Today, we’ll put the conclusion right up front – there isn’t any one way to do it. Now, you’ll have to read on to learn what “it” might be. And, if you want to skip all of that, take a quick look at the end of today’s blog posting to get an update on something we wrote about a few weeks ago.
We’ve been thinking about the best way to respond to someone’s initial draft of an agreement. It could be a lease or a loan agreement or a settlement agreement or any other kind of “involved” document. How does one decide whether to do a comprehensive redraft and send it back before even making contact with the preparer? What about interlineating short narrative comments and questions inside that initial draft and flinging it back over the transom? Or, how about the phone call to point out significant points of disagreement? What about preparing a narrative, written response? How do you like the idea of preparing an elaborate matrix with a column showing the challenged provision alongside columns showing each side’s position? Then, there is always the drip, drip, drip approach of cryptic email messages objecting to one point after another without asking for anything specific in their places?
When do you like to call the principals into the action? How much do you consult with your own principal before making your first response? Do you start out with an “all-hands” conference call or do you work to reduce the list of open issues until reaching the intractable ones and then call for that “all-hands” call? Does “all-hands” include the brokers? How about a face to face meeting? Do you like video conferencing?
[Readers: here is a good place for you to pencil in your own favorite approach or ones that you’ve encountered. Ruminations doesn’t want to create an encyclopedia, only to frame the question.]
We’ve gotten so used to frustration that we rarely get frustrated. We just go with the flow when we’re the preparer of the initial draft document. We can and do deal with whatever form of response we get, often happy just to get one promptly (or, as we say to ourselves, “in our lifetime”). That’s not to say that we don’t have a preference, only to say that we can’t make others approach these things the same way we do. Ruminations suggests that all of us in this business consider that same approach – accept that there are a lot of different routes to the same destination.
That doesn’t mean that we don’t have a preference. We do. We think that major “policy” or “philosophical” differences should be raised right away. That can be by a phone call, a “to the point” email message, a narrative message, or whatever. Identify those key issues and communicate your objections clearly. By clearly, we mean by asking for what you want and explaining why it is important. It isn’t very helpful to receive a comment, as we all have, merely saying, “Unacceptable.”
Earlier, we used the word, “frustrated.” There is something that does frustrate us and that is when the person on the other side of the deal has only one approach in her or his tool box. When you are dealing with someone very experienced in the area, you don’t have to do an essay on why you are asking for a particular change. Experienced negotiators and document craftspeople should already know what will come back in the way of a response. Come on now, we all know that a landlord’s representative will want to see an exculpation provision added to a tenant-form lease. Don’t be shocked when someone wants indemnification provisions to be reciprocal. If you are inexperienced, follow President Reagan’s approach: “doveryai no proveryai” (trust, but verify). [Apparently, history informs us the advice came from a Russian saying. But, we digress.]
As we wrote at the very outset, we don’t think that there is a single, appropriate and successful approach to getting the deal done. We think all but the “vague, lazy” response method are perfectly fine so long as we pick the right one for each situation. Yes, Ruminations recognizes that some organizations act as if they have a rigid procedures manual that dictates a single way for the mechanics of getting to a final document. To that, we respond: “Question Authority.” Otherwise, we think that if each of us is to become a better deal maker, we need to increase our skills and by doing so we will improve those skills. We’ve used the toolbox analogy before. Yes, a screwdriver can do a lot of different things. It can be a “go-to” tool. Who hasn’t used the handle of one to drive in a small nail or to chisel out a small groove? Isn’t it better to own a tack hammer or a chisel set? Isn’t it better to acquire a collection of negotiation tools, including ones that are tailored to the task at hand? No, we don’t need gadgets such as a hot dog cooker, but take a look in the toolbox used by your dentist. Could you imagine that there were so many ways to bend the ends of a dental probe? There is a reason for every twist and angle and the most skilled to pick-holders knows which one to reach for first.
We invite, no urge, readers to pipe in with their thoughts. There is a box at the end of this posting just for that purposes. Let’s have a discussion!
On January 17, 2016, we posted a piece with this title: “The Accountants Are Coming; The Accountants Are Coming: New Lease Accounting Standards Are Upon Us.” Well, the second wave of invading accountants arrived this past Thursday. As predicted in our January posting, the Financial Accounting Standards Board [FASB], (at long last), issued an “Accounting Standards Update.” It was its final standards on lease accounting and has the moniker, “Topic 842.”
It will have very little effect on the way lessors (for real property, landlords) do their accounting. Some slight adjustments in income recognition will result, but to describe those changes would take us deep into the weeds. On the other hand, the accounting approach used by lessees (or, as we are wont to call them, “tenants”) will change in important ways. At the behest of the United States Securities and Exchange Commission and others, all calling for greater “transparency” in financial reporting, all serious leases will need to show up on the balance sheet of tenants. And, by serious, we mean those leases running more than a year. [Keep in mind that lease accounting applies to real estate as well as airplanes and other assets.]
Ruminations isn’t going to explain the changes, the reasons behind them, or the effect they might have on organizations. That’s because we already did that that last month when we wrote about the new rules promulgated by the International Accounting Standards Board (IASB), known on the cocktail circuit as IFRS 16, Leases. You can review that posting by clicking: HERE. The main difference is that the FASB standards leave some room for what will be the “old style” operating lease whereas there isn’t a lot of room under the international rules to keep those leases off the balance sheet.
The international standards are pretty firm in that almost all leases will be treated as what was historically called a “capital lease.” The newly issued FASB standards, as expected, have an exception for leases that commence “at or near the end” of the underlying asset’s economic life, generally those that begin in the final 25% of the asset’s economic life. That’s not going to allow very many real property leases to avoid a tenant’s balance sheet.
Though these new rules technically only apply to public companies (a term a little broader than it sounds), and then only for fiscal years beginning after December 15, 2019, be assured that they will affect all but the smallest tenant because lenders and others “of influence” will insist on its use and many of our existing documents already call for “GAAP” accounting to be used.”
Our conclusion about the new FASB rules is easy to write. We’ll just cut and paste from the January posting about IFRS 16, Leases. “Now, that we’re at the end of today’s blog posting, remember that reading about a change in how brain surgery will be taking place next year does not make the reader into a brain surgeon. Let’s leave the accounting to accountants. Our job is to know that the way we “write” and “design “leases” affects the tenant in a way beyond the landlord-tenant relationship and that we will need to learn what changes we need to make in our leases going forward.”
As Dean Martin always implored at the end of his shows, “Keep your cards and letters coming.” That’s what the “comment” link and “Reply” box are for.