No Go Lease Terms: Landlord Edition

Last week, I gave you a list of my “no go” lease terms from the perspective of a tenant representative.  This week, it’s the landlord’s turn.  I am going to detail the terms that give landlords fits, again in no particular order.

• Multiple renewal options. As a rule, landlords love long term tenants but they do not love uncertainty.  Consequently, while most landlords are happy to offer one renewal option, they are reluctant to agree to extensive options that limit their flexibility far into the future.

• Courtesy notices. One of the few things that a landlord likes less than a tenant default is the requirement that the landlord has to give tenant a “courtesy” notice if the tenant is in default.  As a tenant broker, I understand why tenants request this – they want to make sure that an inadvertent accounts payable error does not throw them into a default.  However, from the landlord’s perspective, it creates another notice responsibility for the property management people where the tenant should arguably bear the burden of their own defaults.  A good compromise on this issue can be that things like a late payment are not considered “defaults” until courtesy notice and an opportunity to cure is given, but penalties still accrue to the landlord.  Further, the parties can agree to limit to one courtesy notice in any twelve month period.

• Unobstructed rights to sublease. Subleases are rarely more than a big inconvenience to a landlord as the landlord has to go through the tenant-approval process when it already has a paying tenant in place. In addition, if a landlord has other space available in the building, they have to compete with this sublease space for tenants.  Landlords therefore will do everything they can to discourage subleasing including barring tenants from subleasing to other existing tenants or prospects of the building or from profiting on sublease.  The compromise usually involves some compensation to the landlord for the hassle of sublease approvals as well as reserving the right of recapture so the landlord can take the space back and lease directly to a subtenant – sometimes after a substantial tenant buyout payment.

• Exclusivity clauses. Often tenants (especially banks, it seems) will request exclusivity rights which can range from a landlord promise not to name a building after a competitor to the promise that the landlord will not lease space of any kind to any tenant in the same industry as the initial tenant.  Because these clauses put often burdensome restrictions on a landlord’s ability to lease space, landlords are loath to grant exclusivity rights to all but the largest, best-credit tenants.  An additional concern for the landlord is administration of the exclusivity provision because it requires that the landlord ensure that all leasing and management staff are aware of the restriction for the life of that tenant’s lease.

• Termination rights. Landlords always keep their ability to finance an asset in mind when leasing a building, and lenders value certainty and lease term.  When tenants request a ten-year lease term (perhaps so that a larger tenant improvement allowance can be secured) with a right to terminate at the end of the fifth year, the underwriter at the landlord’s bank sees only a five-year term.  As a result, for borrowing purposes, the value of the asset is decreased.  Because of this situation, on the occasion that landlords are willing to grant a termination right, they typically will seek a large termination payment from the tenant to make up for the loss of value.  At a minimum, they will want to recoup their unamortized deal costs but often they will also add a penalty element to the total payment due.

The disconnect between the landlord’s and tenant’s interests on each of the above terms is resolvable.  When the two parties work together, they can usually find ways to make both parties comfortable, especially when they both bear in mind that a signed lease is the end goal.