Commercial Leases

WHAT TO LOOK FOR AND WHAT TO LOOK OUT FOR

In today’s business world, virtually every business person is required to develop significant negotiating skills for responsibilities such as hiring, working with vendors, or selling the firms’ products or services.

Nevertheless, those same managers often find themselves ill-prepared to negotiate a lease for office space with their prospective landlord or the landlord’s broker/representative.  That inadequacy stems from the fact that most business typically negotiate a new lease once every five to ten years, while the party on the opposite side of the table goes through this same process virtually hundreds of times every year.  However, if you are faced with the task of negotiating for the lease of new space, you have an opportunity to turn this disadvantage into your advantage by first bringing together a team of professionals to work on your behalf. That team will gather all pertinent data and assist you in analyzing the impact each lease proposal will have on the cost of your businesses’ occupancy.

SELECTING YOUR NEGOTIATING TEAM

Probably the single most important step to reviewing lease alternatives is selecting an effective negotiating team to work for your company. These professionals must be able to put aside their own financial gain, overcome conflicts of interest due to relationships with building owners, and eliminate any other issues that could pose a conflict of interest to your negotiating and financial success. Your team should consist of the following:

  • A lease strategy person from your own corporation, and
  • A tenant representative from a reputable brokerage firm, and
  • An architect/space planner, and
  • A legal professional with extensive experience in commercial real estate.

Lease Strategist

The “lease strategist” should be very knowledgeable about your corporation, its operations, its personnel, and its personality. This person does not need to have extensive real estate experience, but he or she should be able to analyze a complex situation, direct the resources of the corporation, and, most important, have good listening and communication skills.

This person might be a senior individual in the finance department, a partner, or someone with a similar background. Once selected by senior management, the strategist will need to coordinate with the other team members and attend all lease-related meetings, including strategy sessions, landlord interviews, building tours and all other discussions that will help formulate your position on the suggested alternatives. He or she should have a direct and open line of communication to, and the absolute support of, senior management.

Naturally, the selection of this person does not preclude senior managers or partners from participating in the process. However, experience has proven that it is better to appropriately time and strategize the appearance of senior individuals to support your negotiation strategy.

Tenant Representative

The selection of a tenant representative or broker is also crucial to the entire process.  This individual should be a veteran of the real estate industry, and be extremely familiar with the local environment, from both a real estate point of view and a general economic point of view.  The tenant representative must also be highly regarded in the brokerage and real estate industry, and he or she needs to be able to coordinate vast amounts of data and know a great deal about potential buildings and landlords.

One of the most important elements this person can bring to the process is the ability to eliminate any conflicts of interest. Specifically, the negotiation process could be skewed if this individual represents a landlord that could potentially become your landlord through the lease selection process.  This individual must be able to understand that all of his or her fiduciary obligations are to you, the tenant, and not to the landlord.  Finally, this individual should also have access to information regarding properties on a national scale.  This can be beneficial in coordinating with a national real estate department if one exists, particularly if the department is not located in the subject city.

Architect

The next member of the team, the architect or space planner is quite often overlooked until after a particular group of buildings has been selected for your review.  However, it is imperative to include this person on the team from the beginning to give him or her a true understanding of all firm’s needs, operating relationships, etc., that could affect your ultimate lease decision. The architect’s or space planner’s major role will be in determining the structural amenities and deficiencies and evaluating the difference between the usable and rentable square feet of space alternatives.  Additionally, he or she will be very involved in deciding whether or not you can function effectively within the demised space (the usable space that will you occupy) and what alternative methods could be employed to ensure your long term beneficial occupancy.  Much like your tenant representative, the architect or space planner needs to 1) eliminate any conflicts of interest with potential landlords, and 2) fully understand that he or she is representing you and no one else.

Real Estate Lawyer

The final selection is the real estate lawyer who will provide the team and the management group with competent advice on the strength and weaknesses of the various landlords you may be considering. The individual will also help formulate the request for proposal, review the landlord’s response, understand ownership documents, do a detailed review of the actual lease document (if not the development of the lease itself), and advise the management group on the legal issues that could arise.

Like the architect and tenant representative, legal counsel should be chosen at the beginning of the process to allow time for a thorough understanding of your needs and long term goals.

Although the negotiating team need not act as a committee, the individuals should be able to interact and assist each other throughout the various stages of the negotiation process. Obviously, it is important that, in addition to technical skills, these team members be selected based on their personalities and their ability to interact with your management and other team members; a cohesive team will be more apt to successfully work together over a sustained period of time. 

NEGOTIATING FOR YOUR RENEWAL RIGHTS

Most landlords derive a substantial share of their profit from the expansion and renewal of space existing tenants, yet most tenants neglect this area since the need for is seems far into the future. No matter how far off it seems, considering your future space requirements and the negotiating position you will enjoy at the termination of the original lease is as important as negotiation your original lease.  Two methods of negotiating for renewal lease rates are 1) utilizing the then-current market value, or 2) using a fixed renewal rate. Typically, either one presents risks for both the landlord and tenant, but the fixed rate method is superior to market value. When using the market value or a percentage thereof you, as the tenant, are exposed to substantial cost increases should your lease expire at a time when there are not ample alternative spaces available to you.  The larger the space that you are leasing, the more important this is, for it is typically easier to find smaller spaces than space for larger tenants.

The argument against a fixed rate renewal is that, should your lease expire at a time when a soft market exists; the tenant could be exposed to a higher rate.  However, even soft market conditions you should always have the alternative of simply not exercising your renewal option and opening negations with your landlord for renewal at a preferential market rate.

If you are not able to negotiate for a fixed rate and are forced to use a market value, be sure to define that market value and how it will be established.  Find out what comparable buildings will be used to determine the market, the size of your space, the degree of the tenant improvements that will be required and other items that could affect market value.  Furthermore, be sure to define your space as broad as possible and possibly even state, “for any legal and lawful use.”  Having the right to change the use of the premises gives the tenant the flexibility to expand and modify a successful use or to completely abandon an unsuccessful business and pursue a new one.

Also, your architect and tenant representative should take special care in defining what tenant improvement allowances would be available to you at the time of renewal. It is typical to require a minimum of paint, carpet and other fixtures; you may also require of your layout, perhaps adding more private offices or other items. The extent of your improvements and who pays for them should be defined at the time of renewal.

Finally, your tenant representative and legal counsel should be careful to negotiate a favorable holdover clause. This will allow you ample time to negotiate with your landlord or to lease new space outside of your existing facility at a minimum cost increase. It is not uncommon for a landlord to require that during a holdover period the tenant pay 200 percent of the then-current rent. Obviously, this would be a costly oversight for you as a tenant.

Staying in compliance with California leasing and corporate laws is overwhelming. Tamara L. Harper, Esquire advocates and protects not only your corporate interests but also your employment and labor law liability exposure. Tamara Harper understands how you all feel, as she is an employer and manages a corporation too. Many of her clients felt the same way too before they worked with her. Ms. Harper’s clients have found as a result of working together, that they feel confident in the final outcome of their situation.

Tamara L. Harper’s unique competitive advantage is that she is very approachable as an attorney, which makes her clients feel at ease and in capable hands and further brings twenty years of litigation experience as a trial attorney to the drafting table. Tamara Harper, Esq. is an aggressive fighter that is reliable and ethical. Ms. Harper not only offers quality work, but enjoys a good location in Westlake Village, California. Tamara L. Harper prides herself on her good personal and business relationships with clients, and uses her insight and knowledge to obtain successes for each client.