'Prenegotiated' Leases, with Built-in Compromises.

Any method of negotiation may be fairly judged by three criteria:
1. It should produce a wise agreement if agreement is possible.
2. It should be efficient.
3. And it should improve or at least not damage the relationship between the parties."
So say Roger Fisher and William Ury in Getting to Yes 4 (2d ed.
1991).
In the classic method of lease negotiation, the landlord submits its standard form, often in excess of 60 pages, regardless of the size of the relevant premises or the term of the relevant lease; the tenant reviews the proffered form; and the negotiations proceed from there.
In the case of national retail tenants, the tenant submits its standard form, but this article will assume the process starts with the landlord's submission.
This method, usually more often than not, complies with the first criterion above: It produces a wise agreement. This method, usually more often than not, complies with the third criterion: It does not damage the relationship between the parties. However, much more often than not this method fails the second criterion-and fails it
miserably: It is not by any means efficient.
This lack of efficiency is a direct result of landlords time and time again proffering to prospective tenants forms that contain numerous provisions that do not address the tenant's needs. And landlords do this knowing many tenants will complain about these clauses, and also knowing that if a prospective tenant requests that these provisions be changed, the landlord will capitulate. Although there always will be variations in individual situations, often it is the same clauses about which a tenant will complain, only to receive the landlord's standard response, followed by the standard arguments by counsel and, ultimately, the standard compromised result. This not only fails to meet the criterion of efficiency, it is a case study in inefficiency. Worse, it is inefficiency coupled with unnecessary expense in terms of legal fees incurred to negotiate the same provisions over and over again.
But there is an alternative method available that undeniably better serves criterion 2 in that it is more efficient, and arguably better serves criteria 1 and 3 as well. Although not known by any official doctrinal title, the method is for the landlord to create a standard form and proffer in the first instance what one might call a `prenegotiated' lease-that is, a lease where the landlord has built into the form as many of the conventional compromises as it finds acceptable. This serves the cause of efficiency in two ways:
a. It avoids the time and energy wasted on negotiations over clauses about which the landlord is willing to compromise.
b. It helps send the message that the likelihood of the landlord being flexible on various other clauses is not great. If the landlord was willing to be flexible on those scores, the lease form would already reflect that flexibility.
This approach results in shorter, easier negotiations, increasing efficiency, thus saving the landlord and tenant money. It probably results in wiser agreements and better tenant relations as well. And the best part is that this result is achieved without the landlord giving away any position about which it actually cares.
There is no universal list of the provisions in a lease that should be prenegotiated. There is no universal right way these provisions should come out. The individual needs (or quirks) of the particular landlord, the accepted practices in the region, the size of the relevant structure, the prototype size of any individual premises, the landlord's practices concerning the necessary level of credit- worthiness of prospective tenants and the statutory or common law of the relevant jurisdiction are but some of the factors that might affect any of the provisions to be discussed.
Here are some of the conventional compromises to which landlords and tenants often agree. In using as many of these compromised positions as a landlord finds acceptable in its standard lease form, the landlord has prenegotiated the lease and created efficiency not only by including the acceptable provisions, but by thinking through and rejecting the other provisions. Having thought through these positions in advance and deciding to reject same, the landlord will be able to respond immediately to the inevitable tenant requests to modify these particular provisions with rational arguments.
ALTERATIONS
Virtually every tenant is going to want to know its initial build-out is acceptable and that thereafter it has some level of freedom to make alterations. A landlord should consider including in the form permission, without consent, to make nonstructural alterations that do not materially harm building systems, perhaps subject to a dollar cap. If a cap is included, it should not be so low as to forestall the possibility of any meaningful work being permitted. A landlord should consider allowing alterations that do not require consent to remain at lease expiration. The landlord would also be obligated to inform the tenant at the time of granting approval (as to alterations that require approval) whether the relevant approved alteration may remain at lease expiration.
ASSIGNMENT & SUBLETTING
Affiliates, mergers and consolidations, asset sales, public companies, estate planning-does a tenant's need for some flexibility in these provisions without requiring consent, or being subject to recapture or a rent hike or a landlord review fee, come as a shock to anyone? A landlord should consider what is acceptable-and consider volunteering it in the lease form.
