Real Estate Damages Clauses in Commercial Leases Might Not Hold Up in Court

Sometimes, even when both parties agree to the terms of a commercial lease, they can find themselves surprised later when a dispute goes to court. This is certainly the case with damages clauses in commercial leases, because such clauses are sometimes voided by the court!

This can happen because, way back in the 1970s, the State of California adopted a policy of presumptive validity for liquidated damages clauses in commercial real estate contracts. In other words, if one party challenges the provision and shows it to be unreasonably punitive, the entire clause can be voided and damages cannot be collected as expected.

Back in 1997, a contract dispute erupted over the fee charged by a lender in response to a borrower’s violation of the contract. The lender imposed a fee equal to six months’ worth of interest, because the borrower was late making a single payment. In the resulting case of Ridgley v. Topa Thrift and Loan Association, the Court found that this fee was an unreasonable attempt to anticipate damages from default. The borrower did not have to pay the fee, and, of course, the lender lost time and money fighting the issue in court.

The important lesson here is that the Court invalidated the damages clause, even though both parties had agreed to the clause when they originally signed the contract. Sometimes, a real estate contract is not completely airtight if a plaintiff can successfully argue that the damages clause, or some other provision, is unreasonable or draconian in nature.

All real estate contracts, including commercial leases, must include a clause outlining the actions to be taken if one party defaults on the lease. However, as the above example perfectly demonstrates, especially for commercial leases, which are often complex and written in terms that have specific, specialized meaning, it’s important to seek the guidance of an experienced real estate attorney before signing such a contract. Otherwise you cannot be completely sure of how well it will hold up in court later, should a problem arise.

For more information on commercial leases and other real estate contracts, call our real estate attorneys. We will be happy to consult with you on specific or general issues related to your real estate needs. By seeking expert input before drafting or signing a legal agreement, you can prevent many potential problems before they occur.

Real Estate Damages Clauses in Commercial Leases Might Not Hold Up in Court

Sometimes, even when both parties agree to the terms of a commercial lease, they can find themselves surprised later when a dispute goes to court. This is certainly the case with damages clauses in commercial leases, because such clauses are sometimes voided by the court!

This can happen because, way back in the 1970s, the State of California adopted a policy of presumptive validity for liquidated damages clauses in commercial real estate contracts. In other words, if one party challenges the provision and shows it to be unreasonably punitive, the entire clause can be voided and damages cannot be collected as expected.

Back in 1997, a contract dispute erupted over the fee charged by a lender in response to a borrower’s violation of the contract. The lender imposed a fee equal to six months’ worth of interest, because the borrower was late making a single payment. In the resulting case of Ridgley v. Topa Thrift and Loan Association, the Court found that this fee was an unreasonable attempt to anticipate damages from default. The borrower did not have to pay the fee, and, of course, the lender lost time and money fighting the issue in court.

The important lesson here is that the Court invalidated the damages clause, even though both parties had agreed to the clause when they originally signed the contract. Sometimes, a real estate contract is not completely airtight if a plaintiff can successfully argue that the damages clause, or some other provision, is unreasonable or draconian in nature.

All real estate contracts, including commercial leases, must include a clause outlining the actions to be taken if one party defaults on the lease. However, as the above example perfectly demonstrates, especially for commercial leases, which are often complex and written in terms that have specific, specialized meaning, it’s important to seek the guidance of an experienced real estate attorney before signing such a contract. Otherwise you cannot be completely sure of how well it will hold up in court later, should a problem arise.

For more information on commercial leases and other real estate contracts, call our real estate attorneys. We will be happy to consult with you on specific or general issues related to your real estate needs. By seeking expert input before drafting or signing a legal agreement, you can prevent many potential problems before they occur.

3 Things for Landlords to Include (among many others!) in Every Commercial Lease

As if commercial writing and negotiating a commercial lease weren’t hard enough already, landlords sometimes have to face situations in which a tenant defaults on the lease agreement. Loss of rent is just one area in which you can lose money; the cost of recovering that income-e and evicting a tenant can amount to much more.

Because so many legal complications can arise from commercial leasing disputes, you should always consult our real estate attorneys before drafting or executing a lease agreement. The following three issues should be carefully considered and included in your lease, in order to protect your interests.

Acceleration Clause. If a tenant does default on the lease, recovering rent payments can be an arduous and time-consuming process. In the event of such a default, an acceleration clause will allow you to immediately demand payment in full for the remaining term of the lease.

Personal Guarantees. If a corporation, partnership, or limited liability company defaults on its lease, a judgment obtained can be difficult to recover because a business entity might not have assets. A personal guarantee signed by the owner of the company allows you to proceed with your claim against him or her personally.

