and any scheduled increases.
• Lease term and renewal options: Both the initial duration of the lease and the procedures for renewal or extension should be negotiated and documented.
• Use clause: This clause dictates how the tenant can use the property. A narrowly defined use clause can limit the tenant’s ability to pivot their business or sublet to another party.
• Maintenance and repair obligations: Clearly allocate responsibility for property upkeep, including HVAC, electrical, roofing, and plumbing systems.
• Improvements and build-outs: Who pays for tenant improvements? Are those improvements subject to landlord approval? Will they revert to the landlord at the end of the lease?
• Subleasing and assignment rights: Tenants should look for flexibility here in case they need to relocate or downsize. Landlords, on the other hand, may want to maintain control over who occupies their property.
• Security deposit: Amount, permitted uses, and return conditions.

See much more at our Guide to Key Terms for Commercial Leases.

What are the differences between commercial leases vs residential leases?

California law treats commercial leases very differently from residential leases. For instance, commercial tenants in California do not enjoy many of the legal protections offered to residential tenants, such as habitability requirements or caps on security deposits. This makes it even more critical that the lease terms are fair, balanced, and thoroughly reviewed.

If a tenant breaches the lease, landlords can pursue an unlawful detainer action to recover possession of the premises. California courts typically enforce commercial leases as written, so ambiguous or poorly drafted terms can lead to costly litigation.

It’s also important to understand that commercial leases are not subject to rent control laws in California, which means landlords can raise rent as allowed by the lease terms or upon renewal. For tenants, this underscores the importance of negotiating rent caps or renewal terms upfront.

What due diligence is necessary before signing a commercial lease?

Before signing a California commercial lease, both parties should conduct appropriate due diligence.

Tenants should confirm that their proposed business use complies with zoning and permitting requirements, inspect the property for structural issues, and ensure the space meets their business needs.

Landlords should evaluate a prospective tenant’s financial strength, business history, and intended use of the premises.

Engaging a real estate attorney experienced in commercial lease negotiations in California can help identify red flags, negotiate better terms, and ensure compliance with local ordinances and state law.

Further Resources

Guide to Key Terms for Commercial Leases

Guide to the Law for Business Owners

Guide to Getting Legal Help

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