Hawaii Commercial Lease Agreement

Introduction

A Hawaii commercial lease agreement is a legally binding contract outlining the terms and conditions between a landlord of a commercial property and a business tenant. The agreement establishes the lease term, rent amount, security deposit, exclusivity provisions, subleasing rights, and more. Once signed by both parties, it becomes enforceable under Hawaii contract law.

Unlike residential leases, which are governed by Hawaii Revised Statutes (HRS) Chapter 521 (the Residential Landlord-Tenant Code), commercial leases in Hawaii are primarily governed by common law contract principles and the specific terms negotiated between the parties ^[1]. This provides greater flexibility but requires careful negotiation and legal review.

What Is a Commercial Lease Agreement?

A commercial lease agreement is a contract that outlines terms and conditions for the renting of an office, retail space, industrial facility, or other non-residential property. The completed document will set forth:

Lease duration and commencement date

Monthly rent amount and payment schedule

Security deposit requirements

Renewal options and rent escalation provisions

Insurance requirements and liability allocation

Operating expense division (taxes, insurance, maintenance)

Permitted use of the premises

Maintenance and repair responsibilities

Subleasing and assignment rights

Required Disclosures in Hawaii

Hawaii Agency Disclosure (Conditional) - Prior to preparing or presenting a lease agreement, a licensed real estate agent must disclose either in writing or orally who they represent in the transaction. This disclosure requirement applies to commercial leases exceeding one year ^[2].

The agency disclosure must identify whether the licensee represents:

The landlord (seller's agent)

The tenant (buyer's agent)

Both parties (dual agent - requires written consent)

Types of Commercial Lease Structures

Commercial leases in Hawaii typically fall into one of three expense structures, which determine how operating costs are divided between landlord and tenant:

1. Triple Net (NNN) Lease

The tenant pays all operating expenses in addition to base rent, including:

Property taxes

Building insurance

Common area maintenance (CAM)

Landscape maintenance

HVAC maintenance

Utilities

2. Gross Lease (Full Service Lease)

The landlord pays all operating expenses. The tenant pays a single rent amount that covers:

Base rent

All utilities and operating expenses

Property taxes

Building insurance

Maintenance and repairs

3. Modified Gross Lease

The landlord and tenant share operating expenses according to negotiated terms. Common arrangements include:

Tenant pays utilities, landlord pays taxes and insurance

Base year expense stop (tenant pays increases above base year)

Tenant pays interior maintenance, landlord pays exterior

Hawaii General Excise Tax (Get) Considerations

Hawaii imposes a General Excise Tax (GET) on all gross business income, including commercial rent. This is unique to Hawaii and has significant implications for commercial leases ^[3].

GET Rates (as of 2025):

Base GET rate: 4.0% statewide

Honolulu County surcharge: 0.5% (total 4.5%)

Maui County surcharge: 0.5% (total 4.5%)

Hawaii County surcharge: 0.5% (total 4.5%)

Kauai County surcharge: 0.5% (total 4.5%)

GET Pass-Through to Tenants:

Landlords may pass the GET to tenants if the lease agreement explicitly permits it

The maximum gross-up rate is 4.712% (accounts for tax on the tax itself)

The GET pass-through must be written in the lease agreement

Even if not charged to tenants, landlords remain liable for GET on rental income

Security Deposit

For commercial leases:

Security deposit amount is fully negotiable between parties

Common amounts range from one to six months' rent

Return timeframe governed by lease terms, not statute

No statutory requirement to hold in separate account (though recommended)

No statutory requirement to pay interest

Best Practice: Specify in the lease agreement how the security deposit will be held, conditions for deductions, and timeline for return after lease termination.

Rent and Payment Terms

Base Rent: The monthly amount the tenant pays for use of the premises. Base rent is typically due on the first of each month and may be calculated as:

Fixed monthly amount

Per square foot rate (e.g., $2.50/SF/month)

Annual amount paid in monthly installments

Percentage Rent: Common in retail leases, percentage rent requires the tenant to pay additional rent based on a percentage of gross sales or net sales above a specified threshold (the "breakpoint").

Late Fees: Commercial leases may include late fees for rent paid after the due date. Late fees must be specified in the lease and may be structured as:

Flat fee per occurrence

Percentage of overdue rent

Daily accrual until paid

Default and Eviction Procedures

Commercial evictions in Hawaii are governed by HRS Chapter 666 (Summary Possession), not the Residential Landlord-Tenant Code ^[4].

Key Differences from Residential:

Self-help eviction: Commercial landlords may use self-help eviction for nonpayment of rent (67 H. 252, 686 P.2d 12, 1984). This is prohibited for residential tenancies.

Notice requirements determined by lease terms (or 10 days for month-to-month)

Fewer statutory tenant protections

Summary Possession Process:

1. Provide written notice per lease terms (or 10 days for parol tenancy)
2. If tenant fails to cure, file complaint in District Court ($155 filing fee)
3. Serve summons through licensed process server
4. Court hearing - landlord must prove legal grounds
5. If landlord prevails, court issues writ of possession
6. Sheriff enforces eviction

Venue: Summary possession actions must be filed in the District Court of the circuit where the property is located (HRS 666-6).