Who pays attorney fees? Unfortunately, in the event of a default you are at risk of losing not only rent money, but also the attorney’s fees and costs of taking the matter to court. Your lease should include a provision addressing attorney’s fees in the event of a dispute. If your lease does not specifically provide the right for the prevailing party to recover attorney’s fees, it is unlikely that you will be able to recoup the fees in court.

The above are just three things that should be included, or at least carefully considered, for every commercial lease. But because real estate law is so complicated, you should always consult with our real estate attorneys before drafting or signing any agreements with tenants. We would be happy to review your current lease form and make suggestions for changes that will better protect your interests.

Green Lease Clauses to Consider in Commercial Leases

The “green” trend is catching on everywhere, especially in areas like Southern California where we are highly concerned with saving energy. With buildings the single largest energy consumer in the United States, more landlords are considering green lease options. Commercial buildings account for 5.6 million structures, spanning 87 billion square feet, so any attempts to reduce energy usage will benefit us all.

Blog Image 2As a nation, we could save 3.3 billion dollars in energy costs by upgrading to more sustainable energy systems. So what’s holding us up? For existing commercial buildings that are not built to new “green” standards, it’s something called the “split incentive” problem. Landlords don’t want to pay for energy upgrades that won’t benefit them personally, and tenants don’t want to pay for upgrades on a building that doesn’t belong to them.

That’s where the “green lease” comes into play, and potentially help landlords and tenants align their interests in sustainability with their financial priorities. A green lease might include clauses that benefit both the landlord and tenant, so that both parties feel an incentive to implement energy-saving measures. Such clauses might include:

  • Submetering – rather than allowing energy costs to be aggregated across the entire building, adding submeters for each tenant allows landlords to bill them individually, thus providing incentive for tenants to reduce energy use;
  • Building commissioning – if the lease mandates regular evaluation and improvement to energy systems, tenants avoid inconveniences and landlords avoid delays in the improvement process;
  • Energy-efficient tenant improvement (TI) build-outs – tenants often pay for TI modifications to their space, but the lease can require them to select sustainable options such as LED lights, occupancy sensors, efficient appliances, and so forth; and
  • Savings pass-through – efficiency upgrades can be expensive for landlords, but they can recover some capital costs by passing savings from lower power bills through to their own budgets, until the costs are repaid, at which point tenants begin to benefit from savings

These are just some of the creative measures that can help a commercial landlord go green in older buildings. For more information on commercial leasing and ideas to improve energy efficiency, schedule a consultation with our real estate attorneys.

Choosing the Right Commercial Lease for Your Business

I’m looking for the right space for my new business, and I’m not too familiar with commercial leases. But I’ve rented residential property before… Doesn’t it work pretty much the same way? What’s the worst that can happen? If this space turns out to be wrong for my business, I can probably get out of the lease, right?

Blog Image 1Those are just some of the questions new business owners often ask about commercial leases. We can’t possibly address every question you might have in a single blog, but if we can impart one piece of wisdom, here it is: The laws regarding commercial leases differ significantly from those regulating residential leases.

For example, terms of residential leases tend to operate on an annual agreement. When you rent an apartment, you can often leave after only a year if you’ve decided it is not the right place for you. But under commercial leases, you might be subject to a five or even ten year agreement. Check your leasing term carefully before signing a contract; if the location or space turns out to be wrong for your business, you could be stuck there for quite some time.

And no, you cannot just get out of the lease if you change your mind. Residential leases are not easy to simply break either, but commercial leases, since they involve business ventures and typically larger sums of money, are often fairly strictly enforced. Once you sign a commercial lease, you’re on the hook for those payments, whether or not your business succeeds. Additionally, and especially for smaller businesses, commercial landlords often require a personal guaranty, which will prevent the business owner from taking liability shelter behind the business entity if the business fails.

For that reason, carefully investigate all terms of the lease before you reach an agreement. Commercial leases are often lengthy and complex, sometimes including multiple addenda and terms that have a particular meaning in the industry. They do not make for simple, easy reading. Among other things, look for the following items:

  • rent escalations – how are they computed and how much increase is allowed?
  • Insurance, property taxes, and maintenance costs – does the landlord pay these, or will you be billed separately for them or as part of a common area maintenance accounting?
  • Conditions of the space – will modifications be needed, called tenant improvements or TIs, and who will pay for them?
  • Specifications for signage – where can you hang your sign(s) and are there any restrictions?
  • Is the lease renewable? – location is important to the success of your business. If you like the space, you will probably want to stay there indefinitely. Additionally, if the lease is renewable, what is the rent for the option period?
  • Under what conditions can the lease be terminated?

