1. Law For Small Business (Mgmt 349) Professor Charles H. Smith Negotiating a Favorable Lease (Chapter 13) Fall 2011

2. Length of Commercial Lease Short-term lease Short-term lease Usually month-to-month; can be terminated by either party with 30 days’ notice. Usually month-to-month; can be terminated by either party with 30 days’ notice. Flexibility for landlord and tenant. Flexibility for landlord and tenant. Be careful since many month-to-month leases are oral and thus inherently inexact – possible confusion, misunderstanding and/or “selective memory” problems. Be careful since many month-to-month leases are oral and thus inherently inexact – possible confusion, misunderstanding and/or “selective memory” problems. Common for new businesses since neither side may want long-term obligation. Common for new businesses since neither side may want long-term obligation. Long-term lease Long-term lease Usually at least one year. Usually at least one year. Always in writing – less confusion, misunderstanding and/or “forgotten” terms since all lease terms specified; also, statute of frauds may require it. Always in writing – less confusion, misunderstanding and/or “forgotten” terms since all lease terms specified; also, statute of frauds may require it. Tends to be more open to negotiation. Tends to be more open to negotiation. Provides security for landlord and tenant. Provides security for landlord and tenant.

3. Calculating Amount of Rent Gross lease – monthly base rent regardless of use of building, utilities, etc. (base rent often calculated per square feet of premises). Gross lease – monthly base rent regardless of use of building, utilities, etc. (base rent often calculated per square feet of premises). Net lease – monthly base rent plus some/all of property taxes. Net lease – monthly base rent plus some/all of property taxes. Net-net lease – monthly base rent plus some/all of property taxes and insurance. Net-net lease – monthly base rent plus some/all of property taxes and insurance. Triple-net lease – monthly base rent plus some/all of owner’s operating costs (e.g., property taxes, insurance, repairs, maintenance, utilities, etc.). Triple-net lease – monthly base rent plus some/all of owner’s operating costs (e.g., property taxes, insurance, repairs, maintenance, utilities, etc.). Percentage lease – monthly base rent plus percentage of tenant’s gross income (typical for retail stores). Percentage lease – monthly base rent plus percentage of tenant’s gross income (typical for retail stores).

4. Other Commercial Lease Issues Increase in rent amount over time – to be expected in long-term lease. Increase in rent amount over time – to be expected in long-term lease. Security deposit. Security deposit. Landlord improvements. Landlord improvements. Right to or prohibition of sublease. Right to or prohibition of sublease. Landlord’s “reasonable” right to enter premises. Landlord’s “reasonable” right to enter premises. Indemnity or “hold harmless” – will tenant need tenant’s insurance? Indemnity or “hold harmless” – will tenant need tenant’s insurance?

5. Other Commercial Lease Issues cont. “No waiver” of lease terms – generally works to protect landlord; e.g., prevents tenant from arguing rent accepted late in past so OK now. “No waiver” of lease terms – generally works to protect landlord; e.g., prevents tenant from arguing rent accepted late in past so OK now. Default – remedies per Civil Code §§ 1951-1951.7 Default – remedies per Civil Code §§ 1951-1951.7 Acceleration clause permitted which can immediately entitle landlord to all money due through end of lease (subject to mitigation of damages). Acceleration clause permitted which can immediately entitle landlord to all money due through end of lease (subject to mitigation of damages).

6. Landlord-Tenant Disputes Often just a misunderstanding or easily- solved problem – communication between landlord and tenant should resolve the matter. Often just a misunderstanding or easily- solved problem – communication between landlord and tenant should resolve the matter. Put complaints in writing; oral complaints may be unrecorded or “forgotten.” Put complaints in writing; oral complaints may be unrecorded or “forgotten.” Unlawful detainer (eviction) – many statutory procedures to follow (Code of Civil Procedure § 1161 et seq.); cannot just lock tenant out of the premises for failure to pay rent or other breach of the lease; see next slide for details. Unlawful detainer (eviction) – many statutory procedures to follow (Code of Civil Procedure § 1161 et seq.); cannot just lock tenant out of the premises for failure to pay rent or other breach of the lease; see next slide for details.

7. Unlawful Detainer Eviction process is called “unlawful detainer” since tenant who has breached lease but continues to occupy premises “detains” premises in violation of law. Eviction process is called “unlawful detainer” since tenant who has breached lease but continues to occupy premises “detains” premises in violation of law. Several steps must be followed for landlord to regain possession of premises; note that possession is the main issue though judgment can also include damages for unpaid rent. Several steps must be followed for landlord to regain possession of premises; note that possession is the main issue though judgment can also include damages for unpaid rent. Landlord should be sure to exclude unlawful detainer from arbitration agreement (if any). Landlord should be sure to exclude unlawful detainer from arbitration agreement (if any).

8. Unlawful Detainer cont. Unlawful detainer process includes Unlawful detainer process includes Service of 3-day notice to pay rent or quit. Service of 3-day notice to pay rent or quit. If no compliance, then filing of complaint and service of summons and complaint. If no compliance, then filing of complaint and service of summons and complaint. Tenant has 5 days to respond. Tenant has 5 days to respond. Trial must be set no more than 20 days after request to set trial is filed. Trial must be set no more than 20 days after request to set trial is filed. Trial (usually before judge but there is a right to jury trial). Trial (usually before judge but there is a right to jury trial). Judgment and clerk’s immediate issuance of writ of execution (possession of premises). Judgment and clerk’s immediate issuance of writ of execution (possession of premises). Give writ to sheriff’s office to enforce; sheriff will post 5-day notice but, if no compliance, will forcibly remove tenant from premises. Give writ to sheriff’s office to enforce; sheriff will post 5-day notice but, if no compliance, will forcibly remove tenant from premises.

9. Getting Out of a Lease What if tenant does not need/want the premises any more? Any way to get out of the lease? What if tenant does not need/want the premises any more? Any way to get out of the lease? Lease may include “escape” clause. Lease may include “escape” clause. Negotiations – Landlord may be “open to offers” Negotiations – Landlord may be “open to offers” Value of premises may have increased; landlord might be able to quickly rent to someone else for more money/better terms. Value of premises may have increased; landlord might be able to quickly rent to someone else for more money/better terms. Lump-sum payment may be good if landlord needs immediate cash. Lump-sum payment may be good if landlord needs immediate cash. Bottom line – what will make the deal happen? Bottom line – what will make the deal happen?