Why this matters: A landlord, tenant, leasing agent or property manager when negotiating rent payments as a percentage of a non-residential tenant’s gross sales uses a Commercial Lease Agreement of the percentage variety to set the terms for a fixed-term tenancy or uses the month-to-month variety to prepare a Commercial Rental Agreement for a periodic tenancy.

Commercial lease agreements

A lease agreement is a contract entered into by a landlord and tenant. Its provisions set out the tenant and landlord responsibilities, namely, the payment of rent obligations, ownership expenses and maintenance of the real estate.

The lease agreement also is a grant, conveying a possessory interest in real estate, called a leasehold estate, simply referred to as a lease. [Calif. Civil Code §761(3)]

The landlord, on entering into a lease agreement and delivering possession of the leased property to the tenant, conveys to the tenant the exclusive right to occupy a parcel of real estate, or space within a parcel, for a fixed period of time, called the term.

The tenant’s right to occupy the real estate during the term of the lease with a right to exclude others is also conditional. To retain possession, the tenant must perform obligations called for in two categories of provisions in the lease agreement:

  • one is the payment of rent and any property operating expenses agreed to by the tenant; and
  • the other is any maintenance of the property agreed to by the tenant.

During the term of the lease, the landlord as the fee owner holds a reversionary interest in the leased parcel or space. On termination of the lease term, the right of possession to the real estate reverts to the landlord.

Related article:

Form-of-the-Week: Commercial Lease Agreement — Form 552 series

The lease agreement forms

An agreement, such as a lease agreement, conveying possession to real estate for a tenancy exceeding one year needs written evidence of the tenancy signed by the landlord before it’s enforceable by the tenant — a statute of frauds requirement. [CC §1624(a)(3)]

Provisions in a lease agreement are separated into three categories of landlord and tenant activities:

  • conveyance of the leasehold interest;
  • money obligations of the tenant for payment of rent and property operating expenses; and
  • responsibility of the tenant and the landlord for care and maintenance of the property. [See RPI Form 552]

Commercial lease agreements exist in many variations. The landlord and tenant choose one based on:

  • whether the property is for single or multi-tenant use;
  • the type of tenancy; and
  • who is responsible for maintenance.

Realty Publications, Inc. (RPI) publishes and maintains gross and net lease agreements tailored to common variations in commercial rental and lease agreements, including:

A landlord and tenant may further customize and modify their lease agreements with different addenda, such as:

To be enforceable, a lease agreement:

  • identifies the location of the leased premises with reasonable certainty;
  • sets forth the term of the tenancy conveyed; and
  • states the rental amount and other sums due, and the time, place and manner of payment. [Levin Saroff (1921) 54 CA 285]

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Percentage lease agreement

Under a commercial percentage lease agreement, a commercial tenant and landlord agree to:

  • a fixed base rent; plus
  • a percentage of the tenant’s gross sales from the leased premises.

The base rent is set by landlord/tenant negotiations, and is either:

  • calculated as a percentage of the estimated gross sales the tenant will likely receive during the first year of operations; or
  • based on current rents paid for comparable premises.

The monthly base rent is adjusted upward on each anniversary of the lease by either:

  • pre-set increments, called graduated rent; or
  • adjustments based on Consumer Price Index (CPI) figures, called adjustable rent.

The total amount of rent the tenant will actually pay monthly, quarterly or annually under a percentage lease is the greater of either the base rent or the percentage rent.

Typical percentage rent rates for satellite tenants in a large shopping complex are 4% or 10% of the tenant’s gross sales. However, the percentages for graduations of sales depend largely on the type of merchandise and services sold by the tenant, the pricing and volume of these sales and the traffic count at the location. Well-branded heavy advertisers, called anchor tenants, pay lesser rates than satellite tenants who surround the large anchor tenants.

A tenant who retails small ticket items at high volume in a high traffic area, such as a kiosk in the center of a mall, will have a percentage rental rate, as high as 20% to 30% of sales.

Conversely, a tenant who retails big ticket items in low volume, such as an antique furniture store, will have a lower percentage rental rate.