Even though it can be more difficult to get out of a commercial lease, they are often more flexible with regard to negotiations upfront. So, take your time, seek to fully understand each aspect of the lease, and make your needs and requirements known to the landlord. Most importantly, call us and speak with our real estate attorney if you have any questions. It is critical that a commercial lease be reviewed by someone who understands what you will be facing as a tenant and can interpret the complex provisions often found in a commercial lease. It is better to be informed before making this decision rather than to find out later you have made a mistake.

Are You Liable for Injuries Sustained on Your Property?

Your commercial tenant calls you from the hospital, sounding rather upset. He has been injured on your property, and feels that you are responsible for his medical bills. He alleges that you knew some aspect of the property posed a threat, and that you neglected to warn him of the danger. The tenant asks you to pay his hospital bills, and threatens to sue if you refuse.

If you find yourself in such a sticky situation, you might be wondering whether you could be liable, as a commercial property owner, for any injuries sustained on your property. That is a situation where you should immediately check with our real estate attorneys. According to California state law, your tenant would have to prove that you had a duty of care to him, that you breached your duty of care, that the breach did indeed cause his injuries, and that he suffered damages as a result of your negligence.

It’s usually not difficult to prove injuries or the expenses associated with them, but duty of care is another matter. If you are aware of a dangerous situation on your property, then you are obligated to fix the problem or at least warn your tenants of the risk. But in order for your tenant to win his case, the situation must be subject to duty of care laws in the first place. The California Supreme Court uses the following tests to establish whether a particular situation is subject to duty of care:

  • harm is foreseeable
  • the plaintiff most certainly suffered an injury
  • the plaintiff’s injury is closely connected to the property owner’s conduct
  • there is moral blame attached to the owner’s conduct
  • the policy of preventing future harm
  • the burden on the owner, and the consequences to the community of imposing duty on the owner
  • the availability, cost, and prevalence of insurance to protect against the risk

Many cases get hung up on the first point. Were you aware of a potentially dangerous situation on your property? For example, if you’ve known for a long time that a particular stairway was dangerous, failed to warn your tenant, and never attempted to fix the problem, then duty of care will probably apply. On the other hand, if the dangerous situation occurred spontaneously, and you had no knowledge that there was a problem on the property, then duty of care might not apply.

It’s more complicated than that, of course, as most legal matters tend to be! And as with all liability issues, adequate and good liability insurance should be your first line of defense against this sort of claim, so you should check regularly with your insurance broker to ensure that your coverage is adequate. Since liability lawsuits can become tricky situations very quickly, we recommend that you immediately consult with our real estate attorneys, rather than trying to negotiate the issue on your own.

Can Landlords Raise the Rent on Commercial Properties?

I just received a notice from my landlord. The rent on my commercial space will increase by 20 percent next month! Isn’t that against the law?

Due to increased taxes and overhead expenses, I need to increase the monthly rent on my commercial property. Am I allowed to do that?

Whether you’re the tenant of a commercial rental space, or the landlord managing the property, rent increases can be a tricky business. Landlords are often accused of greed, even though the rent increase is necessary to cover their own expenses. Renters are wary of a rent increase because it will impact their own bottom lines, and in some cases they are simply unable to afford it.

Under California state law, landlords of residential properties are prohibited from raising rent without first announcing the rent increase 30 days in advance (and sometimes 60 days in advance, depending upon the situation). Meanwhile, no such laws prohibit a sudden rent increase for commercial properties. Instead, commercial leases are strictly governed by the original lease agreement.

So, if you’re a tenant facing a sudden rent increase, what options do you have? Check your copy of the lease carefully. It should state whether you are due a notice of rent increases. If no such clause exists, your landlord may be able to increase the rent without any advance notice.

The same advice applies if you’re a landlord who needs to raise the rent on a particular property. Check your lease agreement. If you did not agree to notify the tenant prior to rent increases, then you may be able to proceed without violating the terms of the lease.

Rent increases are often a point of contention for both lessees and landlords. But unless your lease states otherwise, the landlord is within his rights to increase rent as early as next month.

Before signing a commercial lease, consult with a real estate attorney about your rights. Since commercial leases are subject to far fewer protections than residential leases, you need to be aware of your rights and the terms of the lease before signing on the dotted line.

Can Landlords Raise the Rent on Commercial Properties?

I just received a notice from my landlord. The rent on my commercial space will increase by 20 percent next month! Isn’t that against the law?

Due to increased taxes and overhead expenses, I need to increase the monthly rent on my commercial property. Am I allowed to do that?

Whether you’re the tenant of a commercial rental space, or the landlord managing the property, rent increases can be a tricky business. Landlords are often accused of greed, even though the rent increase is necessary to cover their own expenses. Renters are wary of a rent increase because it will impact their own bottom lines, and in some cases they are simply unable to afford it.

