It’s Unreasonable to be Unreasonable

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As mentioned in previous articles, every commercial lease is unique. Landlords have their standard lease agreements, which vary based on asset type, i.e. office, retail, etc. and by individual property within the same asset type, i.e. freestanding retail vs. strip center. Even leases for the same property will differ based on the tenant and the specific deal terms. On top of that, leases are subject to further customization based on the tenant’s/broker’s/attorney’s review and negotiation of individual lease provisions. Despite this, most commercial leases have a similar structure and governing practices that are common. Because of this there are certain standards that should be verified in each lease or inserted if absent in the initial draft. The standard of “reasonableness” is perhaps the most important.

A relatively minor case in which a reasonable standard should always be applied is for attorneys’ fees. Many leases require the tenant to pay for the landlord’s “attorneys’ fees” if the landlord must enforce any of the lease provisions against the tenant or review any tenant requests such as subletting the premises. Particularly in contentious situations where there is a dispute between the tenant and landlord, legal fees can be significant. Landlord’s do not necessarily have an interest in incurring unnecessary or excessive attorney’s fees, but in the absence of a reasonable standard there is nothing limiting their ability to do so and pass the expense along to the tenant. In this case, “reasonable” does not have a strict or set definition, but such a standard imposes a requirement on the landlord to justify such costs if contested.

Reasonableness is most important in cases where landlord’s approval/consent is required. In commercial leases such cases include but are not limited to signage, assignment/subletting, and alterations to the premises. Regardless, in each and every case, consent/approval should not be “unreasonably withheld, conditioned, or delayed.”

The initial draft lease may already include this standard but, because most leases are landlord-sided, it’s likely that the standard is that “consent shall be granted or withheld in landlord’s sole discretion.” Another possibility is that “consent shall not be unreasonably withheld.” This is certainly better than the previous standard, but the addition of “conditioned” and “delayed” are important distinctions that should be included.

Having consent not unreasonably “conditioned” imposes a reasonable standard on the factors guiding the landlord’s approval. Some leases will explicitly list the conditions governing the landlord’s approval. In such a case tenants/brokers must review and assess the reasonableness of said conditions. Common examples include minimum requirements of financial strength (often the same as tenant at the time of lease signing), impact on building systems, other tenants, and/or building (aesthetic and/or reputation); etc. Reasonableness should be based on an objective standard but must also be viewed through the lens of the tenant’s business/use, plans, i.e. selling the business during the lease term, etc.

It is important to not have consent unreasonably “delayed” because of the old adage, “Time Kills All Deals.” As is the case with the conditions guiding consent, many leases will provide specific timeframes in which the landlord must respond to tenant requests. These must also be evaluated both objectively and with an understanding of the time required for the landlord to consider and process the tenant’s request. A key example in which unnecessary/unreasonable delays could negatively impact the tenant is in the case of a requested sublet or assignment. The tenant’s proposed subtenant may have a required sublease commencement date due a lease expiration date, contract, etc. and if landlords are not required to respond in a timely manner/within a reasonable timeframe, the tenant may lose the deal.

After the initial adversarial nature of the LOI/lease negotiations process, relationships between tenant and landlord are generally good and reasonableness governs the relationship. Communication and ample notice are good practices that can prevent many of the issues that reasonable standards protect against. Still, tenants should require a reasonable standard in every leases and landlords should be amenable to this standard. It’s unreasonable to be unreasonable.

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