Commercial leases can be lengthy, complicated and full of unfamiliar terms. Often, landlords and or tenants are reluctant to incur the cost required for their attorney to complete a detailed review of the lease because the monthly lease payment is small or they are under a time crunch. The aggregate cost of a lease is often very substantial, however. Through years of experience doing commercial lease work on a daily basis we have discerned the following key tips:
1) Letter of Intent (“LOI”)
Most of the key terms of a lease are negotiated at or prior to this stage. By the time a lease gets to the drafting stage, most of the key points have already been bargained for and leverage on many points has all but evaporated. Landlords and tenants need to be aware that if their attorney is not involved prior to this stage (or an experienced broker) their risk of losing much of the control increases significantly. At a minimum, time should be spent with an attorney working through a detailed LOI so that subsequent lease negotiations get off on the right foot.
Most of the time, parties to an agreement overlook the importance of negotiating security instruments under the lease, i.e. – a security deposit, a letter of credit, or a personal guaranty. In the heat of early negotiations, this may be taken for granted when it should be considered just as important as the price per square foot. Older LOI forms may lack a section for security or limit the discussion to a security deposit. Make sure that the security requirements are clear and that the terms are negotiated in detail at the inception. Asking for it (or asking to remove it) during the lease drafting period is much more difficult than tackling it early.
Keep a lender’s view from 10,000 feet in mind when negotiating the lease terms, beginning at the LOI stage. Certain terms within leases, especially long term leases, can impact the value of the property substantially by reducing the appeal of the otherwise credit worthy tenant. It is important to keep this in mind as the value of the property is largely dictated by its appeal to lenders for financing purposes. A long term lease with clauses most lenders find objectionable (self-help, overly broad landlord obligations, equitable remedies for tenants, etc.) may have unintended negative consequences on future marketability. There is no worse scenario than being obligated to return to the tenant, hat in hand, years later to ask for a modification to a term that never should have been included in the lease in the first place – and having to pay for it yourself.
4) Battling for 100% Success on Every Issue Is Seldom Worth It
Most skilled negotiators will rarely go to the mat on every last issue. Instead, they prioritize areas of greatest importance to their in order to build good will through concessions in some areas that lead to more favorable terms in other areas. With commercial leases this is especially true. The landlord-tenant relationship is generally long term, with an eye toward establishing a positive relationship for future renewal. Entering a lease negotiation with the goal to “win” each and every point rarely amounts to a “win” for anyone. Generally, this results in the tenant incurring exponentially greater fees and burned up goodwill between the parties. At renewal, or during a dispute over operating costs a few years later, the retribution for this conduct will leave one rethinking whether they truly “won” at the negotiation table. Concessions are the reality of negotiations; understanding the tenant’s priorities and picking the right battles is the key to a successful, efficient, and effective lease negotiation process.
These are obviously just a few tips to keep in mind and are not intended to be a complete guide to commercial lease review. If you have questions about commercial leases in Washington, we regularly negotiate commercial leases ranging from a few thousand square feet of office space to entire buildings of core mixed use space. We would be happy to assist you.
*This article is intended to inform the reader of general legal principles applicable to the subject area. It is not intended to provide legal advice regarding specific problems or circumstances readers should consult with competent counsel with regard to specific situations.*