In the Spotlight: Executing Leases Faster and Cheaper

Although this topic has been covered pre-recession, faced with today's challenging economic environment, it is timely to revisit ways to streamline lease negotiation and execution.

When a landlord and prospective or current tenant reach agreement on the major business terms, typically in a non-binding letter of intent, the leasing “process” begins. At that point, landlords, their representatives and the brokers involved, want to finalize and sign leases as quickly as possible, while minimizing legal costs. In order to achieve this objective, landlords, their counsel and broker representatives should evaluate how their leasing “process” can be improved.

Your Lease Should Be User-Friendly

The leasing process begins, of course, with the lease. The form used by a landlord should be in plain English, that is, clear and concise. The use of terms such as “appurtenances” and “betterments” can, and should be, avoided.

The most user-friendly lease format has all major business terms set out in the very first article. The format looks something like this:

ARTICLE 1: LEASE TERMS

Building: The Best Building, 2000 Park Avenue, New York, New York.

Premises: The premises in the Building shown on Exhibit A attached hereto consisting of the entire rentable area of the twelfth (12th) floor, which the parties agree consists of 24,000 rentable square feet.

Term: March ____, 2011 through and including June 30, 2016.

Base Rent : $____________ per year, or $__________ per month, payable in accordance with Article 4.

Base Rent Abatement Period: March _____, 2011 through and including June 30, 2011

Electricity: Direct meter as set forth in Article 7.

Operating Expense Base Year: Calendar year 2012.

Real Estate Tax Base Year: July 1, 2011 through June 30, 2012.

Pro Rata Share: 2.4%, subject to adjustment as set forth in this Lease.

Renewal Option: Five (5)-year renewal option as set forth in Article 28.

Right of First Offer: Right of first offer for space on the eleventh (11th) floor of the Building in accordance with Article 27.

A landlord should work with its counsel and broker representative to reduce the length of the lease. Most leases can be shortened without impairing the rights and remedies of the landlord or the ability of the landlord to finance or sell the asset. There are recommendations later in this article for specific provisions that should be re-examined and either edited or deleted from a lease.

Reconsider Positions Taken in the Lease with the Advice of Counsel

Any effort to streamline the leasing process has to include a re-evaluation of substantive lease provisions. Many provisions are simply inappropriate for inclusion in certain leases. For instance, in a lease of three full floors to a major tenant, it is difficult to see both the need for, and the tenant's acceptance of, a right of relocation by the landlord.

Some lease provisions are of no value or are repetitive. A prime example of such a provision is the following: “The captions and headings in this Lease are inserted as a matter of convenience and for reference and in no way define, limit or describe the scope of the Lease or the intention of any provision hereof.”

Many lease provisions are often negotiated at length by the parties ' especially well-represented, larger tenants ' and end up a far cry from the landlords' initial position. If the landlord and its counsel crafted provisions that protected the landlord and dealt with a typical tenant's concerns, these negotiations could be avoided. Here are some examples:

• Casualty: A lease will sometimes fail to address the tenant's right to terminate the lease in the event a casualty makes it impossible to occupy and use the premises for an extended period of time. A lease should address this issue by defining the parameters that give rise to such right of termination. A lease provision can describe the extent that the casualty impairs the use of the premises (more than 50%) and the time estimated to restore the premises (more than 12 months), and give the tenant a short period to send a notice terminating the lease.
• Recapture: Many first drafts of leases are sent out with extensive recapture rights in favor of the landlord. A recapture right does make sense for the landlord in many circumstances, but there are some situations where it does not. For instance, in a 10,000 square-foot lease of 10 years, does the landlord need the recapture right in the event the tenant proposes a sublease of 1,500 square feet for three years? Doubtful.
• Default Notices and Cure Periods: Landlords should re-evaluate their lease to provide for reasonable notice and cure periods to tenants. To do so simply reflects business reality. A landlord rarely, if ever, will terminate a lease or initiate eviction proceedings without notifying the tenant. At the same time, the lease should provide for such cure rights to be taken away in the event the tenant repeatedly defaults, particularly, in the payment of rent. Some attention to these provisions should avoid lengthy negotiations with tenant's counsel.

The 'Kick-Off Call': Establish A 'Closing' Schedule

With the distribution of the initial draft of lease by the landlord's counsel, the landlord should initiate a “Kick-Off Call” that same day with all parties on the landlord and tenant side participating. On the “Kick-Off Call,” the landlord and its representatives should maintain an upbeat tone, setting a “closing date” for the lease signing, as well as a schedule of the intermediate steps, such as when comments to the lease should be sent by the tenant and its counsel. This call should focus on “lead-time” items needed for lease signing, which typically involve the architect, contractors and lenders. The call should conclude only when the landlord has set a time for a call among counsel to negotiate the initial tenant comments.

Thereafter, landlords should not allow, or should minimize, negotiation sessions involving only counsel. The transaction can benefit from one negotiating session between counsel where the landlord's counsel responds to the tenant's initial lease comments. This session should: 1) resolve many lesser differences; 2) set the list of open issues to be resolved; and 3) set out each parties' positions on those open issues.

From this point forward, there are no legal or business issues. Any issue that prevents a lease from being signed is a business issue. After this one negotiation session, all meetings or conference calls should involve decision-makers from both parties. Particularly with smaller transactions, landlords should insist on it.

Conclusion

Open-lease issues should be tracked in writing. The landlord's counsel and broker should create a list of issues to be resolved following the first negotiation session, which can be circulated to all parties. This list is a useful reference and avoids the problem of issues slipping through the cracks. A landlord should track and resolve open lease issues everyday. This approach is simply the only way for a lease to get signed quickly and minimize costs.

Anthony Casareale is Of Counsel in the Real Estate Practice of Greenberg Traurig's White Plains, NY, and Miami offices.

