Negotiating Commercial Ground Leases for California and Texas Landlords and Tenants (Part 2)

Negotiating a commercial ground lease in California or Texas can be a complex endeavor, especially given each state’s complex legal landscapes. In Part One of this two-part series, I discussed the initial negotiation of a non-binding term sheet for the ground lease. My discussion covered key terms to include in the term sheet and red flags in term sheet negotiations from both the prospective tenant’s and prospective landlord’s perspectives.

If the parties agree on the main business terms set forth in a signed term sheet or letter of intent, the focus shifts to legal due diligence and drafting the long-term ground lease.  This Part Two will dive into this new area of focus. At this stage, the tenant works to verify all the assumptions about the property and the landlord works to confirm the tenant’s ability to perform, all before either is locked into decades-long obligations. Typically, until the tenant is satisfied with due diligence, the ground lease will remain in draft form or any signed version remains conditional. In other words, much like a property purchase contract, a ground lease often will not become fully binding until the due diligence period is completed.

For the tenant, the objective of the due diligence phase is to ensure that the land can indeed be used for the intended purpose without any rude surprises. Meanwhile, the landlord’s objective is to anticipate any issues that the tenant may discovers and deciding how to address them, whether proactively or reactively, as well as making sure the tenant is truly capable of following through on the project. During this phase, both sides will also be negotiating the finer legal points of the ground lease document itself, incorporating what was agreed to the term sheet and adding standard lease provisions on such matters as insurance, default remedies, and indemnification.

Here are the key components of the due diligence process before a ground lease is finalized:

Title and Survey Review

The tenant, often through a title company or real estate attorney, will review the land’s title records to uncover any liens, easements, covenants, or other encumbrances that might affect the lease. Ideally, the landlord should provide copies of all important title documents up front: the deed, any recorded plats or surveys, any existing easements or use restrictions, current property tax statements, and information about any outstanding mortgages or liens on the property. Usually, the tenant will obtain a title commitment for a leasehold title insurance policy, which will list recorded exceptions like, “there’s a utility easement along the north boundary”, or “a mineral rights reservation exists from 50 years ago”. The tenant will want to ensure there are no surprises like an old pipeline easement running right through the middle of the buildable area or a covenant that forbids commercial use. If any title issues are discovered, the term sheet/lease typically obligates the landlord to cure them, to the extent possible. Such cures can include paying off a lien, obtaining a release of an old deed restriction, or negotiating a relocation of an easement.

The tenant will also commission a detailed survey, often an ALTA survey in commercial deals, to map out the exact boundaries of the premises, identify any encroachments or easements on the site, and verify access points. This survey will be used to create the legal description attached to the lease. One red flag from the tenant’s perspective is if the title search reveals an encumbrance that materially interferes with the planned use. Examples of such an encumbrance would be a utility easement exactly where the tenant intended to construct its facility, or a use restriction that would prohibit the intended business. The lease should not be signed until such an issue is resolved to the tenant’s satisfaction, whether by the landlord getting it removed or by the tenant altering the site plan. From the landlord’s perspective, a red flag would be if a tenant finds a minor title issue and then uses it to stall or renegotiate the deal. Both parties should act in good faith to resolve real problems quickly and effectively. The lease agreement should spell out how title defects are handled by giving the landlord a set period to fix issues, and if not fixable, giving the tenant a right to terminate.

Zoning, Permitting, and Land Use Approvals

The tenant must confirm that the property’s zoning and land use regulations do not prohibit the intended project, or that they can be changed or exceptions obtained. This means reviewing the local zoning code, zoning maps, and any comprehensive plans or overlays that apply. If, for example, the land is currently zoned for agricultural use, but the tenant needs industrial zoning, the deal might need to be contingent on a successful re-zoning or a special use permit. The term sheet or draft lease usually addresses this by making the lease obligation conditional on the tenant obtaining all necessary government approvals for its project. Due diligence includes researching whether any variances or permits—building permits, environmental permits, conditional use permits, etc.— will be required and gauging the likelihood of obtaining them. In some cases, especially in California, there may also be required environmental impact reviews. For instance, the project may trigger the California Environmental Quality Act (CEQA). Typically, the landlord’s role is to cooperate with these efforts since,  as the landowner, it might need to sign applications or letters of authorization. However, the burden is usually on the tenant to pursue and pay for any zoning or permit changes needed.

