Key Contract Provisions For Business Owners To Negotiate In Commercial Leases

What do you do when you receive an invoice and are charged $342,703 more than expected? That is the question Rite Aid had to figure out for its retail lease in Glendale, California—and the answer cost them years of litigation.

Case Summary: Thrifty Payless, Inc. v. The Americana at Brand, LLC

In Thrifty Payless, Inc. v. The Americana at Brand, LLC (2013) 218 Cal.App.4th 1230, Rite Aid alleged that its landlord overcharged $342,703 for its annual share of taxes, insurance, and common area maintenance expenses at the large entertainment, shopping, and residential complex known as The Americana at Brand. Rite Aid believed it should have been responsible for 2.2% of total common area operating expenses. Instead, the landlord charged it more than double at 5.67%.

What caused this outcome? Rite Aid alleged significant discrepancies between the figures the landlord provided in the letter of intent, the landlord’s later estimates, and what was ultimately charged. Rite Aid also argued that the landlord breached a specific lease provision by failing to allocate certain operating expenses to nonretail tenants. The landlord disputed the claims, and both parties litigated for years.

Key Lessons from This Case

• Letters of intent are not leases. The terms that matter are the ones in the signed lease. Vague or inconsistent language in the LOI will not protect you once the lease is executed.
• Operating expense provisions are negotiable—and consequential. How expenses are calculated, allocated, and capped can dramatically affect your costs over the life of a lease.
• Audit rights are not just a formality. Without a clear right to review the landlord’s records and audit operating expenses, you may have no practical way to challenge an overcharge.

What This Means for Business Owners

As a business owner signing a commercial lease, it is not enough to understand the basic terms negotiated in a letter of intent. Every material provision in the lease deserves careful review—because a drastic difference between what you expect and what you owe can tip the scales from profitable to unprofitable.

When it comes to operating expenses alone, there are several questions you should be asking yourself and your broker:

• How much can your landlord increase operating expenses annually?
• How is the landlord calculating and allocating expenses among tenants?
• What recourse do you have if the operating expenses imposed on your business are unfair or unexpectedly high?

The answer to all three questions is the same: they are all negotiable. Whether you get favorable terms depends on your type of business, the type of property, its location, and who you are leasing from.

Key Provisions to Review and Negotiate

Before you sign, consider working through each of the following categories with your real estate broker and attorney. This list covers common material terms, but depending on your business and lease, additional provisions may need to be addressed.

Rent

• Base rent and rent commencement date. Confirm when rent begins—especially if tenant improvements or landlord work will delay your opening.
• Additional rent and operating expenses. Understand what charges beyond base rent you are responsible for, how your share is calculated, and what expense types the landlord can pass through.
• Expense stops and caps. Negotiate a maximum on the operating expenses the landlord can pass onto you.
• Escalation clauses. Review any provisions that allow the landlord to increase rent over time, and negotiate limits where possible.
• Rent-free or reduced rent periods. These may apply during periods of construction, tenant improvements, or when the property is unavailable for your use.
• Audit rights. Secure your right to obtain the landlord’s records and audit operating expenses—as the Rite Aid case illustrates, this can make all the difference.

Lease Term and Extensions

• Initial term and effective date. Understand when your obligations begin, not just when you plan to open for business.
• Options to renew. Negotiate favorable renewal options, including the rent rate and notice requirements, before you sign the initial lease.

Use and Definition of the Premises

• Square footage and common areas. Ensure the premises and common areas are clearly defined—ambiguity here directly affects your share of operating expenses.
• Permitted uses and exclusivity. Confirm that your intended use is permitted, and consider negotiating an exclusivity clause to prevent the landlord from leasing space to your direct competitors.
• Alterations and improvements. Understand what modifications you are allowed to make and whether you can remove improvements when the lease ends.
• Continuous operation obligations. Some leases require you to keep operating your business even if you are running at a loss—know before you sign whether yours does.

Property Condition, Maintenance, and Repairs

• Condition at delivery and return. Document the state of the property when you take possession and when you return it to avoid disputes at the end of the term.
• Repair and maintenance responsibilities. Clarify who is responsible for repairs, replacements, and capital improvements throughout the lease term.

Default, Cure, and Termination

• What constitutes a default. The lease should clearly define what actions—or inactions—by either party constitute a default, and what notice and cure period applies.
• Assignment and sublease rights. If your business circumstances change, you want flexibility to assign the lease or sublease the space without needing unreasonable consent.
• Force majeure. This provision allows parties to excuse or delay obligations due to unforeseen events beyond their control—ensure it is clearly defined.

Damage, Insurance, and Liability

• Insurance requirements. Understand the types and amounts of insurance you are required to carry, and who must be named as additional insureds.
• Indemnification and exculpatory clauses. These provisions determine when you must indemnify the landlord—or when the landlord is shielded from liability. Review them carefully.
• Casualty and termination rights. Negotiate the right to terminate the lease if a casualty event prevents you from operating your business at the premises.
• Waiver of subrogation. This waives an insurer’s right to recover claim payments from the other party—it is a standard provision, but it should be mutual.

Other Important Provisions

• Landlord and tenant improvements. These are typically described in separate exhibits. Read them carefully—they govern what the landlord is obligated to build or deliver before you take possession.
• Merger clause. This provision prevents either party from enforcing agreements not contained in the signed lease. It underscores why everything negotiated must be written into the final document.
• Right of first refusal. Consider negotiating the right to purchase the property if the landlord receives a third-party offer to buy.
• Signage, parking, security deposits, and dispute resolution. These provisions are often treated as minor, but they can have significant practical implications for your day-to-day operations.

Seek Professional Guidance Before You Sign

Remember, while the Rite Aid case provides a cautionary example, every situation is unique. The type of property you are leasing, the nature of your business, and the specific terms in your lease all affect how these provisions will apply to you.

Many business owners don’t realize—until it is too late—that they have missed significant savings or exposed themselves to costly disputes. A seasoned real estate leasing agent and real estate attorney can help you negotiate enforceable terms tailored to your specific needs and avoid the pitfalls that have ensnared others.

If you have questions about a commercial lease you are about to sign—or one you are already in—don’t hesitate to contact our firm. We can help you navigate these complex issues and protect your interests.

Please note that the content provided on this website is for general information only; it is not intended to be and should not be construed as legal advice. Please reach out to Valerie Li Law, A Professional Corporation, to schedule a consultation.