5 Red Flags in a Commercial Lease Every Small Business Owner Should Catch

By Anthony Jones, J.D. | The Berhe Law Firm, APC

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Signing a commercial lease is one of the biggest financial commitments a small business owner will make. Unlike a residential lease - where California law provides a robust set of tenant protections - commercial leases are largely governed by freedom of contract. That means what you sign is what you get, and a landlord's standard form lease is almost never written with your interests in mind.

After years of reviewing commercial leases, attorneys have identified the same traps again and again. These are not obscure legal technicalities. They are provisions that routinely cost small businesses thousands of dollars, limit their flexibility, or expose owners to personal financial ruin. Here are five red flags to watch for before you put pen to paper.

1. Personal Guarantees That Follow You Forever

When a small business - typically organized as an LLC or corporation - signs a commercial lease, the landlord's first instinct is to ensure that a real human being is on the hook if that business folds. That is the purpose of a personal guarantee: it obligates an individual, usually the business owner, to personally cover the tenant's obligations if the business entity defaults.

Personal guarantees are common and often unavoidable for newer businesses without an established credit history. What you need to understand, however, is the scope of what you are agreeing to. Under California Civil Code Section 2787, a guaranty is "a promise to answer for the debt, default, or miscarriage of another." Courts interpret guaranty language broadly, and a poorly negotiated guarantee can expose you to years of rent liability even after your business has closed its doors.

Key things to negotiate: a limited guaranty rather than an unlimited one, a "good guy" clause that caps your liability if you provide timely notice of vacating, and a burn-off provision that reduces your personal exposure as you build a track record of on-time rent payments. Never sign a guarantee that covers lease renewals or extensions unless it is specifically negotiated - California courts have held that a continuing guarantee without limiting language can extend to obligations under lease amendments and modifications.

If you are married, be especially careful: landlords sometimes request the co-signature of a spouse, which can expose community property assets to claims arising from your business lease.

2. CAM Charges With No Cap and No Audit Rights

Common Area Maintenance (CAM) charges are how landlords pass the costs of maintaining shared spaces - parking lots, lobbies, landscaping, security, and utilities in common areas - on to tenants. In principle, this is reasonable. In practice, CAM charges are one of the most frequently abused provisions in a commercial lease.

The problem starts with definitions. A landlord's form lease will often define "operating expenses" or "CAM expenses" so broadly that they include capital improvements, management fees calculated as a percentage of rent rather than actual cost, and administrative overhead that has no direct connection to the property. California courts and commercial lease practitioners have flagged this practice, noting that landlords who manage properties themselves sometimes charge arbitrary "industry standard" management fees as CAM even though the lease does not expressly permit it and no third-party management costs are actually incurred.

What to negotiate: a hard CAM cap - typically 3 to 5 percent annual increases - so that charges cannot spike unexpectedly. Insist on a definition of allowable expenses that requires costs to be "actually paid or incurred" and excludes capital expenditures, depreciation, and the landlord's own overhead. Negotiate the right to audit CAM records, typically once per year, within a defined window (often 60 to 90 days after receiving the annual reconciliation statement). Without audit rights, you have no meaningful way to verify whether the charges you are paying are legitimate.

Also watch out for "gross-up" provisions, which allow landlords to inflate CAM expenses to what they would be at full occupancy - even when the property is partially vacant. These clauses can significantly distort your actual share of costs.

3. Exclusive Use Clauses That Are Vague or Unenforceable

If you are opening a coffee shop, a yoga studio, or a specialty retail store, you likely want some assurance that the landlord will not lease the unit next door to a direct competitor. An exclusive use clause is supposed to provide that protection - it restricts the landlord from leasing other space in the same development to another business operating in the same category as yours.

The danger is in vague drafting. A clause that grants you "exclusive rights to sell food and beverages" may seem protective but will be nearly impossible to enforce in a shopping center where a dozen other tenants sell some form of food. On the other hand, a clause narrowly drafted to cover "the retail sale of fresh-brewed coffee and espresso-based drinks as a primary business purpose" gives you something you can actually enforce.

From a tenant's perspective, a well-drafted exclusive use clause should do three things. First, it should clearly define the protected use in specific terms. Second, it should cover not just new leases but also amendments, assignments, and subleases of existing tenants - otherwise a landlord can technically comply with your clause while still allowing a competitor to move in through the back door. Third, it should specify meaningful remedies: rent abatement after a cure period, and the right to terminate the lease if the violation is not corrected.

Without clear remedies, you are left filing a lawsuit to determine what damages you have suffered - an expensive proposition for any small business.

4. Assignment and Subletting Restrictions That Kill Your Exit Options

Businesses change. Owners get sick, retire, or receive acquisition offers. A lease that locks you in with no meaningful ability to transfer your interest can turn what should be an asset into a liability.

Most commercial leases require landlord consent to any assignment of the lease or sublease of the premises. Under California Civil Code Section 1995.260, if a lease requires landlord consent to assignment but is silent on the standard for that consent, the landlord may withhold consent only on commercially reasonable grounds. Section 1995.310 provides tenant remedies when consent is unreasonably withheld. However, many landlord-form leases include language that attempts to override this default and grant the landlord absolute discretion to deny consent - or to impose conditions (like a recapture of profit from a sublease) that make the option practically useless.

Watch for "recapture" provisions that allow the landlord to terminate your lease and deal directly with your prospective assignee rather than allowing you to transfer your interest. This strips you of any premium value your lease may have accumulated. Also look for provisions that require the assignee to meet the same financial standards as a new tenant - which can effectively veto a transfer to a legitimate buyer simply because that buyer is a startup.

At minimum, negotiate for a standard that limits denial of consent to commercially reasonable grounds, a defined response window (typically 30 days), and a carve-out that allows assignment to a related entity or to a buyer of all or substantially all of your business assets without requiring landlord consent.

5. Renewal Terms That Favor the Landlord

Many small business owners sign a lease with a renewal option and assume that "option to renew for five years at market rate" gives them something concrete. In practice, vague renewal provisions can create costly disputes and even result in tenants losing their location entirely due to technical notice failures.

Several issues arise regularly. First, renewal options typically require strict compliance with notice provisions - often 6 to 12 months before the end of the lease term. Miss that window by even a day, and many leases are drafted to extinguish your option entirely, leaving you to negotiate a new lease from scratch or vacate. Second, renewal options that simply reference "market rate" or "fair market value" without specifying a process for determining that value can lead to deadlock. Negotiate a clear appraisal mechanism - mutual selection of an appraiser, or a baseball arbitration process - so that if you and the landlord disagree on market rent, there is a defined path to resolution that does not require litigation.

Third, read whether the renewal option is personal to the original tenant or whether it runs with a valid assignment of the lease. If you sell your business and assign the lease, you want the buyer to inherit the renewal option - otherwise, what you are selling has significantly less value.

Finally, understand the difference between a renewal option (which gives you the right to extend) and a right of first refusal on new lease terms (which only gives you the right to match a third-party offer). The latter is far weaker and provides much less security for your business.

Review Before You Sign

California's commercial leasing market is competitive, and landlords know that many small business owners will sign a standard form lease without negotiating. Do not be one of them. Every provision in a commercial lease is negotiable to some degree, and the time to address these issues is before you sign - not after a dispute arises.

The attorneys at The Berhe Law Firm, APC regularly advise California small business owners on commercial lease review and negotiation. Whether you are entering your first lease or renewing one you have had for years, having a qualified attorney review the document before you commit is one of the most cost-effective investments you can make for your business. Contact our office to schedule a consultation.