Most California commercial leasing transactions use one of the AIR CRE Commercial Leases (“AIR Forms”) or the CAR Commercial Lease form (“CAR Form”). The AIR Forms are very inclusive at 20+ pages, are balanced for the landlord and tenant, but may not be the right choice for every commercial lease. The CAR Form is user friendly at 6 pages, but only covers the basics. The AIR CRE forms have specific leases for office, single, multi-tenant, ground leases and for shopping centers. AIR also offers addendums for arbitration, options to extend, rent adjustments, right of first refusal, etc. The primary difference between the AIR and CAR forms are detailed assignment of responsibility.
Common issues to consider or modify with the leases include the following:
AIR Forms Lease: Condition of the Premises. Paragraph 2.2 of the AIR Forms have a common clause for the landlord’s warranty of the premises at the time of leasing. It states that the existing plumbing, electrical, and heating, ventilation and air conditioning (“HVAC”) systems are in good working order and the structural condition of the building in which the premises is located is free of material defects. However, this landlord warranty is only thirty (30) days, except for the HVAC system, which carries a six (6) month warranty. Any problems following the expiration of the warranty period are tenant’s responsibility to repair. A common modification by interlineation on the form, is to extend the landlord’s warranty for all building systems and/or HVAC for at least one year.
CAR Form Lease: Condition of the Premises. Paragraph 11 simply acknowledges tenant has inspected and all is good except as identified in the lease. CAR is a broker focused organization, so it also provides before the signature page, in a box, a simple statement that the brokers do not guarantee the condition, zoning or provide legal, tax or any; other advice concerning the premises.
AIR Forms Lease: Security Deposit. Paragraph 5 provides that if the base rent increases during the term of the lease, landlord may increase the tenant’s security deposit by the same proportionate amount. This term is fair to the landlord, but some tenants ask to strike that provision. Paragraph 5 also modifies the “default” commercial security deposit law of Civil Code § 1950.7 in favor of the landlord as to how the deposit can be used if the tenant vacates before the expiration of the lease term.
CAR Form Lease: Security Deposit. Paragraph 6 also provides that the deposit increases along with the base rent. The CAR Form may also change the application of Civil Code § 1950.7. Paragraph 6(B)(iv) provides for the deposit to be used to “cover any other unfulfilled obligation of the Tenant.” To me that implies the landlord can keep the deposit to pay for future rent if the tenant breaches and vacates before the end of the lease term. However, the last line of paragraph 6(B) could be read that if only the unpaid rent which was due while the tenant was in possession can be kept by the landlord which is consistent with Civil Code § 1950.7.
AIR Forms Lease: Utility Installations, Trade Fixtures, Tenant Improvements. Paragraph 7.3 of the AIR Forms allow the tenant to make improvements with the landlord’s consent, or without landlord’s consent, but with notice, if is non-structural or not visible from the outside. Tenant brokers may want to strike the “with notice” part.
CAR Form Lease: Alterations. Paragraph 18 simply requires written consent by the landlord before the tenant makes alterations, which consent cannot be unreasonably withheld.
AIR Forms Lease: Ownership, Removal, Surrender of Premises. Paragraph 7.4(b) and (c) allow the landlord to require the tenant to remove its alterations at the end of the lease. However, while the Tenant may have the right to remove its trade fixtures when it vacates, often removing trade fixtures or alterations are an expensive and time consuming hassle. The tenant may want to strike part of the paragraph so that it can just leave its tenant improvements or trade fixtures when it vacates.
CAR Form Lease: Tenant’s Obligations Upon Vacating. Paragraph 24 requires the premises to be cleared of the tenant’s personal property and “deliver Premises to Landlord in the same condition as referenced in paragraph 11.” All improvements revert to the landlord, but the landlord may also require the tenant to remove any improvements. As with the AIR lease, the tenant may want the last sentence stricken as to removal of any improvements and or ownership of installed tenant improvements.
AIR Forms Lease: Partial Damage — Insured Loss. Paragraph 9.2 of the AIR Forms provide that if damage occurs that is insured and the cost to repair is $10,000 or less, the landlord has the option to give the tenant the insurance proceeds and have tenant undertake the repairs. I would strike the phrase about the lessor making the proceeds available on a “reasonable basis” to the lessor shall immediately pay those proceeds. Additionally, this can be changed to have the landlord make the repairs even if the cost is less than $10,000. Further, the tenant may be responsible for any gap between the insurance proceeds received by the landlord and the actual cost of the damage repair. More importantly, the landlord may have a loophole to cancel the lease if only partial damage occurs and there is a gap in the insurance payments due to the “unique nature of the improvements”. The tenant should modify that provision. That portion of 9.2 where it begins “If such funds or assurance are not received, Lessor may nevertheless elect by written notice to Lessee within 10 days thereafter to modify the provision stating “… or (ii) have this Lease terminate 20 days thereafter.”
Paragraph 9.3 also provides the landlord with a way to cancel the lease if the partial damage is uninsured and caused by the tenant.
Particular attention should be given to the AIR Form at paragraphs 9.1, and 9.4. Paragraph 9.1(b) defines total destruction as requiring repairs that cannot reasonably be repaired in 6 months or less from the date of the damage or destruction if the Lessor provides written notice of this intent within 30 days from the date of the damage or destruction as to whether or not the damage is partial or total.
The AIR Forms at paragraph 9.4 adds a line that automatically terminates the lease if there is “Total Destruction” as defined in paragraph 9.1(b). This automatic termination should eliminated, modified or at least require notice from either the landlord or tenant required and the ability for the innocent party to seek damages. Perhaps something along the lines of “if Total Destruction occurs, then either party may provide notice within 30 days of the destruction as to whether or not they intend to terminate this Lease.” Commonly, the “reasonably repaired within 6 months or less” is the litigated issue.
