Now that the economy has turned for the better, it’s back to basics in leasing. Whether it is a strip center or mall, the name of the game is getting that lease signed and a tenant operating. However, there are a number of issues that arise during the legal negotiating process, such as build-outs, allowances, co-tenancy, guarantees, restrictive areas, options, and assignments. This back and forth can be mind-numbing—but a proper strategy that addresses these concerns with tact and finesse will get you on the road to a signed deal. The following are some issues to review to ensure that you leap the time hurdle between Letter of Intent (“LOI”) and a fully executed lease.
First Hurdle: Financial Expectations
Before any negotiations can begin, it’s imperative that both Landlord and Tenant understand and agree to the financial expectations. For a Landlord, that means seeing a Tenant’s business plan, copies of tax returns, P/L statement, creditworthiness and operating history. The better these figures, the more opportunity a Tenant has to negotiate a limited or even no personal guarantee. On the Tenant side, the financial expectations of Landlord should be a proper and financially viable center. That means good traffic patterns, adequate parking for customers, a review of CAM and other charges.
Second Hurdle: LOI
Although an LOI usually is not enforceable, unless parties specify that it’s binding, the LOI is a great starting point to get parties on the same page and to effectively reduce lease negotiations to the basic and essential understood terms. In addition the LOI can function as a way to keep the transaction moving. Of real value for parties is the ability to address third-party issues before the lease is signed, such as presenting the LOI to a board, when their approval is needed, rather than plodding through a formal lease that may not even be close to finished. In addition, the LOI can be used to provide to lenders and investors, who may be weighing investment in the party.
On the flip side, confidentiality should be ensured so that parties don’t use it as an opportunity to shop for either another Landlord or Tenant. Further, if parties specify that the LOI is binding then a breach can be costly and incur time dragging litigation.
Final Hurdle: Finer Points of Lease Negotiations
Although usually part of the LOI, rent and term of lease are always prominent issues in any lease negotiations. These terms and the dance for negotiating the same are usually based on leverage of parties for other issues, like Tenant improvements/buildout responsibilities, co-tenancy, restrictive use, options/renewals, assignments/subletting, continuous operation clauses and even environmental issues. For instance, less tenant allowances could mean lower rent as Landlord is not incurring a cost with the allowance. Further, the term can be lowered or increased based on option for renewal clauses.
In addition to the minimum rent, it is important to address other monetary issues, including any percentage rent, CAM, taxes and other items of additional rent. It is also important to review all other provisions. For example, you may be able to reduce your responsibilities for repairs, construction, utilities and compliance. You may also be able to obtain waivers, releases, estoppel, insurance, indemnity, exculpation and other provisions that you need. It is also critical to address use restrictions, building restrictions, termination rights and unexpected obligations that can kill deals, prevent operation and development, and cause lost rent and damages.
Expediting these issues is key to both Landlord and Tenant. As the old saying goes, time is money, so jumping these hurdles and getting to the finish line matters to both parties. Proper and thoughtful legal counsel can help ensure that you don’t just jump the hurdles, but win the race.
— Thomas Onder, shareholder at Stark & Stark, chairs the firm’s Commercial, Retail and Industrial Real Estate Group. In addition, he is a Trustee of the Mercer County Bar Association. He writes regularly on real estate issues for commercial and mixed-use properties.