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A fair first lease draft: No good deed goes unpunished

March 26, 2004

NJPA Real Estate Journal

as printed in the NJPA Real Estate Journal, March 26, 2004

Fairness, like beauty, is in the eye of the beholder. This is especially true for commercial leases, as landlords will even concede that their first draft leases are not particularly fair or even-handed. Most tenants would state that not only is the first draft unfair, but often so is the executed lease.

In and around major metropolitan areas, tenants expect that they will be able to negotiate leases commensurate with their size or creditworthiness. Larger tenants and creditworthy smaller tenants believe that each lease should be tailor made, and some tenants routinely strive forthat Saville Row of lease documents, the fair lease. This takes a lot of work, and can cost both the landlord and the tenant a significant amount of money. Why, then, doesn't the landlord present a truly fair first draft of lease?

The answer is tenant expectations. A landlord who puts forth a fair, equitable middle ground lease at the onset of bargaining is likely to do less well in the negotiations than the landlord who starts with more aggressive positions. The middle ground landlord hopes to make few changes and thereby maintain the middle ground. Unfortunately for that landlord, he will be viewed as stubborn and unyielding. By contrast, the landlord who sends out a one-sided pro-landlord first draft will be viewed as cooperative if he makes some concessions along the way.

The landlord starting in the middle may end up with a more tenant favorable document than he intends because the tenant will use the middle ground lease as a starting point for negotiations. If the landlord does not respond favorably to at least some of the requested changes, the landlord will be viewed as impossible and will run the risk of losing the deal. Thus, the landlord who tries the middle ground first lease draft may feel that no good deed goes unpunished. The landlord who starts with a harsh lease, but who is willing to negotiate reasonably (for a landlord) will be seen as a great guy (for a landlord), even though the middle ground lease may be a better lease at the onset than the tough version will ever become.

Given this psychological overlay, it is important for the parties to maintain perspective and to try to establish credibility early in the process. The landlord's negotiating strength should be measured, not by the toughness or reasonableness of the first draft, but by whether the lease is thorough and wellwritten. Tenants and their counsel have much more respect for a tough lease that clearly expresses thelandlord's intentions and expectations, than for a lease that is tough for the sake of being tough and, worse, is poorly drafted or inconsistent. Also, it is particularly important for the landlord to present a first draft that reflects the business concessions made during the negotiation of the term sheet. No tenant likes reviewing a lease draft that in addition to being harsh, does not reflect the benefit of the tenant's bargain.

On the tenant's side, lease negotiations are easier if the tenant actually expresses exactly what the tenant is looking for, not only in concept, but also in language. The tenant's counsel should modify the lease electronically, if possible, so that specific changes can be easily reviewed and discussed by the parties. The common practice of sending a lease comment letter addressing picky details and/or general concepts, is tedious to review and is unlikely to achieve a quick and positive result. The tenant should also note that certain clauses are sacrosanct, for example, the landlord's limitation on liability. While some tinkering to the those clauses may be appropriate, tenants lose credibility when they send back comments with clauses of that type deleted or diluted.

Depending upon the desirability of the tenant, some landlords are willing to make portions of the initial draft a bit more tenant friendly, and some will even include more commonly requested changes, making the first draft almost a version 1.5. Although draft 1.5 will not be viewed by most tenants as equitable, by making this effort, the landlord should theoretically be able to save a round ofrevisions. This movement toward the tenant's viewpoint, though usually small, should result in savings of legal expense and may avoid the delay in lease commencement which can be caused by long, drawn out negotiations.

At the end of the process, the tenant should get most of what it needs and some of what it wants, but the lease will still favor the landlord. Except for the largest and most creditworthy tenants, the lease negotiation process will not result in an evenhanded product. Thus, no matter how the parties started the negotiation process, ultimately fairness will be measured not by how many comments were refused by the landlord or won by the tenant, but by whether the end product is viewed by both parties as reflective of the business deal. For most tenants that is an equitable result.

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.