It’s a shame that we’re all in holiday mode because some readers may have missed last week’s posting. If you are one of those readers, click HERE to see what it was all about. And, don’t miss the comments, especially the one from the owner of the business whose entry into the retail market was at the root of our posting. It reinforces the message that you may have the right to do something, but it doesn’t mean you also have the power to do it.
Learning from last week’s lesson about “going long” in a week that leads to a holiday, we’ll just skip a rock along the surface of a topic that has always troubled us – “Why do we pretend we know what we are doing?” Granted, that’s a pretty broad statement/question. So, here’s what triggered it for us today.
Ground leases and space leases are both “leases.” We don’t think that’s enough to empower those with only space lease experience to draft and then negotiate ground leases. In fact, it’s wasteful of the other side’s time and money. Granted, there are features in common, such as there will be rent to be paid and the tenant will get exclusive possession, but that’s not enough. There’s a big difference between a 1,500 square foot tenant who can leave in the middle of the night with nothing left behind, and one who put up a building on leased land. With a tenant of no or little bargaining power, you can play around with taking a security deposit of one to four months’ rent, but to have that discussion with a tenant placing a five million dollar building on a piece of land is just plain foolish. Nonetheless, we see ground leases tendered with a provision for two months’ security deposit, but nothing in the lease to protect against a partially built structure. We’ve seen ground leases tendered with a provision calling for surrender of the premises at the end of the lease’s term in substantially the same condition as when the premises were delivered, fair wear and tear excepted. Does the landlord want the building or not?
If you don’t understand how condemnation (by eminent domain) works, then you’re not going to understand that the tenant has a real stake in the proceeds when it has added all of the value to a piece of vacant land. How can one support an argument that the entire award belongs to the landlord? Imagine that a tall office building or a free standing retail store was completed the day before a taking. Can you then imagine that a tenant, the one who built the structure, isn’t entitled to get its money back?
How about default provisions? If you don’t “do” ground leases, then you probably haven’t cognized that default on failure to pay rent within 3 days after its due date just won’t cut it for a ground lease. That’s because you haven’t absorbed that eviction of a ground tenant is tantamount to a foreclosure. What’s the big deal? There’s five million dollars of security right there on the land, and it isn’t going to disappear overnight. And, what’s the story with “tenant can’t place a mortgage on its lease”? If you’ve only done space leases, you might not understand that tenants borrow money to put up those improvements, just like property owners do.
Why the rant? Fair enough. Everyone who does ground leasing documents had a “first” one. But, why do so many people who are doing their first one have no respect for those who have done many? You don’t have to say “yes” to anything, but how about not saying “no” to everything. How about doing some research about ground leasing. There are books on the subject. There are articles. There are seminar programs. Oh yes, there are those on the other side who are trying to be helpful when they explain why that “good, old, solid, common” lease clause doesn’t belong in a ground lease.
No, today’s remarkably short posting (for Ruminations) does not grow out of anything that happened last week or last month. It is just something that’s been on our mind for a long time and we didn’t know how to say it nicely. So, we’re hiding it at the beginning of New Year’s week, hoping that only our friends will read it and forgive us for our tone. Will it help? Will a reader or two “wake up, step back, chill out,” and listen to experience on the other side of the deal? We hope so. No one has to “buy” the other side’s arguments, but just waiting until the argument has been explained to deliver an attitudinal “no” based on experience with space leasing isn’t very helpful to the naysayer or the experienced lease craftsperson.
Come to think of it, today’s posting might be the basis for an actual New Year’s resolution, and not one written on “touch paper.” We’re going to try to listen to what the other side has to say and not just wait for a pause to say, “No.” If they are right, we’ll have learned something and will have another “tool” or “solution” in our toolbox. If they are wrong, we’ll better understand why we are right because we will have taken the time to listen and then analyze what has been said to us. What’s your New Year’s resolution for professional development?
See you next year!