Extending a Commercial Lease in California

June 6, 2012

A common feature of a Sacramento commercial lease is the option to extend the lease beyond its initial duration. For the successful California business owner, this is a good option to have, considering the goal of a business is to be alive and profitable for many years.

A commercial lease, however, can differ substantially from a residential lease, especially in the length of the lease period. Owners of commercial real estate are typically more interested than their residential counterparts in lessees who will remain in a retail space for a longer period. It is not uncommon for commercial lease periods to endure for up to 5 or 10 years.

Excited entrepreneurs are quick to rejoice in the stability that a lease period of 5 or 10 years can bring. But, what many business owners fail to consider is what will happen to their lease once the 5 or 10 year period expires.

There is no wonder why an extension provision can be overlooked. After all, a business starter cannot project the state of his or her business that far into the future. However, as discussed in a recent Smart Business article, overlooking a commercial lease extension provision in the present could have disastrous consequences in the future.

Thinking Long-Term

Consider, for example, a family-owned brick oven pizzeria. The business produces quality pizzas, strombolis, calzones, and pastas that the locals have come to love over the course of its five-year existence. The pizzeria uses a host of proprietary family recipes that make it quite distinguishable from other similar businesses in the area. As a result, about three quarters of its sales on a given day are from repeat customers.

Unfortunately, Mario, the business owner, did not carefully review the lease extension provisions when he signed the lease five years ago. The commercial property owner is fine with Mario’s restaurant remaining in his shopping center. However, the property owner is demanding twice as much in rent as before. He informs Mario that if Mario is unwilling to pay twice his previous rent, he is free to look elsewhere for commercial space.

The property owner has considerable leverage over Mario. For starters, the success of Mario’s business is tied to its location, and the fact that most of his revenue is generated by repeat customers in the area. Additionally, Mario’s business is dependent on its authentic brick oven, which would be costly to disassemble and reassemble elsewhere. Mario is left with little choice but to agree to double the original rent, all because Mario was not careful when he reviewed and signed the original lease.

Don’t be Mario. A Sacramento commercial real estate attorney can help your business protect its leasing rights by negotiating a lease extension provision that is both fair and equitable. Your California commercial lawyer will ensure that the extension provision includes neutral methods for determining future rent, fair extension notice deadlines, and impartial dispute resolution procedures. Armed with these protections, you can ensure that your commercial lease does not turn into a ticking time bomb several successful years from now.

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