Wednesday, January 4, 2006

What if a Commercial Landlord Says 'Take it or Leave it'?

This an interview with attorney Janet Portman, the author, or co-author of several books about renting, leasing and purchasing real property; including Negotiate the Best Lease for Your Business (Nolo).

NOLO: Janet, let’s say you’re new to leasing commercial space. Is there a number one or number two concern that a businessperson should be aware of?

JANET PORTMAN: Of course, the first thing you think about is ‘Can you afford the rent?’ That’s an obvious one. But a not so obvious one and one you’re not likely to think about when you are planning to stay in the place where you’re renting, is the need to have an exit strategy which you can build into the lease and it need not even be an exit strategy, it can be a ‘flexibility strategy.’ You need to think about what would happen if you want to expand or if you want to contract, if you want to stay in the same place when the lease term expires and you want some assurance that you’ll be able to do that. If you want to bring in a subtenant because you don’t need some of your space, or perhaps you want somebody to take over for a period of time during the season where you don’t need as much space. Those are all flexibility rights that you might not be thinking about when you enter into the lease but they are very important, especially the final one which is how do you get out early if you need to. And if you build in that kind of flexibility from the beginning, then you’ve given yourself the ability to change as conditions and as your business grows and changes.

NOLO: Is it better to form an LLC or Corporation before leasing property in order to limit your personal liability?

JANET PORTMAN: Well, there are two kinds of protection you want as a businessperson. The first is from lawsuits from the public in general; your customers, your vendors and so on. The second one is protection from the Landlord should you be unable to pay the rent or perform any other legal obligations or monetary obligations under the lease.

Now, if you have a business in which it’s likely that you can be sued for big money--such as running a restaurant, running a gymnasium--then your risk and your exposure is rather high and you would want to form an LLC to protect yourself from lawsuits of that nature. Will that do you any good with respect to your landlord? Probably not because the landlord is going to ask you to forego your corporate or LLC shield by giving either a personal guarantee or offering someone who is financially viable, such as a friend or another business.

NOLO: Let’s talk about the length of the lease. Are there any general rules for when shorter is better?

JANET PORTMAN: The moving pieces in that equation are the market as best you can guess. What’s going to be happening with this particular property within the next few years, and in particular, at the end of your lease term and the other important piece, of course, is what’s likely to be happening with your business. If you can conclude that the value of the property will be going up and the value of properties in general are going to be going up, and that your business is likely to flourish--of course, everyone hopes that it will--then you might opt for a longer lease term so that you don’t face the hassle of having to re-rent.

On the other hand, if you’re not quite sure of the viability of the neighborhood, or if you’re frankly not quite sure about the viability of your own business, you might want a shorter term because you might jump at the ability to get out of the lease sooner.

NOLO: Janet, as you explain in your book, most landlords are represented by their own broker known as the ‘listing broker,’ and for a lot of business owners it’s not possible for them to have their own broker, who is a ‘tenant’s broker.’ Since this is a reality for so many business people, do you really have to worry if you’re only dealing with a listing broker?

JANET PORTMAN: Yes, you do have to worry because you need to realize that the broker who’s working for your landlord has a legal duty to advance the best interest of the landlord, not you. So you’re up against a stacked deck to begin with. And if you can’t afford your own broker, the thing you should do certainly is to, at some point, in the lease negotiation, show the lease to a reputable attorney who’s familiar with tenant issues and who will be representing your interest. The amount of money you’re going to spend on that lawyer for a lease review and suggestions, will pale next to the monetary consequences of signing the lease that’s stacked in the favor of the landlord.

NOLO: What do you estimate is the amount of money that you’ll pay for that type of legal representation?

JANET PORTMAN: You know, large metropolitan area, you’re looking at $200 to $250 dollar an hour fees. You could easily spend a thousand dollars asking for a review and having a meeting with the attorney, getting some suggestions as to where you should push, where you can afford to give up, and what’s really critical. And, in particular, understanding the consequences of what you’re about to sign, even if you don’t get your way. A thousand dollars in the long run is not that much, especially if you think about what you’d have to pay as a retainer if you end up going to a lawyer, fighting over a lease clause, litigating a lease clause that you could have mitigated, that you could have avoided possibly if you’d reviewed that clause with a lawyer before you signed it.

NOLO: In your book, you provide a lot of great advice about what to look out for, and how to negotiate a commercial lease. But what do you say to a landlord, who says, ‘take it or leave it?’