A red flag for the tenant is if the current zoning does not permit the planned use and there is strong indication that it will be very hard or impossible to change due to, say, local opposition or a long-shot rezoning. No amount of contract negotiation can fix that. As such, it might be prudent to walk away if the project simply is not permissible. Another red flag is if a landlord or broker made representations that your independent zoning check contradicts. Never rely on verbal assurances and always verify the zoning. For landlords, if a tenant’s project requires a highly uncertain approval—say, a controversial rezoning or a lengthy environmental review—you might be concerned about tying up your land for too long. It is reasonable to put a time limit on how long the tenant has to get their approvals before either party can terminate the deal. Both sides should have a clear understanding of who bears the risk of regulatory outcomes. Typically, if critical approvals are denied despite the tenant’s diligent efforts, the tenant can terminate the lease without penalty and not go forward with construction.

Environmental Due Diligence

Especially if the land is currently unimproved or has an industrial history, the tenant will want to conduct environmental investigations to ensure there are no hidden contamination issues. This usually starts with a Phase I Environmental Site Assessment, whereby a consultant reviews records and does a site walk looking for any signs of hazardous materials or potential contamination like underground tanks, prior uses of the site that handled chemicals, nearby contaminated properties, and so on. If the Phase I report flags potential issues—say, a previous use as a gas station or dry cleaner, or stained soil was observed—then a Phase II Environmental Site Assessment might follow that involves soil and groundwater testing. The term sheet or lease should give the tenant the right to enter the property to perform these tests, often with the tenant giving the landlord prior notice, obtaining prior approval to perform any intrusive testing like drilling or excavating, and restoring any disturbance to the property. Why does all this matter? If serious contamination is found, it can derail the project or at least add significant costs and legal complexities. Typically, the party responsible for pre-existing contamination remains liable for cleanup. Usually that would be the landlord, unless the tenant somehow agreed to assume that liability with conditions, such as just compensation by the landlord. The lease will contain detailed provisions about environmental responsibility. For example, the tenant will agree to comply with environmental laws and be responsible for any pollution it causes during its use, while the landlord often agrees to indemnify the tenant for any claims arising from conditions that pre-date the lease.

If a Phase II finds significant contamination, such as oil in the soil or chemicals in the groundwater above legal limits, the tenant should proceed with great caution unless there is a clear remediation plan and perhaps an agreement that the landlord or some third party it hires will clean it up. Similarly, if the landlord refuses to allow proper environmental investigations, that is a red flag in itself because that refusal might indicate they suspect a problem. In Texas, environmental regulations and cleanup programs exist—the Texas Commission on Environmental Quality  oversees them—but generally, the state’s approach can be more business-friendly than some others. In California, environmental standards are notoriously strict; even a whiff of contamination can trigger regulatory oversight and substantial cleanup obligations. In fact, California law can even hold a property tenant responsible in some cases if they knowingly lease a contaminated site and contribute to it. Both sides need to be comfortable with the allocation of environmental risk. If either party is not comfortable with this, this issue either needs to be resolved or the deal abandoned before the lease is signed. No one wants to be stuck in a long-term lease of a toxic property with disputes over who pays for cleanup.

Site Condition and Other Physical Due Diligence

Beyond title, zoning, and environmental matters, the tenant will likely need to investigate other physical aspects of the property. This might include a geotechnical study to ensure the soil can support the planned construction or to identify any need for soil stabilization, checking whether the site lies in a floodplain, wetland, or habitat for protected species, and evaluating the general topography and drainage. For instance, if the property is in a 100-year floodplain, the project might require elevating structures or obtaining flood insurance, which affects costs. Also, if an endangered species is living on the land, special permits or timing restrictions might apply to development. The tenant may also look into the availability and capacity of utilities. Can the nearest substation provide enough power? Is there sufficient water pressure for fire suppression? And so on. Due diligence ought to include investigating any ongoing or pending development plans affecting the property or adjacent property. Just imagine the implications for the tenant if there are plans for a new highway or utility project  to cut through a corner of the leased land, or that land is about to be annexed by a city or put into a special taxing district.

If the tenant’s investigations uncover a serious issue, the tenant may need to reconsider the viability of the project. A landlord should be forthcoming about any known physical issues. If a landlord seems to be hiding or downplaying a known physical issue, that is a major red flag for the tenant about the landlord’s trustworthiness. Conversely, from the landlord’s perspective, a red flag during due diligence would be a tenant who keeps dragging out the inspection period or raising trivial issues as excuses to delay signing the lease. While thoroughness is good, an overzealous tenant that nitpicks every minor detail could be signaling second thoughts or simply be difficult to deal with. It is important for both sides to communicate and focus on truly material issues during due diligence.

