Translating the Lease

Recently, we completed a lease for a client in a small San Francisco building. The transaction was negotiated to provide our client with a tenant improvement allowance, and the right to manage their construction. Because the client is a design firm, this approach suited them well. They understand design and construction and can leverage relationships to mitigate cost. The ownership of this building is not an institution, its management team lacks the sophistication you would otherwise see with professionals working for larger institutional owners. The lease provided the landlord with the right to approve the plans prior to construction, but it notably lacked a specific mechanism for communicating such approval. Our client provided detailed plans. They received a few minor comments/questions to which they responded promptly. Otherwise, the landlord agreed to the project schedule and let them commence their construction – implicit approval. During the construction, the client invited the management team to attend weekly meetings, to walk the space and generally sought to keep them informed (under no obligation to do so). Despite a few bumps along the way (the building had non-compliance in a few areas and a small amount of hazmat was discovered), the project was successfully completed. However, after moving into the space, the landlord sent a letter stating numerous elements of the construction had been completed without its approval, and the space must be restored at the end of the lease term (an undertaking which would cost hundreds of thousands of dollars). Naturally, our client was concerned. Thankfully, they sent us the letter and asked for our guidance.

The landlords letter referenced numerous sections of the lease which, in the aggregate, they claimed, entitled them to demand restoration. Here’s where it gets interesting. Either the landlord and its management team didn’t understand their own lease document, or they were attempting to make it look like they had rights they did not have, hoping the tenant would not understand the flawed ways in which they referenced the lease. In nearly every case, the sections of the lease to which they attributed their rights was incorrect. For example, they referenced the “Alterations” section of the lease despite this section explicitly governing the defined term Alterations, which relates to work done in the Premises after lease commencement and which may (with notice), at landlord’s election, require restoration. This section specifically excluded the initial tenant improvements, the governing of which was detailed in the Work Letter. The Work Letter itself included language that noted the initial tenant improvements were not subject to restoration.

To the average person, a commercial office lease, with its 60+ pages of legalese, can be confusing, difficult to translate. As experienced tenant advisors, to us the lease is more like a playbook we’ve studied for years, with which we are intimately familiar. We understand which clauses define which behaviors. Since we are deeply involved in negotiating the document, we know how these clauses have been formed. As with rental economics, there’s a “market” for lease clauses, a spectrum ranging from good to bad in terms of how any given clause is negotiated. While a landlord and/or its management team may send an official looking letter referencing the document, don’t assume they’ve got it right. Rely on your advisor(s), those who negotiated the document, to guide you in assessing the veracity of the landlord’s claims. For our part, we’re always available to our clients, not just when engaged in transaction-related work, but throughout the life cycle of the lease. In this capacity, translating the document is a common request.