ASSIGNMENT OF EXTENSION & EXPANSION OPTIONS Is this part of the bargain for which the tenant is paying, and accordingly assignable whenever the lease is assignable, or personal to the named tenant? Traditionally, on the East Coast the right was the tenant's to assign. On the West Coast, these rights traditionally have been viewed as personal to the named tenant. A landlord might consider allowing the rights to be transferred, but only to any person to whom the lease can be transferred without consent.
CAPITAL EXPENDITURES & CAM
The landlord often starts with the position that any penny spent on anything is properly included in Common Area Maintenance (CAM), and often, but not always, provides for some type of amortization of capital items. The tenant often starts with the position that it should have no responsibility for capital items, as it has no equity in the building. A prenegotiated compromise to consider is to include in CAM only capital expenditures incurred to replace existing building equipment or reduce building operating costs (as compared to lobby renovations, art work or other changes mostly designed to attract new tenants). Such expenditures would be amortized over the useful life of the improvement (without an artificially short absolute maximum period of reimbursement), and without an interest factor (the tenant is not financing a purchase; it is paying an annual use charge).
LEASE AUDIT RIGHTS
A landlord should consider providing this right. If it does, the landlord should further consider not mandating that the tenant provide specific information as to the details of the complaint in advance of the audit. If the tenant knew the details, an audit wouldn't be needed. And the landlord should consider not mandating that the auditor be a Big 4 firm or even a certified public accountant; the required professional fees might be enough to cause the tenant to forgo the audit. A landlord should consider as well not mandating that the auditor refrain from working on a contingency fee or from contacting other tenants, although these last two points are ones landlords might be loath to relinquish.
DAMAGE BY FIRE
Leases almost invariably provide landlords tremendous flexibility while very often providing tenants none. A landlord might consider providing tenants a right to terminate, especially as the term draws to a close, and might also consider granting this right if parking or access is affected even if there is no direct damage to the premises.
ENVIRONMENTAL
A landlord should consider allowing de minimis amounts of cleaning and other toxic products to be maintained in offices in the ordinary course, and consider making compliance with law, as compared to compliance with the landlord's subjective decisions, the standard of required behavior. The lease should make clear that the tenant has no responsibility for pre-existing conditions.
INTERRUPTION of SERVICES
Absent a 9/11- or Katrina-type disaster, how often are services interrupted for extended periods of time? A landlord should consider volunteering rent abatement if services are disrupted for more than a relatively short period-maybe 72 hours.
HOLDOVER
A kick-up of basic rent is de rigeur. But a landlord should consider dropping both multipliers of CAM and broad-stroke indemnities against any and all damages, and protect itself from problems with new tenants in the delivery section of that tenant's lease.
HVAC OVERTIME
A landlord should consider volunteering that multiple tenants in the same zone will divide the hourly rate, rather than each paying in full.
NOTICE of MONETARY DEFAULTS
How many thousands of times has this topic been discussed? And how many times has a landlord terminated a lease without demanding the overdue rent be paid-not once but multiple times? Landlords do not desire evictions or empty spaces-they want the cash flow. Almost invariably, notice of nonpayment is delivered. So a landlord should think about putting it in the form. And it does not have to be all or nothing-perhaps on the third monetary default in any consecutive 12-month period the landlord can proceed without notice. And landlords should also consider whether requiring credit and payment history reports on prospective tenants might be a better tool to guard against nonpayment than preserving the lease clause entitling the landlord to evict without notice.
REMEDIES
A landlord should consider whether the form, if it includes the right to accelerate rents, should also include a fair market value credit for the then-remaining value of the space upon such acceleration of rents.
MITIGATION of DAMAGES
A landlord should contemplate whether its purposes are not better served by acknowledging that it has an obligation to mitigate, while also objectively defining what steps will be deemed to satisfy this obligation.
ESTOPPEL
Rather than simply mandating that the tenant, on demand, deliver an estoppel-a document in which the tenant is asked to make certain representations-a landlord should consider volunteering to deliver one when requested by the tenant. Given the possible volume of requests, a landlord might also contemplate including an appropriate administrative fee to be charged in connection with processing such a request.
There is no one perfect lease that works for every landlord in every setting. But if the time and effort is invested to prenegotiate a lease form, and to simply trim its length as well, the effort will be rewarded in savings of time and money, without loss of meaningful rights."
from The National Law Journal, October 3, 2005 for more information go to: www.houstonrealtyadvisors.net