Tenant Advocates: A tenant never has more leverage in its negotiations with landlord than during the LOI preparation and negotiation stage. Once the LOI terms have been agreed to the tenant has lost a fair portion of its leverage.
Since landlord is either attempting to seduce a prospective tenant to lease space in its building or seduce its current tenant to remain in its space to avoid vacancy and lease up costs (and the absence of revenue loss) associated with a tenant vacating its space at lease expiration. Provided that the tenant concession cocktail and other tenant “asks” are rooted in reality and border on some semblance of reasonableness, never is there a better time for the tenant to ask of the landlord that which truly desires.
Importance of Leverage: Examples
- Tenant may have foregone other spaces of interest, therefore leaving itself with no fallback options if the lease is not finalized.
- Tenant may be in a holdover situation at its current space, which puts tenant in a position where it may need to pay its current landlord 200% to 300% of the rental amount provided for in its lease if it holds over beyond the lease expiration date.
- Tenant may need to open up its new location very quickly for financial reasons (such as accruing interest on a business loan or the ticking of the clock on preferred returns to investors).
- Tenant may have gotten a bit “financially pregnant” by hiring its leasing attorney, architect and other third party professionals.
LOI Sets the Playing Field
Tenant Advocates, keep in mind that:
- Most initial commercial lease drafts are arguably among the most one-sided, offensive, legal documents known to mankind.
- Although a commercial lease is a legal document, roughly 90% or more of the language contained in a lease is of a “business nature.”
- LOI’s are generally negotiated by brokers and owners (not by attorneys); and
- Brokers often perceive attorneys to be less-than-knowledgeable about the business terms of a lease. That said, it’s shocking that they often pass control of the deal onto the attorney.
Landlord Market vs. Tenant Market
Landlord Advocates: In a landlord’s market, it’s important to be empowered but remain reasonable and tactful.
Tenant Advocates: In a tenant’s market, tenant has the ability to back out of a deal, which can be a very powerful negotiating chip.