Arizona Commercial Lease Agreement

Introduction

An Arizona commercial lease agreement is a legally binding contract between a landlord and a tenant seeking to rent commercial space for business purposes. Once signed by both parties, it becomes enforceable until the end of the lease term. The agreement defines the rights, obligations, and responsibilities of both parties while protecting their respective interests.

Commercial leases in Arizona are primarily governed by the terms negotiated between the parties, with additional authority found in Arizona Revised Statutes Title 33, Arizona case law, and general common law principles. ^[1] Unlike residential leases, commercial leases have fewer statutory protections because Arizona courts presume commercial parties are sophisticated and capable of negotiating their own terms.

Common Lease Term Duration

It is common for Arizona commercial leases to have terms of three to five years with potential for renewal periods at the option of the tenant. ^[2] However, lease terms can range from less than one year to 10 years or more, depending on:

• Market conditions and demand for the space
• Existing condition of the premises and required improvements
• Tenant creditworthiness and business stability
• Scope of tenant improvements and build-out costs

New businesses or startups may prefer shorter lease terms (less than 3 years) to minimize long-term financial commitment. Conversely, if the space requires extensive build-out paid for by the landlord, expect to sign a longer lease term.

Commercial Lease Expense Structures

Arizona commercial leases use three primary expense structures that determine which party pays for operating expenses such as property taxes, insurance, common area maintenance, landscape maintenance, and HVAC maintenance. ^[3]

Triple Net Lease (Nnn)

In a triple net lease, the tenant pays for all operating expenses on top of base rent: property taxes, building insurance, and common area maintenance (CAM) charges. This is the most common type of commercial lease structure. ^[4] Triple net leases typically have lower base rent because the tenant has assumed responsibility for operating expenses. They are most common in retail and industrial properties.

Gross Lease (full-Service Lease)

In a gross lease, the tenant pays a single fixed rent amount, and the landlord covers all other property expenses including utilities, insurance, taxes, and maintenance. ^[5] This structure is simpler for tenants but often results in higher base rent. Gross leases are most commonly used in office properties.

Under a gross lease, the landlord is obligated to maintain the general exterior structure of the premises, all major systems (heating, plumbing, electrical), parking areas including snow removal and environmental hazards, and the grounds and lands surrounding the premises.

Modified Gross Lease

A modified gross lease is a hybrid structure where both the landlord and tenant share responsibility for operating expenses. ^[6] The specific allocation of expenses is negotiated between the parties. Typically, the base year rent includes certain expenses, but any increases in these expenses over the base year are charged to the tenant. Every modified gross lease is unique to the landlord and the building.

Required Disclosures in Arizona

Arizona law requires specific disclosures when real estate agents are involved in commercial lease transactions. These requirements are established by the Arizona Administrative Code and apply to protect all parties in the transaction.

Agency Disclosure Form (Conditional)

If a real estate agent is representing either the landlord or tenant, they must disclose their relationship to the other party in writing. ^[7] More broadly, Arizona Administrative Code R4-28-1101(B) requires licensees participating in a real estate transaction to disclose in writing to all other parties any information that materially or adversely affects the consideration to be paid by any party to the transaction.

Material Defects Disclosure (Conditional)

If a real estate licensee is representing the landlord, they must disclose, in writing, any information that adversely affects the consideration to be paid by the tenant in the transaction. ^[7] This includes information about the seller or lessor being unable to perform, material defects existing in the property, and the existence of liens or encumbrances on the property.

Disclosure of Conflicts of Interest (Conditional)

A real estate agent cannot act directly or indirectly in a transaction without informing the other parties in writing, before they enter any binding agreement, of present or prospective conflicts including: ^[8]

• The agent has a license and is acting as a principal
• The purchaser or lessor is a member of the agent's immediate family
• A party is the agent's employing broker
• The agent or their immediate family has a financial interest in the transaction other than the commission

Transaction Privilege Tax (Tpt) Responsibility

While not required by statute, it is recommended that the lease clearly states which party is responsible for the payment of Arizona's Transaction Privilege Tax (TPT). The Arizona Department of Revenue provides tools to determine whether a specific property is subject to TPT. ^[9] TPT is Arizona's version of a sales tax and may apply to commercial lease transactions depending on the property type and location.