Supplementary Terms in the Lease 

Assuming the due diligence process either does not reveal any deal-breaking issues, or any discovered issues have been successfully resolved, the next step is to finalize and to sign the formal ground lease agreement. This lease will be a comprehensive document, often dozens of pages long, that takes all the business terms from the term sheet and adds extensive legal terms and protections for both sides. Notable things to address in the lease drafting include insurance requirements, default and remedy provisions, casualty and condemnation clauses to address what happens if the property is damaged or taken by eminent domain, and often detailed construction requirements and timelines for the tenant’s project.

Memorandum of Lease

One important procedural step at lease signing is to record a Memorandum of Lease in the county real property records. This is a short document that does not disclose all the rent and terms, but puts anyone searching for the land’s title on notice that there is a lease on the property. (This memorandum often mentions the names of the parties, a general description of the leased land, the lease term, and perhaps rights like renewal or purchase options.) Recording this memorandum protects the tenant’s leasehold interest by preventing the landlord from selling the property to someone who claims they did not know about the lease. In both Texas and California, recording a memorandum of lease is standard practice for long-term ground leases.

Title Insurance

Another item to address at this stage is for the tenant to secure a leasehold title insurance policy to insure the tenant’s leasehold estate just like an owner’s policy would insure a fee simple title. To facilitate the tenant’s policy, the landlord will usually need to provide information or execute documents required by the title company, such as an owner’s affidavit or copies of organizational documents. For the tenant, this insurance is crucial because it protects their interest in the property. For example, if someone later challenges the landlord’s title or an undisclosed encumbrance affects the property, the tenant can make a claim.

Once the lease is signed and any memoranda are recorded with the applicable county clerk, the deal moves into the construction and operation phase and the focus shifts to the long-term landlord-tenant relationship. With the ground lease drafted and due diligence done, both parties should feel confident about moving forward. However, it is worth examining in more detail some red flags that can pop up during the due diligence and pre-lease-signing phase. These are issues that, if unresolved, might justify re-opening negotiations or even walking away before you fully commit.

Red Flags For Tenants

Unresolved Title Defects.  If your title review uncovers a serious problem that the landlord cannot or will not fix, think carefully about proceeding. For example, if there is an old lien on the property, or a neighbor’s easement cuts through your planned building site, and the landlord is unable to clear it, that is a major red flag. Do not accept vague promises like “we’ll sort that out down the road.” Insist that any title defects be cured before the lease becomes binding. If a defect cannot be cured—a neighbor refuses to relocate an easement for example—you should have the right to terminate. Entering into a 30+ year lease with a known title issue is a recipe for future legal headaches.

Zoning or Permit Obstacles.  If the current zoning does not permit your intended use and your attempts to get a zoning change or variance are met with denial or strong resistance from the city or community, you might be facing an impossible battle. Similarly, if a critical permit, whether environmental, traffic, building, or other type, is denied by authorities, that is a show-stopper. The term sheet and lease should allow you to exit in these cases. The worst scenario is to sign a binding lease and then discover you are stuck paying rent on land that you cannot develop as intended. Also, keep an eye on any pending lawsuits or appeals related to your approvals, which are particularly common in California due to environmental challenges. If a permit is tied up in court, you may want to pause until that is resolved.

Discovery of Environmental Contamination.  If the environmental assessments reveal significant contamination in the property’s soil or groundwater,  any cleanup effort can be extremely costly and time-consuming. Even if you as the tenant are not legally responsible for pre-existing pollution, just being on a contaminated site can hinder your project because contractors might need special protocols, lenders might balk, and regulatory agencies could become involved. As such, you should negotiate clearly who will handle and pay for any required cleanup. If the landlord refuses to take responsibility for known pre-existing contamination, you have to evaluate whether it is worth proceeding at all. In some cases, parties work out escrow arrangements or reduced rent to offset remediation costs. However, if no agreement is reached on how to manage a contamination issue, it is safer to not get entangled in a long-term lease with environmental baggage.

