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Office Leasing Toolkit (CA)
Practical Law Toolkit w-004-9668 (Approx. 18 pages)
Resources to assist landlords and tenants in understanding and effectively drafting and negotiating office leases and related documents in California. This Toolkit includes links to Practice Notes and commonly used forms, such as leases, letters of intent, guaranties, estoppels, and consents. These resources provide analyses of common office leasing concerns, including tenant rights, landlord remedies, operating expenses, expansion options, assignments, and security deposits.
Commercial tenants typically need office space to house their employees and run their businesses. Leasing space is often an efficient way to meet this need. Tenants usually invest significant time and money in finding the right space and finalizing the lease agreement. Most office leases are long-term commitments, often five years or more, with ongoing obligations and risks. When negotiating leases, tenants should:
- Identify short- and long-term business goals. The clearer the business goals, the more likely the finalized lease agreement will be an effective and useful tool for the tenant and its business vision. For example, if the tenant believes it will encounter growth, it should negotiate for additional space options during the letter of intent and lease negotiations.
- Effectively negotiate the business terms and lease provisions. Lease negotiations generally start with the landlord's lease form. The tenant should understand the issues and lease provisions affecting its ongoing obligations. For example, negotiating the provisions specifying the tenant's obligation to pay its proportionate share of the building's operating expenses may create a more fair and balanced clause that effectively saves the tenant money each lease year.
- Obtain appropriate protections. The tenant should negotiate certain protections to ensure intervening interests do not prematurely terminate the lease. For example, a landlord's lender generally has priority over a tenant's lease and may be able to terminate the lease if it forecloses on the landlord's loan. The tenant should negotiate to obtain a subordination, non-disturbance, and attornment agreement (SNDA) from the landlord's lender to ensure that a landlord's default under its loan and a subsequent foreclosure by the lender would not permit the lender to terminate the lease prematurely.
Commercial landlords own and lease office buildings to earn income and benefit from property value appreciation. When negotiating leases, landlords should seek to:
- Protect the asset. To keep its investment safe, the landlord should include lease provisions that protect the building's physical condition. For example, the landlord should negotiate to approve and control the tenant's construction of any improvements to the office space. In addition, the landlord should include language making the tenant liable for any damage it causes to the space or the building.
- Maintain a stable cash flow. The landlord needs to maximize its income from the building to pay operating expenses, lenders, and investors and earn revenue. The landlord should, therefore, seek to pass all operating costs through to tenants and include extensive rent recovery rights if the tenant defaults under the lease.
- Optimize the ability to finance and sell. The landlord typically obtains financing to purchase the office building and often purchases the building to sell it. To secure financing and attract purchasers, the landlord should negotiate to reduce tenant rent abatement and termination rights and restrict tenant lease transfers.
An office lease's continuing rights and obligations can affect a landlord's and tenant's bottom line. A landlord or tenant planning to enter into an office lease in California should use the general practice tips and negotiating techniques discussed in the resources linked in this Toolkit to better assess and allocate the costs and other risks associated with an office lease.
This Toolkit contains continuously maintained Practice Note Overviews, Practice Notes, Standard Documents, Standard Clauses, Checklists, and State Q&As to help counsel for landlords and tenants in California to:
- Understand the office leasing process (see Office Leasing Overview and Brokerage and Letters of Intent).
- Negotiate favorable lease terms (see Office Lease Forms, Ancillary Lease Documents, Supplemental Lease Clauses, and Supplemental Lease Schedules and Exhibits).
- Create flexibility that suits the parties' business needs (see Lease Assignments and Subleasing and Tenant Options and Additional Rights).
- Protect the landlord or tenant from third-party interests (see Subordination and Estoppel Issues).
- Understand possible remedies, including eviction (see Security Deposits and Guaranties and Defaults and Remedies).
- Manage the ongoing lease relationship (see Lease Termination and Lease Administration).
In addition to the California-specific resources and guidance, this Toolkit also includes links to several jurisdictionally neutral office leasing resources. These resources include forms and discuss useful and relevant issues to landlords and tenants in every state, including California.
Finding office space in California may involve taking a sublease. For a jurisdictionally neutral Toolkit designed to provide general guidance and resources on subleasing, see Assignment and Subleasing Toolkit (National and Select States).
Many office buildings in California are ground leased, and the parties must understand the particular effects of ground leases. For a Toolkit designed to provide general guidance and resources on ground leases in California, see Ground Leasing Toolkit (CA).