Make The Lease Fit The Parties; Don’t Make the Parties Fit The Lease

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Not every lease is going to pay for the cost of a child’s college. [That raises the question, unanswered today, as to whether the cost (internal or external) to get any lease done should cover a year’s tuition and board.] Sometimes, we need to do a mental reset and ask ourselves: “What is needed here?” It’s easy to approach every deal as if all deals are the same. It’s smart to step back each time and ask: “What is needed here.”

A close relative, bearing the same family name and looking very much like this writer, recently asked us to look at an office lease for him. Our first thought was that we would finally show a member of the younger generation how this progeny’s college education was paid for. Then, the lease appeared on our screen – a two year office lease, on a new form, for space the business and his predecessor business already had been occupying for eight years. Whoa!

That’s “Whoa” as in “hold your horses.” Here was a situation where money was no object. This was a fixed-fee assignment. So, the sky was the limit when it came to negotiating all of the tenant protections known to woman or man. The problem was that the lease was for only two years. That doesn’t mean there weren’t any risks. But, the near future is more predictable than the distant future. Yes, the economy could collapse, but no one thinks that will happen tomorrow. If it started a year from now, there would only be a year to go under the lease.

Another key factor is that the same tenant (and its predecessor) was already in the space. So, there wasn’t going to be a “delivery of premises” issue, nor would there be any surprises as to “how the property worked.” The restrooms worked. The building and its encompassing complex where were well maintained. Parking spaces were always available. The complex was fully leased; its cash flow seemed to support the cost to keep it running tomorrow just like it ran yesterday. So, in essence, but for the fact that the landlord had proffered a “new” lease form (for a very reasonable reason), this situation was not much different than facing an extension option where a tenant rarely seeks to renegotiate “all” of the terms of the existing lease.

Nonetheless, this was a “new” lease on a new lease form. So, what would you do? What is the role of the person negotiating such a lease? While we know that there is a legitimate range of responses as to the things readers, collectively, might focus on – might seek to negotiate – we firmly believe that these kinds of situations do not call for the kitchen sink approach. These are not opportunities to show off how much we know. These are opportunities to show how wise we are.

Does the lease offer an extension option? How does it handle “surrender,” meaning: “In what condition must the tenant return the space?” How does the lease treat improvements that were installed at the outset of the predecessor tenant’s lease? Is this a start-up business without a known or comfortable cash flow, one that needs to be protected against draconian results arising from periodic delays in paying rent? Or, is its cash flow history such that, at least over the next two years, this just plain isn’t a problem?

As a two year lease, is a base year (escalation) approach appropriate, especially where there would be nothing to be paid on account of its first year? Are there any improvements the tenant wants to make “now”? If so, shouldn’t they be landlord-approved “now”? So, how important are the “alteration” provisions of the proffered lease? If the tenant isn’t contemplating anything now, when would it next plan to make interior improvements? Would that be a year from now with only a year to go in the lease? That’s not likely. What would be the consequence of losing the lease (say by reason of a fire)? Is there “good will” connected to the location, such as in a retail situation? What are the chances a landlord would exercise a relocation provision within the two year lease term?

The reward of getting this “assignment” did not come in the form of a check. It came in the form of triggering today’s simple thoughts. And, after reviewing today’s Ruminations posting, we realized that what we wanted to say was that, in every assignment, we need to look at the required task through the tenant’s eyes, figure out what the tenant needs, not what we need. It is easy to apply a standard approach to every deal, but it doesn’t serve the parties to do so. We all need to think twice before making the customer fit the suit (aka “lease”); what we need to do is create a bespoke suit (lease) – one that fits the customer.

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  1. RLGunn Associates LLC says:

    I remember two instances, the opposite of each. Several years ago, I was the tenant representing the tenant for a ground lease. I was the grocer. The landlord was a REIT who’s in house legal counsel took great offense to the base ease not being their form. the end result, 2 months of negotiations. SOMETHING was changed on every other line of the 40 page 11×14 lease. The other, representing first time franchisee’s who were seeing their first commercial lease. The condemnation provision may not need several days of renegotiation.

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