Add Two Protections to Commercial Condo Lease

If you’re considering operating a restaurant in a commercial condo space, get the proper protections in your commercial condo lease. Because the space is subject to the governing documents of an association, there are several hoops to jump through, such as getting approval for improvements that typical retail tenants don’t need like gas lines. But the association might’ve decided that if you can’t get permits or permission necessary to operate there, it’ll nonetheless hold you to the lease you signed—despite the fact that you can’t use the space. It could also decide to keep whatever amounts you’ve given it for a security deposit, improvements that you’re paying for, or other costs.

To get out of a lease and recoup your costs in that situation, it’s key to include two protections in your lease. Ask your attorney about including an automatic termination, so that in the event that you can’t get approval from the association or necessary permits or approvals from any other authority, the lease will immediately terminate. And include a provision specifying which exact funds the owner will have to return, and how that amount will be calculated.

In a recent California case, a restaurant tenant faced a situation that dealt with a commercial condo association approval. But the tenant had been savvy when negotiating its lease and had drafted provisions that included an automatic termination clause and spelled out what costs it would be able to recoup if the deal didn’t work out.

In that case, the owner of two commercial condominium units in a shopping center signed a lease with a restaurant tenant. When the homeowners association that governed the condos learned that the tenant had been unable to get certain permits, it refused to allow the restaurant on the leased premises. The lease automatically terminated, but there was a disagreement between the owner and tenant as to the amount of money that the owner was required to refund to the tenant in this event. Because of that, the tenant refused to sign a formal termination agreement, and the owner asserted that as a result, the tenant had become a “tenant at sufferance” that was obligated to continue to pay rent, even though it couldn’t use the space.

The tenant sued the owner, and a trial court and appeals court ruled in favor of the tenant. The appeals court noted that the lease agreement included a specific provision regarding the landlord’s refund obligation regarding expenses: “If permit is not approved at a later date, due to food, grease trap, or gas line not allowed for the location, landlord and tenant will split the cost of architect drawings, health and building permits.” The appeals court also agreed with the trial court that the automatic termination provision in the lease was sufficient to end the tenant’s obligation to pay rent. No additional or “formal” termination agreement was needed [Luyen v. Phuong Pham, August 2016].