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The idea of owning commercial real estate can be appealing for many investors.  A well-run commercial building with reliable, long-term tenants can be very lucrative for the landlord and it is undoubtedly a potential path to lasting wealth.  For those real estate investors considering a purchase, there are some important things to understand about commercial real estate law in Arizona and the non-contractual obligations a landlord has to a commercial tenant.  We put this short guide together to help real estate investors know some of the things to expect when they become a commercial property owner and sign leases with commercial tenants.

Initial Property Disclosures to Tenant

Arizona law says that landlords must make all repairs and do whatever is necessary to put and keep the premises in a fit and habitable condition (See A.R.S. § 33-1324).  However, any custom work or modification is not the responsibility of the landlord and must be detailed in the lease agreement.

Because the Arizona Residential Landlord and Tenant Act parcels out various duties to the landlord and tenant,  a real estate developer should judiciously utilize the services of an experienced real estate law firm in Arizona to make sure any leases signed before the completion of the project are realistic and obtainable.

Tenant Right to Quiet Enjoyment

Arizona landlords are required to provide a tenant with quiet enjoyment of the leased premises.  This means that the tenant cannot be disturbed or prevented in any way from the full use of the leased property. Courts generally read a covenant of quiet enjoyment between the Landlord and Tenant into every rental agreement or tenancy.  It is important to work with an experienced real estate attorney to understand all implications of this implied right for commercial tenants in Arizona.

Landlord Duty to Repair in Arizona

A landlord in Arizona is generally not required to make repairs or improvements to the property that are not expressly stated in the lease agreement. In fact, most leases require the tenant to return the rental property to the landlord in a clean and habitable condition, except for “reasonable wear and tear” at the end of the lease term. However, if the tenant does damage the property, the Landlord can pursue damages against a tenant if those defects or repairs are the result of permanent harm to the real property.  This is generally termed as “waste.”

Ability to Sublease or Assign Commercial Lease in Arizona

An Arizona commercial landlord must understand that unless they expressly forbid a sublease or assignment of the lease, a commercial tenant has the right to sublease or assign the lease to any party (pending certain Arizona requirements).  This can certainly come as a surprise and you might find with an undesired business or tenant occupying the premises if you have not prepared contracts the prohibit it or require landlord approval.

Most landlords would rather have a sublease or assignment than no tenant at all so they might not think of this as an important contractual clause.  However, the simple addition of a clause requiring landlord approval for any sublease or assignment can give you piece of mind and keep the decision in your hands.

Arizona Standards for Material Breach

The State of Arizona has various standards for determining when a breach is “material.”  By distinguishing between “material” and “immaterial” breaches, the law recognizes that some violations of a lease agreement are trivial and should not immediately represent grounds for eviction or legal action against the tenant.

Under the Reinstatement of (Second) Contracts § 241, there are some non-legally binding guidelines to help standardize the process of determining a material breach in a commercial real estate lease:

  • What extent was the injured party deprived of expected benefits?
  • What extent can the injured party be appropriately compensated for being deprived of those expected benefits?
  • To what extent will the party failing to perform suffer forfeiture?
  • What’s the probability the party failing to perform will be able to cure the failure?
  • What extent do the actions of the party failing to perform represent a failure to adhere to standards of good faith and fair dealing?

This is an important reason to utilize an expert in commercial real estate law to review your contracts and any actions you consider a breach before pursuing a claim or confronting a tenant you believe to be in breach of an agreement.  You want to make sure their evidence to support a material breach.  In cases where these standards, it will generally be best to attempt to work out a reasonable settlement or agreement with the tenant instead of pursuing legal action.

Find an Experienced Commercial Real Estate Attorney in Arizona

MacQueen & Gottlieb have significant experience with commercial real estate law in Arizona.  Our attorneys can help you review a potential commercial real estate purchase, draft and review all commercial real estate contracts, assist in the negotiation of lease agreements, resolve lease disputes, and pursue legal action when necessary.  Contact us today at 602-533-2840 to schedule an initial consultation or make an appointment online.

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