This newsletter will be about experience. It is what we call (literally) gray hair, in real estate. It refers to those of us who have been practicing in many areas of real estate (brokerage, ownership, landlord representation, tenant representation, lawyers, etc.) that have seen many deal and legal scenarios and whose experiences allow us to use that knowledge to benefit our clients and to help transactions actually get to the finish line.
These days, real estate deals generally run from 7 to 10 years, and some run significantly more than that. If you have a large, long term deal, it may run to 15 or 20 years including renewal options. That is a long time for everyone involved. Buildings may be sold in that time. They will certainly be refinanced (some multiple times). The tenant companies may be sold or merged into other companies. Some of the people who did the original deal may retire. Some may die. Some may move to other employers. Buildings can be surrendered to their lenders in default. There are items that extend beyond the lease term, including the condition in which the space is returned, the return of the Security Deposit, any potential holdover beyond the lease expiration date, escalation bills due after the lease has expired, and more.
The good practitioners are the ones who want to get it right. For any size business, its lease (or purchase) of space is a long-term commitment, and a significant financial one.
When leases are being negotiated (and they are heavily negotiated) both sides try to look at what we call the “what ifs.” There can be lots of these over the lease term, and we want to do our best to prepare for as many of them as we can in advance. If any or all of those involved in the transaction are no longer there when some key event takes place in the future, the language in the lease is all we have to clarify how that event is to be dealt with. A client of mine (a CFO, not an attorney) used to lobby hard to get language in certain lease paragraphs that began with “for the avoidance of doubt” which then proceeded to then explain the reasoning behind that particular paragraph’s language or deal point.
Remember that both parties have to agree on all the language in a lease, which can run over 100 pages on a large deal. No easy task, but it has to be slogged through and to satisfy both sides enough to get the document signed.
I have done two different leases where there were “doggie clauses” when my client insisted on having their dogs legally able to be in her space every day (not something normally permitted in an office building). The landlord in one of them was a publicly traded Real Estate Investment Trust. There were “doggie defaults” such as leaving dog waste on the property. A certain number of “doggie defaults” had to lead to a “material default” which had severe economic remedies and could result in the cancellation of the lease for the business’s only location. We were laughing a bit about this clause, but it was important to my clients and had to be done.
A very large data center client of mine once walked away from the negotiating table on a 168,000 square foot build to suit deal. When we began to discuss the business terms relating to the building of the structure, the landlord/developer wanted to use a “cost plus” basis, where every addition to the cost of the building would be reflected in a higher rent. They then tried to add design flourishes that my client felt strongly were not germane to his business, but that he would be paying for. So, we walked away, literally saying we were not going to do the deal.
We only came back to the table when we were able to get the Landlord/Developer to agree that we would give him a set of specifications and he would set the rent based solely on those specs. If the Tenant wanted something additional, the Tenant would then pay additional rent for it. If the Landlord wanted something he deemed important, then he would pay for it, and that cost would not be passed through to my client. We also had lots of issues negotiating language that allowed my client to lay its fiber optic cables and backup power cables in separate conduits while the developer was excavating for another building on an adjoining site. It saved my client a lot of money, but there were lots of engineering, legal and monetary issues involved.
We got the deal done, and it was the largest deal in Fairfield County in over 11 years. The Chief Financial Officer of my client was the one who insisted on the “for the avoidance of doubt” language, and I am sure it will come in handy during the lease, particularly as the Tenant company has been sold and the Landlord/Developer has sold the building. The Lease is the only document they have to resolve any issues that come up.
Some of my clients are going through situations at this moment that involve landlords who are reducing services (cleaning, landscaping, general maintenance, utilities threatening to cut off electric service to entire buildings) because they have lost tenants and rental income and cannot or will not pay to keep the building up to its previous standards. This is becoming a big issue throughout the United States as more buildings are suffering through high vacancies, higher interest rates on refinancings, and higher build out costs for new tenants. There will have to be some creativity involved in solving these issues in many buildings, as they were never anticipated in present lease forms.
So, it’s not just getting to a “meeting of the minds” to make a deal. It is making sure that the agreed-upon terms make their way into the final document that governs the services during the term of the lease (and after) and the obligations of both parties. Multiply this by every commercial lease in the United States and the world, no matter what size or building type. Landlords need to be protected and so do their tenants. It takes compromise, creativity, and communication. It takes time and money. And it takes the gray hair of the parties who have seen similar issues before, or whose thought process have been influenced by unusual issues that have come up in other transactions to get today’s deals to the finish line.