We Never Do That Until We Do, Now Let’s Negotiate

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Why do we do this to each other? Yes, at the end of the day, bargaining power is the dominant factor in determining a negotiated result. But, does that mean reaching a deal is an act pure gamesmanship? We hope not.

We recently attended a panel program, quite a good one, featuring four landlord representatives and four counterparts on the tenant side. For the most part, those working for landlords held singular views. It wasn’t much different on the tenant side but for one factor. The represented landlords were large multi-property companies; the represented tenants included a 10 store chain, a prominent supermarket, a well-known health club chain, and a very large publicly owned franchisor. So, on the tenant-side, there was a broader range of “power.”

The issue that triggered today’s blog posting had to do with a the issue of tenants requesting protection from the big real estate tax hit that could take place if a shopping center in California was sold. Trust us, that can happen, and it can happen big time.

Uniformly, the landlords refused to offer any protection, basically with a statement similar to, “We never give such protection.” Now, we know, first hand, that “never” must mean sometime. We’ve gotten that protection many times despite the uniform front presented by the panel’s landlords. But, that’s for another day. What interested us was one form of an all too common approach to deal making. One of the landlord’s representative stated that his employer, a very, very large property owner, had never sold a property and never would. So, if that were the case, would that landlord agree that a tenant’s lease could include a provision protecting that tenant from a tax increase solely generated by reason of a property sale? As all readers know, the answer was a firm: “No.”

So, if a landlord won’t even give a tenant what the landlord claims to be “ice in the winter,” what does that say about its willingness to agree to something where the landlord actually sees a risk? Also, we think that when a seller tells its customer that the product can be returned within 60 days for any reason at all, it should be willing to state that in writing.

We understand and appreciate why a landlord would want its tenants to absorb 100% of any real property tax increase following a property’s sale. After all, if the buyer would have to absorb all or any part of the post-sale real property taxes, its return on the investment would be lowered and it will not pay as much for the property. Why that is the tenants’ problem, we don’t know. After all, the landlord is really selling “leases” and insisting that a tenant face a (dramatically) higher tax bill is no different from insisting that upon sale of the property, all rents automatically increase by 10%. At the end of the day, the issue gets resolved through the “bargaining power” machine. Basically, never never means never. That’s how bargaining power affects outcomes.

Now, the “we never have done it and never will do it, but we won’t give you the comfort of committing to that in writing” situation isn’t limited to our example. It isn’t limited to landlords. It probably has always been that way and, will probably always be that way. There are people who act differently, but you need two of them in the same transaction. That’s because even if one party tries to act differently, and the other party “didn’t get the memo,” then, in retaliation, the willing party will almost always revert to form.

We think this negotiating approach falls within a general category – jungle behavior, a required survival tactic useful in the jungle, but not where there are concrete sidewalks. It’s a technique of conflict and cooperation where animals “test” each other to find out who is “safe” and who is not. Our society likes to avoid the “survival” comparison, so it softens the behavior’s name by saying we are “feeling out” the other side. How hard can we push? What cards does our counterpart hold? What hot buttons can we find? (Not nicely put), can we intimidate the other side? What’s our proof? While we can’t source to any authority, our experience is that this negotiating approach doesn’t happen between parties who have dealt with each other in the past.

[For an interesting book review, the book being “The Ape in the Corner Office: Understanding the Workplace Beast in All of Us,” click: HERE.]

Now, as unpleasant as this common attempt to intimidate the other side may be, it isn’t the negotiation nadir. We don’t know “how low you can go.” Certainly there are war stories out there and they might compete for that award. But, there are common ones and we nominate those that are aimed at undermining a party’s representative in the eyes of her or his employer or client. Unless you got into the business this morning, you’ve seen the following very common approach.

How many times have you heard: “We aren’t even going to read your lease comments; there are far too many of them?” Or, “Whoever responded to our document (your in-house person, your attorney, etc.) is asking for stupid things and we won’t go further until and unless you withdraw your request for [whatever].” Or, “Your ‘person’ is changing the deal. We’re going to talk to the other [landlords or tenants, as the case may be].” Or, even worse, “Your ‘person’ doesn’t know what she or he is doing.”

There’s nothing wrong with walking away from a deal early in the process, but there is no reason to do so by blaming the other side. It leaves a bad taste and creates a “reputation,” and not a good one. What’s more, in almost all cases, the deals actually take place. “Somehow,” those who “walk away” because there were too many comments or because the comments were “deal changers” or because they were “stupid,” seem to get over that initial reaction and make the deal. They might or might not get “more” than they would have gotten had they not disparaged their counterparts, but they certainly won’t be getting any “favors” in that deal or in the future. We think the expression: “Turnabout is fair play” applies here.

Yes, all of this is goes into what makes one’s bargaining power. But, as we see it, that side of bargaining power is more useful in the jungle “game” and is unnecessary in reaching a quick, yet solid deal. Firmness is appropriate. Credibility, however, may be even more appropriate and useful. If we want to reach a substantially equivalent deal to what the intimidation approach yields, and do so in substantially less time, let’s try agreeing to what we know we will accept and let’s be believable when we come to an issue where “we really won’t go there.” Note that Ruminations didn’t say where “ we never go there” because we think it a rare situation where one side or the other asks for something the other side “never” gives or will “never” give as time goes by.