CAR Form Lease: Damage to the Premises. Paragraph 26 provides that if the premises cannot be repaired within 90 days, then either the landlord or tenant can terminate the lease. Compare that to the AIR Forms, at paragraph 9.3, providing only the landlord can terminate the lease if the repairs will take at least six months!
AIR Forms Lease: Real Property Taxes. Paragraph 10 deals with real property taxes that are passed through to the tenant as part of the common area operating expenses. Paragraph 1.6, 4.2 and/or Paragraph 10(a) should be modified to eliminate the tenant’s responsibility to pay increased taxes due to a sale or transfer of ownership of the premises causing a real estate tax increase (re-assessment). Related issues, or other clauses, may include a Landlord Proposition Tax 13 Tax Buyback or Proposition Tax 13 Protection clause.
This clause may be used alleviate the potential tax burden upon the tenant:
“Notwithstanding anything to the contrary, Real Estate Taxes shall not include any increase of Real Estate Taxes and assessments due to any change in ownership including, but not limited to, the sale or any other form of full or partial transfer of title of the Building or any part thereof, or due to the transfer of title of any leases in the Building/Project, or due to any renovation or new construction in the Building or related facilities.”
AIR Forms Lease: Default –Time to Cure. Paragraph 13 of the AIR Forms provide for most breaches to be cured counting “business days” as opposed to calendar days. Paragraph 13.1(e) allows for more than 30 days to cure if the tenant has begun the curing process. This is an example of a tenant friendly AIR Forms lease provision and is logical given the time required by certain commercial repairs.
AIR Forms Lease: Jury Trial Waiver. Paragraph 48 waives rights to jury trial. Such a provision is void as against public policy and is unenforceable. See Code of Civil Procedure § 631 and Grafton Partners L.P vs. Superior Court (2005) 36 Cal.4th 944. Waiver of jury requires a signed arbitration agreement.
AIR Forms Lease: Arbitration Clause. Paragraph 49 requires the parties to check and attach a separate arbitration addendum. The parties and brokers can also choose to all be bound to arbitration.
AIR Forms Lease: ADA Accessibility. AIR Forms Paragraph 50 or 51 require notification if the premises have or have not been inspected by a Certified Access Specialist (“CASp”) and states in subsection (b) the landlord does not warranty that the premises are ADA compliant and any ADA modifications required by the tenant’s use are the sole responsibility of tenant.
The tenant should never agree to make anything other than its own non-structural tenant improvements ADA compliant. For those unfamiliar with basic ADA requirements check this out https://www.adachecklist.org/doc/fullchecklist/ada-checklist.pdf
CAR Form Lease: ADA Requirements. Paragraph 19 places responsibility for any “alterations required by Law as a result of Tenant’s use shall be Tenant’s responsibility.” That is fair. However, the landlord also has some responsibility for required government alterations. The last line of Paragraph 19 provides that “Landlord shall be responsible for any other alterations required by law.” I believe that would include ADA improvements to the building to be the obligation of the landlord.
The CAR Form Lease at paragraph 34 is a little sneaky. It omits the ADA phrase which would highlight the issue, rather, it states that the property has or has not been CASp inspected with checked boxes. However, CAR provides an optional ADA Notice form called the Commercial Lease Construction Accessibility Addendum that should be attached providing similar information as the AIR Forms paragraphs 50/51. This addendum should be used as it clearly satisfies the Lessor’s disclosure requirements.
CAR Form Lease Anti-Fraud Provision. Paragraph 33 is unique because it provides that if the tenant lied on its application, then at any time, the landlord can “cancel this agreement”! My feeling is a court will not permit a forfeiture or eviction based upon that type of fraud, but it provides a negotiation point.
AIR Forms exclude many matters from arbitration. While the AIR Forms Arbitration Addendum allow the parties (and their brokers) to choose to arbitrate any disputes, the AIR arbitration clause excludes more than it includes! For example, it excludes torts, bad faith, punitive damage actions, unlawful detainer and small claims actions. It even excludes disputes about “options” to extend the lease (paragraph 39 of the leases). The AIR Forms arbitration addendum significantly differs from paragraph 22 of its AIR Forms Commercial Purchase and Sale Agreement. I prefer the AIR Addendum and suggest adding that the arbitrator follow Code of Civil Procedure § 1280, et seq. Take care reading the AIR Forms arbitration addendum provides as to exclusions to make sure you are comfortable with a limited arbitration clause. E.g., a limited arbitration clause may benefit a tenant who wants to sue a landlord.
CAR Form Lease uniquely requires mandatory mediation. CAR at Paragraph 35A requires mediation even if the arbitration clause is not signed but also has many exceptions to mediation before filing a lawsuit. You may want to enlarge which disputes require early mediation. The penalty for not mediating is severe, the party refusing to mediate may lose its right to recover attorney fees even if ultimately prevailing in the dispute.
CAR Form also has many arbitration (and mediation) exceptions. Paragraph 35. B of the CAR Form carves out exceptions to arbitration. These include foreclosures, unlawful detainer actions, bodily injury, wrongful death and latent defect lawsuits. However, a lis pendens or writ of attachment can also be filed as part of a Superior Court action without invoking the no mediation attorney fee penalty.
Which form should I use?
Both sets of forms work for almost every leasing situation and modified as needed. For example, neither provide for payment of Key money to avoid the consequences of Civil Code § 1950.8(b) The AIR and CAR forms should handle 95% of your real estate transactional needs. Both AIR CRE and CAR offer excellent courses and guidance as to how to use their forms.