Theory (2 of 9)
Much as one needs to have an exit strategy in life, such as the one that some people employ when going on a blind date by having their friend conveniently text or call them at a predetermined time as a potential means of being able to leave that date rather suddenly, the same can be said of the mindset that a real estate professional should have when not only negotiating a commercial lease, but even earlier than that.
It is imperative that at the preparation and subsequent negotiation of a letter of intent, the tenant’s broker be cognizant of the fact that during a 5 to 10 to 15 year lease term, a plethora of business and life changing events can occur, and consequently, it must put its client in a position of having the ability to not only monetize its investment in the space it will be leasing, but also to have the ability to fully or partially offload the space and maybe even be released from the lease and/or guaranty, with as little pain as possible. Broadness should rule the day as much as possible, with specified rights of tenants defined so broadly that an 18 wheel tractor trailer could drive through the LOI provision sideways. Examples of the myriad of things that can occur during a long term lease include but are not limited to:
- the sale or merger of a business;
- partners leaving or new partners joining a company;
- a downturn in a tenant’s business; and/or
- the need to extend the term of a tenant’s occupancy.
On the flip side, landlord advocates should not lose sight of the fact that many landlords feel that it is a pre-ordained right for the landlord to not only control the mix of tenants in his or her building or shopping center, but also to be entitled to each and every penny earned off of the brick and mortar that it owns. Consequently, wherever possible, so that it can accelerate the process and get the prospective tenant into the lease negotiation stage when the tenant and its team will have less leverage due to, for example, lost space opportunities, becoming financially pregnant by way of hiring an attorney and/or architect or being subject to time constraints caused by an excessive holdover penalty in their current lease, landlord advocates need to be as brief in detail and as narrow as possible when describing the rights and benefits of the tenant in what will hopefully be no longer than a 2 or 3 page letter of intent.
With the playing field and players now in place, prime examples of the necessity to negotiate exit strategies at the letter of intent stage can be found in the manner in which a seasoned tenant broker crafts:
- a broad use and subletting and assignment term sheet provision to allow for easier maneuverability and landlord’s consent if and when a tenant needs to offload its space, or as a temporary bridge, to allow the tenant to grow into a space larger than initially required, by allowing the tenant to license out a portion of its space on a short-term basis without landlord having the right to consent, share in the profits or recapture the space;
- a release from a straight or good guy guarantee upon an assignment of a lease by the tenant; and
- a renewal term sheet provision allowing the tenant to not only have the right to exercise a renewal option, but also for its assignee to have ability to exercise it as well.
That all said, getting back to our “Snagglepuss, Groucho Marx, The Clash & Steve McQueen Great Escape Theory,” among the Hanna-Barbera cartoon character Snagglepuss’s greatest lines was “Exit, stage left,” Groucho Marx’s line from the movie Animal Crackers, when he was introduced to someone that he wanted no part of meeting, was “Hello, I must be going,” a classic song from legendary punk-rockers The Clash was “Should I Stay or Should I Go” and lastly, Steve McQueen starred in the classic World War II movie “The Great Escape.”
Simply put, I implore tenant advocates to make my “Life and Real Estate Great Escape Theory” part of their negotiating playbook, and landlord advocates to not only be cognizant of the theory, but to be prepared to counteract tenant advocates trying to deploy it by maintaining as tight a grip as possible on an owner’s control over its tenant mix, secure and stable cash flow, and its right to all or a substantial portion of any profit generated from an assignment of a lease or subletting of a space.
Until next time, playing off of the title of a 1960’s rock classic by a band called The Animals, it’s time “We Gotta Get Out of This Place.”