Call us naïve, but after all of our time in battle, we’ve come to believe that cooperation, not conflict, makes for better and faster deals.

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Comments

  1. Good topic – it’s an even greater issue in Illinois, where the buyer is unable no accurately estimate the post-sale tax increase. It may take up to a year to get the big chill notice! This naturally depresses sales activity & prices. Compare that to the California property tax code which enables fairly reliable, and stable, tax increase projections. Prop 13 is great for property owners but harmful to Cali’s once-great education system.

  2. Smart landlords write a lease that gives them maximum power and leverage and flexibility and profitability and deniability- while offering none of that to the tenant. And they secure those advantages by being very specific about their rights and the tenant’s obligations while at the same time, being very vague about the tenant’s rights and the landlord’s obligations. Everything in a lease is either an asset or a liability. Where one party enjoys the benefit of the asset, the other is burdened by a corresponding liability. And too many landlords want the benefit of the asset without the liability. That one-way mentality is simply unhealthy and short-sighted. An my clients will never sign a one-way lease like that. If the landlord thinks that his asset is important enough to protect in a thorough manner, he should be willing to extend the same consideration to the tenant. Most of my negotiation work is on the side of the small, one-of space user tenants – 1,500 to 3,000 sf (mostly dentists). It is very common for a landlord to present a 30 or 40 page lease. And that’s certainly understandable, because it does make sense to protect its asset. It is also very common for that same landlord, who has no hesitation whatsoever about requiring that the tenant jump through all kinds of hoops, to get his panties in a twist when the tenant has a knowledgeable lease lawyer tear the one-sided document apart in an attempt to level the playing field. A common response is “We’re not going to make all these changes for 1,500 sf tenant.” or “You’re not a big chain and we don’t do any of that for independent tenants.” My response is “OK. Good bye.” That usually gets their attention. My argument is that the little guy, with his entire business tied up in only one location, has a significant risk of complete business failure if his lease isn’t done in a manner that protects him. A multi-unit chain is better able to absorb a hit if a lease is inadequate to protect that one location. So it’s that’s much more important for that small space user to insist upon securing consideration of issues that are of reasonable concern that may have significant effect on his business.

  3. Elliot L. Warm, Esq. says:

    I think that there are times where an attorney comment letter on a proposed lease is so extreme and unworkable that it may make sense to have the client go back to the other party and suggest, politely I hope, that this is not a way to get the deal done. No name calling is needed, but occasionally one has to assert that what another party is seeking is not in fact the deal or is so overblown as to make negotiations too ponderous. There could even be a suggestion that another attorney is needed.

  4. Howard Burns says:

    Two comments.
    First, California’s educational system was not signifcantlly hurt a bit by Prop 13. Money is not the problem w/ California Education. Check the facts on how much tax money goes to the ‘system’ before and after Prop 13.

    Second: The Landlords make the argument “our shopping center has low taxes so you can pay higher rent” yet refuse to provide protection. Either protect tax hit, total occupancy costs, or, reduce the rent or option increases if the property sells and the tax increase is greater than a negotiated percent (say 10%?) Example abound of destructive increases such as qsr’s getting hit with increases of $100,000 in annual tax bills in last few years of a lease when land is sold for ‘hotel’ values.

    • Howard.

      We all know that landlords do not ever want to absorb any costs that they can pass on to tenants and they do not ever want rent to go down. Instead, they want to have their cake and eat it too. And in many cases, the supply and demand equation allows them that luxury.

  5. Elliot.

    I would certainly agree that, occasionally, a response to a presented lease might be extreme. But I would also say that MOST small tenants NEVER avail themselves of legal assistance from an attorney with the appropriate commercial lease negotiation skill set necessary to level that very one-sided playing field that many landlords establish right out of the box. And so when a small tenant DOES have such representation, many landlords who are not used to having their custom lease challenged get their backs up and say things like “Oh, all of our tenants sign our lease the way it is.” or “This is our standard lease and we won’t change it.” or “Our lender won’t allow us to make any changes to the lease.” or “This is our corporate policy and we can’t change it.” They think that they can simple bully the small tenant into accepting whatever they are trying to force down the tenant’s throat. And, unfortunately, in many cases, they are successful. So my question to you, Elliot, is when is it reasonable to say that a landlord’s 40 page lease for a 1,500 square foot tenant is “overblown” or “too ponderous”? If your mother were negotiating for 1,500 square foot space within which to operate a business, would you respond to a landlord’s 40 page lease with just a few comments or would you apply everything that you know about what happens between landlords and tenants to attempt to level that playing field? How many comments would you think are OK in response to a 40 page lease? 3? 10? 30? 300? Would you be unhappy if the landlord wanted to limit the number of comments from you? I think it’s a safe guess that you would tear that document apart, leaving no stone unturned in order to protect your mother – as you should.