Landlord Delay or Lack of Cooperation. Pay attention to the landlord’s behavior during due diligence. If they drag their feet on providing documents, will not sign reasonable applications or affidavits, or seem to be getting cold feet, any such behavior is a red flag. For example, if you need the landlord to sign a permit application or a memorandum of lease and they stall or refuse, ask yourself why. That could indicate that the landlord is not fully committed or is perhaps entertaining a better offer. Similarly, if the landlord is found to have misrepresented something that breach of trust is a warning sign. (For example, if the landlord claims there are no liens on the property, but your title search uncovers a deed of trust.) A successful ground lease requires a cooperative landlord, and if cooperation is lacking now, it likely will not improve later.

Unsatisfactory Lease Terms in the Draft.  Sometimes when the first full draft of the lease is produced, often by the landlord’s attorney, you might see terms that were never discussed in the term sheet and that are quite onerous. For instance, the draft might include a clause allowing the landlord to terminate the lease at-will under certain conditions, or an obligation that the tenant must rebuild any improvements destroyed near the end of the term even if doing so makes little economic sense. If you encounter surprising, one-sided provisions in the draft lease that were not agreed to in the term sheet, treat that as a red flag and negotiate them out. Perhaps those provisions are on account of some the landlord’s attorney inserting some boilerplate that does not fit a ground lease of this nature. If the landlord’s side is inflexible about removing or modifying a highly unfavorable term, you need to reevaluate the deal. Do not assume any term is “standard” if it fundamentally alters the risk allocation or economic balance that was understood at the term sheet stage.

Red Flags for Landlords

Concerning Findings in Tenant’s Due Diligence.  If the tenant’s investigations uncover something problematic about your property that you were unaware of, you have a decision to make. For example, if they find an endangered species on site that will halt development, or discover that half the property is in a floodway, the tenant may justifiably want to walk away. That is a red flag for you too: not only may you lose this deal, but this is unfortunate information you will have to disclose to any future prospects. Be prepared for the possibility that due diligence might kill the deal. Yet, in some cases that is the right outcome because it is better than moving ahead under false pretenses. Also, if an issue can be fixed, such as a title defect or a minor environmental cleanup, a landlord should tackle it proactively. If you are unable or unwilling to address a serious issue the tenant finds, you cannot be surprised if the tenant walks.

Tenant Retrading or Asking for Major Changes Post-Due Diligence.   Beware of the prospective tenant who comes back after weeks of due diligence with a laundry list of changes that significantly alter the deal economics or terms, especially if those changes are not directly tied to a due diligence finding. For example, if after signing the term sheet the tenant suddenly asks for a much lower rent, or wants to push the lease commencement out by a year for no strong reason, they may be retrading the deal. It is one thing if due diligence revealed higher costs and the tenant is seeking some reasonable accommodation that can be part of good-faith negotiations. (For example, due diligence uncovers unexpected soil issues that make construction more expensive.) However, if the tenant’s demands seem opportunistic or unrelated to any actual discovery, that is a red flag. A common example of this is that the tenant got a better offer elsewhere and is now using minor issues as leverage. As a landlord, you should feel confident that the tenant is as committed as you are. If the tenant continually tries to renegotiate key terms or delay the process without clear justification, you might consider setting a firm deadline or even looking for other interested parties if the term sheet allows for that.

Excessive Delays in Finalizing the Lease.  Time is money for both parties. If the target date to sign the lease keeps slipping because the tenant is slow to respond, or they request extension after extension of the due diligence period, be cautious. While some delays can be legitimate, such as waiting on a city council vote for a zoning change, a pattern of delay might indicate the tenant is not fully organized, is having second thoughts, or is struggling with financing. As a landlord, you do not want to have your land tied up indefinitely with no certainty of rent. If 60 days for the tenant’s due diligence turn into 120 days with no clear progress, that is a red flag. You might need to have a frank conversation with the tenant in which you impose a “drop dead” date for signing the lease, or even reserve the right to walk away if the tenant cannot perform. Being flexible is fine, but do not let the process drag on forever at the expense of other opportunities.