Insurance Requirements

Commercial leases typically require both landlord and tenant to maintain specific insurance coverage:

Tenant Insurance Requirements (typical):

Commercial General Liability (CGL): Minimum $1,000,000 per occurrence

Property Insurance: Coverage for tenant's personal property and improvements

Business Interruption Insurance: Coverage for lost income during disruptions

Workers' Compensation: As required by Hawaii law

Additional Insured: The landlord should be named as an "additional insured" on the tenant's liability policy, with certificates of insurance provided before lease commencement.

Ada Compliance Requirements

Commercial properties in Hawaii must comply with the Americans with Disabilities Act (ADA) Title III, which applies to places of public accommodation ^[5].

Liability: Both landlords AND tenants can be held liable for ADA violations. The lease should clearly specify:

Who is responsible for ensuring ADA compliance

Who bears the cost of required modifications

Allocation of liability for ADA-related lawsuits

Key ADA Requirements:

Doorway openings: 32-48 inches clear width

Ramps: Maximum 1:12 slope

Accessible restrooms with required clearances

Accessible parking spaces

Penalties: Non-compliance can result in penalties up to $75,000 for a first offense and $150,000 for subsequent violations, plus private lawsuits.

Hawaii DCAB: The Hawaii Disability and Communication Access Board (DCAB) oversees state accessibility requirements and can be contacted at 808-586-8121.

Environmental Disclosure Requirements

Hawaii adopted the Uniform Environmental Covenants Act (UECA) in 2006, codified as HRS Chapter 508C ^[6].

Environmental Covenants:

Required for properties with residual contamination above Tier 1 Environmental Action Levels

Must describe environmental hazards remaining at the site

Must specify restrictions on future use

Must outline requirements to maintain controls

Due Diligence Recommendations:

Request disclosure of any environmental covenants affecting the property

Consider conducting a Phase I Environmental Site Assessment (ESA)

Check the Hawaii DOH environmental covenant registry

Zoning and Permitted Use

Before entering into a commercial lease in Hawaii, tenants should verify that their intended business use is permitted under local zoning ordinances.

County Zoning Codes:

Honolulu: Land Use Ordinance (LUO)

Maui: Title 19 Maui County Code

Hawaii County: Chapter 25 Hawaii County Code

Kauai: Kauai County Comprehensive Zoning Ordinance

Lease Provisions: The lease should specify:

Permitted use of the premises

Which party is responsible for zoning compliance

Consequences if the intended use is not permitted

Process for obtaining necessary permits

Hawaii Business Registration Requirements

Commercial tenants in Hawaii must complete certain registrations before commencing business operations ^[7]:

1. Hawaii DCCA Business Registration: Register with the Department of Commerce and Consumer Affairs

2. GET License: Obtain a General Excise Tax license from the Hawaii Department of Taxation

3. County Business License: File for any required county business licenses (requirements vary by county)

4. Industry-Specific Licenses: Obtain any professional or occupational licenses required for your business type

How to Create a Hawaii Commercial Lease Agreement

Step 1: Identify the Parties

Include legal names and addresses of both landlord and tenant. For business entities, include entity type (LLC, Corporation, etc.) and state of formation.

Step 2: Describe the Premises

Provide complete property description including:

Street address

Suite or unit number

Square footage

Type of space (retail, office, industrial, etc.)

Common areas included

Step 3: Specify the Lease Term

Define the lease period, including commencement date, expiration date, and any renewal options.

Step 4: Establish Rent and Payment Terms

Specify base rent, percentage rent (if applicable), payment due date, acceptable payment methods, and late fee provisions.

Step 5: Define Expense Allocation

Clearly state the lease type (Gross, Modified Gross, or Triple Net) and specify which party pays for each operating expense.

Step 6: Address Security Deposit

Specify the deposit amount, how it will be held, conditions for deductions, and return timeline.

Step 7: Include Insurance Requirements

Detail required insurance types, minimum coverage amounts, and certificate requirements.

Step 8: Execute the Agreement

Both parties should sign and date the agreement. While notarization is not required, it may be advisable for long-term leases.

Important Considerations for Hawaii Commercial Leases

1. Legal Review: Given the complexity of commercial leases and the lack of statutory protections, parties should have the lease reviewed by a Hawaii attorney familiar with commercial real estate.

2. GET Implications: Understand how the General Excise Tax will affect your total occupancy cost and ensure lease terms address GET pass-through.

3. CAM Caps: Tenants should negotiate caps on Common Area Maintenance charges and request annual reconciliation statements.

4. Assignment and Subletting: Understand restrictions on assignment or subletting, as these affect your flexibility to transfer or share the space.

5. Personal Guaranty: Many landlords require personal guarantees from business owners, especially for new businesses or those without established credit.

6. Exclusive Use Clauses: Retail tenants should consider negotiating exclusive use provisions to prevent competition from other tenants in the same property.