Commercial Tenancies
A “commercial tenant” owns their business, but not the building it’s in.
Introduction
A “commercial tenant” owns their business, but not the building it’s in. The vast majority of businesses in America have that in common. Commercial zones are limited, and those who control that land are a powerful few. Commercial tenants must be especially careful to protect themselves.
Special rights which are available to residential tenants are not extended to commercial tenants, who are presumed to be sophisticated and strong, not needing any protection from the law. Except for the huge corporate tenant, like the anchor tenant in a shopping mall, the landlord calls the shots, from the beginning and long past the end. As a result, business tenants are more vulnerable and abused than residential tenants.
The information below is designed to help you avoid the problems, as well as to deal effectively with them when they arise. You knew to look for information on the Internet. Now use it.
Finding a Space to Rent
Having your own agent – for free
You probably never thought of having your own agent. It sounds like an extra expense, and you’re going to need all your money to get started in your new location. You know how do read. What benefit would you get from them anyway? Don’t they just work for the landlords? What could they do that you can’t? Doesn’t that just complicate things?
The most important thing you can do is to hire a commercial real estate agent to help you find and negotiate the lease for your business. This is your lawyer telling you to use them, not a real estate agent trying to get your business. Ask around, and you’ll find out.
Nobody works for free, including your real estate agent. However, you don’t pay them because your future landlord does, indirectly. Your future landlord pays a commission to his own leasing agent, who splits that commission with your agent. That’s why it’s free to you. Now that the cost thing is out of the way, here are five major reasons WHY you should hire your own agent.
1. The Search : For finding available space for lease, you can’t beat it. On your own, you may hear about spaces opening up. Driving around , you may see some signs. However, your agent specializes in knowing what’s available, and knowing the neighborhood. They have their computer links to subscriber-only multiple listing services that show everything for lease and permit immediate comparison of size, price, features, and location. You’re on the Net, and probably do comparison shopping in the same way. They have been doing it for a decade. Most choices = better choices.
2. The Double Agent: The landlord’s agent has divided loyalty. You want what’s best for you, not a place they’re trying to unload from their inventory. Your needs are naturally secondary. Here are a few examples of the problems with NOT having your own agent and just trusting the landlord’s leasing agent:
a. The leasing agent is just trying to help the landlord fill his spaces.
b. His or her job is to convince you take what they have, not look elsewhere.
c. They’re not likely to suggest that you lease another broker’s spaces.
1) They have a duty of loyalty to their landlord client
2) They would lose or reduce their commission.
d. They’re not likely to suggest that you get your own agent.
1) They would have to split the leasing commission with your agent.
2) They would lose their authoritative edge in your decision making.
e. They’re unlikely to tell you about the problems with a building in their inventory.
1) Problems might include location, coming Redevelopment, or structural flaws.
2) You might choose something without such problems, or negotiate better terms.
It’s not that they would lie to you, but there is less incentive to volunteer information, or make that extra inquiry that the circumstances suggest. It’s much better for the landlord if you are docile and trusting, accept what they have to offer right there, and just sign the lease blindly.
3. What You Don’t Know: Your own agent will find you the best space and conditions for your business. He or she will show you more than what they have at their firm. They know what would affect your business in a given location, which you could have overlooked. For example:
a. They know the problem buildings and some of the problem landlords to avoid.
b. The place might have structural defects, a bad layout, or be subject to flooding.
c. The building might not have been built to Code, causing delays and/or expenses.
d. The premises may need asbestos removal, or handicapped access bathrooms.
e. There may be a lot of crime in that neighborhood, or a deterrent police presence.
f. There may be a type of business nearby that would bother you or your customers.
g. There may be a new development coming that is compatible with yours, or not so.
h. Another competitor may be planning to move nearby, thereby dividing your local market.
i. The location may have repeatedly been proven bad for your type of business.
j. The local city government may be targeting your business for special restrictions.
k. The zoning may prohibit your type of business. [When would you have learned that?!]
l. The locality may have sign ordinances, curfews, or noise restrictions affecting business.
Obviously, these things could drastically affect your success at the given location. The list is by no means exhaustive. How would you ever have known of them, until it was too late? Your agent knows these things (or can find out) and will tell you about them. Your agent is loyal to you.