Changes in the Tenant’s Circumstances.  Keep alert for any external signals about the tenant’s business health or commitment. For instance, if you hear that the tenant’s company has undergone a major financial setback—perhaps their stock price tanked, or they lost a major investor— during the negotiation period, you should be concerned about their ability to fulfill the lease. Perhaps the specific project for which the land was needed is being downsized or canceled. (If the lease is for an energy project, perhaps they lost a power purchase agreement. If the tenant is a retailer, maybe upper management changed the expansion plans.) These are red flags that the tenant might default or fail to even start the project after signing. Landlords in both Texas and California commonly protect themselves by requiring some form of security in the lease, especially if the tenant entity is newly formed or not extremely creditworthy. The security could be a personal or corporate guaranty, a letter of credit, or a sizable security deposit. If you have not already, and such concerns arise, consider asking for additional security before executing the lease. If the tenant cannot provide reasonable assurances, such as the tenant claiming their parent company will not guarantee the lease and the tenant has limited assets of its own, you may decide it is safer to nix the deal rather than gamble on a tenant who might go under, leaving you with a partially-built project or a legal mess.

Both parties should approach the due diligence phase in the spirit of “trust, but verify.” Surprises can and will pop up, but the goal is to handle them transparently and decide together whether the lease still makes sense. It is far better to address or exit a bad deal before it is finalized than to sign a lease and regret it later. By the end of Phase 2, if all goes well, both landlord and tenant will have confidence that the ground lease is built on solid factual footing and that the risk allocation is fair.

Ground leases are common in both Texas and California, but each state’s legal environment brings some unique wrinkles that parties should consider. If you are negotiating a ground lease in one of these states, or especially if the landlord is in one state and the tenant is in the other, keep the following differences in mind and tailor your lease accordingly:

Property Taxes and “Change of Ownership” Reassessment

California’s famous (infamous?) Proposition 13 limits how much property taxes can increase each year until there is a change in ownership. Importantly, entering into a lease of 35 years or more in California is considered a “change in ownership” for tax purposes, even though is a lease, not a sale. (Cal. Rev. & Tax. Code § 61(c)–(d)) That change in ownership triggers a reassessment of the property’s value. In practical terms, if a California landowner has a very low assessed value, thanks to Prop 13’s caps over years, and they sign a 40-year ground lease, the county tax assessor will likely reset the property’s taxable value to current market levels. That could mean a big jump in property taxes, an expense that most ground leases pass through to the tenant. Moreover, California law triggers another reassessment when such a long lease terminates or if it is transferred with more than 35 years remaining on the term. As a result, California landlords often keep the initial ground-lease term just under 35 years—commonly 34 years 11 months—to avoid triggering an immediate “change-of-ownership” reassessment. When the parties want a longer overall relationship, they sometimes layer on renewal options.  However, those options must not be unilaterally exercisable by the tenant, or they must require either the landlord’s consent or a fresh rent negotiation. Under Proposition 13 and Cal. Rev. & Tax Code § 61(c)–(d), any lessee-controlled option that can push the total tenant-controlled term to 35 years or more is aggregated with the base term and will still trigger reassessment.

By contrast, in Texas, there is no system akin to Prop. 13-type. Instead, Texas property taxes are assessed annually at roughly the market value of the property. While tax rates can be high, there is no artificial benefit to keeping a lease term below a certain length. Therefore, Texas ground lease terms routinely go 40, 50, even 99 years without any special tax-trigger consequences. The key difference between the two states is that,  in California, a very long lease term can bring tax costs way up, while in Texas, taxes will rise or fall each year with the market anyway, lease or no lease. As such, California tenants should be prepared for a potential tax hit if the lease term is 35+ years and to negotiate which party bears that hit, whereas this is not a factor in Texas negotiations.

Lease Term Limits – 99 Years in California

California has a legal limit on the length of certain real estate leases. California Civil Code § 718 prohibits leases of city, town, or village lots for a term that exceeds 99 years. As such, any portion of an urban ground lease that would run past year 99 is void. Recent cases, such as Tufeld Corp. v. Beverly Hills Gateway, L.P., 86 Cal.App.5th 12 (Cal. Ct. App. Dec. 7 2022), confirm that courts will strike down extensions that push an urban lease beyond the 99-year ceiling. When parties want a longer relationship, they must ensure that the total tenant-controlled term—the initial term plus tenant-controlled renewal options—does not exceed 99 years. To be clear, landlord-controlled or mutually-negotiated renewals may be added without violating this statute.

