Ten Tips for Upgrading the Air Commercial Real Estate Lease Form
| Jurisdiction | California,United States |
| Author | Jo Ann Woodsum |
| Publication year | 2021 |
| Citation | Vol. 39 No. 3 |
Jo Ann Woodsum1
Jo Ann Woodsum is a solo practitioner specializing in commercial leasing. Her clients range from high tech office tenants to large institutional landlords to small business owners. She frequently presents on commercial real estate leasing topics and is a contributing author to CEB's Office and Retail Leasing handbooks. She founded the Women in Leasing Law series of symposia which is in its seventh year. She recently qualified as a solicitor in England and Wales.
The AIR lease forms have frustrated commercial leasing attorneys for decades in California. Whether representing landlords or tenants, there are many aspects of the AIR lease forms, which contain a multitude of non-market and eccentric terms, that need to be modified to prove more effective and more consistent with commercial leasing practice in California.2
Using the AIR lease forms present several challenges, including the requirement to use the AIR CRE software.3 This is a proprietary software and the parties ultimately end up signing a cumulative redline of the lease.4 The theory behind this is that if the parties are very familiar with the form, then after signing, it will be easy to quickly determine the changes to the form lease made for a particular lease transaction. However, in our experience, the businesspeople are almost never familiar with the forms and few attorneys are comfortable with them either. Yet commercial real estate brokers continue to promote these forms as the "easy" way to complete a transaction, although this is rarely the case.
The purpose of this article is to highlight ten areas of the AIR form lease that should be modified to be consistent with California commercial leasing practice. With these changes, the forms will be closer to fulfilling their promise of being a "form lease" of value to commercial leasing professionals.5
There are a variety of AIR lease forms available depending on the economics of a particular deal, e.g., gross, net, single tenant or multi-tenant.6 There are roughly three categories of leases based on the property type: industrial, office, and retail.7 For the purpose of this article referring to the Standard Multi-Tenant Office Lease - Net (hereinafter referred to as the "AIR Form Lease") will be referenced, but the majority of these provisions appear in most of the AIR lease forms that are published.8
A. Rent Increase for Various Defaults: Several provisions in the AIR Form Lease grant the landlord the unilateral right to increase the base rent by 10% upon the occurrence of a tenant breach. For example, section 6.4 of the AIR Form Lease provides that if the tenant fails to allow the landlord to inspect the premises in connection with hazardous materials, then "Base Rent shall be automatically increased, without any requirement for notice to Lessee, by an amount equal to 10% of the then existing Base Rent or $100, whichever is greater for the remainder of the Lease." This type of automatic increase also applies if: (i) Tenant fails to timely deliver an estoppel certificate (section 16(b)), (ii) Tenant fails to maintain the insurance coverage required by the lease (section 8.9), or (iii) if Tenant assigns the lease in violation of the assignment provision (section 12.1(d)).
Not only are these concepts more appropriately handled in the default provision, but they are also unique to the AIR Form Lease and are not used in even the most aggressive California landlord lease forms. This creates a more arduous negotiation process, as all tenants will want to strike these terms and some landlords will insist on including the provision simply because it happens to appear in the AIR Form Lease. For this reason, a tenant attempting to delete this language may have a difficult time prevailing. This presents an unfair advantage to landlords as this provision is not commercially reasonable and is never used outside of the AIR Form Lease universe.
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B. Increases in Security Deposit. Section 5 of the AIR Form Lease provides for an automatic increase in the amount of the security deposit following any increase in the base rent: "If the Base Rent increases during the term of this Lease, Lessee shall, upon written request from Lessor, deposit additional monies with Lessor so that the total amount of the Security Deposit shall at all times bear the same proportion to the increased Base Rent as the initial Security Deposit bore to the initial Base Rent." The amount of the security deposit is typically negotiated at the letter of intent stage. It is unlikely that the parties were aware of this language in the AIR Form Lease because if they had been, they would have dealt with it at the letter of intent stage. This language should be deleted from the AIR Form Lease.9
The AIR Form Leases were created by the American Industrial Real Estate Association (the "AIREA"). The AIREA is an organization focused primarily on commercial real estate brokers, and so it should not be surprising that the AIR Form Lease includes many provisions whose sole purpose is to protect the brokers.10 Crucially, the AIR Form Lease includes the brokers as parties to the lease. There are a number of problems with this concept.
