Asking For Option Rights – Negotiators Need To Be Credible. Let’s Help Them Out.

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Today, from 30,000 feet down to only 5,000 feet, we’re going to ruminate over purchase and expansion rights. We’re not doing any sample lease provisions.

We know from long experience and from a whole bunch of comments to previous postings that there is the following negotiation philosophy: “We really don’t need it; we’ll give it up just for the asking; we’ll ask for it anyway; and, sometimes we get it.” In most cases, that applies to tenant-form leases that include a right of first refusal to buy the property or to expand into adjacent (and sometime non-adjacent) space. Yes, generic provisions that have nothing to do with the “deal” and weren’t part of the letter of intent, even though quite material. Landlord forms often do the same thing when it comes to tenant relocation provisions. We’re not going to address those relocation provisions today. That’s for down the road.

Before the “flamers” fuel up their comments, please assume that Ruminations knows that purchase and expansion rights can be a legitimate part of a deal. Our skepticism is directed to their inclusion in form leases as if they were “boilerplate.” To us, our skepticism is validated by how frequently tenants collapse on this issue in the first round. That means they were “fishing.”

Why does this matter? After all, isn’t it harmless to throw a whole bunch of requests against the wall to see what sticks? Maybe, but we don’t think so. We think it goes to credibility – the credibility of the parties and their negotiators.

Here’s what we mean, and this is not an “oddball” example. Why would a 2,000 square foot tenant in a 400,000 square foot shopping center even ask for a right of first refusal to buy the entire shopping center if the owner were to get an offer? If your answer is because the owner might not realize its implications, then there is no reason to read on. You would be right.

Why should an owner care? After all, it would still be selling the property for the price it was willing to take, only to a different buyer (its tenant with the option). It cares because: (a) the tenant isn’t likely to buy the property for the tenant’s business, but if it exercised the option at all (likelihood, slim to none), it would be for a “flip”; and (b) rights of first refusal are like throwing ice water on a deal. Prospective buyers don’t like to be stalking horses for others; lenders won’t lend if the property is subject to a purchase right; waiting out the notice period out kills deals; responsible brokers lose interest. And, that’s all assuming that the purchase option right is drafted in a way that allows for transfers that really don’t change the “ownership interests” in the property.

The same is true when it comes to expansion rights. They really put a damper on a landlord’s ability to market empty space or space that will become empty.

None of this is to say that a deal can’t or shouldn’t include a purchase right (outright or by way of some form of option) or an expansion right, only to say that these things have important business consequences and should be in or out of the deal on day one, not slipped into the back of a lease form. Also, none of this is to say that there aren’t ways to balance the legitimate rights of a landlord and its tenant, whether by use of a right of first offer or a right of first negotiation or by the careful use of time limitations or otherwise. Experienced leasecrafters know how to make the “deal” work, but the deal they set out to “work” should be agreed-upon before the craftspeople do their magic.

Please file this with Rumination’s other thoughts on how to make the negotiating process more effective, more efficient, and less combative. Maintaining credibility is important. It engenders trust.


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