    • Elliot L. Warm, Esq. says:

      Very fair comment, George, and sometimes I do get improperly upset because of the magnitude of comments on behalf of a small tenant – the request, say, for nondisturbance for a 1,000 s.f. mom and pop tenant in a large shopping center. I do need to remember my early days when I used to send lengthy comment letters to regional mall landlords as attorney for a small operator who was often in food courts (unfulfilled requests for nondisturbance included). I suppose in the final analysis there is no harm in asking; the landlord has the prerogative of doing as Nancy Reagan used to remark: Just say no. I think that sometimes you do have to alert the other party up front in a given situation that the landlord is not willing to make extensive changes. In the final analysis, as Ira has noted, the bargaining power will rule the day. Sometimes even the “big guy” has a special need for a particular “small guy” and will be more flexible.

      • Elliot, this is entertaining and educational. I hope to learn from you. A non-disturbance agreement might be an apt example of a provision that can be just as important for a small, independent tenant as it is to a large space user or a national tenant. Most of my clients are dentists. And they commonly spend $300K to $400K to build out their space (not counting fixtures and equipment) to get their doors open (often with some TI from the landlord). And then they work doggedly and spend heavily establishing their brand in the community. For a lender to have the right to pull the rug out from under them would be totally devastating, given the difficulty in finding the right alternate location and building it out in a timely manner before all of their patients have fled (not to speak of the burden of coming up with another $300K to $400K for build out.) For most, if kicked out by the lender, that would mean the death of their business, as they would likely be unable to treat their patient base in a timely manner. Those patients don’t wait around. That’s just ONE example of a lease provision that is very important to (some) little guys. Some others might include such things as drop dead delivery dates, assignment rights, CAM audit rights, indemnification, renewal rights, personal guarantee limitations, casualty termination rights, etc., etc., etc. As I am always eager to learn, I would enjoy continuing this back and forth with you on other examples. Meanwhile, yes, the landlord can always say “NO.” and the tenant can always say “OK. See ya later.” – which is what I will always advise my client to say if the landlord is arbitrarily unwilling to grant a reasonable hearing on issues that will bear on my client’s business success.

  6. Elliot L. Warm, Esq. says:

    Well said, George. There is no question that EVERY tenant needs to consider limits on personal liability, timing of delivery of space and other basic issues. Ideally, there would be competent people initially negotiating the fundamental terms, so that the lawyers would not necessarily need to do so. By the way, another critical issue that is often not resolved upfront, before the lawyer drafting and review, is the matter of whether or not the tenant is given any exclusive use rights. Even the smallest tenant has a valid need for limiting competition, but landlords are not willing to tie up hundreds of thousands of square feet of space for one “little guy,” even one that constitutes a national or regional chain retailer. Compromises can often be worked out.

    • Negotiating the LOI terms is what I do (I’m not an attorney). And I focus on exclusive use protection, expansion rights, purchase rights, parking rights, signage rights, etc., in addition to the basic economic elements. What I do NOT like to see in the landlord’s proposal is long, drawn out language describing maintenance and repairs or assignment rights or other provisions which require very detailed and often legal attention and, thus, should be left to the lease document negotiation phase itself. Thanks for offering up another provision that is critical to many small tenants – exclusive use.

  7. Elliot L. Warm, Esq. says:

    Agreed, but it is sometimes good to have reasonable detail in an LOI on certain provisions, such as determining the rent commencement date and providing for exclusive rights. Assignment, casualty, default rights and various other areas of drafting can be left to the lawyers for the formal document, unless there is a particular concern, such as a contemplation upfront of a subletting or other arrangement for shared use.

    • I agree completely.

      The curious thing about the LOI, most commonly declared to be “non-binding”, is that one may wish to point to very specific language as a base line for establishing an overall agreement on this provision or that while, on the flip side, seeking wiggle room on very specific language upon which the other side may have insisted. I had the recent unpleasant task of dealing with a landlord who insisted that the LOI was to be fully binding and demanded that the prospective tenant put up $5,000 of non-refundable funds to defray the landlord’s legal costs if the tenant pulled out of the deal after the LOI was signed. I told him that we would not agree that the LOI terms be binding as that would require negotiating every word and every punctuation mark and, further, that we had no intention of paying $5,000 up front to protect the landlord’s legal exposure unless he similarly protected us. He backed away. Another example of a landlord playing the bully simply because he’s been able to get away with it in the past. Not with me. If they push hard, I push back harder, irrespective of the size or strength of my client. The little guy always has more leverage than many people think. It’s just that most don’t have the courage of their convictions. I rarely – rarely lose the deal for having pushed too hard.

  8. Elliot L. Warm, Esq. says:

    No disagreement that LOI should be non-binding even though it should be reasonably comprehensive on the fundamental deal. If any particular aspect is to be binding, such as confidentiality, that can be set forth. Maybe there is some obligation (beyond moral and ethical) to use good faith efforts to reach a formal agreement, but I would leave that to another article by Ira.

  9. Elliot, George, and all other readers: for some thoughts about the obligation to negotiate in good faith, take a look at: http://www.retailrealestatelaw.com/archives/3088

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