Lease Termination and Eviction Procedures

Arizona Revised Statutes § 33-361(A) grants landlords the right to terminate a commercial lease and retake possession if the tenant fails to pay rent or violates any provision of the lease. ^[10] Importantly, this statute does not limit termination rights to only material breaches—any lease violation may provide grounds for termination, though courts recognize equitable defenses.

Notice Requirements for Month-To-Month Tenancies

For month-to-month commercial tenancies, Arizona law requires:

• Landlords must provide 10 days' written notice via certified mail to terminate
• Tenants must provide 10 days' notice for monthly tenancies
• Tenants must provide 5 days' notice for semi-monthly tenancies

Material Vs. Immaterial Breaches

Arizona law distinguishes between material and immaterial breaches:

Material Breaches: Significant violations such as failure to pay rent or causing substantial damage to the property. These breaches impact the tenant's ability to use the premises as intended.

Immaterial Breaches: Minor violations that do not significantly impact the tenant's use of the premises. These may be addressed differently than material breaches.

Eviction Process and Timeline

The Arizona commercial eviction process follows these steps: ^[11]

1. Written notice issued to tenant (typically 5-10 days to correct issues)
2. Court approval required if tenant does not comply (can take weeks)
3. Writ of Restitution obtained from court if tenant remains
4. Sheriff enforces writ "as promptly and expeditiously as possible"
5. Additional 3-4 weeks may be required depending on sheriff's workload

Equitable Relief and Waiver Considerations

Arizona courts have long asserted the ability to grant tenants equitable relief from "forfeiture" based on fraud, accident, or mistake. Additionally, a landlord may be deemed to have waived its right to terminate the lease based on late rent payments or other nonmonetary breaches where it accepts rent with notice of the tenant's breach. ^[12]

Assignment and Subletting Rights

Arizona common law recognizes that "in the absence of an express restriction by contract or statute, each tenant has the unrestricted right to assign or sublet as he wills." ^[13] This principle was established in TMC v. Zoslow, 147 Ariz. 612, 614 (Ct. App. 1985).

Landlord Consent Standards

When a commercial lease conditions assignment or subletting on landlord consent, Arizona law imposes a reasonableness standard: ^[14]

• The landlord cannot arbitrarily or unreasonably withhold consent unless the lease explicitly grants the landlord "sole and absolute discretion"
• The landlord must articulate valid and legitimate reasons for denying consent
• The burden is on the tenant to provide sufficient information for evaluation
• Every lease contains an implied covenant of good faith and fair dealing

Valid Reasons for Withholding Consent

Examples of appropriate objections to assignment or subletting include:

• Proposed assignee's inability to fulfill the terms of the lease
• Financial irresponsibility or instability of the proposed assignee
• Unsuitability of the premises for the proposed assignee's intended use
• Intended unlawful or undesirable use of the premises

Americans With Disabilities Act (Ada) Compliance

All commercial properties in Arizona must comply with the federal Americans with Disabilities Act (ADA) and related state accessibility regulations. The 2010 ADA Standards for Accessible Design establish minimum requirements for newly designed, constructed, or altered commercial facilities. ^[15]

Who Must Comply With Ada Requirements

The ADA applies to:

• All businesses with 15 or more employees
• Any business operating for the benefit of the general public
• All local, county, state, and federal government agencies
• Exemptions: Places of worship and private clubs

Arizona-Specific Accessibility Regulations

In addition to federal ADA requirements, Arizona has adopted state-level accessibility regulations: ^[16]

• Arizona Attorney General Administrative Rules R10-3-401 through R10-3-404
• Buildings must comply with whichever standard (federal or state) provides the greatest degree of accessibility
• Arizona state and local governments may enforce accessibility standards above federal ADA requirements

Key Accessibility Features Required

Commercial properties must provide:

• Door widths with minimum clear width for wheelchair passage
• Ramp slopes meeting ADA specifications
• Accessible parking spaces located close to entrances, clearly marked
• Accessible restrooms with proper stalls, sinks, and fixtures
• Accessible signage meeting ADA standards
• Elevators for multi-story buildings
• Unobstructed access to all accessible elements and spaces
• Proper layout and spacing that facilitates movement and accessibility

