Straight Talk, Lease Negotiations: Getting What You Want
Real Estate New Jersey
as printed in Real Estate New Jersey, (Jan. 2004)
"For the headquarters tenant to achieve its objectives, it must wrestle some control away from the landlord."
Most tenants live with the adage, "You can't always get what you want." With all due respect to the Rolling Stones, that may not apply to the headquarters tenant with good credit who takes significant space. When the market is soft, many items are open to negotiation. Big users, however, can usually get most of what they want.
After the economics of the deal are resolved, landlords' lease forms focus on control. While it's important for the landlord to efficiently run the building, the headquarters tenant thinks differently, knowing its rent, space and prestige are keys to the building's value. If the tenant brings value to the table, it will want something in return. For the headquarters tenant to achieve its objectives, it must wrestle at least some control away from the landlord.
There are a lot of issues on the tenant's wish list. Most are "positive" rights: signage, reserved parking, expansion rights and the ability to assign or sublet. The aggressive tenant will also look for "negative" clauses, such as restrictions on signage rights of other tenants. Landlords hate this.
The headquarters lease is a different document-the party controlling the lease form will set the tone. The first task for the tenant is taking control of the lease form, which must be negotiated. Now that he can draft the lease, what should the tenant ask for? Simply put, everything. Of course, the tenant's requests must be tempered with reason and practicality. The key to drafting the tenantfavored lease is to not take away all of the landlord's rights.
Signage is important to big tenants-they will want their identity to he prominent. If the tenant doesn't put its name on the building, the landlord can still give that right to another. The lease must expressly limit signage rights of other tenants.
The tenant should also specify general and reserved parking needs. While the landlord wants enough premium and secondary parking for other tenants, the major occupant needs convenient parking for its non-executive employees.
Roof rights need to be negotiated. Most landlords will grant some roof rights for satellite dishes and AC. As part of roof rights, the headquarters tenant will want to prohibit interference with its rooftop equipment by the installations of others. The lease should also address construction by the landlord and other tenants. An R&D facility; for example, would be inconvenienced if construction interferes with its operations. But draft with care: It's very easy to violate the "don't be a pig" principal.
A sensitive question pertains to the solvency of the landlord. A headquarters tenant may need upgrades and improvements, which can cost millions. The tenant wants to know the landlord is financially able to do the job. While it's rare for a landlord to give a tenant security for landlord's construction obligations, the tenant isn't wrong to explore it. One solution, which most landlords and their lenders dislike, but is appropriate under certain circumstances, is to provide for a right of offset against rent if the tenant must complete construction.
Big leases often include expansion rights. If the tenant can project growth with reasonable accuracy, these rights work. Expansion rights are a good way for a landlord to ensure that the headquarters tenant remains in the building as it grows.
A similar item is the right of first refusal for other space in the building. The big tenant needs this right, as timed expansion rights may not correspond with its needs. The landlord hates giving this right as it interferes with the normal dealmaking process for the rest of the building. There are compromises each can make, and all expansion and renewal rights of other tenants signing leases after the headquarters tenant should be subject to the headquarters tenant's potential right.
Possibly the most contentious negotiating point concerns options to purchase and rights of first refusal regarding the sale of the building-some tenants even ask for an ownership interest. Can these rights be achieved? Sometimes. Will it be easy? Maybe not, but if the tenant's business necessitates asking for rights like these, go ahead and ask. There are many other rights the tenant will want or need-some are legal issues, such as the ability to assign and sublease. Others relate to lifestyle, such as whether the tenant can participate in choosing the building manager or management company.
Many of these issues should be addressed at the term sheet stage, when the landlord is courting the tenant. Some can be left for the lease negotiation, but by that time the tenant has committed, at least psychologically, to the property. Most are better addressed by the tenant if their counsel drafts the lease. No matter who drafts the lease, don't forget that together with many headquarters-style rights, the tenant also needs to negotiate adequate restrictions to safeguard those rights.
Jeffrey M. Gussoff is a member of the West Orange based firm of Wolff & Samson. Gussoff, whose practice consists of a spectrum of real estate matters, can be reached via e-mail at firstname.lastname@example.org.