Although this topic has been covered pre-recession, faced with today's challenging economic environment, it is timely to revisit ways to streamline lease negotiation and execution.

When a landlord and prospective or current tenant reach agreement on the major business terms, typically in a non-binding letter of intent, the leasing “process” begins. At that point, landlords, their representatives and the brokers involved, want to finalize and sign leases as quickly as possible, while minimizing legal costs. In order to achieve this objective, landlords, their counsel and broker representatives should evaluate how their leasing “process” can be improved.

Your Lease Should Be User-Friendly

The leasing process begins, of course, with the lease. The form used by a landlord should be in plain English, that is, clear and concise. The use of terms such as “appurtenances” and “betterments” can, and should be, avoided.

The most user-friendly lease format has all major business terms set out in the very first article. The format looks something like this:

ARTICLE 1: LEASE TERMS

Building: The Best Building, 2000 Park Avenue, New York, New York.

Premises: The premises in the Building shown on Exhibit A attached hereto consisting of the entire rentable area of the twelfth (12th) floor, which the parties agree consists of 24,000 rentable square feet.

Term: March ____, 2011 through and including June 30, 2016.

Base Rent : $____________ per year, or $__________ per month, payable in accordance with Article 4.

Base Rent Abatement Period: March _____, 2011 through and including June 30, 2011

Electricity: Direct meter as set forth in Article 7.

Operating Expense Base Year: Calendar year 2012.

Real Estate Tax Base Year: July 1, 2011 through June 30, 2012.

Pro Rata Share: 2.4%, subject to adjustment as set forth in this Lease.

Renewal Option: Five (5)-year renewal option as set forth in Article 28.

Right of First Offer: Right of first offer for space on the eleventh (11th) floor of the Building in accordance with Article 27.

A landlord should work with its counsel and broker representative to reduce the length of the lease. Most leases can be shortened without impairing the rights and remedies of the landlord or the ability of the landlord to finance or sell the asset. There are recommendations later in this article for specific provisions that should be re-examined and either edited or deleted from a lease.

Reconsider Positions Taken in the Lease with the Advice of Counsel

Any effort to streamline the leasing process has to include a re-evaluation of substantive lease provisions. Many provisions are simply inappropriate for inclusion in certain leases. For instance, in a lease of three full floors to a major tenant, it is difficult to see both the need for, and the tenant's acceptance of, a right of relocation by the landlord.

Some lease provisions are of no value or are repetitive. A prime example of such a provision is the following: “The captions and headings in this Lease are inserted as a matter of convenience and for reference and in no way define, limit or describe the scope of the Lease or the intention of any provision hereof.”

Many lease provisions are often negotiated at length by the parties ' especially well-represented, larger tenants ' and end up a far cry from the landlords' initial position. If the landlord and its counsel crafted provisions that protected the landlord and dealt with a typical tenant's concerns, these negotiations could be avoided. Here are some examples:

• Casualty: A lease will sometimes fail to address the tenant's right to terminate the lease in the event a casualty makes it impossible to occupy and use the premises for an extended period of time. A lease should address this issue by defining the parameters that give rise to such right of termination. A lease provision can describe the extent that the casualty impairs the use of the premises (more than 50%) and the time estimated to restore the premises (more than 12 months), and give the tenant a short period to send a notice terminating the lease.
• Recapture: Many first drafts of leases are sent out with extensive recapture rights in favor of the landlord. A recapture right does make sense for the landlord in many circumstances, but there are some situations where it does not. For instance, in a 10,000 square-foot lease of 10 years, does the landlord need the recapture right in the event the tenant proposes a sublease of 1,500 square feet for three years? Doubtful.
• Default Notices and Cure Periods: Landlords should re-evaluate their lease to provide for reasonable notice and cure periods to tenants. To do so simply reflects business reality. A landlord rarely, if ever, will terminate a lease or initiate eviction proceedings without notifying the tenant. At the same time, the lease should provide for such cure rights to be taken away in the event the tenant repeatedly defaults, particularly, in the payment of rent. Some attention to these provisions should avoid lengthy negotiations with tenant's counsel.

The 'Kick-Off Call': Establish A 'Closing' Schedule

With the distribution of the initial draft of lease by the landlord's counsel, the landlord should initiate a “Kick-Off Call” that same day with all parties on the landlord and tenant side participating. On the “Kick-Off Call,” the landlord and its representatives should maintain an upbeat tone, setting a “closing date” for the lease signing, as well as a schedule of the intermediate steps, such as when comments to the lease should be sent by the tenant and its counsel. This call should focus on “lead-time” items needed for lease signing, which typically involve the architect, contractors and lenders. The call should conclude only when the landlord has set a time for a call among counsel to negotiate the initial tenant comments.

Thereafter, landlords should not allow, or should minimize, negotiation sessions involving only counsel. The transaction can benefit from one negotiating session between counsel where the landlord's counsel responds to the tenant's initial lease comments. This session should: 1) resolve many lesser differences; 2) set the list of open issues to be resolved; and 3) set out each parties' positions on those open issues.

From this point forward, there are no legal or business issues. Any issue that prevents a lease from being signed is a business issue. After this one negotiation session, all meetings or conference calls should involve decision-makers from both parties. Particularly with smaller transactions, landlords should insist on it.

Conclusion

Open-lease issues should be tracked in writing. The landlord's counsel and broker should create a list of issues to be resolved following the first negotiation session, which can be circulated to all parties. This list is a useful reference and avoids the problem of issues slipping through the cracks. A landlord should track and resolve open lease issues everyday. This approach is simply the only way for a lease to get signed quickly and minimize costs.

Anthony Casareale is Of Counsel in the Real Estate Practice of Greenberg Traurig's White Plains, NY, and Miami offices.