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Informed owner reps facilitate leasing.

Landlords and their representatives who develop and maintain the reputation of deal-makers have a distinct competitive advantage in the current weak economy. Those who are not well-informed regarding basic issues in New York commercial leases and who allow their attorneys to control the lease negotiation often undermine the negotiation process and impede results.

Throughout the lease process, the parties must keep in mind the primary purpose of the commercial lease - to identify various business risks and obligations and to allocate those risks between the owner and the tenant. Both owner and tenant should use their attorneys to discuss all the business/legal risks up-front before proceeding with negotiating and documenting the specific issues. These discussions may uncover another approach, such as using insurance, which may be more appropriate than using lease terms to mitigate a specific business risk. Those points which are not addressed and resolved at the beginning of negotiations inevitably prolong the deal-making process.

Typically, however, the parties reverse the process just recommended; that is, they fail to discuss many of the legal/business issues at the outset and "leave it to the lawyers" to draft and to negotiate lengthy leases and numerous significant business issues. This sequence escalates legal costs and often leads to an unsatisfactory conclusion. When the phrase, "Let's leave it up to the lawyers," enters the negotiation, the deal rarely gets done.

The more information the client gives the lawyer at the beginning to narrow the scope of disagreement, the quicker a deal will be signed. There are really only a finite number of significant deal points. These include, among others, subletting and assigning, how the rent escalation is computed, which year is the base for escalation, how many months will pass without an initial increase, details of the date of possession, and the consequences, if any, of delayed possession.

In the full range of landlord-tenant negotiation styles, the deals that have the best and fastest chance of closing start with the landlord's representative sending a short deal memo. This memo, or non-binding letter of intent which is sent before leases are drawn, highlights significant deal points. The memo will also quickly reveal any major areas of disagreement or misunderstanding. Full leases should be drafted only after the principals agree on the essential deal points.

Once the tenant's lawyer receives the draft lease, he or she then prepares a "memo of comments" to narrow the areas of disagreement and to have a document from which to proceed. Telephone calls during this time are less productive, more time-consuming, and more expensive for both parties than simply documenting the talking points. These written memos allow the landlord's representative to be involved without having to attend meetings and without receiving information that has been passed back second-hand from their lawyer, often after having been filtered through their lawyer's perspective.

Only after these two steps are complete is a meeting recommended with the tenant, the landlord's representative, and their respective lawyers to discuss the final, open items. Nothing moves the process along faster than having a frank discussion about the intention of various clauses, getting the landlord to focus on the significant issues, and having the lawyers help resolve the disagreements. The inexperience of an attorney who continues to focus on insignificant or arcane issues at this time and in this forum will be readily apparent, and the attorney should be reminded of the purpose of the process.

One example of a potentially simple deal which quickly turned contentions occurred in the late 1980's and involved a 2,000 square foot commercial lease, a major mid-town office building, a fairly sophisticated tenant, and a major landlord. The lease prepared by the landlord's attorneys and sent to the tenant was 115 pages long, single spaced with a ten-page sublet clause and no deal memo. Because leases of this length usually have inherent inconsistencies, the tenant's lawyer attepted to obtain a simpler lease or a lease which had been already negotiated with a tenant in place. The lawyer was told the lease was "non-negotiable."

By the time all parties got to the table, they were so hardened in their positions that the purpose of the meeting - to sign a lease that was mutually acceptable - was lost and the deal fell through. Had the landlord's representative been more involved with identifying deal points at the outset and had the landlord's lawyer had less pride of authorship, the outcome might have been different. The tenant went on to negotiate with a more responsive landlord and to obtain a simpler lease. For several years afterward, all parties on the landlord's side had to overcome the difficult image of "deal-breaker."

Because a landlord-tenant relationship is not a static process, the tone and pace of the lease negotiations are often just a preview of the future working relationship. In a soft market when many owners are offering equivalent space and tenants are scarce, tenant's attorneys and brokers will advise their client to focus on leasing with less litigious and/or difficult landlords.

If a commercial lease does go to litigation, most cases are resolved by a busy judge in the Civil or Supreme Court sitting without a jury. The length of the lease does not appear to correlate with a better judgment for the landlord. In fact, judges who are very familiar with leasing issues often do not want to read a ten-page clause. They prefer, instead, to use the concept of fairness rather than weightiness.

Additionally, the longer the lease, the more inconsistencies are likely to be found by the tenant's lawyers. No one person really knows what a 100-page lease says as a whole. Anything that can shorten the litigation process, such as resolving a dispute on a summary judgment motion, is likely to be well received by the Court. Each party saves time and money, and most landlords would rather fill space and collect rent than litigate.

Tenants are becoming more sophisticated and are using their lawyers to learn about the leasing process. These prospective tenants know that a landlord's representative who presents them with a 15-page lease - rather than an 85-page lease - has a better grasp of what is occurring in the real world of leasing in New York City and elsewhere. Landlord representatives who place ads offering tenant space with a "simplified lease form/no lawyer negotiation" understand the needs of the parties in the negotiation process and are in a better position to facilitate deals.
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Title Annotation:Building Management & Maintenance; landlord's representatives must be knowledgable of basics of commercial leasing
Author:Shustak, Erwin J.
Publication:Real Estate Weekly
Date:Oct 6, 1993
Previous Article:Hands-on key to properties in transition.
Next Article:Successful renovations require tenant input.

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