The tenant usually pays the additional percentage rate after the rental period has ended. The additional amount of the percentage rent is normally due within 10-to-45 days after the end of the period used to calculate the percentage rent.

Landlords and tenants agree to a monthly, quarterly, semi-annual or annual accounting period for payment of the percentage rent depending on:

  • whether the tenant’s sales tend to be constant or seasonal; and
  • the financial strength of the tenant.

To create a percentage lease, the landlord and tenant enter into a commercial lease agreement — percentage rent. [See RPI Form 552-4]

Month-to-month lease agreement

Under a commercial month-to-month lease agreement, the rental agreement continues on a month-to-month basis.

Either party, on 30-days’ written notice, may terminate the rental agreement. [See RPI Forms 569, 571 and 572]

A month-to-month tenant has no ability to alter the terms of the rental agreement, other than to terminate the tenancy and vacate. [Calif. Civil Code §1946]

A month-to-month lease agreement is a type of periodic tenancy. A periodic tenancy automatically continues for equal, successive periods of time, such as a week or a month. The length of each successive period of time is determined by the interval between scheduled rental payments. A periodic tenancy is automatically renewed until notice by landlord or tenant to terminate the tenancy.

A periodic tenancy is intentionally created by a landlord and tenant entering into a rental agreement, though in non-residential property, they enter into a commercial month-to-month lease agreement. [See RPI Form 552-5]

The contents of a lease agreement

A properly structured commercial lease agreement form has five sections, each fulfilling a separate purpose:

  • identification of the participants and the premises, conveyance of the leasehold and the term of the tenancy;
  • rent provisions setting the amount of rent and identifying other amounts the tenant owes the landlord, and conditions for payment of the amounts;
  • use-maintenance provisions which allocate between the landlord and the tenant the responsibilities for care and maintenance of the leased property;
  • miscellaneous provisions for conditions controlling the transaction; and
  • the signature of the participants.

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Form-of-the-Week: Buyer and Tenant Representation Agreements — Forms 103.1, 103.2, 105.1 and 105.2

Analyzing the commercial percentage lease agreement

A leasing agent, tenant or landlord uses the Commercial Lease Agreement — Percentage Rent published by Realty Publications, Inc. (RPI) when retail space in a project is leased by a tenant for a fixed term. It grants the tenancy and sets the terms for the tenant’s payment of rent in an amount based on a percentage of the tenant’s gross sales. [See RPI Form 552-4]

The Commercial Lease Agreement — Percentage Rent contains:

  • Facts: The landlord’s and tenant’s names, a description of the leased premises, the security deposit and first month’s rent amount and a checklist of addenda. [See RPI Form 552-4 §1]
  • Term of lease: The commencement and expiration date of the lease term, and conditions of the occupancy conveyed. [See RPI Form 552-4 §2]
  • Possession: The date possession is delivered to the tenant and conditions related to possession. [See RPI Form 552-4 §3]
  • Rent: The schedule for payment of rent, the date rent begins to accrue, the monthly base rent amount as either a fixed amount, a graduated rent amount or a CPI adjusted amount, the amount of additional percentage rent, how rent is paid, who it is paid to, the recipient’s address, the tenant’s credit card and bank account info, and when rent is delinquent and the late fee charged. [See RPI Form 552-4 §4]
  • Operating expenses: Utility, service charges and property taxes the tenant and landlord are separately responsible for, and energy consumption reports. [See RPI Form 552-4 §5]
  • Repair and maintenance: The condition of the premises on transfer of possession, the fixtures the tenant maintains and the structure and common area components the landlord maintains. [See RPI Form 552-4 §6]
  • Use of the premises: The tenant’s intended use of the premises, uses not allowed by the tenant on the premises, and whether an inspection by a Certified Access Specialist (CASp) has occurred. [See RPI Form 552-4 §7]
  • Appurtenances: The tenant’s right to ingress and egress and parking spaces available to the tenant. [See RPI Form 552-4 §8]
  • Assignment, subletting and encumbrance: Whether and on what conditions the tenant may assign the lease or sublet any part of the premises, or further encumber the leasehold. [See RPI Form 552-4 §9]
  • Signs and advertising: Tenant signage needs landlord consent, and whether the landlord provides a directory and sign on tenant’s unit paid by the tenant. [See RPI Form 552-4 §10]
  • Tenant improvements/alterations: Tenant alterations of premises require landlord’s consent, tenant will notify landlord for postings of Notices of Nonresponsibility, any increases in the landlord’s property taxes caused by improvements made by the tenant is additional rent and whether tenant improvements may or may not be partially removed on expiration of the lease. [See RPI Form 552-4 §11]
  • Right to enter: Landlord access on 24 hours’ notice. [See RPI Form 552-4 §12]
  • Liability insurance: Tenant to obtain commercial general liability and plate glass insurance coverage, and a waiver of subrogation rights. [See RPI Form 552-4 §13]
  • Fire insurance: Tenant to obtain fire insurance policy for tenant’s personal property and tenant improvements. [See RPI Form 552-4 §14]
  • Hold harmless: Tenant holds landlord harmless for claims due to the tenant, employees or patrons. [See RPI Form 552-4 §15]
  • Destruction: On total or partial destruction of the premises, tenant to repair when caused by the tenant or covered by the tenant’s insurance, and landlord to repair when not covered by the tenant’s insurance and covered by the landlord’s insurance, and no termination of lease agreement on destruction with exceptions. [See RPI Form 552-4 §16]
  • Subordination: Tenant to subordinate their leasehold estate to new financing with specified parameters not likely to jeopardize tenant’s leasehold. [See RPI Form 552-4 §17]
  • Tenant estoppel certificates: Tenant to execute a Tenant Estoppel Certificate verifying the terms of the lease agreement. [See RPI Form 552-4 §18]
  • Eminent domain: On condemnation for public use, the tenant’s recovery is limited to payment by the condemning agency for other than the leasehold interest. [See RPI Form 552-4 §19]
  • Waiver: A waiver of a breach does not constitute a waiver of another breach, and landlord’s acceptance of rent does not waive landlord’s right to enforce a breach. [See RPI Form 552-4 §20]
  • Default remedies: On a tenant breach, landlord may collect future rent after a forfeiture of possession. [See RPI Form 552-4 §21]
  • Tenant broker fees: The landlord to pay tenant broker fees per an addendum. [See RPI Form 552-9; See RPI Form 552-4 §22]
  • Miscellaneous: Attached addenda; tenant’s receipt of the Agency Law Disclosure; the lease agreement is the entire agreement binding on successors; enforced by California law; an attorney fees provision; whether performance of the lease agreement is secured by a trust deed or assured by a Guarantee Agreement; and whether the property is located in a special flood hazard area or an area of potential flooding. [See RPI Form 552-4 §23]
  • Blank: A blank space for writing additional provisions. [See RPI Form 552-4 §24]
  • Signatures: The landlord, landlord’s broker, tenant and tenant’s broker sign and date the agreement.

Related article:

Form-of-the-Week: Commercial Lease Agreements — Net variety — Forms 552-2 and 552-3

Analyzing the month-to-month lease agreement

A leasing agent, tenant or landlord uses the Commercial Lease Agreement — Month-to-Month Tenancy published by RPI when space in a project is rented by a tenant on a month-to-month basis. The form grants the tenancy and sets the terms for the tenant’s payment of rent and the allocation of the cost of utilities, maintenance and operating costs between the landlord and the tenant. [See RPI Form 552-5]

The Commercial Lease Agreement — Month-to-Month Tenancy contains:

