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Are you a Commercial Landlord or Tenant? A New Year’s Resolution for any Commercial Landlord or Business Owner Should Include a Review of your Commercial Lease

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What to review?

  • Who is the landlord? Who is the tenant? Are these the proper entities? Is your lease in your individual name as tenant, but your company operates as a corporation?
  • Is there an option to extend? Have you calendared the date by which the option has to be exercised? As a tenant, you need to be on top of a timely exercise of your option to extend. The law requires a strict adherence to the lease terms as to the timing and methodology for the exercise. One day too late could signal disaster.
  • If you are the tenant, are you exercising any audit rights for calculation of CAM charges? The CAM Charges can end up being very complicated, depending upon the complexity of the property. However, if you have the right to audit the calculations, we suggest that you (and possibly a broker) look these over for accuracy. This may be a BIG issue if the split roll ballot measure becomes the law (see below).
  • If the split roll ballot measure becomes the law, are you aware of who will pay the increased property taxes? Do you know how much it would be? Organizers of the 2020 “split roll” initiative are looking to untether commercial property from residential property tax protections under Proposition 13, the landmark 1978 law passed at the ballot box. The law remains popular among voters for its firm cap on residential property taxes that over time allow homeowners to pay predictably lower rates than if they had to face reassessment at market value each year. This firm cap also exists for commercial property owners. However, if the ballot initiative is passed, commercial property will be subject to reassessment for property tax purposes at it fair market value, NOT its Prop 13 value. This could result in HUGE increases to property taxes for commercial property. The lease most likely will determine whether the landlord or the tenant will bear the burden of the increased taxes.
  • If you are the landlord, are you collecting everything that you should under the lease? I have many landlords that (for whatever reason), are not charging for all of the CAM charges that they are authorized to charge under the lease. When it comes time to sell the property, the new buyer is going to want to reconcile the rent roll to the leases. This is uncaptured income!
  • Is there a right of first refusal? We recently represented a landlord that held a strip-mall in the family for over 3 generations (over 70 years)! The strip mall had many tenants that had been at this location since the previous generation. The current family members didn’t negotiate or draft the leases that were in effect. When it came time to sell the property, it was discovered that over 40 years ago one of the tenants had been granted a right of first refusal to purchase the property. This right wasn’t in the title records, so it wasn’t until a close inspection of the leases that the right was discovered. These old leases need to be reviewed as they will sometimes contain terms that aren’t included in leases now, but were more popular when they were first drafted.

If you have questions about your commercial lease, either as a landlord or a tenant, reach out to Brooke Pollard, Esq.

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