Let’s talk about commercial tenancies and evicting tenants in a commercial space

We can draw some parallels with the process required to transition out residential tenants, but commercial tenancies are a different creature. 

It’s sad. At Bornstein Law, we don’t have to walk far from our office on Polk Street in San Francisco to see shuttered, graffitied storefronts and other detritus left in the wake of the pandemic. Offices have empty seats and many shops, restaurants and cafes have not been able to survive the exodus of workers who are now working remotely. We are encouraged to see that new businesses have sprouted up and tourism is on the rise, but there have been many casualties.

Commercial landlords have been put in a precarious position but our office can assist.

 

Since commercial tenants are businesses and organizations, they are seen as being savvier and more sophisticated than residential tenants in the eyes of the law.

Thus, commercial property owners are afforded fewer legal protections and rights than those who own residential units.

For example, unlike residential tenants, California commercial lease law permits commercial tenants to negotiate the terms of a lease with a landlord. This is because California commercial lease law is centered on contract principles and the notion of equal bargaining power when renting to commercial tenants. There is a level playing field.

On the other hand, leases for residential tenants must conform to California state laws and leave little opportunity for negotiations.

Unlike residential evictions, owners of commercial properties need not be concerned about “just cause” reasons to evict. Instead, we need to look at which terms of the lease the tenant is in breach of. Predominately, the failure to pay rent accounts for most of the commercial eviction actions we handle at Bornstein Law, but this is a pathway we take with careful thought and only used as a last resort, particularly if the business has established goodwill with the public.

 

What is the value of a commercial tenant and how quickly can a vacancy be filled? 

Generally speaking, it is relatively easy to re-rent a vacant apartment if the unit is priced right and is in good condition. It is not so easy to fill a vacancy in a commercial space.

Prospective tenants willing to move into an empty storefront or office are harder to come by, especially with a glut of inventory. We don’t expect it to get any easier; as the hybridization of office work continues, more and more companies are either moving from core urban areas or downsizing their square footage.

When endeavoring to evict tenants, then, commercial property owners run the risk that the space will languish on the market for months or years on end with no clear path to rental income. Worse yet, the underutilized property may be subject to a vacancy tax.

 

Related CNBC article: As store owners sign more short-term leases, landlords are taking a risky bet on the future of retail

 

In residential rental relationships, we have said that litigation is not a sporting event like a Warriors’ or A’s game when one side wins and the other side loses. It should only be avoided unless absolutely necessary, taking into time, risk, and attorneys’ fees. This is all the more true with commercial tenancies, especially when there is no guarantee that a more suitable tenant can be found.

After a 3-day notice is served and all other options to come to an amicable resolution have been exhausted, the matter can be escalated to court with the assistance of an experienced team of eviction attorneys.

 

The difference between large businesses and the little ones

Some commercial tenants have more legal muscle. We are differentiating between a large restaurant chain, for example, and Joe’s Hole In The Wall Diner which has five employees.

Large, mid-sized businesses and chains generally have more leverage in the negotiation of leases and if something goes astray in the rental relationship, they tend to have a phalanx of attorneys and staff able to address disputes. Oftentimes, when eviction actions are not going in their favor, larger businesses will throw in the towel and just pay off the rent debt.

By comparison, small businesses have less bargaining room in negotiating leases and not as many resources to stave off eviction. Smaller, mom-and-pop businesses, moreover, are more prone to pockets of dysfunction that are not normally encountered by larger businesses in a huge strip mall. For example, sanitation issues or noise complaints by neighboring residents.

The prospect of recovering rent debt from these small businesses can be dismal, especially if they are insolvent.

 

Future-proofing the business of commercial property owners and handling disputes when they arise

Although Bornstein Law is best known for managing rental relationships in residential units, our firm is experienced and exceedingly capable of drafting commercial leases, offering informed guidance when there is friction in the rental relationship, and helping owners power through all of their real estate challenges.