Red Flags in Commercial Leases: A Broker’s Legal Checklist

A commercial lease isn’t just a rent and due dates followed by a bunch of boilerplate. Commercial leases contain a lot of language that can make or break a deal for tenants, landlords, and brokers alike. Even experienced brokers can miss critical clauses that create legal headaches down the line. This checklist highlights key red flags to watch for in Texas and California commercial leases, some of which might be applicable to other jurisdictions.

1.         Ambiguous Rent and Escalation Clauses

Ambiguous language on rent increases, operating expenses, or common area maintenance fees (CAMs) can lead to disputes. Texas makes frequent use of NNN or triple net leases. In these arrangements, tenants may be liable for property taxes, insurance, and maintenance. These have to be clearly defined. The same is true for California, where common practice involves stricter rules around disclosure and (to an extent) caps on CAMs.

2.         Tenant Improvement (TI) Allowances

TI allowance refers to the amount the landlord is willing to pay for the property to be modified to suit the tenant’s needs. It might be a lump sum or per-square-foot amount. But vague language creates disputes over the cost of renovations or who owns improvements at lease end.

Commercial brokers must make sure TI responsibilities are explicit and deadlines for completion are clear. Brokers can generally expect higher TI allowances in California, where the cost of construction is generally greater.

3.         Maintenance, Repairs, and Indemnity Obligations

Keep an eye out for leases that shift excessive repair or liability obligations to tenants. As with CAMs generally, keep an eye out for clauses that could expose tenants to liability to third parties or adjacent property owners (i.e., neighbors). Knowing where responsibilities lie protects both your client and you from claims of misrepresentation.

4.         Early Termination and Renewal Clauses

Many leases may contain specific procedures for termination. In such leases, automatic renewals and hidden penalties for early termination can trap tenants. Ensure break clauses, renewal options, and notice requirements are crystal clear. Brokers can advise tenants to negotiate flexibility without jeopardizing the deal.

5.         Use Restrictions and Zoning Compliance

For lease applications, landlords will almost always ask for the intended use. The landlord wants to know whether you’re using it for something they don’t want, or using it for something that violates other leases (e.g., you want to operate a coffee shop, but the landlord has an existing lease with another coffee shop at the same property; the landlord might have agreed not to let to a competitor).

Frequently, there might be municipality imposed restrictions on the property. Restrictions on business operations or failure to comply with municipal codes can make a space unusable. Zoning requirements vary by city (e.g., Houston has exceptionally permissive zoning, while Austin is very strict; in California, Los Angeles as very strict, while San Diego is relatively permissive).

6.         Sublease and Assignment Limitations

Overly restrictive clauses may prevent tenants from subleasing (tenant becomes the sublandlord) or assigning (tenant gives the lease to someone else) the lease. Confirm whether landlord approval is required and under what conditions. This can be a major sticking point for investors or businesses planning growth.

7.         Dispute Resolution, Governing Law, and Venue

Texas leases may include arbitration clauses or choice of law provisions that favor the landlord. Perhaps the landlord prefers arbitration to keep the proceedings private, or because of the perception that the parties have a little more control over the procedures than in court. Perhaps the landlord is based in Texas and wants Texas law to apply, despite the property being in Las Cruces or Oklahoma City or Riverside. And “venue” refers to the location of the court. You might be surprised to find that the landlord filed suit in Denton County when the space is in Rockwall County.

Make sure your clients understand whether disputes must go to arbitration or to court, where that will take place, and which law state governs.

A Note about Attorney Fees

California and Texas both generally follow the American Rule; that is, no matter who wins at trial, each party is responsible for their own attorney fees. Nevertheless, both states have changed this with regard to contracts (like commercial leases). In both states, commercial leases will usually contain an attorney fees clause (attorney fees go to the prevailing party).

In California, if one party tries to write a contract such that only that party gets attorney fees despite losing at trial, California law imposes mutuality into the contract. (Cal. Civ. Code section 1717). There are some ways to play with this. For example, California contracts can (and commercial leases often do) require a party to demand mediation before filing suit. If they don’t, they give up their right to attorney fees; also, if the would-be defendant refuses mediation, they give up their own right to attorney fees.

In Texas, where the contract is silent, statutory law will often create a right to attorney fees in some circumstances (Tex. Civ. Prac. Rem. Code, Chapter 38). For example, if you are suing an individual, corporation, or other entity for breach of contract, Texas law creates a right to attorney fees to the prevailing party. (Tex. Civ. Prac. Rem. Code section 38.015). But be careful: this creates it where the contract is silent! If the contract only gives one side the right to fees, Texas courts will construe that strictly.

Key Takeaways for Brokers

A thorough lease review protects both tenants and brokers from costly surprises. Texas and California leases share similar red flags, but state-specific nuances can create big differences. Providing clients with a concise checklist positions you as a trusted advisor, not just a deal facilitator.

If you’re a broker and have comments, questions, or additions to the list, don’t hesitate to contact us at info@heckmanlawpc.com.