Daily Business Review
John Smith (fictitious name) reports with delight to his family that he’s scored a great job: The “Company Reforming Aggregate Production Product Yields” has hired John to handle sales of its game-changing educational materials that will save U.S. industry millions of dollars. John will also have “a few other business tasks” (perhaps reforming the acronym of his employer). John is stoked. The job is in his comfort zone; he has lots of sales experience. The product here is educational materials but John can do this; all good.
John is less familiar with commercial leasing, but his first assignment is to help “offload” some empty space on the ground floor of the company’s building. Sadly, the company has a long-term lease and does not need the lower level space. The company needs income from that space. John is told the market is good, and “we have a great broker who does it all, no worries!” So, what could go wrong?
In a word, plenty. Our friend John is thinking this shouldn’t be rocket science—there’s a space, it is a certain size, there’s a start and end date, the rents need to be agreed upon; what else is there? If John agrees to such a simple LOI (letter of intent), he could miss out on a great opportunity to nail down other terms that would be more contentious to negotiate legally in the lease document.
Here are some tips for you (and John) to help you both steer clear of the icebergs in managing a commercial lease negotiation.
Confirm Prime Landlord Will Consent
If it’s a sublease—and John will be dealing with a sublease in our example—consent from the prime landlord may be required. The existing lease should shed light on the question. Quite often, the commercial lease calls for a standard of reasonableness in the landlord’s decision, although some leases purport to out-and-out prohibit any transfers. If the prime landlord is refusing to cooperate, John may need to involve legal counsel to help solve the issue. Few landlords will risk “war” (litigation) over this issue, but some need a strong nudge from legal counsel.
Ask the broker to show you in advance the standard LOI the broker will use. Ask a lawyer who routinely concentrates in commercial leasing to glance at the LOI form and make suggestions. At the very least the lawyer may urge that you must control (prepare and propose) the lease form—so definitely state that in the LOI. Ask the lawyer to confirm the LOI is “nonbinding.” Neither you nor John want to get sued for a “deal” supposedly struck the moment the LOI was signed, with a tenant urging the LOI itself granted rights of use. Instead, you want good language that says otherwise: The LOI is an expression of hope and intent but should not be legally “binding.”
Know Your Space, Put Yourself in the Occupant’s Shoes
Learn the history of the space to be leased. What has it been used for, what could it be used for; ask the broker for ideas on how to market and lease the space out. Take the broker’s thoughtful advice.
Focus on Plain English Deal Terms
Ask the broker to explain the deal in plain English. If you cannot articulate all the basic deal terms in simple, clear English, then neither the broker nor the lawyer will be effective in crafting language to make the deal you want. That will lead to mistakes and disappointment. One perspective is don’t let the lawyers write sentences so long that your eyes glaze over. Push for everyone to keep the sentences clear, concise and understandable. It’s a common misconception that lawyers have to write with obfuscation (although some surely seem to enjoy doing so). One day a judge might have to read that sentence—and understand it—and make a decision that could prove very expensive for your company. John’s job is on the line here!
Solve Problems Up Front
Seize the opportunity to nail down more issues and topics with true economic impact on the deal. Anticipate controversy over anything that obviously will require resolution that you know about. Put yourself in the tenant’s shoes and think, “what would upset me about this space”—then think through how to make it a known and accepted fact, rather than a latent bomb to one day erupt in a fight. Lay it out now in the LOI. Save time later in the lease negotiation. If you fail to avoid the fight, the costs could ruin any income stream benefit from the lease.
Find the right lawyer—one who actually concentrates in commercial leasing rather than a generalist or a basic “real estate” lawyer. John would not ask a podiatrist to perform an appendectomy; so find the right lawyer who routinely handles such leasing work. Let the lawyer guide you conceptually at the LOI stage as well as during the actual lease negotiation.
Stay in the Loop
Insist the broker and lawyer keep you in the loop on communications, especially emails, once an LOI is in progress and then once the lease negotiation efforts commence. Ask lots of questions. John cannot fix a leaky faucet until he understands at least a little about the plumbing. So lean on the professionals to explain.
Don’t Sign the Lease Until You Abstract and Confirm
It is tempting, once the lawyer and broker tell you the deal is done, to just sign. John can shout, “Great news, deal is done!” But resist the impulse and check for mistakes first. The easiest approach is to require an “abstract”—summary of salient final lease terms as actually negotiated in the lease. Compare the abstract to your LOI and note any material deviations from the deal intended. The “fog of war”—in this case the legal negotiation of the lease—could have brought about deal term changes whether or not intended. You may have agreed to them but no longer recall doing so. Now is the time to see all the changes in the aggregate, in full and final context. Then, ask more questions until you are comfortable it’s the deal you intended and want. Let’s make John proud!
Finally, Celebrate but Calendar
Of course, don’t forget to celebrate the signed-up lease! But, also, don’t forget to calendar milestone dates and any post-execution landlord lease obligations. The last thing you or John want is to snatch defeat from the jaws of victory by failing to timely take actions required of the landlord shortly after the lease is signed.