California Commercial Lease Agreement

A California commercial lease agreement is a legally binding contract between a landlord and tenant that conveys terms for renting non-residential real estate. Commercial leases define the tenant's monthly payment, property expenses, rights and liabilities, and other essential terms of tenancy. Unlike residential leases, commercial leases are highly negotiable, and the parties commonly negotiate the lease to reach an arrangement that meets their respective business needs.

Types of Commercial Properties

Commercial leases apply to non-residential properties used for business purposes, including:

• Retail spaces (stores, restaurants, shopping centers)
• Office spaces (professional offices, coworking spaces)
• Industrial properties (warehouses, manufacturing facilities)

Expense Structure Types

Commercial leases typically follow one of three expense structures that determine who pays for operating expenses such as property taxes, insurance, common area maintenance, landscape maintenance, and HVAC maintenance:1. Triple Net (NNN) Lease

The tenant pays for all operating expenses in addition to base rent. This includes property taxes, building insurance, and maintenance costs. Triple net leases are common for single-tenant commercial properties.

2. Gross Lease

The landlord pays for all operating expenses, and the tenant pays only base rent. The landlord handles property taxes, insurance, and maintenance. Gross leases provide tenants with predictable costs.

3. Modified Gross Lease

The landlord and tenant share operating expenses according to negotiated terms. The specific allocation of expenses (who pays what) is defined in the lease agreement. This structure offers flexibility based on the parties' needs.

Key Differences From Residential Leases

Commercial leases differ significantly from residential leases under California law:

• No rent control: Commercial rents are not subject to rent control ordinances
• No habitability warranties: Unless specifically negotiated, landlords have no implied warranty of habitability
• No security deposit caps: Commercial security deposits can exceed residential limits
• Greater negotiability: Parties have more freedom to negotiate custom terms

Required Disclosures

California law requires landlords to make specific disclosures to commercial tenants before signing a lease agreement. These disclosures protect tenants by ensuring they have complete information about the property's condition and history.

1. Certified Access Specialist (CASp) Inspection Disclosure

Every commercial lease must state whether the property has been inspected by a Certified Access Specialist (CASp) for compliance with disability access laws. ^[1] This disclosure is mandatory for all commercial leases executed on or after January 1, 2017.

If the property has been inspected:

• The landlord must provide a copy of the CASp report to the tenant before signing the lease. ^[2]
• If the report is not provided at least 48 hours before signing, the tenant can cancel the lease within 72 hours after execution. ^[3]
• If the property received a disability access inspection certificate, the landlord must deliver it to the tenant within seven days of lease execution. ^[4]

If the property has NOT been inspected:

• The lease must include a statutory notice informing the tenant of their right to request a CASp inspection. ^[5]

2. Death on the Property

The landlord must inform the tenant of any death that occurred on the property within the last three years. ^[6] However, deaths due to HIV or AIDS-related complications do not need to be disclosed, regardless of when they occurred.

3. Energy Use Benchmarking and Disclosure

For commercial buildings larger than 50,000 square feet OR buildings with 17 or more residential utility accounts who are billed directly for energy, landlords must benchmark energy use annually and make the data publicly available. ^[7] This requirement helps promote energy transparency and conservation in California's commercial building sector.

4. Methamphetamine or Fentanyl Contamination

If the property was previously contaminated by methamphetamine or fentanyl manufacturing but has since been remediated, the landlord must provide the tenant with a copy of the remediation order issued by the local health officer. ^[8] The tenant must acknowledge receipt of this order in writing before signing the lease. If the landlord fails to provide this disclosure, the tenant may void the rental agreement.

5. Toxic Mold Disclosure

If the landlord is responsible for maintenance and knows that the property contains mold (visible or hidden) that exceeds permissible exposure limits or poses a health threat, the landlord must promptly notify the tenant in writing. ^[9] This disclosure requirement applies to commercial and industrial landlords when mold levels exceed state-established standards.

Additional Conditional Disclosures

Depending on the property's characteristics and transaction details, the following additional disclosures may be required:Real Estate Agent Relationship Disclosure

In commercial transactions involving real estate agents, the agent must disclose who they represent (landlord, tenant, or both) and obtain signed consent from all parties. ^[10] This ensures all parties understand the agent's fiduciary duties.

Asbestos Disclosure

For commercial properties constructed before federal asbestos regulations took effect (commonly before 1979) that contain asbestos-containing materials (ACMs), landlords must notify tenants in writing. ^[11] This disclosure helps tenants understand potential health risks and renovation constraints.

Proposition 65 Warning

If the property contains chemicals known to the State of California to cause cancer, birth defects, or other reproductive harm, the landlord must provide a Proposition 65 warning to tenants. ^[12] The California Office of Environmental Health Hazard Assessment maintains the official list of Proposition 65 chemicals.

Important Considerations for Commercial Tenants

Permitted Use and Zoning Compliance

Before signing a commercial lease, tenants should verify that:

• The property is zoned for the intended business use
• All necessary business licenses and permits can be obtained
• The property complies with building codes for the specific business type

Tenants cannot rely solely on the landlord's representations about permitted uses. Independent verification with local planning and zoning authorities is essential.

Americans with Disabilities Act (ADA) Compliance

In addition to California's CASp inspection requirements, commercial properties must comply with federal Americans with Disabilities Act (ADA) requirements. ^[13] While CASp inspections address state accessibility standards, ADA compliance is a separate federal obligation. Tenants operating places of public accommodation should ensure the property meets both state and federal accessibility requirements.

Insurance Requirements

Commercial leases typically require tenants to maintain:

• General liability insurance protecting against third-party claims
• Property insurance covering tenant improvements and personal property
• Business interruption insurance (recommended for income protection)
• Worker's compensation insurance (if the tenant has employees)

Insurance requirements vary by lease type and should be clearly specified in the lease agreement.

Assignment and Subletting

Commercial leases typically include provisions regarding the tenant's ability to:

• Assign the lease to another party
• Sublet all or part of the premises to another tenant
• Transfer the lease due to a change of control for corporate tenants

Most commercial leases require landlord consent for assignment or subletting, though the specific terms are negotiable. Tenants should carefully review these provisions before signing, especially if they anticipate potential business changes or expansion needs.

Environmental Compliance

Beyond the disclosure requirements listed above, commercial tenants may have ongoing environmental obligations, including:

• Compliance with the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA, also known as Superfund) ^[14]
• Proper hazardous waste storage and disposal
• Air quality permits for certain business operations
• Stormwater discharge permits if applicable

Tenants operating businesses that generate, store, or handle hazardous materials should consult with environmental compliance experts to understand their obligations.

Default and Remedies

Commercial leases should clearly address what happens if either party fails to perform their obligations. Key provisions typically include:

• Notice and cure periods: How much time a defaulting party has to correct violations
• Landlord's remedies: Eviction procedures, damages recovery, attorney's fees
• Tenant's remedies: Rent abatement for uninhabitable conditions, repair and deduct rights

Unlike residential leases, commercial lease default provisions are highly negotiable and should be carefully reviewed by legal counsel before signing.