Question

What are the pitfalls of commercial leases and purchase and sales in California?

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Answer

Matters related to commercial real estate leases and purchase and sale of commercial property are complex. For anyone unfamiliar with the nuances of such transactions, it can be easy to make costly mistakes. Here is a sample of some of the numerous pitfalls and issues that you should be aware of in California:

Questions To Ask Before Signing A Commercial Lease

As a potential commercial tenant or landlord, you need to make sure that you fully understand the ramifications of the proposed lease agreement in order to protect your own interests. Here are a few questions to ask:

  • What is “rent”? Typically in commercial leases, the tenant will pay “base rent” (monthly flat rate stated in your lease that may annually increase) and “operating expenses” (i.e., a certain percentage of common area maintenance charges, insurance, property taxes for the building).  The amount and type of “operating expenses” to be paid are usually negotiated between the landlord and tenant. 
  • Which party is responsible for compliance with laws, including Americans with Disabilities Act (ADA)? Compliance with laws is an important issue and could cost either the landlord or tenant a huge expense (i.e., if they need to replace an elevator, bathrooms or walkway). This issue is heavily negotiated by trying to put the cost of such compliance on the other party.
  • What is the term of the lease, and do you have the option to extend the lease? It is important to determine the term of the lease and whether the tenant has an option to extend the lease.  Moreover, it is important to set forth a manner to determine the rent amount for that extension period ahead of time. Moreover, holdover provisions are usually included in the lease just in case the tenant goes over the term of the lease. 
  • Is subletting or assignment allowed? With a sublet or assignment clause in the lease agreement, the tenant will have the option to sublease or assign the lease to a new tenant. This is important if your business should face unforeseen economic difficulties. The landlord will always want to have the right to consent to such assignment or sublease since they feel comfortable with the original tenant as opposed to a new tenant.
  • What liability provisions are in the lease?  Typically, leases include indemnification, insurance, releases and limitation of liability provisions that create or exculpate liability on respective parties.  These are heavily negotiated.

Questions To Ask Prior To Purchasing Or Selling Commercial Real Estate

If you are intending to purchase or sell commercial real estate, make sure to ask the following questions, among others:

  • Do you have a letter of intent?  A letter of intent is an agreement to agree to the business terms of the purchase and sale of the transaction.  Ascertaining such items before the purchase and sale agreement is drafted saves time and money later.
  • Is the title marketable? Make sure you conduct a thorough title review (usually with the help of the title company) to obtain a preliminary title report, which shows recorded easements, liens, vesting of title/ownership, encroachments and other matters. 
  • Do you have enough time to conduct due diligence? Typically, buyers of commercial real estate make a deposit into escrow that is refundable until the buyers waive or approve due diligence (sometimes referred to as going “hard”).  Make sure buyers have enough time to adequately perform their due diligence investigations without risking the loss of their deposit. Furthermore, ascertain whether there are existing contracts for the property (i.e., leases with tenants or vendor contracts that will be assigned at closing to buyer) and the terms of such contracts. 
  • Are you expected to sign a waiver or release? Many times, buyers are asked to purchase commercial real estate “as is.” If this is the case, it’s important to understand the implications and obtain the adequate representations and warranties in the purchase and sale agreement to make an informed decision on the purchase of the property. The last thing you want is to find yourself in possession of property with a litigation claim, construction defects or other costly problems.

For legal advice that is specifically suited to your unique situation, feel free to contact my California firm and arrange a consultation.

 

Disclaimer: The answer is intended to be for informational purposes only. It should not be relied on as legal advice, nor construed as a form of attorney-client relationship.

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