Negotiating office leases Featured

2:38am EDT August 30, 2006
The old real estate axiom of “location, location, location” suggests to business owners that they should find the most suitable location to attract customers and present a professional appearance. That often means negotiating property leases that do not have a significant adverse effect on their business’ finances or create unanticipated adverse consequences down the road.

Crafting an office lease that is beneficial to both tenants and landlords should not be left to chance. It requires guidance from experienced third parties, often attorneys.

Smart Business talked with Terry Thornton, a commercial lease specialist at Godwin Pappas Langley Ronquillo LLP, about the attorney’s role in negotiating office leases and how critical it is.

Why should landlords and tenants include attorneys in lease negotiations?
Unfortunately, most disputes that arise regarding lease agreements don’t have anything to do with basic things like rental amounts and the length of the lease term. It’s the seemingly inconspicuous verbiage in the rest of the lease to which landlords and tenants don’t normally pay much attention that tends to create problems.

Tenants and landlords will often be married to their lease terms for the next 10, 15, 20 years — so they want to look carefully before they leap. Lease agreements can contain many loopholes. It is the attorney’s function to help close these loopholes.

At what point in lease negotiations should attorneys be introduced?
That depends. Tenants and landlords don’t want to wait until after their leases are signed to ask attorneys what is wrong with them. But they also may not want to get an attorney involved too early in the process before the initial lease terms are discussed.

Tenants and landlords may want to work out what both parties want in a lease before they engage attorneys. If the tenant and landlord aren’t going to find a suitable match with each other from the get go, and they bring in attorneys to try iron out basic terms, they may incur unnecessary attorneys’ fees if the deal isn’t going to work anyway.

Tenants and landlords are wiser to do some homework in advance on some of the basic terms, such as rent, terms of lease, and finish-out allowances. Once they have done that, then they should bring in the attorneys to iron out the remainder of the lease issues and finalize a lease document.

How can attorneys help landlords and tenants in lease negotiations?
Attorneys think about the ‘bad stuff’ that tenants and landlords may not consider when drafting their leases. After leases are signed is the wrong time to start thinking about them.

Attorneys can also assist tenants or landlords who are in disparate bargaining positions to negotiate items that are the most important to them in the long run and that may be critical to their business. The attorney can help provide the legal leverage that lets tenants or landlords know how far they can push to gain favorable leases, or when they should back off.

Is it the attorney’s role to provide business advice to tenants and landlords when negotiating leases?
Attorneys provide legal advice, not business advice. They act as advisers in commercial lease negotiations and advise the clients on their legal positions. Ethically, attorneys are prohibited from giving their clients business advice. There are times they might suggest to a client that, legally, the terms or provisions of a lease are not a very wise choice for them or their business.

Attorneys point out the legal pitfalls tenants or landlords might face deep into a lease if they accept a lease agreement as written. The clients, however, must make the final decisions as to whether those problems are worth the risk.

How do clients select an effective attorney who specializes in leasing?
They can ask for referrals from real estate brokers, lenders or people they know in their industries, and then concentrate on retaining attorneys with significant experience in negotiating commercial leases. It is a bonus to work with attorneys who are board certified in commercial real estate.

The best thing, though, is for clients to find an attorney who fits their personal style, and with whom they feel comfortable. Commercial leases can run 20 to 30 years, and clients want to retain attorneys with whom they can develop good communication and long-term relationships throughout.

TERRY THORNTON is a partner and chair of the Real Estate Transactions Section with Godwin Pappas Langley Ronquillo LLP in the Dallas office, and is board certified in commercial real estate law. Reach her at (214) 939-4897 or tthornton@godwinpappas.com.