If the landlord is aware of the presence of “toxic mold”, new Health and Safety Code 26141 requires the landlord to tell prospective tenants about it [as well as existing tenants], and give new tenants a booklet about it [H&S Section 26148] when that booklet gets published by the State. It is a factor to consider with tenant improvements and readiness of the unit, particularly in moist areas of the State. Toxic mold can cause serious lung infections and is no joke, despite the hoaky name.
5. They Win When You Do: An additional advantage to using your own agent is their liability: if they are negligent, you have a malpractice claim to fall back on. They are fully aware of that, and consequently your agent fully checks everything to make sure you are placed in the best position. They do earn the money, and deserve every penny. It’s a lot of responsibility, and they take it seriously. They also don’t get paid until you’re happy with a place and sign the lease on it.
Signing the Lease
This is it
Unlike residential tenants, who have special protections under the law to repair and deduct or withhold rent, or move out mid-lease, commercial tenants have essentially only what their contract provides. If it’s not there, you can’t do it. This is it.
The success of your entire business depends on your business premises. You may be betting your whole life savings and the welfare of your family on what the lease says. After a problem arises, it’s too late to renegotiate a better term: you are stuck. You could be driven into bankruptcy just because of your lease terms.
Most of our commercial tenant clients did not take reading the lease seriously. They assumed that it permitted what they had in mind, and that if a problem arose, the landlord would handle it in a reasonable fashion. It didn’t happen that way. Now, they have to hire a attorney to help undo the mess. Learn from them. Avoid the problems.
The terms of the lease are another important reason for having your own real estate agent. Just like problems with the building or location, your own agent will tell you whether the price, terms, conditions, or special clauses are dangerous, disadvantageous, standard, or outrageous. You would have no way of knowing, because this decision requires specialized knowledge. Your lawyer would have no such information, although many people want a lawyer to look over a potential lease. Lawyers could only evaluate whether the terms are enforceable or inconsistent with each other or with your goals.
“Key money”, the common term for a lump sum you must pay up front just to get the lease, is now required to be specified in the lease, itself. [Civil Code 1950.8] The amount is not limited if the contract includes it, but if the lease does not specify it, the charge is void and illegal, and the tenant is entitled to sue the landlord for 3 times the amount!
You, Alone:
If you’ve been there, you know it’s true. This is not how it should happen, but usually does. This is you, without an agent, getting your lease.
You call the number on the leasing sign. After a couple of minutes glancing at the layout of the leased space, you say, “OK, I’ll take it.” You end up in a room with the leasing agent. Most of the interview focuses on whether you “qualify” as a tenant, not whether the lease or commercial space qualifies to meet your goals. You are finally handed the lease to sign.
You are handed a prepared multi-page, fine print, form lease entitled “Standard Lease”, to which your name and nothing else is now added. You are expected to hurry and read in a minute what should take hours of quiet study.
An impatient clerk points out that you should just sign here, and initial here, here, and here. The fine print is wearing on the eyes. The verbose, unclear, and cross-referenced style of most commercial leases does little to communicate, and is confusing. It’s simply too much to absorb at once. You feel duty-bound to make the effort.
You start through the lease, read half the first page, skim the other pages for bold lettering. It’s printed, and looks official. You do not want to sit there feeling like an idiot who’s never seen a lease before, and wonder if your caution in reading the lease suggests that you don’t trust them: not a good start.
You conclude that it says, “We get everything. You get nothing.” You shrug, and with glazed eyes, little understanding, and much reluctance to ask questions of the impatient clerk, you initial the box that says you “have fully read and understood the foregoing and agree to its terms.”
If you’re lucky, the impatient clerk hands you a copy of the lease after you sign it, which you tuck away somewhere. You’re just happy it’s over and you hope for the best.
It is now too late. You think of something later, and wake up anxiously. Was it a nightmare? No, it is about to be one.
Negotiation
There is no “standard” commercial lease, although most are entitled that, to suggest that everyone signs the same lease, and there is nothing unusual about it. The whole idea of having a “standard” lease with pages of take-it-or-leave-it “boilerplate” fine print is to dominate the situation. If you don’t question the terms or want to change them, the lease heavily favors the landlord. Even the spaces to initial are not presented as options you might refuse to initial. They are to prove that you read them.
