Sadly, many lease negotiations, at least from the perspective of the tenant, begin closer to the middle than to the beginning. Remember that the lease is normally the landlord’s and that, however fair or not it is, the lease is initially drafted from a landlord’s perspective. The letter of intent (LOI) is also often drafted by the landlord, meant to mirror the issues and concerns of the landlord. The tenant, often anxious to finish the lease and occupy the space, begins the process somewhat defensively, and the tenant broker is forced to try to negotiate additional points, often negotiating both with the landlord and with the client-user.
The above scenario works just fine in many instances, but it would be wiser, perhaps, if the lease is of any size and relevance to the parties, for the tenant to bring together their team before the deal is “baked.” This all-hands meeting would include the tenant, the broker, the attorney, and perhaps the designer or contractor. It would include issues of timing, a review of the site plan, a discussion of economics and a review of the needs of the user, an analysis of the future plans and, of course, a review of the what ifs—the things that could go wrong over the term of the lease. This is, for sure, an odd dance with the broker explaining the deal proposed and the attorney exploring what could go wrong and what protections are most likely needed.
From the landlord perspective, the shortest LOI might be the best way to begin. This deals with the big items: space and rent, timing and buildout, parking and use. Makes perfect sense. The tenant, however, may have other concerns: assignment and maintenance, security and a tenant allowance (and how it is paid), electrical and plumbing capacities.
In a perfect world, not often enough achieved, all of the tenant parties are on the same page. The tenant team understands what issues are the most important, the timing challenges of the tenant, and the future needs of the tenant. Everyone understands whether the tenant has alternative space if the lease is not timely concluded and understands the timing that is required to successfully complete the deal. Yes, this can take time, but there is little worse than an uneducated client, one who has an “aha” moment way too late in the process.
The truth is that both the landlord and the tenant will rely on the LOI in the lease negotiation. New issues or modifications of issues take time to negotiate, oftentimes issues that could have been better resolved when negotiating the LOI. For instance, landlord’s LOI states the rent for the primary term but that the rent becomes market rent in the first year of an option. Counsel for tenant suggests that it should be modified to note a “but not greater than” amount. Perhaps the lease suggests that operating costs go up based on the actual increases, but counsel suggests that these be capped at a “no more than” percentage. Alternatively, the lease says that tenant cannot change its use, but the use clause is so narrow, so tailored to the use of the expected tenant, that it would not fit any other tenant. Of course, this also goes to the issue of assignment—both landlord and tenant should assume that any lease of a potential 10 years or more will be assigned.
Sadly, the parties often are satisfied by answering the wrong questions, like: Was the lease signed? Having a signed lease is not the same as having a good lease. Failing to properly articulate timing issues and issues pertaining to the payment of an allowance can impact the success of the tenant and the relationship between landlord and tenant. These problems can be avoided by careful planning and good team play. Far too often tenants find themselves owing rent before they have finished their build-out, an unfortunate situation, particularly if unexpected. Or the premises is not delivered as tenant expected, notwithstanding that the LOI noted clearly that the space was to be “as is.” These are situations that are, in most cases, avoidable if the parties work in sync.
Lastly, when negotiating the lease, it is important to remember that the goal is for the lease to work for all parties. Making dozens of comments and seeing impressive black-lined documents do not necessarily make for a workable document. It is, of course, true that many issues are way more important than others, that the goal of negotiator is, from the landlord’s side, to retain the most important rights, certainly protecting the rent stream and the operational issues that are the obligation of landlord. And the tenant wants to feel that it can operate in the premises without unnecessary oversight by the landlord.
In summary, a good lease starts with good preparations. The negotiations, from the LOI through the lease execution, result in a document that is understood by both parties, where obligations and responsibilities are clearly set forth, where surprises are minimized. Hopefully, spending time on the front end of the process allows both parties to sign the lease document and file it away, rarely needing to resolve any issues. Sadly, too many times, lease disputes result from misunderstandings that could have been avoided by better planning and by a comprehensive understanding of the rights and obligations of the parties when signing the lease.
