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Lease Negotiations: Where Style IS As Important as Substance

Look at Leasing
By: James Hochman, David Liebman

In golf, when a missed chip ends up on the green and near the cup, someone often says “It’s not how, it’s how many.” In real estate negotiations (especially for leases) it IS “how” that truly counts in creating a foundation for a strong multi-year landlord/tenant relationship. As experience has shown, we suggest that you bear this in mind when the other party hides behind the battle of the red-lined documents.

Your attorney co-author recently concluded the negotiation of a mid-sized industrial lease in the red-hot landlord’s market of the greater Chicago area. The tenant client really liked the space; the building was vacant; and the landlord had completed a substantial renovation of the building and was pleased to have interest in the property after a prior deal had cratered. Negotiation of rent, term, rent concessions, and tenant improvement allowance went relatively smoothly. Our task was to take a fully signed, but non-binding, letter of intent and get those terms into a mutually acceptable lease. It all seemed straight forward enough. But think again: obstacles lurked ahead.

The lease started as a typical institutional landlord-oriented lease, with the expectation that we would work from what the landlord’s counsel drafted. However, some surprise issues were encountered. First, while the lease was clear on the amount of space being leased, the exhibit showing the space was so simplistic that it appeared to have been drafted by a junior high school student. What’s more, this depiction did nothing to verify the size of the space. Would you believe that three requests of the landlord’s counsel for a copy of the landlord’s survey were rebuffed? Instead, only a careful review of the listing broker’s drone-assisted brochure, and a secret request directly to the landlord’s broker for a copy of the survey provided verification of the size of the building. The survey showed the space was as represented. Why couldn’t the landlord’s counsel have cooperated at the outset of that issue?

The so-called “standard” triple net financial and rent terms edged closer to an absolute net or bond lease than what was expected. The landlord wanted the tenant to pay all capital improvements (however few) when required during the term. It took several versions of pushing back to get the landlord to accept its full roof and structural responsibilities. A real battle ensued over other capital improvements, which were ultimately resolved when the parties agreed to share the costs. The tenant would pay its share of the expenses during the term of the lease, amortized over a heavily negotiated term. The landlord also resisted the tenant’s request for the audit rights of taxes and operating expenses (which were actually paid by the landlord), the choice of auditor, and the responsibility for the audit costs if the landlord overcharged taxes or any common area maintenance (CAM). This was also a protracted negotiation. It seemed that this landlord lacked confidence in its own ability to assess CAM accurately. The discussion of that clause went down to the end, but why?

The negotiation was made more challenging because the tenant had a signed LOI to sell its current building. It was pressed for time on finalizing the purchase and sale agreement (PSA), and coordinating the tenant’s vacating the existing site. The brokers did their part, regularly cracking the whip with requests for status reports, suggesting a conference call, etc., yet still, the battle of the redline lease versions continued.

In prior articles we have recommended direct human contact for lease negotiations: share the draft, and do a redline or two, but whether virtual or in-person, get some human interaction, whether by phone, Zoom, and even, perish the thought, an in-person meeting. In this case, we could not get that done, hard as it is to believe. No one would get on the phone, much less meet. After constant struggles to connect and move forward with a final version, a new team member came on board and took my call, and we were finally able to discuss the open issues and get to “yes.” The next lease version actually became the execution version.

"Human contact—the more direct the better—is the best way to conclude a lease negotiation! When parties shun direct contact, it creates the impression that someone either has something to hide or lacks confidence in the position being taken."

It’s hard to believe that this lesson is necessary. Human contact—the more direct the better—is the best way to conclude a lease negotiation! When parties shun direct contact, it creates the impression that someone either has something to hide or lacks confidence in the position being taken. It surely doesn’t bode well for a multi-year landlord/tenant relationship when you can’t engage in a direct conversation to finish the deal. Looking back, had this landlord or its counsel been more forthcoming with information—including the reasoning behind its positions—and been available to discuss rather than belabor differences on open issues, the parties’ needs would have been better-served and the lease would have been completed in less time. Perhaps even the legal fees would have been a little lower, too.

 

Media Contact
Alexis Fermanis SIOR Director of Communications
James Hochman
James Hochman
Schain Banks Kenny & Schwartz
jhochman@schainbanks.com

Jim Hochman is a partner at Schain Banks Kenny & Schwartz law firm and freelance writer. Contact him at jhochman@scheinbanks.com.

David Liebman
David Liebman
Merit Partners, LLC
dliebman@meritre.com

David Liebman, SIOR, JD, is a managing broker at Merit Partners, LLC. Contact him at dliebman@meritre.com.