Commercial lease agreements are complex legal documents. In spite of their complexity, some tenants tend to think of leases as rather simple, “standard” documents. I have seen tenants make the mistake of either not hiring a broker to represent their interests or not consulting an attorney before signing a landlord’s lease form.
Every tenant in a lease transaction should have legal counsel involved in the negotiation of the actual lease document. The best real estate attorneys prefer to work with a client who is represented by a broker and understands the tenant representative can play an important role in supporting legal counsel in working through the lease document. Conversely, why would a tenant representative ever want to complete a lease transaction without legal counsel’s involvement? A savvy real estate lawyer has made me look good many times.
In situations where I have worked on the landlord side of the table, brokers who know the market can get a lot more out of a landlord than an attorney acting alone. The reason for this is fairly evident. A broker provides the credible scenario of taking the tenant to another project. Also, brokers are generally more knowledgeable than many attorneys concerning what sort of concessions landlords are currently making in the marketplace. This helps greatly in the negotiations. Much like in business terms, the willingness by the landlord to make substantive changes to the lease document will depend on market conditions, the tenant’s relative negotiation leverage as well as the negotiation skill of your representatives.
Beyond the basic business terms
In most cases, a lease document in its original draft is heavily slanted in the landlord’s favor. What are some of the commonly negotiated provisions beyond the basic business terms that a tenant will need to address?
- Size of the space: Verification of the premise size by BOMA standards
- Pass-through of expenses: Exclude capital improvements and marketing and leasing expenses and allow for audit
- Failure of essential services: Provide for rental abatement and possible cancellation rights
- Restoration following casualty: Provide for reasonable time limit
- Indemnities and releases: Provide for cross indemnity for third-party claims and mutual releases for claims by parties
- Notice of default: Provide for notice and opportunity to cure
- Landlord’s lien: Provide for subordination to third-party lenders
- Assignment and subletting: Provide for exceptions for related parties and sale of business
- Compliance with laws: Limit tenant’s obligations to premises and exclude capital improvements
- Relocation provisions: Delete if possible or cover all expenses and require comparable space and location
- Build-out of premises: Provide deadline and time for punch list work
Knowing the client and the deal
The very best deals I have ever structured for clients involved a great real estate attorney who knows how to utilize a broker with the objective to:
- Inform and advise the client about the impact of each contingency upon the prospective tenant’s expectations of the underlying business terms; and
- Ensure that the final terms negotiated between the parties is reflected accurately in the documents.
Clients are served best when attorneys and brokers effectively collaborate in representing tenants in corporate real estate transactions.
Coy Davidson is Senior Vice President of Colliers International in Houston. He publishes The Tenant Advisor blog.