Common leases often involve tough negotiations, pitfalls to avoid
We are embroiled in a lease negotiation currently. Discussions can vary on the size of the building being leased, the complexity of the terms, and the sophistication of the parties.
Sometimes known as the “second negotiation,” the process can be mind-numbing.
What is the first negotiation, you may be wondering? Typically, it’s the agreement upon business points such as the amount of rent that the tenant will pay, how the rent will escalate throughout the lease, abated rent, the length of commitment, and the condition in which the premises will be when the lease commences and expires. As brokers, we do this first negotiation work.
These business points are generally debated, and an agreement is forged. From there, a non-binding letter of intent forms the basis from which a binding lease document is crafted. And let the games—or in this case, the second negotiation—begin!
You’ll witness both sides lawyer up and “turns” will be swapped. Normally, the landlord will submit a draft document to the tenant and tenant’s counsel. The first turn occurs when the lawyer representing the tenant presents her proposed edits, changes and language insertions to the draft. The turns continue until one side says uncle or until the parties agree upon a satisfactory compromise.
As commercial real estate professionals, we sit by idly as the fate of our carefully authored business deal gets scrutinized.
So what are some of the most common sticking points for counsel to volley? Here are a few to consider:
Operating expenses
One of the most contentious areas of negotiation is who pays for what when it comes to common area maintenance (CAM). Tenants want predictability and often request a cap on controllable expenses or exclusions for certain costs, like capital improvements or management fees. Landlords, however, prefer flexibility, leaving expenses broadly defined to ensure full cost recovery.
Repairs and maintenance
The question of who repairs the roof, maintains the HVAC system, or resurfaces the parking lot can lead to significant back-and-forth. Tenants naturally prefer landlords to shoulder the burden of major repairs, while landlords aim to push as much responsibility as possible onto the tenant. In multi-tenant buildings, this can be especially complex.
Tenant improvements
When tenant improvements come into play, the scope of work, completion deadlines, and cost overruns are often debated. Additionally, tenants and landlords may spar over whether improvements become the landlord’s property upon lease expiration or if the tenant has the right to remove them.
Assignment and subletting
Businesses evolve, and tenants often seek the ability to assign their lease or sublet the space if needed. Landlords, however, want assurance that the financial strength and operational nature of any new occupant won’t negatively impact the property. Negotiations can revolve around the conditions under which these transfers are permitted.
Default remedies
Default clauses are where things can get tense. Landlords seek broad definitions of tenant default and swift remedies, while tenants want narrowly defined defaults with ample notice and grace periods before penalties kick in. Finding the middle ground here can take time—and creativity.
Casualty and insurance
Recent natural disasters have made casualty clauses a critical focus. Who pays for repairs after a fire, flood, or earthquake? How much insurance is required? Landlords may push for expansive tenant obligations, while tenants demand clarity to avoid unexpected liabilities.
Option terms
Options to renew, purchase, or expand are like mini-negotiations within the lease. While tenants value flexibility, landlords worry about limiting their future rental or sale opportunities. Every word in these clauses matters, which is why lawyers scrutinize them so heavily.
A broker’s perspective
As brokers, our role during the second negotiation is both limited and crucial. While we’re not in the room debating legalese, we can act as interpreters — helping our clients understand the practical implications of proposed changes. Often, our experience allows us to suggest creative compromises that bring both sides back to the table when they’re at an impasse.
I’ve seen deals stall for weeks over seemingly minor details. One tenant once insisted on two reserved parking spaces, a request that cost the landlord almost nothing but became a symbolic sticking point. It took some gentle nudging to remind both sides of the bigger picture.
Tips for navigating the second negotiation
If you’re heading into lease negotiations, here are a few tips to keep in mind:
- Hire experienced counsel. A seasoned real estate attorney understands the nuances and can save you time and money.
- Pick your battles. Focus on clauses that directly impact your business operations and bottom line.
- Stay flexible. Compromise is the name of the game. A deal where both sides win a little often lasts longer than one where one side feels steamrolled.
In the end, a well-negotiated lease sets the foundation for a successful landlord-tenant relationship. And for brokers, there’s no better feeling than seeing a deal come together—twice.
Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104. His website is allencbuchanan.blogspot.com.