First, brokers should not be parties to the lease nor should brokers be third party beneficiaries of the lease. Typically, the landlord has agreed to pay commissions to the landlord's broker and the tenant's broker. Under California law, such an agreement should be memorialized in writing. If the broker has a dispute with the landlord over payment of commission, then under the AIR Form Lease, the broker could sue to enforce the terms of the commission agreement as set forth in the AIR Form Lease, which means the tenant could be dragged into the dispute. The more prudent practice would be for the brokers and the landlord to enter into a separate written agreement to provide for the payment of broker commissions.
Ronald Rossi, a commercial leasing attorney, points out that "tenants and landlords can also end up in court if the broker or agent handling the transaction breaches a duty or makes a mistake while assisting the tenant/landlord in negotiating the lease." 11 In particular, he notes that section 25(b) of the AIR Form Lease includes an artificial statute of limitations of one year. In addition, a party's damages against a broker are limited to the amount of the broker commission paid to the broker.12 These issues are more appropriately handled in a separate commission agreement between landlord and the brokers.
To address these problematic provisions, the following changes should be made to the AIR Form Lease: (i) section 1.10(b) should be revised to provide that brokerage commissions be paid to brokers pursuant to a separate written agreement, (ii) references to brokers should be deleted from section 31 (Attorneys' Fees), (iii) the last sentence of section 22 should be deleted, (iv) sections 15.1, 15.2, and 25 should be deleted in their entirety, and (v) the signature blocks for the brokers should be deleted.
One of the more egregious oversights in the AIR Form Lease from the landlord's point of view is the lack of statutory waivers.13 It is common practice in California commercial leases to provide for the waiver of various statutes. The idea is that sophisticated parties to a commercial lease can create their own rubric for determining how to deal with security deposits, repairs, and casualty and condemnation events rather than relying on outdated statutes.14
A. Security Deposit: California courts have upheld the validity of a tenant waiver of the benefits of California Civil Code section 1950.7(c) in commercial leases.15 The following language should be added to section 5 of the AIR Form Lease: "Lessee hereby waives the protections of Section 1950.7(c) of the California Civil Code, as it may hereafter be amended, or similar laws of like import."16 In addition, the tenant may wish to insert a time period for the return of the security deposit.
B. Repairs: The following language should be added to section 7.2 (which deals with landlord's repair obligations):
To the extent allowed by law, Lessee waives the right to make repairs at Lessor's expense under Sections 1941 and 1942 of the California Civil Code, and the right to terminate the Lease under Section 1932(1) of the California Civil Code, and any other laws, statutes or ordinances now or hereafter in effect of like import.
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C. Casualty: The following language should be added to section 9 (which deals with the impact of fire or other casualty damage to the premises):
The provisions of this Lease, including this Section 9, constitute an express agreement between Lessor and Lessee with respect to any and all damage to, or destruction of, all or any part of the Premises, the Building or the Project, and any statute or regulation of the State of California, including, without limitation, Sections 1932(2) and 1933(4) of the California Civil Code, with respect to any rights or obligations concerning damage or destruction in the absence of an express agreement between the parties, and any other statute or regulation, now or hereafter in effect, shall have no application to this Lease or any damage or destruction to all or any part of the Premises, the Building or the Project.
D. Condemnation: The following language should be added to section 14 (which deals with the impact of eminent domain or governmental taking on the premises):
The rights contained in this Section 14 shall be Lessee's sole and exclusive remedy in the event of a taking or condemnation. Lessor and Lessee each waives the provisions of Section 1265.130 and 1265.150 of the California Code of Civil Procedure and the provisions of any successor or other law of like import.
E. Waiver of Forfeiture: Under...
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