Negotiation is bargaining with the landlord, or their leasing agent, over what terms in the lease to add, drop, or change. Everything is potentially negotiable: price, extras, size, physical changes, time, whether to arbitrate disputes, and even how to handle building defects. You are not limited to the printed form. You can cross-out words, whole paragraphs, or pages. You can add type-written pages of new or different terms that affect your business. So long as the landlord agrees, you can.
Sometimes, there are trade-offs of one term for another. Other times, the changes you want are acceptable to them without objection. If the landlord is using a multi-page lease without a leasing agent, the landlord probably has not read the lease, or at least not in a long time, and isn’t sure what is says or how it works. For the money involved, it’s worthwhile to just type out the simple terms each side wants, rather than depending on a long form neither party reads or understands.
Your agent will do the talking, having already discussed with you what you want, need, and can afford. There may be several back-and-forth sessions before final terms are agreed. You will have the opportunity to go over the details with your own agent, in a calm setting, and plenty of time to think and decide. Your agent won’t rush you to sign the lease.
Most of your leverage in these negotiations through your agent is the choice that your agent has arranged: if this landlord won’t accept your terms, you’ll give your money to the landlord down the street, instead, and this place will remain vacant. You may not know what a good deal is, but your agent does, and the landlord knows that.
You should also take the lease home and read it, and even run it by your attorney for further advice. Try to think of what could go wrong, and how it should be handled. Try to think of how you need things to be. Remember, if it’s not there on paper when you sign the lease, you can’t do it, and it never existed, no matter what they promised orally beforehand.
Immediately after you sign the lease, you should get a copy of what you signed. If the landlord signs at the same time, or has signed before, you get a copy [or duplicate original] with their signature on it. If you sign first, and then the landlord will sign later, you at least have a copy of what you did sign. [Some landlords actually add new terms after you sign.] Get a deadline by which you will receive the landlord’s signature on the lease, preferably before you make plans to actually move in. Each party should have the original signature of the other party on the copy they retain, because that is what the court will require to enforce the lease.
Glossary
Here are some terms you will encounter in evaluating leases, and you should be familiar with them to better understand what is presented in negotiations. The order is conceptual, not alphabetical.
“Triple Net” (sometimes called “Net Net Net”) means that in addition to your rent just for the space, you will pay additional amounts based upon your space’s percentage size of the entire complex. The usual “triple” charges are (1) Common Area Maintenance [CAM charges], (2) landlord’s real property tax, and (3) landlord’s insurance. In reality, there may be more than these three items, or fewer, but the same term is used. If your space occupies 10% of the entire building, you would pay in addition to your rent 10% of the combined total of the annual charges for these three. Those additional charges are amortized into 12 monthly payments, due along with your rent, usually in the same check. When comparing places to lease, it is important to know what those triple net charges will total, so that you can compare with other possible spaces and budget accordingly.
“Gross Lease” is the alternative to a triple net lease, simply meaning that you pay $X flat rate for your space, without any additional monthly costs. The “triple net”- type expenses are presumably built into the monthly charge.
“Commencement Date” means the date on which your lease period officially begins. If you have a 5 year lease, it ends 5 years from that date. If you have the first 3 months’ rent free, you pay rent starting the fourth month after the Commencement Date. You typically sign the lease and receive the key long before the Commencement Date, in order to permit you install whatever tenant improvements you need, along with your furnishings and stock, to be ready to do business.
“Rentable square feet” is a real estate industry term referring to the area upon which your rent is based. It is not the actual square footage inside your individual suite, measuring from the interior walls. Typically, commercial space is evaluated at $X per square foot, and that rate times the rentable square feet for your space determines your monthly rent.
It is measured from the middle of the wall [i.e., middle of the wall stud behind the plasterboard] for the exterior boundaries of your suite, plus your proportional share of the common areas, including common bathrooms, hallways, lobbies, and elevators. Parking and external areas are excluded.
For example, you might have an interior 20X40 room [800′] and yet pay for 1000 square feet of “rentable” space. After you move in, the room proves too small for your needs. You measure, and then conclude that you were defrauded. You have to check the rentable square feet, not just your usable square feet. You may have exactly what lease promised in rentable square feet.
