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Property and the Law, Every Landlord's Dream

July/Aug. 2003

Real Estate New Jersey

as printed in Real Estate New Jersey, (July/Aug. 2003)

In many markets, the demand for office space isn't as strong as New Jersey's commercial real estate owners would like. Current conditions favor tenants, and for large space users, there are opportunities for great economic deals and for equalization of the landlord/tenant relationship, which can be uncomfortable for even the most savvy landlord.

After the economics of term, landlord's work, rent and additional rent, the foundation for the ordinary landlord/tenant relationship is control. The dominant party is usually the landlord-most tenants negotiate from the landlord's lease form, and too many leases still treat the landlord with too much emphasis on "lord." But larger tenants recognize that many aspects come down to control, and in this pro-tenant market, it's no longer a given that the landlord will retain the control he once had.

When one tenant negotiates for an entire building, the tenant may want to control the operation of the property and the landlord may be willing to substantially limit control by entering into a net lease. These negotiations focus on how much control the landlord retains and whether the landlord can lay off responsibility for expensive repairs. Often, with single-occupant buildings, daily management by the landlord is neither wanted nor warranted, and the tenant sets the standard for operational matters.

The more interesting and more contentious scenario is when one tenant occupies most of a building. In this case, the tenant wants significant influence over operational, functional and decorative aspects, which can be adverse to the landlord's need to address the requirements of other tenants and the landlord's pocketbook. What can the smart landlord do to walk this line?

The major tenant anticipates that the landlord will do a good job running the building. That won't stop the tenant from requiring the landlord to replace the property manager, cafeteria operator and cleaning service. As long as the lease provides that only serious problems will trigger tenants' rights, that the landlord will have a time period to address the problem, and that the tenant cannot offset or withhold rent, the landlord should be able to live with this. Obligations to the tenant will require the landlord to make sure that service contracts can be terminated, or the landlord will be in breach of the lease if the landlord can't replace the bad operator, or the service contract, if the operator is terminated prior to the end of the contract term.

"With the market favoring tenants, landlords need to negotiate leases especially with major tenants-with care."

Next, the landlord should acknowledge that there are certain lifestyle aspects of a building that may need to be conceded. One of these is the aesthetics, such as lobby decoration and signage. A major tenant may want to have influence over the look of the building. Some landlords will accept this, while others are concerned that it will make other tenants feel like secondclass citizens. The major tenant will pay enough rent to warrant exclusive naming rights and other signage, but the sophisticated tenant may also ask to limit the ability of another tenant to post its logo. The landlord can agree as long as he reserves sufficient identification opportunities for other tenants.

Some lifestyle issues can have a significant cost aspect. In a service firm, business hours may not be limited to cJ-5, Monday through Friday. To address its realities, the tenant may demand extra security or longer air conditioning hours, which can increase expenses. When possible, the lease should provide that the tenant will be charged for extras, or at least share the cost. If the tenant has the bargaining position to have these items included in rent, the landlord must take into account their impact on rent calculation and whether other tenants will be adversely affected.

Finally, the larger tenant will negotiate for space options during the initial term and may ask for rights of first offer or first refusal. This can be sticky, because it limits the landlord's ability to give other tenants long-term leases and renewal rights. Also, rights of first refusal make the landlord's premises less attractive to the brokerage community because each new deal can be taken away by the major tenant after much of the broker's work is done.

The major tenant is every landlord's dream: good credit, prestigious occupancy and significant reduction in vacancy rates. With thoughtful negotiation, the major tenant does not have to be the landlord's worst nightmare.

Jeffrey M. Gussoff is a member of the West Orange, NJ-based firm of Wolff & Samson PC. Gussoff, whose practice consists of a broad spectrum of real estate matters, can be reached via e-mail at jgussoff@wolffsamson.com.