Commercial leases are binding, legal documents that should not be taken lightly. Purchase and sale agreements are “easy.” They dictate the terms of a single transaction at one moment in time. Leases, on the other hand, formalize a long-term relationship between the landlord and tenant. These parties have to “live with one another” and the terms of the lease govern what that life looks like, what is expected of each party, and what happens if either party violates the terms of their agreement.
Every commercial lease is different but, without exception, they are weighted in favor of the landlord. This is to be expected as the landlord is the one leasing their property to a (usually) unknown party. That being said, the level of one-sidedness varies and the goal when negotiating a commercial lease is to even it out so that the terms are reasonable. Reasonableness can vary as well based on the tenant and deal terms, but at the end of the day, a lease should protect the tenant against unnecessary, onerous, and/or malicious fees, disturbances, and requirements so that if they abide by the terms of the lease (particularly payment of rent) there won’t be any issues and they can quietly enjoy the space for the duration of the lease term.
This article deals with the approach to commercial lease negotiations from the tenant’s point of view. The emphasis on “how” relates to the appropriate and productive frame of mind or perspective from which to approach the lease terms based on the stage/round of negotiations. The relationship between landlord and tenant is always combative at first as both parties seek to extract the maximum concessions from the other; however, as the process nears lease signing it becomes increasingly collaborative as it is in the best interest of both parties to have a good relationship. While lease negotiations can involve multiple rounds of comments back and forth, there are generally 3 stages, each requiring a unique perspective from which to approach the process in order to yield the best results.
Stage 1: Tenant’s Initial Review
When the tenant first receives the lease from the landlord, they are receiving the most landlord-sided version of the lease and should approach the review with the assumption that the landlord is a scoundrel and will act in bad faith in any and every way the lease allows. First and foremost, tenants should verify that everything that was in the letter of intent (LOI) is accurately included in the lease, i.e. rent, renewal option(s), etc. I review every sentence and paragraph; imagining the craziest thing that could happen and how it could impact my client (based on their use). I identify the operative language (phrase, word, etc.) and either modify it or delete it to protect my client against probable and improbable situations governed by that particular section of the lease. When landlord’s consent or approval is required it should always be “not unreasonably withheld, conditioned, or delayed.” Exclusions or inclusions should be added where appropriate and/or for clarification to reduce the likelihood of (future) issues resulting from different interpretations. Finally, timeframes should be modified from “days” to “business days” to avoid unintentional defaults due to weekends or holidays. This is the most critical stage of the lease negotiations process in both its importance and the level of scrutiny applied.
Stage 2: Tenant’s Review of Landlord’s Response (to Tenant’s Initial Review)
In this stage, tenants receive a modified version of the lease in which the landlord has accepted some of the tenant’s changes, rejected others, and modified or added language in an attempt at compromise or to address the spirit or intent of the tenant’s requested change. Unbridled skepticism must be replaced by reason. Was the tenant’s original change/request reasonable? Is the landlord’s response? This stage requires a deeper understanding of the implications, likelihood, and purpose of specific lease terms/language. It is no longer productive to view the landlord as the enemy. In most cases, there are good reasons behind a landlord’s “push back,” and it’s important for a tenant to understand those reasons so that they can appeal to the landlord within that context. Some issues simply require push back from the tenant to be accepted by the landlord in the next round (persistence pays off) while others require a deeper, more nuanced explanation. There are times when landlords will simply not agree to a tenant’s demand/change, and, in cases such as this, tenants must conduct an honest risk analysis and realize, as the Rolling Stones said, “you can’t always get what you want.”
Stage 3: Conference Call
This is the collaborative phase of the lease negotiations. The best way to resolve any issues after Stage 2 is to schedule a conference call in which both parties discuss (and hopefully resolve) any remaining issues. The best approach at this stage is to approach the landlord as a friend and partner. It is in the tenant’s interest to express the rationale behind their request and explain to the landlord that they intend to be good tenants that pay on time but simply want to protect against any unforeseen or unintentional issues. In many cases, the landlord will agree to language that addresses the tenant’s concerns; however, when the landlord cannot or will not concede to the tenant’s request based on the impact on other tenants in the building/project and/or the landlord’s management of the property, they will explain why. At the end of the day, both parties are entering into an agreement for their mutual benefit, and a conversation can go a long way to establish the trust necessary to formalize that relationship.