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Six “Things” That are (or Should be) in Every Lease

Here are six “things” that I think must be in every commercial real estate lease. You may have a different list. Also, state law may dictate changes or additions. The names of the landlord and the tenant. (That’s obvious.) The address of the premises. (This may also seem obvious, but in early 2015, I received […]

Here are six “things” that I think must be in every commercial real estate lease. You may have a different list. Also, state law may dictate changes or additions.

  1. The names of the landlord and the tenant. (That’s obvious.)
  1. The address of the premises. (This may also seem obvious, but in early 2015, I received a lease from a landlord that had no address for the premises – no street, city or state. Nothing. There were also other errors in the lease. When I pointed out these errors, I was told by the landlord that I was being “picky.” The lease took over three years to be signed.)
  1. Consideration – who’s giving what to whom? (Attorneys Jordan L. Paust and Robert D. Upp in their book “Business Law” defined it as follows: “Consideration is something of value which is a benefit to one party or a loss to the other party. It is the inducement to the contract.”) Rent is the most common form of consideration given by a tenant to a landlord, but it is NOT mandatory. There are many leases (particularly land that’s leased for farming where the tenant grows crops and removes the weeds) in which a tenant takes care of the property, but pays no rent.
  1. The use – what can the tenant use the space for? In my opinion, this is the most important provision in the lease. (This is different from the question “Why do you as the tenant want to lease space in the first place?” If it takes you longer than five seconds to respond with a succinct answer, you haven’t thought through the question. Remember – leases are LONG TERM CONTRACTS. You cannot terminate a lease except where it states you can (end of the term; fire; possibly landlord’s default; maybe others). You do NOT want to break the lease. Going to war with the landlord is very dangerous and often expensive.)

    Once you understand WHY you want to lease the space, then you must determine if the premises can be used for your intended purpose. If you’re the tenant and you cannot use the premises for your intended purpose, then you’re out of business. This provision also protects the landlord, because it can limit the tenant’s activities.

  1. The term – the beginning and ending dates of the lease.
  1. Signatures of the landlord and the tenant. Some state laws may permit the exchange of emails as “signatures.” However, I am not an attorney, so I urge you to consult a good commercial real estate attorney about this.

There are dozens, perhaps hundreds, of other provisions that are important and can appear in a lease. But if you don’t have all six of the above, then you have nothing.

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Why are Real Estate Lease Negotiations Often Like Playing Poker?

There are two main reasons. The first is that there is often a lot of bluffing. Each side will bluff as long as is necessary to get what it wants. The second reason is that in poker, there’s only one winner of each hand. Each person wants to win, and therefore everyone else must lose. […]

There are two main reasons. The first is that there is often a lot of bluffing. Each side will bluff as long as is necessary to get what it wants.

The second reason is that in poker, there’s only one winner of each hand. Each person wants to win, and therefore everyone else must lose. Players watch their opponents for signs of weakness, or for giving away information about what they have. So, it’s “Win/ Lose.”

Sometimes this attitude carries over into lease negotiations. One side or the other (or both) perceives that the negotiations have to be “win-lose.” “I win, and you lose” is an expression frequently used.

The problem is that “win/lose” often doesn’t work when negotiating a lease. If you made a deal (i.e., signed a lease) but didn’t trust the other side, or if the negotiations were bitter and you signed a lease anyway, you’re facing a potential disaster. You’ve signed a lease, and now you have to live with it. You’re stuck with the other side, probably for years. If you saw the Academy Award-winning movie “The Sting” and remember the brutal, high stakes poker game between Paul Newman and Robert Shaw, you will understand what I mean. That is NOT the kind of negotiation to have and expect that the relations between the parties (who were enemies) will automatically improve.

Early in my real estate career, I was told a story about a large negotiation that occurred in New York in the early 1980s. The landlord desperately needed to lease a large amount of space, and the prospective tenant knew it. The tenant not only obtained a below-market rent but pressured and then obtained so many significant concessions that eventually the deal became very personal to the landlord. The landlord reluctantly signed the lease but exacted his revenge when it was time to negotiate a renewal of the lease. The story may be apocryphal, but the message was clear to me: don’t infuriate the other side.

Sophisticated negotiators know better than to infuriate the other side. To them, it’s more important first to know their needs and priorities and identify if someone can reasonably meet those needs. It’s “win-win” rather than “win-lose.” Bluffing is part of the process, but only to a point. If you don’t get what you need, you’ve lost.

In the early 1990s, I was the lead negotiator for the lease of over 60,000 sq. ft. of office space for my employer. (This was a large deal at the time.) The landlord’s chief representative was the nicest negotiator I have ever met. She was pleasant in every instance where we disagreed, and our side never felt any hostility. As a result, we simply recognized that there were disagreements, so we resolved them amicably. The needs of both parties were met.

Stephen R. Covey described this very well in his masterpiece book “The Seven Habits of Highly Effective People” when he discussed “Win/Win or No Deal.”

There are many, many parts to a commercial lease. What is very important to one side may be minor to the other side. So, one of the keys is to find out what the other side really wants and simultaneously determine if those things are important to you, while you decide what you want and see how important they are to the other side. Rent is only one aspect.

So, what could be important? Here are some examples: timing (how soon can the tenant occupy the premises); length of lease term; options to renew; annual rent increases; options to expand to adjacent space; an option to decrease the amount of space leased; option by the tenant to terminate the lease early; an option by the tenant to purchase; the landlord’s right to relocate the tenant within the building or complex; hours of operation (if in a retail building); the tenant’s right to not remove its renovations and improvements after the lease ends; and the tenant’s right to self-repair (if the landlord doesn’t perform the repairs as required). There are many more.

In my career, I have represented two multibillion-dollar organizations hundreds of times each as both landlord and tenant. I have also represented clients (both landlords and tenants) who only had 2-5 employees.

Life is too short to become involved in lease negotiations that eventually resemble brutal poker games. I strongly recommend that you avoid them at all costs.

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