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Negotiating a Commercial Lease in California: Guaranty, CAM, Options

By Matthew Martinez, Founder, CEO & Managing Broker, Diamond Real Estate Group. California DRE #01869679.

A personal guarantee on a commercial lease makes the business owner personally responsible if the tenant company stops paying rent or breaks the lease. In California the scope of that guaranty is negotiable: it can be capped, can shrink over time, or can end once the tenant leaves on proper notice. The same is true of most other lease terms, because state law treats a commercial lease mainly as a private contract and fills only a few gaps.

This guide walks a small-business tenant through the clauses that usually matter most in the North Bay: the guaranty, the deposit, operating costs and CAM reconciliation, use and exclusives, renewal options, assignment and subletting, and what happens at the end of the term. It cites the Civil Code sections that apply. Read it alongside our overview of gross, modified gross and triple net leases, since the lease structure decides which of these clauses carry the most money.

Start with the letter of intent

Most commercial deals begin with a letter of intent (LOI) that sets out the business terms before anyone drafts a lease. An LOI is usually non-binding on the deal terms, but it frames the negotiation. A point you give up in the LOI is hard to win back in the lease draft.

Define the space and use. Confirm the rentable and usable square footage, the permitted use you need and any zoning or permit approvals your business requires.
Price the total occupancy cost. Add base rent, estimated operating costs, utilities and your build-out budget. Compare offers on that total, not on base rent alone.
Put the hard points in writing. Guaranty limits, tenant improvement money, free rent, renewal options and transfer rights all belong in the LOI.
Ask for the landlord’s documents. Request the last two or three years of operating expense reconciliations, any CASp report and the landlord’s standard lease form.
Send the draft lease to your attorney before you sign or pay a deposit.

Our guide to tenant improvement allowances explains how to tie the build-out request to a contractor’s budget at the LOI stage.

Personal guaranties: full, capped, burn-off and good-guy

Landlords ask for a guaranty because a new or small operating company often has few assets behind it. The guaranty is a separate contract, signed by an owner (and sometimes a spouse), that backs the tenant’s obligations. The common forms differ mainly in how much exposure the guarantor keeps and for how long.

Guaranty type	What the guarantor owes	When it can make sense
Full (unlimited)	All rent and other lease obligations for the whole term and any extensions	Landlord’s opening position; rarely the best a tenant can get
Capped or limited	Up to a fixed dollar amount or a set number of months of rent	Longer terms where the landlord’s main risk is the early years
Burn-off	Full or capped liability that reduces or ends after a period with no default	Tenants who expect to build a payment record quickly
Good-guy	Rent and charges only until the tenant gives agreed notice, pays through the move-out date and returns the space in the required condition	Office and retail tenants whose main fear is being stuck with years of rent after closing the business

A good-guy guaranty lets the landlord recover the space quickly instead of pursuing the owner for the remaining term. The notice period, the condition the space must be left in and any unpaid rent at move-out are the details to negotiate.

Waivers in the guaranty form

Most landlord guaranty forms include a long list of waivers. Civil Code section 2856 lets a guarantor waive the suretyship rights and defenses that Civil Code sections 2787 to 2855 would otherwise give it. A clause that clearly shows an intent to waive works without special wording. In practice, that means the guaranty usually lets the landlord pursue the guarantor without first suing the tenant.

Ways to shrink the guaranty

Offer a larger security deposit or a letter of credit in exchange for a cap or burn-off.
Limit the guaranty to the original term, not renewal periods.
Ask for a release if the lease is assigned to a buyer of the business with comparable financial strength.
Exclude the spouse’s signature where the guarantor can show separate assets that support the obligation.
Tie a burn-off to clear, objective triggers, such as a number of months of on-time rent.

Security deposits and letters of credit

Commercial deposits are governed by Civil Code section 1950.7, not the residential deposit statute. A landlord may apply the deposit only to amounts reasonably needed to cure rent defaults, repair damage the tenant caused, or clean the space at the end of the tenancy, if the deposit was made for those purposes.

The balance generally must be returned no later than 30 days after the landlord gets the space back. Where the landlord’s only claim is unpaid rent, a deposit above one month’s rent has a shorter two-week deadline for the excess. If the building sells, the landlord must transfer the deposit to the new owner and notify the tenant, or return it. Bad-faith retention can bring damages of up to $200 on top of actual damages.

A letter of credit is a bank’s promise to pay the landlord on demand. It frees the landlord from holding cash, but it ties up the tenant’s credit line. Negotiate the conditions for drawing on it and any scheduled reductions.

CAM, operating expenses and the annual reconciliation

In net and modified gross leases, the tenant pays a share of the building’s operating costs, often billed monthly as an estimate and trued up once a year. That reconciliation is where disputes start. The lease decides what counts as an operating cost, how your share is calculated and whether you can check the math.

Clauses to negotiate

Exclusions. Capital replacements (roof, structure, parking lot rebuilds), leasing commissions, the landlord’s financing costs, costs to fix construction defects, and costs paid by insurance or other tenants.
Capital items. If some capital costs are allowed, require them to be amortized over their useful life rather than billed in one year.
Caps. A yearly cap on increases in “controllable” expenses, with taxes, insurance and utilities often left uncapped.
Management fees. A stated percentage, calculated on a defined base.
Gross-up. In a partly vacant building, check how variable costs are adjusted so your share stays fair.
Reconciliation deadline. A date by which the landlord must deliver the year-end statement, with old charges waived if it is late.
Audit rights. The right to review the landlord’s records within a set window, with the landlord paying the audit cost if overcharges exceed an agreed threshold.

Two California rules interact with this clause. A sale of the building can trigger a property tax reassessment under Proposition 13 that flows through to net tenants, so ask for a cap or exclusion on increases caused by a change in ownership. Separately, Civil Code section 1950.9 added documentation rules for some small businesses and nonprofits, starting with leases signed in 2025. Our lease types guide covers both in detail.

Use, exclusives and the CASp statement

Write the permitted use broadly enough to let the business change and to allow a sale of the business. A narrow use clause can block an assignment later. Retail tenants should also ask for an exclusive: a promise that the landlord will not lease other space in the center to a competing use.

Confirm the use is legal before you commit. A restaurant, tasting room or medical practice may need planning, health or fire approval. If approval is uncertain, ask for a permit contingency or a delayed rent start tied to issuance. Our pages on tasting room space and medical office space cover use-specific issues.

CASp disclosure under Civil Code 1938

For commercial leases signed on or after January 1, 2017, Civil Code section 1938 requires the landlord to state in the lease whether a Certified Access Specialist (CASp) has inspected the premises. If there is a CASp report, the tenant gets a copy before signing and must keep it confidential except as needed for agreed repairs. Repairs to correct violations in the report are presumed to be the owner’s responsibility unless the parties agree otherwise. If the report isn’t provided at least 48 hours before signing, the tenant may rescind within 72 hours after signing.

Where there is no inspection certificate, the lease must include a statement that a CASp can inspect the space and that state law does not require one. The landlord may not prohibit the tenant from getting an inspection, and the parties must agree on timing, cost and who pays for repairs. Settle that point before signing. Our CASp and ADA guide explains inspections and repair priorities.

Renewal options and how rent resets

An option to renew is one of the most valuable rights a tenant can hold, because moving a business is expensive. The option clause should answer four questions.

How many options, and how long? For example, one or two extensions of a stated number of years.
When and how to exercise. Most options must be exercised in writing within a window before expiration. Missing it usually ends the right, so diary the dates.
How the new rent is set. A fixed increase is predictable. “Fair market rent” needs a definition: comparable space, term, concessions and whether the tenant’s own improvements count.
What happens if you disagree. Many leases use broker opinions or appraisal, sometimes with a floor or cap on the new rent.

Landlords often make options personal to the original tenant and void if the tenant is in default. Ask that a permitted assignee, such as a buyer of the business, keep the options. Also note that a lease of 35 years or more, counting options, is treated as a change in ownership for property tax purposes, as our lease types guide explains.

Holdover after the lease ends

If you stay after expiration and the landlord accepts rent, Civil Code section 1945 presumes the lease renewed on the same terms. That renewal is limited to one month when rent is paid monthly, and never more than a year. Most commercial leases override this with a holdover clause that sets a higher rent and treats the holdover as month to month. Negotiate the holdover rate and a short grace period if your move-out date is uncertain.

Assignment and subletting (Civil Code 1995.010 and following)

California’s rules on lease transfers are in Civil Code sections 1995.010 to 1995.340. Section 1995.250 lets a lease require the landlord’s consent to a transfer, subject to any express standard or condition the lease states. The lease can say consent may not be unreasonably withheld, or can set express standards or conditions for withholding it.

