Using a “Conformed” Lease – The Good, the Bad, and the Ugly.

To many landlords and tenants who do repeated business with each other, the “holy grail” is a “conformed lease.” The same could be said for frequent borrower-lender combinations or for any pairs who do repetitive deals of a similar nature. To the uninitiated, a “conformed lease” is a previously done deal and where the parties have agreed to use that document as a template for future deals of the same character. Every lease begins with a template, be it the landlord’s usual form or the tenant’s usual form or the one from the stationery store. The difference is that, with a conformed lease, the parties can avoid the need to renegotiate many, many provisions because they have already fought the battles and licked their wounds. Basically, parties prefer using “conformed leases” because of their reasonable belief that it will be efficient and effective to start with one. Efficient means “faster and cheaper,” and effective means that the parties get a lease that works for each of them.

So, is there a rub? Of course there is. The rub is that every negotiated contract, whether a lease or some other document, is the result of compromise and also was based on a specific set of facts or circumstances. Even the people who negotiated what became the “conformed lease” won’t remember what compromises were made for that particular deal, and what were the special factors that led to a particular agreement.

As to compromise, was the original lease, now the basis for a “conformed lease,” one that was done for a property with one empty space and a line around the corner to get in? Or, was the space sucking wind for five years beforehand? Was it for the relocation of a nearby store whose lease was lost, or was it for a marginally acceptable location? Did the landlord need the lease to boost its NOI in preparation for a refinancing? Those are just examples. Like it or not, negotiating a lease is not an academic exercise. It is a task targeted at getting a store open so that the tenant can get sales income (or so that tenant can commence some business-beneficial activity) and the landlord can start getting rent.

Does anyone believe that even the original negotiators, when using their “conformed lease” for a subsequent deal, will remember what went into reaching agreement on each lease provision? Of course not. And, imagine the task presented to an entirely new set of negotiators, or in a deal when one of the negotiators worked on the “conformed lease,” and the other did not. Why did the conformed lease allow up to two shopping entrances to be closed or blocked without consequence? Did that project have seven entrances, whereas the “new” one only has four? Why did the parties settle on parking lot lighting of only two foot-candles at five feet above ground level? Was the tenant’s credit better at the time the “conformed lease” was prepared? Was the Landlord’s better? Have the risk postures of one party or the other changed significantly in the interim? Has the “state of the art” changed? When business terms and conditions change, so do considerations as to how risk will be allocated. Consequently, so do the “legal” provisions of the “conformed” document.

Yes, go for it – start with a “conformed lease” or a “conformed purchase agreement” or “conformed loan documents,” but don’t treat them as “read only” files. A “conformed document” is just a better starting point for negotiations, but not an immutable set of business and legal terms.