Texas, on the other hand, has no statutory limit on lease length. So, in theory, a Texas ground lease could be 100 years, 150 years, or even “99 years renewable forever.” In practice, long-term ground leases tend to rely on finite terms like 99 years, in part because title companies tend to be wary of extremely long arrangements that look like de facto transfers of ownership. The absence of a limit in Texas provides more flexibility, such that parties might select a 50-year initial term with several 25-year renewals, potentially adding up to more than 99 years,

Community Property and Spousal Signatures; Homestead Rights in Texas

Both California and Texas are community property states, which is relevant if the property is owned by an individual or couple who is married. In California, if a married couple or either spouse owns real estate as community property, or even as joint tenants in many cases, both spouses typically need to sign any lease that exceeds one year. Under California Family Code § 1102, both spouses must sign any lease longer than one year that affects community real property or the family homestead, even if the homestead is the separate property of one spouse. Separate, non-homestead property held in one spouse’s name does not require the other spouse’s signature, though both must sign if they are record co-owners (e.g., joint tenants). In Texas, there is a concept of homestead rights: if the property is considered a family homestead, even if it is just in one spouse’s name, both spouses must sign any lease or conveyance of that homestead interest to make it valid. Additionally, pursuant to Texas community property law, a spouse has a say in transactions involving community assets. In practical terms, this means that, if the land is owned by a married person or a couple, make sure all requisite parties sign the lease. A red flag would be a situation where, say, only one spouse is mentioned but you know the property is community property or could be a homestead. That could lead to a void or voidable lease if the non-signing spouse later objects. So always clarify ownership and marital status of individual owners in both states and obtain spousal consent when needed. If one spouse is not going to be involved in the leasing negotiations, sometimes a quitclaim deed or other arrangement is made beforehand to avoid community property issues.

Mineral Rights and Surface Use

Because Texas has a long tradition of oil, gas, and other mineral production, the mineral estate beneath a parcel is often severed from the surface estate, so the minerals may be owned by someone other than the surface owner. In Texas, mineral rights are dominant over surface rights, which means if an outside party owns the minerals, they typically have the legal right to use the surface as reasonably necessary to extract those minerals, unless they have agreed otherwise. For a ground lease tenant planning to build on the land, this can be a big issue. (Imagine constructing a building only to have a third-party mineral owner show up wanting to drill an oil well through your parking lot!) Therefore, a Texas ground lease should address mineral rights. Ideally, the landlord can represent and warrant that no third party holds any mineral interest and that the landlord owns both the surface and all minerals underneath. If that is not the case, the landlord should secure a surface waiver from any mineral owners, meaning those owners waive their right to use the surface. (They might still be able to extract via directional drilling from adjacent land, but they will not disturb the leased premises.) California also has areas with significant oil and mineral activity, but severed mineral rights are less routine than in Texas. Nonetheless, if you are leasing land in California that has a history of resource extraction, it is wise to ask similar questions and possibly get assurances about surface use.  To recap, know who controls the minerals under your site. In Texas it is a top-of-mind issue, while in California, it is a niche issues that nevertheless should not be ignored if applicable to the property at hand.

Default Remedies and Self-Help Rights

Landlord remedies for default can play out differently in Texas and California due to differences in state law. In Texas, commercial landlords have certain self-help rights subject to Texas Property Code § 93.002 that are legally permissible if spelled out in the lease. For instance, Texas law allows a commercial landlord, under specific conditions and with proper notice, to change the locks on a tenant that is delinquent in rent. This is essentially a peaceful self-help eviction, often with the condition that the landlord must give the tenant a key promptly if they pay the delinquent rent in full. Texas also recognizes contractual landlord’s liens on a tenant’s personal property for unpaid rent. By contrast, California law forbids self-help evictions or seizures in almost all cases and Cal. Civil Code § 789.3 imposes statutory penalties against violators. As such, a landlord must go through the courts via the unlawful detainer process to evict a defaulting tenant and landlords generally do not have the right to seize tenant assets for rent other than through normal legal judgment collection procedures.

So what does the above mean for a ground lease? For a Texas ground lease, the landlord may opt to include a provision that allow the landlord to re-enter and retake the premises quickly if the tenant fails to pay rent or abandons the property, or to remove and store the tenant’s property, all without a court order. Meanwhile, a California ground lease would be written with the understanding that the landlord will have to pursue judicial remedies. Any clause that tries to shortcut that, such as  an automatic termination or lockout, might not be enforceable. Landlords should be aware of these differences so they do not inadvertently violate law. For example, using a Texas-oriented ground lease form for a lease in California could get a landlord in trouble if they attempt a lockout. Tenants should also be mindful of avoiding inadvertent violations: in Texas, they might negotiate for notice and cure periods before any self-help kicks in, whereas in California the law already gives them more protection by requiring a court process. This is a nuanced area where having attorneys adjust the default clauses to the applicable state’s norms is important. The bottom line is that remedies for breach ought to conform to the laws of the applicable state.