JANET PORTMAN: Landlords aren’t stupid and they’re going to say ‘take it or leave it,’ if it’s a landlord’s market. If space is tight, if their property is highly desirable, if there are 17 stellar businesses lined up behind you who are willing to sign on the dotted line without reading the lease, then the landlord can afford to say ‘take it or leave it.’ The only thing you can say at that point is ‘Okay,’ or ‘See you later.’ A landlord who says ‘take it or leave it,’ who doesn’t have the advantage of the marketplace however is being foolish. And you’ll find out very quickly whether that person is bluffing and can be dealt with or whether, in fact, the market is behind him and he has every ability to hand the lease to the next guy in line and get a tenant. If you have a landlord who says ‘Take it or leave it,’ and you know darn well that the property isn’t all that advantageous, that anybody looking at it is going to be asking for the same things you are, and you point that out to the landlord and you still come up against a stone wall, I think you’re dealing with somebody who’s unreasonable, who’s unrealistic and you probably don’t want to do business with that person anyway. So, look elsewhere.

NOLO: What if you’re offered an opportunity to sublease property, is there a primary concern you should keep in mind?

JANET PORTMAN: Yes, if you are the tenant and you’re about to sublease to someone or you would like to be the subtenant and get space from your friend down the street, the first thing that both of you need to check out is whether the person with the lease has a right, under the lease, to sublease. Most smart landlords will put a clause in their leases which says that the tenant may not sublease or assign the space without the landlord’s consent. And reasonable landlords will add in the lease clause that the consent of the landlord will not be unreasonably withheld. Which means simply that the landlord won’t arbitrarily say ‘No,’ that the Landlord will apply reason and good sense and objective business criteria to evaluating the subtenant. But the first thing is to check the lease and see what the procedure is for subleasing. If you don’t do that and you bring somebody in, on your own, then the landlord will have every right to not only kick that person out, but that would constitute a breach of the lease and it might constitute ground for the landlord to terminate your lease.

NOLO: In light of the disasters that happened to so many businesses from earthquakes, hurricanes and other natural disasters, what type of concerns would that raise when negotiating a lease? Will the landlord’s insurance cover your business?

JANET PORTMAN: The landlord insures the building. But your business property, your inventory, your tools, everything that you bring into the space to operate your business is not covered by the landlord’s insurance policy. And in order to cover it, you have to take out your own policy on your equipment. Incidentally, most leases will require you to do that because the last thing the landlord wants is to have you facing a huge loss, unable to recover, unable to pay the rent and there goes his tenant. So it’s very important to make sure that you get that coverage even if it’s not required, but don’t be surprised to see it in your lease.

Another issue to look for in the lease is a clause that describes what will happen if the property is damaged through fire, flood, anything actually short of the ultimate cataclysms such as a hurricane or a tornado or an earthquake. I mean you could have damage from a simple kitchen fire or equipment fire. It’s a good idea to have a clause in your lease that sets this out. Landlords, of course, will want the ability to declare either that the leases is over, you have no more right to stay there and they’re going to go ahead and fix it, and they also want the right to decide instead that the lease will simply be suspended while they make repairs. You, on the other hand, of course want the ability to make the decision whether you stay or go. It’s a common negotiating point. Who gets to declare what will happen? Will the lease simply be suspended while repairs are being made or will the lease be declared over? Now, if the building is utterly destroyed then there’s no really no question but that the lease is over. But, often times, the problems are less all encompassing and the question for the tenant, ‘Do I want to just get out of here, and start anew, or am I willing to wait a period of weeks, or even months while repairs are being made and then move back in?’

NOLO: Speaking of disasters, if you’re leasing property, what happens if the landlord goes bankrupt or someone forecloses against the building?

JANET PORTMAN: This is an area that very few people understand – landlords and tenants. And it’s actually very important because it happens quite commonly. The general rule is that if you have signed your lease, after the landlord put up the building as collateral for a loan or after the landlord bought the building, and of course, the building is more or less, collateral for his mortgage payment, then if he fails to pay out on the loan and it’s foreclosed, or doesn’t keep up with his mortgage payments, then a foreclosure will terminate your lease, unless you have some protection in the lease itself saying that whoever takes over at that point will honor your lease.

The flipside of that is that if your lease pre-dates either of those two events, then legally you would survive the foreclosure. In other words, if the building is put up as collateral for a loan after you’ve moved in, and the landlord doesn’t make his loan payments, and the lender forecloses, you would survive.

And what you want, in any situation, is you want to sort of short-circuit those two rules. And simply provide in the lease itself that if there is a foreclosure of the building, that not only will you have the right to stay where you are, regardless of the dates involved, but the new owner will be required to let you stay. That’s a very complicated clause. It’s called a ‘Subordination Attornment and Non-Disclosure Clause.’ It probably takes the cake for the most complicated and mouthful clause in the lease, but it’s very important so that you don’t find yourself out on the street because a new owner has taken over.

No comments: