Investing in commercial real estate in California can yield significant returns, but it also entails a complex matrix of legal risks that differ substantially from residential property transactions. Commercial investments—whether involving office buildings, retail centers, industrial parks, or mixed-use developments—require careful navigation of lease structuring, zoning laws, financing instruments, environmental regulations, and potential liability exposure.
This guide explores the most common legal issues faced by commercial real estate investors in California, with references to statutory authority and governing case law.
1. Title Defects and Due Diligence Failures
A fundamental risk in any commercial acquisition is the existence of undisclosed title defects. These may include:
- Unrecorded easements;
- Boundary encroachments;
- Undischarged liens or deeds of trust;
- Illegal lot line adjustments;
- Mechanics liens under Civil Code § 8400 et seq.
See Civ. Code § 8400
These issues can render title unmarketable or expose the property to litigation. Thorough due diligence includes obtaining and reviewing the preliminary title report, survey, and ALTA policy with extended coverage endorsements. Investors should not rely solely on title company summaries—attorneys can identify and interpret exceptions and encumbrances that could affect valuation or usability.
2. Zoning, Land Use, and Entitlement Conflicts
Commercial properties must conform to local zoning ordinances and land use regulations. Buyers often assume that existing uses are permitted, only to discover that:
- The use is non-conforming under current zoning;
- Conditional use permits (CUPs) are non-transferable or require reapplication;
- Planned development overlays or Specific Plans impose use restrictions;
- Development rights are subject to floor area ratio (FAR) or parking minimums.
Legal due diligence should include a zoning verification letter from the local planning department, review of the municipal code, and, if applicable, investigation into California Environmental Quality Act (CEQA) compliance (Pub. Resources Code § 21000 et seq.).
Where development or redevelopment is contemplated, attorneys should also assess the entitlement path, including the risk of discretionary denials, neighborhood opposition, or mitigation requirements under CEQA.
3. Environmental Liability (CERCLA, DTSC, and Local Ordinances)
Environmental compliance is a critical legal issue in commercial real estate. Under CERCLA (42 U.S.C. § 9601 et seq.), purchasers of contaminated property may be held strictly liable for cleanup costs—even if the contamination predated their ownership.
In California, additional liability may arise under:
- Health & Safety Code § 25300 et seq. (DTSC enforcement);
- Water Code § 13304 (Regional Water Board cleanup orders);
- Local “Brownfield” ordinances and vapor intrusion mitigation requirements.
Commercial buyers must conduct Phase I Environmental Site Assessments (ESA) and, if red flags appear, a Phase II subsurface investigation. Attorneys play a crucial role in negotiating indemnities, allocation of risk, and insurance-backed remediation escrow holdbacks.
4. Commercial Lease Risks and Tenant Disputes
Investors who acquire income-producing commercial property often inherit one or more existing leases. These leases vary widely in form and complexity, and can carry hidden legal traps:
- Triple-net (NNN) lease obligations that shift repair or capital costs to the tenant;
- Percentage rent clauses tied to gross sales;
- CAM reconciliation clauses that are vague or improperly calculated;
- Exclusivity clauses or co-tenancy requirements in retail centers;
- Option to renew or purchase provisions that run with the land.
Lease disputes are governed by both the lease contract and common-law principles. For example, the duty of good faith and fair dealing applies even in commercial leases. See Storek & Storek, Inc. v. Citicorp Real Estate, Inc., 100 Cal. App. 4th 44 (2002) (view opinion).
Investors should obtain a lease abstract, audit financial terms, and ensure that subordination, non-disturbance, and attornment agreements (SNDAs) are in place when financing is involved.
5. Financing Documentation and Personal Guarantees
Most commercial real estate investments involve significant leverage. Investors must navigate complex loan documents, often including:
- Deeds of trust with assignment of rents;
- Recourse carve-outs (a/k/a “bad boy” guarantees);
- Prepayment penalty provisions;
- Cross-default or cross-collateralization clauses.
Lenders often require personal guarantees from entity principals. These guarantees may expose investors to joint and several liability for the entire debt, even where the borrower is an LLC or limited partnership.
An attorney’s review of the loan documents is critical to negotiate carve-out limitations, define liability triggers, and ensure the borrower understands its rights and remedies in case of default.
6. Entity Structure and Co-Investor Disputes
Most commercial investments are held in an entity—typically an LLC or limited partnership—for liability and tax reasons. But these structures can also create internal conflict if:
- The operating agreement is silent on major decisions (e.g., refinancing, sale, capital calls);
- The agreement lacks a dispute resolution clause or buy-sell mechanism;
- One party alleges breach of fiduciary duty or self-dealing;
- A member dies, becomes incapacitated, or seeks withdrawal.
See PacLink Communications Int’l v. Superior Court, 90 Cal. App. 4th 958 (2001) (view opinion), confirming that managing members owe fiduciary duties to other members under Corporations Code § 17704.09.
Well-drafted governance documents are essential to reduce the risk of litigation or operational deadlock. Attorneys should also advise on Section 1031 exchanges, Delaware Statutory Trusts (DSTs), and other structuring tools for tax deferral and investor coordination.
7. ADA Compliance and Premises Liability
The Americans with Disabilities Act (ADA) applies to places of public accommodation, including retail, hospitality, and office properties. Commercial landlords may be sued for:
- Inaccessible entrances, restrooms, or parking areas;
- Lack of compliant signage or path of travel;
- Construction that violates California Building Code Chapter 11B.
Serial ADA litigants in California frequently bring claims under Civil Code § 51 (Unruh Act) and § 54 (Disabled Persons Act), often seeking statutory damages.
See Civ. Code § 51
Landowners must also guard against premises liability claims for injuries caused by unsafe conditions. California applies a general negligence standard for commercial property owners who fail to maintain safe premises. See Alcaraz v. Vece, 14 Cal. 4th 1149 (1997) (view opinion).
Conclusion
Commercial real estate investments in California present lucrative opportunities—but also complex legal challenges that require more than casual review. Investors must contend with zoning compliance, environmental risk, lease analysis, financing terms, and regulatory enforcement, often in high-stakes, long-term commitments. The costs of failing to identify and mitigate these issues can be substantial.
At Guiding Legal Counsel, APC, we offer comprehensive legal support for commercial real estate transactions—from due diligence and contract review to dispute resolution and entity structuring. Whether you’re acquiring your first income-producing property or managing a multi-asset portfolio, our firm provides practical, strategic counsel tailored to your investment goals. Contact us today to schedule a consultation and secure your next investment with confidence.