If the lease requires consent but states no standard, Section 1995.260 implies that consent may not be unreasonably withheld. Whether a refusal was unreasonable is a question of fact, and the tenant carries the burden of proof. The tenant can meet it by showing that, after the tenant asked in writing for the landlord’s reasons, the landlord did not state a reasonable objection in writing within a reasonable time. Section 1995.270 applies that implied standard to transfer restrictions signed on or after September 23, 1983.

Because the statute respects what the lease says, the drafting matters. Points to raise:

Permitted transfers without consent to an affiliate, or to the buyer of substantially all the business’s assets.
Change of control. Whether a sale of company shares or membership interests counts as an assignment.
Recapture. A landlord right to take the space back instead of approving the transfer. Ask for the right to withdraw your request if the landlord elects recapture.
Profit sharing. Whether the landlord takes part of any rent a subtenant pays above your rent, and after which of your costs.
Release. Whether you and your guarantor remain liable after an assignment. Without an express release, the original tenant typically stays on the hook.

A future buyer of your business will read this clause closely, as will any lender. If the property itself later sells, the landlord’s buyer will ask you to sign an estoppel certificate confirming the lease terms.

Repairs, systems and the end of the term

Under many net leases the tenant maintains the HVAC, plumbing and storefront, and sometimes replaces them. Ask for the landlord to deliver building systems in good working order, for a period of landlord responsibility after delivery, and for replacement costs to be shared or amortized near the end of the term. Get an HVAC inspection before signing.

Read the surrender clause too. It says whether you must remove your improvements and restore the space when you leave. Restoration of a restaurant or lab can be costly, so ask the landlord to state at approval which improvements may stay.

Owners comparing leasing against buying can see our guide to owner-user commercial property and the SBA 504 and 7(a) loan comparison. Before committing to any space, our commercial due diligence checklist lists the records to request. Diamond may refer you to partners we work with, such as attorneys, CASp inspectors and contractors; you’re free to choose any provider.

This is general information, not legal advice; talk to a California commercial real estate attorney about your situation.

Questions people ask

Can I get out of a personal guarantee on a commercial lease?

Usually only on the terms the guaranty itself sets, such as a burn-off date, a cap or good-guy notice and surrender. Otherwise you need the landlord’s written release, which is often negotiated when the lease is assigned to a buyer of the business with comparable credit.

What is a good-guy guaranty?

A guaranty that limits the owner’s liability to rent and charges through the date the tenant vacates, as long as the tenant gives the agreed notice, pays through move-out and leaves the space in the condition the lease requires.

How long does a landlord have to return a commercial security deposit in California?

Under Civil Code section 1950.7, generally no later than 30 days after the landlord gets possession back, with a two-week deadline for part of the deposit in some rent-only cases. The landlord may deduct only for rent defaults, tenant-caused damage and cleaning, where the deposit was made for those purposes.

Can a landlord refuse to let me assign my lease?

It depends on the lease. If the lease requires consent but states no standard, Civil Code section 1995.260 implies consent may not be unreasonably withheld. A lease can instead set express standards or conditions, and those generally control.

What is a CAM reconciliation?

The landlord’s year-end statement comparing the operating cost estimates you paid during the year with actual costs. You pay any shortfall or receive a credit. Audit rights, exclusions and a delivery deadline in the lease protect you from errors.

Does the landlord have to tell me whether the space was CASp inspected?

Yes. For leases signed on or after January 1, 2017, Civil Code section 1938 requires the lease to state whether a Certified Access Specialist has inspected the premises, and sets out what happens if a report exists or doesn’t.

Should I use a broker to negotiate a commercial lease?

A tenant representative can gather comparable lease terms, model total occupancy cost and run the letter of intent. Ask how the broker is paid; in many leases the landlord pays the commission, which should be disclosed to you. The lease itself should still be reviewed by your attorney.

Commercial sales and leasing are part of the work Diamond Real Estate Group does in the counties it serves; our pages on Sonoma County commercial property and Napa County commercial property cover local conditions. To talk through a space you are considering, or a renewal coming up, contact us or start from our commercial real estate services page.

Sources & notes

Last reviewed October 2026 by Matthew Martinez.