  • Facts: The landlord’s and tenant’s names, a description of the leased premises, the security deposit and first month’s rent amount and a checklist of addenda. [See RPI Form 552-5 §1]
  • Term of rental agreement: The commencement and expiration date of the rental term, and conditions of the occupancy conveyed. [See RPI Form 552-5 §2]
  • Possession: The date possession is delivered to the tenant and conditions related to possession. [See RPI Form 552-5 §3]
  • Rent: the monthly rent amount, when rent accrues, how rent is paid, who it is paid to, the recipient’s address, the tenant’s credit card and bank account info, and when rent is delinquent and the late fee charged. [See RPI Form 552-5 §4]
  • Operating expenses: Utility, service charges and property taxes the tenant and landlord are separately responsible for, and energy consumption reports. [See RPI Form 552-5 §5]
  • Repair and maintenance: The condition of the premises on transfer of possession, the fixtures the tenant maintains and the structure and common area components the landlord maintains. [See RPI Form 552-5 §6]
  • Use of the premises: The tenant’s intended use of the premises, uses not allowed by the tenant on the premises, and whether an inspection by a Certified Access Specialist (CASp) has occurred. [See RPI Form 552-5 §7]
  • Appurtenances: The tenant’s right to ingress and egress and parking spaces available to the tenant. [See RPI Form 552-5 §8]
  • Assignment, subletting and encumbrance: Whether and on what conditions the tenant may assign the lease or sublet any part of the premises, or further encumber the leasehold. [See RPI Form 552-5 §9]
  • Signs and advertising: Tenant signage needs landlord consent, and whether the landlord provides a directory and sign on tenant’s unit paid by the tenant. [See RPI Form 552-5 §10]
  • Tenant improvements/alterations: Tenant alterations of premises require landlord’s consent, tenant will notify landlord for postings of Notices of Nonresponsibility, any increases in the landlord’s property taxes caused by improvements made by the tenant is additional rent, and whether tenant improvements may or may not be partially removed on expiration of the lease. [See RPI Form 552-5 §11]
  • Right to enter: Landlord access on 24 hours’ notice. [See RPI Form 552-5 §12]
  • Liability insurance: Tenant to obtain commercial general liability and plate glass insurance coverage, and a waiver of subrogation rights. [See RPI Form 552-5 §13]
  • Fire insurance: Tenant to obtain fire insurance policy for tenant’s personal property and tenant improvements. [See RPI Form 552-5 §14]
  • Hold harmless: Tenant holds landlord harmless for claims due to the tenant, employees or patrons. [See RPI Form 552-5 §15]
  • Destruction: On total or partial destruction of the premises, tenant to repair when caused by the tenant or covered by the tenant’s insurance, and landlord to repair when not covered by the tenant’s insurance and covered by the landlord’s insurance, and no termination of lease agreement on destruction with exceptions. [See RPI Form 552-5 §16]
  • Subordination: Tenant to subordinate their leasehold estate to new financing with specified parameters not likely to jeopardize tenant’s leasehold. [See RPI Form 552-5 §17]
  • Tenant estoppel certificates: Tenant to execute a Tenant Estoppel Certificate verifying the terms of the lease agreement. [See RPI Form 552-5 §18]
  • Eminent domain: On condemnation for public use, the tenant’s recovery is limited to payment by the condemning agency for other than the leasehold interest. [See RPI Form 552-5 §19]
  • Waiver: A waiver of a breach does not constitute a waiver of another breach, and landlord’s acceptance of rent does not waive landlord’s right to enforce a breach. [See RPI Form 552-5 §20]
  • Default remedies: On a tenant breach, landlord may collect future rent after a forfeiture of possession. [See RPI Form 552-5 §21]
  • Tenant broker fees: The landlord to pay tenant broker fees per an addendum. [See RPI Form 552-9; See RPI Form 552-5 §22]
  • Miscellaneous: Attached addenda; tenant’s receipt of the Agency Law Disclosure; the lease agreement is the entire agreement binding on successors; enforced by California law; an attorney fees provision; whether performance of the lease agreement is secured by a trust deed or assured by a Guarantee Agreement; and whether the property is located in a special flood hazard area or an area of potential flooding. [See RPI Form 552-5 §23]
  • Blank: A blank space for writing additional provisions. [See RPI Form 552-5 §24]
  • Signatures: The landlord, landlord’s broker, tenant and tenant’s broker sign and date the agreement.

Related article:

Form-of-the-Week: Commercial lease agreements — Gross variety — 552 and 552-1