You care about the usable square feet: the space you can walk inside your own unit. You should bring a tape measure when visiting potential space. It’s the only way to be sure that you’re getting the right size and shape. Then you can compare that actual space and what it will cost altogether with other spaces and what they will cost altogether, and make a more intelligent choice.
“C.P.I.” [abbr. for Consumer Price Index] is the measure of inflation. It is used in long term commercial leases to adjust the annual rent to inflation rates, so that your landlord will get more money. If you paid $1,000 per month rent this year and the CPI is 4%, you will pay $1,040 next year. The US Department of Labor publishes the CPI information, usually about 2 months behind. You can have a copy sent to you with a telephonic request.
There are other types of rent increases besides CPI. Some leases don’t change the rent at all. Others set annual specified rent increases: $1000 now, $1200 next year, $1350 the next, etc.. Some just allow for an adjustment to “market rent”. Store leases may require as an extra part of the rent a percentage of your gross sales, so that if you make more money, you pay more rent.
“Abated rent” means rent that you don’t have to pay. Usually “abated rent” refers to the first few months of free rent commonly given to the new tenant as an inducement to move in. The idea is that you are just starting out, completing the move-in, and getting ready to do business, so they give you a break.
Of course, it is not truly “free”, but merely amortized over the other months that you are paying. Since a 2- or 3-month rent abatement is typically included in a commercial lease for years, you have to calculate your choices of spaces by including the benefit of that free time, or if you don’t need it, reducing the monthly rent amount.
Sometimes, free rent is included for slow business months. For example, your business might be slow during December, so you negotiate for abated rent each December for cash flow reasons.
Another kind of rent abatement is sometimes found where there there has been a structural defect interfering with the commercial tenant’s business. The rent can be “abated” (reduced) to the extent that the business is adversely affected. That “extent” might be a rent reduction percentage represented by the area, or an offset proportionate with gross sales reduction. In practice, this type of abatement is rarely invoked, because the landlord’s response is an eviction for nonpayment of rent, so if the landlord wins, the tenant loses their entire business. To be truly effective, such a clause should specify the criteria, and set a reasonable settlement procedure so that the costs of resolving the dispute would not eclipse the amounts in dispute, nor would it erupt into an eviction action.
“T.I.” [abbr. for Tenant Improvements] means those physical changes in the proposed lease space that will be made to accommodate your business layout and needs. Walls can be moved or built, utilities installed, kitchens and rest rooms built, lighting changed, doors added, lofts built, ceiling lowered, carpeting and painting done, and whatever else is required.
Typically, the TI is done by the landlord, to a dollar amount proportional to how much rent you will be paying over the entire term of your initial lease period. The more you will be paying and the longer you will be staying, the more the landlord can justify spending fixing up the unit to your specifications. Its cost is amortized over the lease term, and built into the asking rent for the space. If you’re going to do the TI yourself, or going to take the place “as is”, the landlord doesn’t have to spend that money, and can afford to drop the lease rate for you.
“Trade Fixture” means generally a piece of equipment or a structure that is used in your particular type of business. Stoves, dishwashing machines, and stainless-steel counters are among the trade fixtures for restaurants. Dental chairs, X-Ray shielding, and sinks are among the trade fixtures of dentists. Reception windows facing the customer area, and the wall containing it, is not a trade fixture because other businesses might use such a structure. There are gray areas between these obvious extremes. The term is used relative to TIs that may be removed, or must remain once installed. Trade fixtures are permitted to be removed, absent express language to the contrary.
“Option” usually refers to an option to renew the lease for another period of time, but it can also refer to an option to purchase the property, itself. A typical commercial lease is a “5 and 5”, meaning a 5 year lease, with an option to renew for another 5 years. Options usually must be exercised by writing a letter to the landlord some months before the initial lease term expires, expressly exercising the option.
One major pitfall commercial tenants encounter is the vague option in their lease “at new rent to be negotiated”. What’s wrong with that? For example, you would finish 5 successful years of building your business in that location, expecting to extend your lease for another 5 years, only to find that your landlord refuses to extend your lease unless he gets double rent. There is no negotiation, only submission. If you don’t pay what the landlord asks, even if it’s higher than market rent, you are out.
