Nowadays, dealing with the same landlord from the beginning of a lease until the end is a rarity. With so much commercial property now in the hands of pension funds, institutions, and private equity real estate investors, most of whom often have short term hold periods and quick exit strategies, a tenant can expect to deal with two or more successive landlords during the term of its lease. Even if the same company retains ownership of your property for an extended time period, though not very likely in today's environment, if the landlord is a corporate or institutional type of owner chances are the leasing manager you're dealing with today will be replaced by another executive at a later date.
Managers of private equity real estate funds seek not only to generate positive annual returns but, they expect to generate equity appreciation, which can be realized in multiple ways, including by refinancing or selling the properties owned by their funds. In many cases, private equity and other investor focused real estate funds will acquire an asset with the expectation of achieving a liquidity event and/or exiting the property in as little as three years or as many as seven. So, as your company negotiates its new lease for office, distribution, technology, retail, or any other type of real estate, or if your company plans to extend the lease it already has, it is likely that the landlord with whom you're currently dealing will not be there in three years or more.
Given current economic and real estate market conditions, whether or not your landlord will be around at a later date is more pointed, since many buildings are at risk of foreclosure, many will be deeded back to their lenders, and many will be sold over the next two to five years.
So what? Why is this so important? Any new landlord would have to abide by the terms agreed to in the lease by the original landlord anyway. So, why be concerned....right? Remember that while companies lease real estate from other companies, it is people who make the deals. In any lease negotiation, both parties typically make concessions in exchange for certain terms. And, while the logical strategy is to thoroughly document all aspects of any transaction, tenants have to make decisions that sometimes require them to place personal trust in the promise by a landlord that he or she will complete, accomplish, or maintain some aspect of the property or the transaction in a certain fashion, at a specific cost, by a particular date, etc. This is sometimes the case with smaller tenants or those whose creditworthiness may not be perceived well by a landlord. But, it can also be the case when large companies negotiate substantial transactions.
In a recent negotiation where our firm, Real Estate Strategies Corporation, represented the interests of a company seeking to become a tenant in a large office building, the landlord included text in their proposed lease that provided them with the right to relocate the tenant, our client, during the lease term as often as necessary and with only thirty days notice. You can imagine the kind of burden this would have placed on the tenant. During negotiations the landlord insisted that the clause remain in the lease but, said that because of the configuration of the floor, that it was unlikely that she would seek to relocate the tenant. While the text clearly provided the landlord with the ability to force the tenant's relocation, her words suggested something else. So, then why include that clause? Since the clause provided the landlord with strong rights, we reminded the tenant that during the course of the lease, the landlord could change its mind or the tenant could be dealing with a new landlord who could choose, based on the written word in the lease, to relocate the tenant, despite promises to the contrary made by this landlord. We strongly advised the tenant not to accept the landlord's word and to make its decision based solely on the written word, which they did.
When landlords change, so can methods and styles of conducting business. Specific business and lease items that can be most effected by changing landlords are typically those that may be external to a particular tenant but, may impact that tenant, and may include:
- Commitments by the landlord as to how certain future events might play out
- Completion of building improvements by a particular date, at a certain cost, in a defined manner, to create a desired image, etc.
- Completion of lobby, common area, parking, landscape or other upgrades
- Installation of amenities and services of a particular type and quality and by a certain date
- Building expansions and additional on-site developments
- Unofficial notice in advance of space becoming available and before other tenants or the general market are notified
- Commitment to negotiate an expansion or extension on certain terms
- Verbal or hand-shake commitments that might be counter to what appears in the lease, such as the likelihood and frequency or the landlord exercising its right to relocate a tenant
- Keeping competing companies from taking space in your building
- The landlord agreeing to lease the vacant space directly adjacent to your space last, so you can have time to grow into it, instead of leasing it first
- Landlord cooperation when you seek to sublease your space
- Providing your company with construction or tenant improvement upgrades or committing to construct your premises by a certain deadline, at a certain cost, or using a certain level of quality materials and workmanship
- Providing quality services, like cleaning, maintenance, repairs, and the like, in a timely, professional, responsive, and cost-effective manner
- And, more...
So, how can you possibly put faith in someone or in a company that will not likely be there for the duration of the lease? How should you negotiate leases differently based on this likelihood?
No terms should be left to memory or be agreed to based upon hand shakes. All terms must be clearly defined in a written lease document. Otherwise, they should not be counted on, and neither should you count on the party making verbal promises to keep them or even to be around. Remember, it is likely that your company will experience two or more landlords during the term of your lease. If a landlord or leasing manager won't put his or her commitments in writing, then those promises should be considered worthless, not only because the person might be lying but, because that person simply may not be around in the future to keep verbal promises.
Other lease clauses must be carefully addressed in the context that your company may likely experience transfers of its building to multiple landlords. Such clauses include those concerning:
- Notice provisions
- Default
- Casualty
- Transfer of security deposits to new owners
- Future financial commitments by the landlord
- Timely delivery of operating statements and how escalations are calculated
- Your company's rights to review the landlord's books and records and where the landlord is required to make those records available to you
- Service continuity during transfers of ownership
- Frequency with which your company may be required to execute legally binding estoppel certificates
- Definition of rights and options
- And, more...
If your company does not have the full compliment of business and real estate resources required to address these issues and properly negotiate leases to protect its financial and operational issues, then engage a qualified commercial real estate service provider to advise and represent your company.
Either way, plan in advance and negotiate your company's leases aggressively based on the assumption that you will deal with more than one landlord during the term of your company's lease.
