Flexibility Beats Hardball in Legal Lease Negotiations

Despite headwinds of enormous proportions, including the pandemic and government mandated shutdowns, new leases are being executed across the country. CoStar reported new leasing activity of 114 million square feet for office, industrial and retail properties nationwide in January 2021. This figure is just 15% below the January 2020 level when the COVID-19 pandemic had not yet closed down much of the U.S.

However, landlords, tenants, attorneys and brokers that work to get new leases over the finish line have had to adapt to new and constantly evolving circumstances. As a result, adaptability has become a key characteristic of the process by which a handshake is successfully transformed into a signed lease.

This essential component of adaptability has made the legal leasing process both more resilient and more complicated. Adaptability yields resilience because reasonable requests are more likely to be considered and accepted rather than dismissed, simply because they haven’t been raised before. Thus, a more adaptable process can be more complicated because virtually every aspect of it is subject to change. So, to ensure that every letter of intent results in a signed lease, all parties involved must be willing to reconsider and potentially re-engineer all aspects of the process, whether it be the initial business terms, the lease document or standard operating procedures.

Below are recommendations to increase the likelihood that your legal leasing negotiations will yield the desired result: a signed lease that is favorable to both the landlord and tenant.

The legal leasing process can be likened to a black box where raw ingredients, including the letter of intent and initial lease draft, are transformed by landlords, tenants, brokers and attorneys into a signed lease. Although the machinations that take place inside this black box are not typically well understood or managed, they are essentially a series of balancing acts between conflicting goals. The need for speed must be carefully weighed against the need for precision, and the tendency to go for the jugular must be tempered by the inevitable need to compromise.

Looming over everything is the relative bargaining power of the landlord and tenant. It would make no sense for the 80-pound weakling—whether it be the local tenant without financial strength or the owner of a local office building that is off the beaten path—to overreach, especially when the other party is an 800-pound gorilla, be it a national credit tenant or the owner of a popular regional mall.

At a certain point in every leasing transaction, urgency trumps precision and the need to accommodate surpasses the desire to get it all. But there are an infinite number of paths to that all-important point and figuring out the most direct one is often tricky. In addition, knowing you've arrived at that point can be elusive and requires an intuitive sixth sense that even the most experienced practitioners don't always have. Keeping an eye on the following essentials throughout every lease negotiation will increase the likelihood of success. To make your legal leasing process bulletproof, make sure that it’s:

• Effective: weak links are eliminated, and the lease is signed time after time. For example, a weak link could be either party’s tendency to say no to the other party’s requests during the leasing process, without taking the time to evaluate whether the request is reasonable and could be accommodated.

• Efficient: the use of resources, including time and cost, is minimized. An example of increased efficiency would be shortening the time it takes to get answers from either party during a negotiation.

• Adaptable: unexpected circumstances are seamlessly accommodated. For example, if an unexpected governmental regulation is enacted during the negotiation, the efforts of both parties working together to reasonably address how to allocate risk and responsibility will be much more likely to result in a signed lease than if one or both are not willing to work through the implications of the unexpected regulation.

From the vantage point of a commercial leasing attorney across the retail, office and industrial sectors, it’s clear that the rules of the game are changing for each product type. Those landlords, tenants, attorneys and brokers nimble enough to adjust accordingly will enjoy significant advantages, and those that cling to the past may soon face extinction. Three ways that landlords and tenants can modernize their approach to the legal leasing process include the following:

• Throw those dinosaur leases, which address every landlord/tenant issue since the beginning of time, into history’s dust bin.

• Consider every issue raised by the other party with an open mind and never resort to the time-worn, tired refrain of “this is the way we’ve always done it.”

• Seek out and embrace new ways to approach roadblocks, whether they be old problems that always get in the way or new issues that have never been encountered.

The legal leasing process is often a highly charged and antagonistic negotiation between adversaries. We have always believed this approach is a mistake. In our experience it results in wasted time and money for both landlords and tenants and increases the risks of a deal falling through. Strategies we’ve employed for years that avoid posturing and keep the transaction alive include:

• Plan, coach and pivot: coach your team around constantly changing plans of action that respond in real time to new issues and realities. Whether tenant or landlord, train your team to plan ahead and anticipate changes that may arise, so they are prepared with meaningful, potentially pre-vetted, counteroffers as negotiations move back and forth.

• Communicate: keep everyone informed about the nuances and tenor of the negotiations every step of the way. Every time there is feedback on an open issue, or the negotiation moves a step forward, make sure everyone on your team is aware of it and in some cases, make sure everyone on the other team is aware as well.

• Teamwork: create, and then take full advantage of, good working relationships to ensure everyone is clear about the role they play in the process. If you have a good rapport with your counterparty and with other members of your team, it’s a lot easier to push them for responses and deliverables to meet goals and avoid missing deadlines.

Applying these strategies has resulted in the following widespread changes to the legal leasing process:

• Lease execution and delivery, which are the last steps in the process, have evolved from what was a centuries-old practice of exchanging hard copies of the lease with “wet” signatures, to digital execution and delivery.

• Leasehold guarantees, which were routinely notarized in the past, are now being accepted without notarization by landlords who recognize that most signatories are working remotely.

• Force majeure provisions have been expanded to include pandemics and mandated shutdowns, and in some cases to trigger prospective rent deferrals and/or abatements.

• Co-tenancy requirements in retail leases have been temporarily relaxed in some cases because of COVID to give landlords a realistic period of time to backfill vacant premises.

• Nontraditional use restrictions typically found in many retail leases are being reconsidered to permit landlords to activate vacant retail spaces with office, residential, industrial and hospitality uses.