Unless the new option period rent and terms are specified in writing along with the lease, it’s a trap for the unwary. It’s nothing. It’s not an option. It’s an illusion of an option. The law says that an agreement to agree in the future is not an option, but a nullity. You can’t promise that you will agree, even though you both have the obligation to act reasonably. The new rent can be market rent, CPI adjusted, the last rent plus $100, or something calculable. An important term like rent amount for the option period cannot be “to be negotiated” or similar “trust me” language.
“Assign” means to have someone else take your place as the tenant. Usually, this happens when you sell your business to someone else. They buy the business and take over the lease. The landlord must approve the assignment, failing which the lease may be terminated. You may or may not be released from secondary liability [i.e., a guarantor] for the rent.
The landlord can condition his approval of the assignment on his getting higher rent, or a pay-off. If you plan to sell the business during your lease, you can avoid such problems by adding appropriate terms to the lease which prohibit the landlord from taking your profits from the sale.
“Sublease” is similar to an assignment, except that you remain the primary tenant, responsible for paying the rent directly to the landlord, and you retain the right to “evict” your subtenant if they fail to pay you. A business sold with a sublease might be recovered by the tenant seller through an eviction of the sub-tenant buyer. The tenant seller must still pay the rent to the landlord while going through that process.
“Subordination” means yielding priority to another. Your lease usually provides for subordination where the landlord needs to refinance the mortgage on the building. Your lease needs to be subject to the new mortgage, even though it was first in time. Otherwise, the bank’s foreclosure would not terminate your lease, and they would take title as a new buyer would.
“Estoppel Certificate” is a document used in the sale of the building to prove to the buyer that you and the other tenants are paying the rent and acting under the terms which your selling landlord has represented to that buyer. If you get one to sign, it means that the landlord is selling the building. Just be sure that the individual facts in the Estoppel Certificate are true.
Tenant Improvement Problems
Where substantial Tenant Improvements must be done before your unit will be ready to occupy, you have a set of special problems to address.
Specify, Specify
The lease should include diagrams of what will be done, and specific lists of items to be accomplished. All work should be done to Code and by licensed contractors under permits, where required by law. Exact measurements should be provided. A schedule of what will be done is important, particularly if the landlord’s portion of the tenant improvements needs to dovetail with your portion. If you left something out, you will pay for it, one way or the other.
For example, you may need computer cabling installed in the floor under the carpet. First, the landlord must jackhammer up the strips of concrete flooring to provide the channels for the cabling. Then you must install the cabling, followed by the carpet laying, followed by the receptacle jacks, furniture and computers. Contractors need to be hired and scheduled, and dates of work become the operative factor essential to completion. Phase A must be completed by X date. Phase B by Y date.
Whatever is attached to the building by you as a tenant improvement, except for “trade fixtures”, becomes the landlord’s property, even if you paid for it, and considered it yours. There is no clear rule as to what type of attachment is sufficient to make personal property part of the real property, nor is the line clearly drawn for what constitutes a “trade fixture”, although some features would obviously be trade fixtures. If you remove an attached item, and the landlord wins in a suit against you for it, you could end up paying the landlord to replace the item.
Avoid that entire problem by specifying in a separate attachment to the lease those items which you will attach and be entitled to remove when you leave. The landlord’s only legitimate concern is that the premises are not left destroyed by the removal of improvements. Restoring the premises to their original condition, or patching over and painting any holes from such attachments might be the practical term to include in the lease, so that you have the full rights to remove and take with you those things you intend to keep. At the very least, it gives you room to bargain when you go, if the landlord wants to buy the improvements from you.
Delays That Postpone
Your lease is signed in March, your Commencement Date for the lease is June 1, and your rent starts in August. You begin construction of the tenant improvements, but problems arise. Subcontractors don’t show up on time. The Building Inspector requires the electrical to be re-done. You forgot handicapped access bathrooms. The rain has stalled the new roof repair. Those delays put off later work that relied on them, and now it’s August. Your rent is due, and you’re nowhere near ready to pay it, let alone open the doors to customers whose money you were planning to use to pay the rent. It happens all the time.
All that was missing was a clause that postponed the other lease dates by the amount of time by which the stated construction deadline was exceeded for reasons beyond the parties’ control. The lease should include a “punch list” step, where anything specified in the TI which has not been done, or has been done incorrectly, can be identified and completed. There should be adequate remedies to complete the construction, if not done in timely fashion, such as the tenant advancing the money and deducting that amount from future rent.
