Strategies for Cost-Effective Lease Negotiation

In the Press · June 20, 2012

In a lease negotiation, lawyers are always
challenged to balance their desire to be a strong advocate and protect a
client’s interests against the practical realities of devoting the appropriate
amount of resources to a matter. While long-term leases of large spaces with
complicated build-out requirements often require significant time to negotiate
and document, a routine lease of an office suite or typical mall store does not
justify the same level of time, effort, or cost.

In either case, and at all points on the
leasing spectrum, both the client and the attorney should have the shared goal
of making the negotiation as efficient, economical, and painless as possible.
This Alert discusses what clients can do to minimize the cost and time to
complete a routine lease without compromising important interests.

For
Landlord and Tenant: Start With a Comprehensive Letter of Intent (LOI)

The LOI should not bind either party to
complete a transaction, but it is a useful tool to help the parties think
through issues. Lawyers can suggest specific provisions and details, but it is
much more cost-effective for that discussion to occur in connection with the
LOI rather than after fully drafting lease documents. The parties should
discuss at least the following basic terms and include them in the LOI:

  • Basic rent; free rent period, if any
  • Security deposit; whether to use of a Letter
    of Credit as a security deposit
  • Taxes and operating expenses
  • Timing of commencement date
  • Length of lease term
  • Extension rights, including rent during the
    extension periods and the minimum required notice for exercise of the extension
    rights
  • Terms of landlord’s construction obligations,
    if any
  • Tenant allowance, if any, including when and
    how any tenant allowance will be paid
  • Terms of any required guaranty

Other
terms to think about in negotiating a Letter of Intent:

  • Expansion rights
  • Complete or partial termination rights
  • Limitations on right to assign the lease or
    sublet all or a portion of the premises, including whether there is to be
    sharing of any subletting profits
  • Limits on alterations to the premises

For
Landlord: Use a Reasonable Form

If the landlord is in the business of
regularly leasing small office suites and stores to tenants who are represented
by counsel, consider providing a "second draft" first. A
sophisticated retail client asked us to modify its lease form to include in the
first draft most of the points raised by tenants which the client routinely
would agree to when asked. Rather than being concerned about keeping available
throw-away issues to concede as bargaining chips, this client was intent on
signaling to tenants that it was reasonable and trying to complete the lease
with a minimum of fuss, which encouraged the tenants to focus on issues which
had a practical impact on them.

For
Tenant: Pick Your Top Five or Ten Issues

If a tenant limits its comments to its top
five or ten issues, it will have emphasized the importance of those issues and
they are more likely to get the attention and discussion they deserve. Too many
tenants and their counsel push hard for every issue raised by a lease, and the
focus on the most important items gets lost in pages of comments or redlined
revisions. Fewer comments mean shorter telephone negotiations, shorter and
fewer letters and emails, and quicker turnaround of drafts, all of which keep legal
costs in check. Landlords can help by reinforcing this with tenants and even
instructing counsel to refrain from negotiating overreaching lease comments.

For
Tenant: Don’t Spend Money Trying to Change What Can’t or Won’t be Changed

A lease of a small space in a big building
will contain clauses that simply will be punitive or unfair, especially in the
areas of damages after default, holdover rent, and termination rights after a
fire or other casualty. However, tenants should understand that landlords may
have limited ability to modify these clauses, which usually need to be
consistent within the building (except for possibly the largest tenants) and
that many of these clauses have been approved by the landlord’s lender in
connection with its financing.

Tenants also should not spend much time or
money trying to limit landlord’s remedies if there is a lease default.
Landlords are unlikely to be sympathetic or agree to give up rights in the
abstract, but they are much more likely to be realistic and practical when the
facts of a situation are known, such as an impending bankruptcy or some other
tenant problem.

For
Tenant: Don’t Spend Money Sweating the Small Stuff

Some tenants spend a disproportionate amount
of time and money insisting through multiple lease drafts on grace periods for
late fees or whether the tenant will be able to repaint its office suite
without obtaining landlord’s consent. Landlords are busy, too – it is rare for
a landlord to insist on late charges when a tenant is late once and the check
really did get lost, or for the parties to dispute about whether a paint color
is reasonable. In a small lease, tenants should not spend much time and money
negotiating waivers in advance. As in the case of remedies after a default, it
will be easier to deal with facts when they are known. Tenants should focus on
getting notice and grace periods to fix inadvertent mistakes and unforeseen
circumstances without triggering an inadvertent default.

Conclusion

Professionals who routinely deal with leasing
will recognize that these points all represent an ideal scenario. There are
always the problems of inexperienced counsel, clients who want to press every
last issue, and sometimes knotty but legitimate problems to be resolved.
However, if both parties recognize that time literally is money and focus on
reaching a workable lease arrangement, the result is much more likely to be a
usable document and an effective business relationship at a cost both parties
will recognize as fair and reasonable. While anyone with a leasing manual can
grind each possible issue to a conclusion, it takes an experienced practitioner
to know what battles are worth fighting.

If you
would like to learn more about how to effectively negotiate a commercial real
estate lease, or have any commercial real estate question or concern, please
contact Robert M. Schlein, the Chair of Prince Lobel’s Real Estate Practice
Group
and the author of this Alert. You can reach Rob at 617 456 8098 orrschlein@princelobel.com.