Important Clauses to Include in a Commercial Lease Agreement

A well-drafted lease agreement serves as the foundation for a successful and smooth landlord-tenant relationship. To this effect, there are certain clauses that should be included in your commercial lease agreement to protect your investment. You should talk to a skilled real estate attorney to draft or review your lease contract. Your lawyer will ensure it complies with California laws and regulations and best serves your interests as a landlord or tenant.

Important Clauses in California Commercial Lease Agreements

Late Rent Fees

Late rent fees need to be reasonable estimates of the actual costs incurred by landlords due to late rent payments. These fees are not meant to punish tenants and should be applied in accordance with state law. Don’t forget to:

• Specify any late fees and describe any grace periods that allow your tenants to make late payments without incurring penalties.
• Clarify the consequences of non-payment, including the process of eviction.

• Define the grounds for lease termination, including non-payment of rent, breach of lease terms, and other potential defaults.
• Specify the notice period for both parties in case of lease termination.

Renewal and Rent Increases

Most California rentals are subject to a 5% rent increase cap, with inflation factored in. Moreover, some cities and localities have their own rent increase requirements. You should adhere to both state and local regulations regarding rent increases. You should include clauses that:

• Address the process for lease renewal, including any changes to rent.
• Provide advance notice of any rent increases in accordance with California law. 
• Specify procedures for negotiating lease terms upon renewal, including any rights to contest rent increases.

Security Deposits

In California, while not mandatory, most landlords choose to collect a security deposit, which cannot exceed two months’ rent for unfurnished apartments or three months’ rent for furnished apartments. 

You should take care of these things:

• Specify the amount of the security deposit and its intended use.
• Describe the conditions under which the security deposit can be withheld, such as unpaid rent or property damage.
• Comply with California law by providing an itemized list of deductions and returning any remaining deposit within the required timeframe.

Some cities, like San Francisco and Los Angeles, require landlords to pay tenants the security deposit plus interest, so it’s crucial to speak with a dependable real estate attorney who understands local regulations.

Specific Payment Requirements

Landlords in California can accept various forms of rental payments but cannot require cash payments. The exception is when a tenant’s check has bounced within the last three months, in which case you may request rent payment in cash.

You may want to consider the following:

• Clearly state the monthly rent amount and specify whether it is fixed or subject to periodic increases.
• Outline the due date for rent payments, which may include provisions for weekends and holidays.
• List accepted payment methods, such as checks, electronic transfers, or other forms of payment.

Recreational Marijuana and Rentals

Although recreational marijuana is legal in California, landlords have the right to prohibit its cultivation and smoking on their properties. This prohibition should be included in the smoking clause of the lease agreement and address specific rules related to recreational marijuana.

Assignment and Subletting

Typically, landlords in California reserve the right to approve any new tenants or sublessees to ensure they meet acceptable criteria. You should clearly state the conditions under which the tenant can assign the lease or sublet the premises. You may also want to add a clause that addresses any fees associated with the approval process, such as application or administrative fees.

Notice of Entry

Landlords in California are required to provide tenants with written notice at least 24 hours in advance before entering a rental unit, except in emergencies. Entry is generally allowed for agreed-upon repairs, showings to prospective tenants, or in cases where the rental property has been abandoned. The rental agreement should:

• Clearly define the circumstances under which the landlord can enter the leased premises, such as for inspections or repairs.
• Specify the frequency and timing of inspections and how tenants will be notified.

Rental Agreement Disclosures

Landlords should provide renters with disclosure information related to environmental hazards (mold and asbestos). Additionally, under Megan’s Law, landlords are required to provide information about registered sex offenders in the area to prospective tenants. If a rental unit is not individually metered for gas or electricity, landlords need to disclose to tenants the estimated cost of these utilities each month.

Consequences of Not Having These Clauses in Your California Commercial Lease Agreement

Not including these important clauses in a California commercial lease agreement can have various consequences for both you and your tenants:

• Disputes over Security Deposit: Failing to specify the rules regarding security deposits can lead to confusion and disputes over the amount and conditions for withholding or returning the deposit. 
• Payment Issues: Not clarifying accepted forms of payment can create uncertainty about how tenants should pay rent, potentially leading to disputes and payment issues.
• Inconsistencies: Without a clear late rent fee clause, landlords may not have a legal basis for charging late fees. This can lead to inconsistent enforcement of late payment penalties and potential income loss for you.
• Financial Strain: Failure to adhere to local rent increase requirements can also lead to disputes and financial strain for both parties.
• Privacy Issues: Failing to provide proper notice before entering the rental property can infringe on tenant privacy and lead to legal issues, including tenant complaints and potential legal action.

Our Real Estate Attorneys are Determined to Protect Your Rights and Interests

The seasoned real estate attorneys at Garmo & Garmo, LLP can provide you with comprehensive legal support, ensuring that your contracts are airtight, your transactions are secure, and your interests are protected. To request your free, no-obligation consultation, call us at 619-441-2500 or complete this online form.