Defects and Repairs
The Typical Commercial Lease
Typically, a commercial lease makes the landlord responsible for repairing the roof, exterior walls, and utilities, and makes the tenant responsible for everything else. The tenant is usually required to give written notice to the landlord of the defective condition, who then has 30 days to start to do something about the problem, with no deadline for solving it.
The landlord is usually absolved of all liability for any adverse impact of these conditions on your business, no matter how severe. If the roof leak ruins your business, it’s your tough luck. Finally, you are normally prohibited from taking any action on your own to repair the defective conditions or make any other improvements, violation of which is grounds for eviction.
Some leases even require the tenant to continue paying the rent where the premises have not even been completed for occupancy, or have been destroyed by fire. These terms were derived from the “Golden Rule”.
The Impact
Broken air conditioning or heating can make the premises unbearable to work in, and no customers want to remain there. Leaky roofs can destroy inventory, customer files, and electronic equipment. Defective wiring can ruin your business.
If you lose customers, clients, and staff to these conditions, how will you pay your rent? It is still due, and you could be evicted for nonpayment of rent, and then held liable for the rest of the lease term money, if you fail to pay the rent.
Your desperate calls to the landlord to “please do something” have no legal impact, if a written notice is required. Your business could be completely destroyed in 30 days, before he even has to start taking action, and meanwhile your hands are tied. This kind of situation happens every day.
The Solution
The only way to protect yourself from such consequences is to negotiate into the lease special provisions that (1) permit you to repair and deduct after reasonable advance oral or written notice, (2) make the landlord liable for any adverse impact on your business, and (3) expressly reduce rent for the period of time that the defective conditions remain, so that the landlord is not encouraged to delay repairs. Even low rent can’t make up for the losses you could suffer.
If the landlord won’t permit at least some of these remedies, look for another place.
Gouging Rent Increases
Normally, rent can be increased on a month-to-month tenancy with a 30-day notice. However, due to the current wave of rent hikes, effective January 1, 2001, a new law requires a 60-day notice if the rent increase will make that year’s increases exceed 10%. The idea is to give tenants the ability to adjust to gouging rent increases, but not to stop them. The calculation is a little weird; it doesn’t have to be a large rent increase at once, but just the total of increases over a year. This new law will mostly affect the expensive rentals, which also tend to have proportionately much bigger hikes. Also, it does not affect yearly leases, but only month-to-month [or shorter] tenancies. This law expires automatically in 2006, unless the Legislature extends the time or makes it permanent. If you have scheduled rent increases in your lease, this new law does not affect you.
For example, if last year in January you were paying $500, and the landlord already raised the rent $25 in July, an increase for more than $25 this January would require a 60-day notice, because the total of increases for the year would be more than $50, 10% of $500. If the increase total was 10% or less for the year, all you get is the 30-day notice. If the year’s rent increases already total 10% and the landlord then wants to increase rent by one dollar, it has to be by 60-day notice, to mitigate the impact. The new law adds five more days if the notice is mailed: a mailed 30-day notice is effective 35 days later; a mailed 60-day notice is effective 60 days later.
Time to Move
Moving Away
The time will come when you move your business to another location. Your lease should include signage and referral requirements, so that customers who go to the old site will be referred to your new site by a conspicuous sign for a reasonable period of time. If it’s not required in the lease, the landlord does not have to do it, and you may lose valuable customers.
Typically, your lease will require that the premises be left in clean condition. If you have toxic substances that you use in your business, it may require that you remove them and certify that the premises are free of such toxic threat.
A smooth transition can benefit you in good future references and referrals of customers to your new location.
Trade Fixtures and Improvements
You might spend $100,000 of your own money dolling up your commercial space, and it looks terrific. Then, your lease ends. Unless you put the language in the lease to protect you [see above], whatever you put in that is attached to the building [other than trade fixtures] is a gift to the landlord. A mere utility connection would probably permit the removal, whereas a built-in or solidly bolted structure would suggest that the item must stay. Trade fixtures may be removed when you leave.
The lease may require that you remove the tenant improvements you installed, absolutely or at the option of the landlord. You should consult your lease to see what you should do. Be sure to comply with the restoration requirements, since you will probably do it cheaper than the landlord would.
