Modern Workplace Planning: Solving for Experience Part VI: Negotiating the Lease

Leases vary by building, by market, and by market circumstances.  In most major metros, when dealing with larger buildings, the lease document is sophisticated and complex, addressing a broad range of variables that will have a material impact on the occupier’s experience at the building, as well as its cost of occupancy.  If you’ve done a good job negotiating the letter of intent, you should begin the lease negotiation phase from a position of relative strength.  However, even when the letter of intent is fully maximized, there’s still a lot to negotiate in the lease.
 
Tenants are often turned off by a long lease document.  Yet we’d rather have a long, detailed lease that contemplates the full range of issues that can arise between landlord and tenant, because when the issues have not been properly clarified, it leaves the parties open to misunderstandings which can lead to problems.  Think of the lease as an operating manual for your tenancy.  It’s the place where you go to understand the rights and obligations of the parties.  Negotiating the lease should be a collaborative effort in which your real estate advisor works hand-in-glove with your real estate attorney.  Notice we specified “real estate” attorney.  Negotiating a real estate lease is a highly specialized undertaking, best accomplished by a real estate attorney whose practice is solely focused on this work.  General counsels, or other lawyers not well versed in the nuances and market specific dynamics of lease negotiations will simply not be able to capture all the appropriate value. 
 
A little about market fluctuation.  In tight real estate markets, like that of San Francisco in 2019, landlords aggressively protect their document, offering as few concessions as possible.  In these markets, the lease tends to afford the tenant less flexibility, less value.  In fact, landlords will reject otherwise reasonable arguments a tenant may make simply because they can.  Most office leases are drafted by the landlord.  The starting point is decidedly landlord favorable.  To be sure, there are law firms that have made a practice of continuing to advance new takes on lease concepts that favor the landlord.  When the markets permit, these firms win clients by advocating increasingly restrictive language that limits the occupier’s rights.  For example, in the pre-pandemic madness of the San Francisco market (4% vacancy),  a new take on subleasing emerged in which the tenant was precluded from subleasing its space at a discount to market, or, on terms that were less than those being achieved by the landlord in its direct leases.  This is a ridiculous position for any landlord to take, and nearly all landlords understand that subleases often transact at a discount to direct leases due to a host of factors, including limitations on term, and fewer concessions, to name a couple.  Just because the market has softened, do not expect the landlord to proactively offer a more favorable lease document.  Leases must be reviewed word by word with careful consideration given to each clause.
 
As with the negotiation of the letter of intent and all other phases of a good real estate process, there is a cadence to the lease negotiation.  The very first step is to establish a complete, consolidated redline document that accurately reflects the tenant’s full comments to the landlord’s proposed document.  Adding new items in the future will be seen as moving backwards in the negotiations.  Bear in mind, these documents are negotiated via a series of “trades”.  It’s a bit of “…we’ll give you this, but we need that”.  In our experience, the exercise of continuously trading drafts back and forth is not the best mechanism for achieving agreement.  After the initial draft and comments, we typically recommend one more turn, followed by a meeting in which the attorneys, principals, and real estate advisors can come together to discuss the open issues.  Competent real estate attorneys understand the market.  There is a dance that goes on in which the attorneys argue the issues back and forth.  Experienced attorneys (and real estate advisors) know the landlord and tenant arguments and the market-based resolutions that should be achievable. 
 
Lease issues fall into 2 main buckets; 1) real world stuff that will happen and needs to be understood, and 2) academic issues, which while potentially important, are highly unlikely to ever come to pass.  The most important aspects of an effective lease negotiation are the knowledge and communication skills of the advisors/lawyers.  The concepts addressed in the lease can easily be misunderstood, leading to protracted, unproductive negotiations.  When the parties sit together and express their concerns about the issues, we discover the concern may be misguided due to a lack of understanding and/or there is an easy solution.  But this level of communication is not achieved when the lawyers are merely trading the standard arguments back and forth via drafts.  We find that only the most experienced lawyers and advisors have enough knowledge to be creative.  Otherwise, they hold onto the textbook positions, making it harder to reach agreement.  Retaining a real estate attorney is therefore one of those moments when it makes sense to pay up for more experience.  It’s also important to have the experience be local.  A great real estate attorney in New York will be less effective at negotiating a San Francisco lease than a great, San Francisco-based real estate attorney because the markets do fluctuate and many elements of the lease relate to the local market norms and issues (e.g., earthquakes are a real factor in San Francisco, not so much in New York).
 
Getting the lease right, maximizing your position on all the important clauses addressed therein, is the last step in a great real estate process.  Mistakes at this critical juncture can materially impact what is often a long-term arrangement, and these mistakes can be very difficult to correct downstream.