Under California state law, landlords of residential properties are prohibited from raising rent without first announcing the rent increase 30 days in advance (and sometimes 60 days in advance, depending upon the situation). Meanwhile, no such laws prohibit a sudden rent increase for commercial properties. Instead, commercial leases are strictly governed by the original lease agreement.

So, if you’re a tenant facing a sudden rent increase, what options do you have? Check your copy of the lease carefully. It should state whether you are due a notice of rent increases. If no such clause exists, your landlord may be able to increase the rent without any advance notice.

The same advice applies if you’re a landlord who needs to raise the rent on a particular property. Check your lease agreement. If you did not agree to notify the tenant prior to rent increases, then you may be able to proceed without violating the terms of the lease.

Rent increases are often a point of contention for both lessees and landlords. But unless your lease states otherwise, the landlord is within his rights to increase rent as early as next month.

Before signing a commercial lease, consult with a real estate attorney about your rights. Since commercial leases are subject to far fewer protections than residential leases, you need to be aware of your rights and the terms of the lease before signing on the dotted line.

Duty to Repair in Commercial Leases

The success of a business often depends heavily upon its location. Proximity to a customer base, ease of access to the building, and even traffic patterns can make or break a business. Therefore, it’s not hard to imagine the negative impact that structural defects or damage to the building itself could cause. Business could even come to a complete halt if the premises must be closed for repairs, costing the company thousands of dollars or more.

Protection for tenants. Many commercial leases provide very limited protection for tenants. If a defect is discovered, the tenant is required to report the damage to the landlord. The property manager must then respond to the request for repairs within a reasonable period of time. Many commercial leases give the landlord up to 30 days to respond to the request, but some leases do not actually specify whether the damage must be completely repaired, and in what time frame.

The tenant may be required to keep paying rent, and the lease may not specify whether the landlord is responsible for damages to the business as a result of structural defects.

Duty to repair. Business owners are encouraged to consult with a real estate attorney experienced in commercial leases before signing or re-negotiating a lease contract. Certain “duty to repair” clauses should be included in the contract, in order to protect the business from adverse impacts due to structural problems in the building. A commercial tenant may wish to ask for provisions such as:

• the right to pay a professional to repair damages or defects, and be compensated by the landlord
• liability for loss of business, due to defects in the premises. This can help to ensure that the landlord is motivated to promptly fix problems.
• a provision which states rent will be reduced for any period of time during which a defect remains, called a rent abatement provision.

These, and other helpful provisions, are often not found in a standard commercial lease, and the first two will likely be met with great resistance by most landlords . When tenants consult with an experienced real estate attorney, however, they can negotiate a lease which best protects their interests.

What to Do When Your Commercial Tenant Stops Paying Rent

For any commercial property owner or manager, dealing with tenants who fail to pay rent is often the least favorite chore. Most commercial tenants want to pay their rent and keep the space; after all, their business success may depend upon that location. But cases do arise in which a tenant is unable to stay current with the rent. Usually, a commercial tenant is already aware of a serious problem with cash flow before they ever miss a payment. In this case, they may already be prepared to vacate the property when pushed to do so. But in some cases, property owners or managers must resort to formal evictions proceedings.

Four Questions to Ask:

Is the lease compliant with the law? Hopefully, the property manager used a lease agreement that was reviewed by an attorney and is in accordance with state laws. A clear lease agreement states clear expectations and paves the way for a much smoother eviction.

Is there a good reason for the eviction? Commercial real estate is a business and it’s rare that a property manager would even consider eviction without good reason. But the reason for the eviction must be a clear violation of the lease, and the property manager must be able to prove it in court.  Failure to pay rent is certainly a lawful reason for eviction. Other reasons for eviction may be valid, provided the tenant violated the lease terms and these violations have been documented.

Has the landlord complied with the law? Property managers should remember that a court will hear both sides of the argument. If a landlord fails to uphold his or her end of the agreement, courts often side with the tenant. Harassing tenants, turning off their utilities, removing property from the premises or changing locks are all prohibited behaviors.

Has the tenant been given proper notice?  Evictions are commonly avoided with a simple reminder or written notice. After consulting with a real estate attorney, the property manager should mail a letter to the tenant stating the violation. The letter should be mailed via certified mail or as otherwise provided in the lease and should offer the tenant an opportunity to remedy the situation and avoid eviction.

If you’ve gone through the steps above and still can not resolve the issue, the smart move is to consult with counsel to determine the best course of action and make sure that you are adhering to state laws.

 

 

 

 

Search Larson & Solecki LLP