Eviction
When Push Comes to Shove
Eviction is devastating to the commercial tenant. The costs of moving and setting up again, amid the disruption and loss of normal business, the unsatisfactory new location, and the liability for rent through the end of the lease, all present a terrible price for what might be a trivial event gone ballistic.
It is usually better to stay and sue the landlord, rather than to risk eviction where your downside is so steep. Maybe you can’t afford to both pay rent and sue. Sometimes, you don’t have the choice, and eviction results.
If you see that you are getting into a conflict with your landlord, consult a landlord-tenant attorney immediately. So much can be done to help your position before the conflict goes to court, and the time with an attorney is well spent. The “stitch in time” philosophy very much applies to legal matters.
Special Rules for Commercial Tenant Evictions
For the general eviction process, see the Evictions section of this web site. These are special exceptions for commercial tenants.
Commercial tenants can be evicted for non-payment of rent which exceeds the amount that is due. It is ridiculous in most instances, but it is currently the law. Code of Civil Procedure Section 1161.1 permits the landlord to be off by as much as 20% and the eviction notice is still valid. If your rent is $1000 per month, and the landlord gives you a notice to pay $1200 or quit, you can either pay the $1200 to avoid an eviction suit entirely or pay just the $1000 that you believe you owe and hope that the judge agrees with you. If the landlord is able to convince the judge that you still owed more than the $1000 you paid, you could lose your business.
The law normally provides that if the tenant is in violation of the lease, the landlord must give the tenant a 3-day notice to correct the violation to avoid eviction. Commercial leases will often provide that if the tenant is in violation of the lease, a notice of more than 3 days must be given. It is not uncommon for 5-day or 10-day notices to be required.
The time period can be important, since failing to correct the matter within the short time can result in eviction and the loss of your business. Particularly for those landlords who don’t read their own leases, they may start an eviction upon too short a notice, and you then have to decide quickly how to handle the situation – to stand on your rights and fight out an eviction, or just comply with the insufficient notice.
‘I Couldn’t Believe It’
Commercial tenants are often shocked at the reactions of the courts. They may have believed that the judges would back the small businessman and apply a reasonable solution that avoids forfeiture of the entire business through an eviction. The Legislature is not sympathetic. Neither are the courts.
The courts continue to generally display a strong bias in favor of any landlord. You are not seen as a respectable businessman, seeking a reasonable solution. You are just another tenant who ought to be evicted, irrespective of the circumstances, because of the Golden Rule [see above]. You may get lucky in court, and find a sympathetic judge. Don’t expect to win, unless you’re absolutely certain – then you might have a chance.
How Deep is the Hole?
Let’s say you get evicted in the second year of your 5-year lease. You are out August 6th. The landlord has a judgment for the rent through the date of trial, and probably attorney fees. Is it over?
This is where the nightmare gets bad. The landlord can now file a second lawsuit against you for the rent you owe under the lease out through it’s termination date. In the example above, through the end of the 5-year period, but not including any option period. You are not in possession, can’t do anything to reduce the landlord’s losses yourself, and you still owe rent to the landlord as though you were still using the place, at the same rate. One thing worse: you owe it now, not monthly as it would have become due.
Your only chance of reducing your liability is if you can prove that the landlord could have reduced his losses by leasing out the premises to someone else. For example, after 3 months of vacancy, the landlord leases out the premises to someone else, who is paying $300 less per month than you were for a period beyond your lease termination. You would probably owe the 3 months of vacancy and the $300 per month differential for all of the months in the balance of your lease.
You could challenge that the 3 month vacancy or rent differential were inexcusable in today’s rental market, but the Court could perceive [see Golden Rule] that the landlord made best efforts, and make you pay the entire difference. In the extreme, the judge might perceive that the landlord’s refusal of a nearly identical rent and terms from a prospective tenant was reasonable, and make the evicted tenant pay the full rent for the lease term. You could be held liable for a six-figure judgment, and have your home foreclosed and sold to satisfy the judgment, while it is up on appeal, for all that might help you. The damage would be done. It happens all the time.
Settle When You Can
As with other lawsuits, it is possible that the eviction case can be settled. Your bargaining power is directly related to the strength of your case. However, since your downside risk of going through the eviction is severe, including owing future rents, a perfect case on your part might enable you to just move out and owe nothing.