Regulatory and Environmental Climate

California and Texas have very different regulatory environments and their respective regulations can subtly influence ground lease negotiations and provisions. Generally, California tends to have more stringent regulations on development and operation, while Texas has a more pro-development regulatory climate with fewer state-specific hurdles beyond the standard federal requirements. For a ground lease, one practical consideration is timelines and contingencies. A ground lease project in California might need a longer runway for approvals and might be conditioned on completing an environmental impact report or surviving a public comment period. The lease might need to address what happens if there are delays due to such processes. For example, does the rent commencement date get delayed if permits are stuck in CEQA review? In Texas, while big projects still require permits and possibly environmental assessments, in most cases, you will not have a state-law equivalent of CEQA or as intensive a public hearing process. Another area is ongoing operational compliance. California has unique laws like greenhouse gas emission rules and recycling mandates that a ground tenant might need to comply with. Sometimes a landlord will incorporate a generic clause in the ground lease requiring the tenant to comply with “all applicable laws,” but tenants should be aware of the cost implications. Both parties should be realistic about regulations applicable to the property when setting deadlines in the lease for the project to be built and the lease to commence.

To summarize, while the core business deal of a ground lease is similar wherever you go—the landlord provides land, while the tenant builds and operates on it while paying long-term rent—the legal landscape in Texas versus California has some important differences. From tax reassessment rules and maximum lease lengths to spousal consent requirements, mineral rights issues, default remedies, and general regulatory climate, each state has its quirks. As such, it is crucial to adapt the ground lease to fit the state law that governs it. Often this means consulting legal counsel knowledgeable in that jurisdiction; a clause that might be boilerplate in a Houston lease could be problematic in Los Angeles, and vice versa. By being aware of these differences, landlords and tenants can avoid unwelcome surprises and ensure their lease will be enforceable and effective under the applicable law.

Negotiating a commercial ground lease is undoubtedly complex, but with the right approach and guidance, you can transform this transaction from a daunting task into a strategic opportunity. Whether you are a landlord looking to generate long-term income from your land, or a tenant aiming to secure a prime location without the massive upfront cost of land acquisition, success lies in carefully navigating the two critical phases I have discussed here and in Part One: getting the term sheet right and conducting thorough due diligence before signing the lease. By clearly outlining the deal in a well-crafted, mostly non-binding term sheet and spotting any red flags early, both parties create a strong foundation of trust and understanding. Then, by verifying every important detail through legal due diligence—from title and zoning to environmental conditions and financing arrangements—you ensure that the final ground lease is built on rock-solid ground. As we highlighted, special care must be taken to address issues like access rights, permissible uses, title encumbrances, and what-if scenarios, such what happens at the end of the lease, or if something goes wrong during the term. Finally, if your project is in Texas or California, knowing the state-specific nuances regarding tax rules, legal limits, procedural requirements, and so on can save you from rude surprises down the road.

Whether you are a would-be landlord or would-be tenant in California or Texas, our law firm and extended network of advisors have extensive experience advising on ground leases across both states. This experience extends to retail shopping center pad sites and industrial facilities to renewable energy projects and oil and gas installations. We understand the business considerations and the legal technicalities to help you ensure that your term sheet will capture your goals accurately and that the final ground lease will protect your interests long-term. We have seen what can go wrong in these deals and know how to structure these deals to proactively avoid pitfalls. If you are contemplating a ground lease in the industrial, retail, energy, or any commercial sector, now is the time to involve seasoned legal counsel. We can guide you step-by-step with aspects of matters I have discussed in this two-part series. We pride ourselves on helping our clients identify the red flags before they become problems, negotiate favorable terms that reflect your needs, and ultimately secure ground lease agreements that are air-tight.

So do not leave a high-stakes, decades-long transaction to chance. Contact our team today for sophisticated, practical guidance through every phase of the ground lease process. With the right legal partner by your side, you can navigate the terrain of ground leases confidently and focus on building success on solid ground.

This publication is provided by Amini & Conant, LLP for educational and informational purposes only and is not intended and should not be construed as legal advice. Should the reader seek further analysis of the subject matter or answers to specific questions about the subject matter, please contact the author at joel@aminiconant.com. This publication is considered advertising under applicable state laws.

 

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