Penalties for Ada Non-Compliance

Arizona businesses found non-compliant with the ADA face significant penalties: ^[17]

• First violation: Fines up to $75,000
• Subsequent violations: Fines up to $150,000 per violation
• Private lawsuits: Disabled persons can file federal lawsuits for non-compliance

Environmental Compliance and Hazardous Materials

Both landlords and tenants must be aware of environmental compliance obligations under federal and Arizona state law. The Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and the Superfund Amendments and Reauthorization Act (SARA) impose significant liability for environmental contamination. ^[18]

Landlord Environmental Disclosure Requirements

Arizona landlords are required to disclose any known information about environmental hazards that could affect the property's use or value. This includes: ^[19]

• Known environmental contamination
• Presence of hazardous materials on the premises
• Previous uses of the property that may have caused contamination
• Environmental cleanup obligations or pending actions

Cercla Liability for Landlords and Tenants

Under CERCLA, both landlords and tenants can be held liable for environmental contamination:

• Landlords are considered "owners" under CERCLA and can be liable for tenant-caused contamination, even if the landlord did not cause it
• Tenants are considered "operators" under CERCLA and are responsible for environmental compliance during their tenancy
• Cleanup costs for environmental contamination can be enormous

Tenant Environmental Responsibilities

Tenants using hazardous materials in their operations must: ^[20]

• Ensure compliance with all environmental regulations
• Implement proper storage, handling, and disposal procedures
• Maintain all required environmental permits and licenses
• Indemnify the landlord against environmental liabilities arising from tenant's use

Recommended Environmental Lease Clauses

To protect both parties, commercial leases should include specific environmental clauses beyond a simple "compliance with all laws" provision: ^[21]

1. Indemnity Clause: Tenant reimburses landlord for cleanup costs arising from tenant's use
2. Cleanup Standards Clause: Specifies standards governing tenant's cleanup obligations
3. Definition Clause: Defines relevant environmental terms (hazardous materials, contamination, etc.)
4. Prohibition/Limitation Clause: Restricts or prohibits manufacture, storage, disposal, transportation, and use of hazardous substances

Dispute Resolution

Arizona provides multiple mechanisms for resolving commercial lease disputes. Arizona courts are increasingly supportive of Alternative Dispute Resolution (ADR), and many commercial leases include mandatory mediation or arbitration clauses. ^[22]

Mediation

Mediation is a non-binding process where a neutral third-party mediator facilitates communication between the parties to help them reach a mutually agreeable solution. ^[23] Mediation offers several advantages:

• Faster resolution than litigation (days to weeks vs. years)
• Significantly reduced costs compared to court proceedings
• Confidential process that protects business privacy
• Parties maintain control over the outcome
• Preserves business relationships when ongoing dealings are important
• Flexible solutions possible (rent reductions, deferrals, space reconfigurations, early exits)

Arbitration

Arbitration provides a binding resolution through private arbitrators rather than judges and juries. Under Arizona law, written arbitration agreements are generally enforceable and irrevocable. ^[24] Many commercial leases include arbitration clauses requiring disputes to proceed through arbitration forums such as the American Arbitration Association (AAA) or JAMS.

Arbitration Characteristics:

• Binding decision by arbitrator (typically final with limited appeal rights)
• Duration: Basic disputes may take 3 hours; complex cases may last weeks
• Timeline: Most arbitrated matters decided in months rather than years
• Arizona counties have mandatory arbitration for disputes under certain dollar thresholds
• If arbitration clause exists and party files lawsuit, court can order case to arbitration

Litigation

When mediation and arbitration fail or are not required by the lease, litigation is the final option for resolving disputes. Litigation involves filing a lawsuit in court where a judge or jury decides the outcome. ^[25]

Litigation Characteristics:

• Most expensive dispute resolution option
• Most time-consuming (can take years to resolve)
• Public process (not confidential)
• May be necessary for serious disputes that cannot be resolved through ADR
• Formal court procedures and rules of evidence apply