Most costly lease traps
Above: A major landlord broker, supposedly offering tenant representation, failed to disclose key non-rent costs in the landlord's proposed lease, and the tenant's lawyer missed these. The tenant wound up paying 50% more than expected, as you can see from this chart comparing expected effective rent per rentable square foot with actual effective rent.
Landlords propose draft leases loaded with traps. There's nothing sinister about this. It's the responsibility of a landlord and a landlord broker to protect the landlord's interest. It's your firm's responsibility to protect your interests.
There are so many different kinds of lease traps, often beyond a law firm's expertise. That’s why so many corporate executives retain CTRR to identify lease traps and negotiate them away. Here’s an executive summary:
1. Operating expenses. When Fortune 500 chief executives shake hands on the key elements of a leasing deal, they rarely focus on terms relating to operating expenses and other non-rent costs. Yet these clauses can obligate your firm to pay millions of dollars more than you have any business paying. Sometimes these charges can approach the cost of rent. Tenants get back our commission or fee just by the way we negotiate tough controls for operating expenses.
2. Electricity. An engineer can tell you what you need, but not how to translate that to effective controls in your lease. There are 5 factors that mean outrageous electricity costs for a tenant's premises or common areas. We always protect tenants against them in the leases we negotiate.
3. Heating, ventilating & air conditioning. After signing a lease, many Fortune 500 companies discover "standard" fine print that says they are obliged to pay as much as 50% more than they bargained for to get the heating, ventilating and air conditioning they need. This doesn't happen when we negotiate a lease.
4. Real estate taxes. Real estate taxes are supposedly straightforward, but abatements, incentives, five-year phase-ins, differences in new vs. existing construction and ambiguity over realty vs. personality can all create opportunities for error. One multinational bank angled for savings on their 300,000 square foot lease and wound up granting the landlord the right to collect more in taxes than he actually pays the city. When we negotiate a lease, we provide thorough protection.
5. Your ability to use space the way you want. A Fortune 500 company occupied several hundred thousand square feet of space on Manhattan's Park Avenue. Although they had a complete in-house real estate department, their lease was so inadequate that it took them several years and more than $300,000 in unexpected costs to get the landlord's approval for a seemingly simple thing like building a conference room. We negotiate leases which maximize flexibility for tenants.
6. One-sided performance obligations. Landlord draft leases push liabilities to tenants myriad ways, and landlord brokers belittle this as just the "standard" way of doing business. Attorneys, lacking hands-on knowledge of building operations, landlord billing practices and market conditions, invariably miss some costly traps -- especially when the problem is what a lease fails to say. Inadequate specificity. We make sure the leases we negotiate include enforceable landlord performance commitments and adequate remedies in the event a landlord fails to perform.
7. Subleasing. This involves a lot of commonly-overlooked liabilities. Even with all of today's corporate down-sizing, executives tend not to fully think through the subleasing issues before they move in. Several years ago, the partner of a big law firm told CTRR he couldn't sleep at night. The lease they had negotiated for themselves was so weak that they could not sublease their space even though the firm was in a cash flow crunch and letting go both partners and associates. The firm had relied on their general legal knowledge and on a prestigious landlord broker claiming to represent tenants