Following is a transcription of episode 39 of the LeaseSmart Commercial Real Estate Podcast.
The comments made in this interview are not intended as a solicitation, legal advice or to create a lawyer-client relationship. Seek the advice of an attorney familiar with your circumstance before relying on any content contained in this discussion.
Intro: Welcome to Corporate Real Estate Podcast, brought to you by LeaseSmart.com. I’m Natalie Piles and I’m here with Craig Melby, founder of LeaseSmart. LeaseSmart finds companies the best facilities and gets them the best terms making their business more profitable and less at risk to future unpredictable circumstances.
Thankfully, Craig is going to teach us something about commercial space today. Craig, what do you have for us?
C: Today we have Taylor Speer on the line with us. He’s a lawyer with the firm of Turner Padget out of Greenville, South Carolina. Taylor sues landlords on the tenant’s behalf, and sues tenants on landlord’s behalf, because apparently there’s a lot of misunderstandings in the leasing business. “Taylor, why are you being kept so busy in this landlord/tenant industry?”
T: “Well Craig, as you know the Greenville Commercial Market is exploding right now and there’s a lot of valuable space out there to be had. We want to make sure that, from the perspective of a tenant, the landlord is not over reaching and stays within what’s reasonable in their lease. I typically represent small to medium size businesses, often the tenants have disputes with the landlords. In our law firm we have a transactional practice and those are the folks that are going to be representing, more often than not, the landlord in drafting the lease. I know what tricks they use, having litigated a lot these things. There are just things that tenants really need to look out for.”
C: Well, when the tenant comes to you, have they used an attorney when they executed the lease, or do they come to you after the fact now that they have problems?
T: I would say it’s probably about 50-50. It depends on the size of the business in fact that brings up a good point. The first issue that should be addressed is always taking a potential or prospective lease to an attorney – that’s the first point. The second point is listening to the attorney. I have more than once litigated over a lease where I actually represented the tenant prior to executing the lease! I represented the tenant in the negotiations of the lease, and the tenant (which in these circumstances is the client) waited in the last minute to address particulars of the lease that I thought were over reaching and the client shouldn’t agree to. Well, lo and behold, it’s the twelfth hour, they need to move in, the space has been built out and boom the important terms are not negotiated and the landlord has gotten everything they’ve asked for.
C: Yes, I run across that all the time! I did a survey and put together the Top Ten Site Selection & Lease Negotiation Mistakes, and the most common mistake is timing: They don’t leave enough time. It’s interesting you just said the same thing: At the last moment, the landlord has all the leverage and doesn’t have to say yes to anything.
T: I have certainly seen that more than once with more than one client. Negotiation is a process that takes time. If you don’t leave some of time for negotiation then you’re going to be left with a lease that favors the landlord and not the tenant. But it’s also a matter of listening to the lawyer. I think if you ask the clients that I’ve assisted, they’ll confirm the money that you’ll end up spending to litigate a lease is far more than what you would have spent to have a lawyer look at the lease. Not only did you save money but you’re not looking over at your shoulder. You know that as you move forward, you have at least some security that you’re going to end up ok.
C: Some of things you are going to suggest in just a second, I’m guessing some of them might not ever be relevant depending on future circumstances. But if they DO become relevant you’re going to be awful glad it’s addressed in the lease.
T: That’s right! As a litigator, we certainly expect the worst but 9 times out of 10 the worst doesn’t happen so really what you’re doing is you’re just protecting yourself and your lawyer knows there are plenty of situations out there to protect yourself against.
C: No doubt! So, you told me earlier you had a particular lease that might be a good example to go through. What are the some of the top items that a business owner needs to think about in a typical business-space lease.
T: Craig, this was a lease that I negotiated and ended up litigating and there’s so much in it that was so unproductive and so overreaching on behalf of the landlord and I thought it would be a really good example for us to go over. One I often see is a “move in as an acceptance of build out” or as soon as you move in, you’re accepting the landlord’s build out as is. This is problematic. It doesn’t take a brain surgeon to figure out why. This is an issue since you are not yet a tenant and don’t have physical possession of the property. You’re not turning on the faucets, using the bathroom, plugging computers in electric sockets . . . you’re not in the position to have a conference and determine whether or not noise is an issue and the list goes on and on. But I would certainly – as representing a tenant in negotiation of a lease – not agree to that term because again as a litigator we’re always thinking about leverage. “What can I do to create a leverage for my client moving forward if there’s an issue”, because the landlord will essentially always have a leg up on the tenant because of the law in the various states. Specifically concerning your payment of rent, particularly in a commercial lease. There are very few circumstances in which a tenant would not have to pay rent. I think it would surprise many of your listeners the degree of problems that a tenant would have that would forebear their duty to pay rent. I don’t want to go into them specifically.
C: You’re saying you can pay on one hand and you can argue and litigate about other things on the other hand, but paying the rent must continue.
T: Exactly! So, that the issue with creating leverage.
C: Now, in my experience, almost all landlord leases say to the fact that “Hey tenant, you acknowledged you accepted the space. You’re taking it “as-is”. As of now it’s all your problem. You’re going to fix anything that needs fixing. That’s extremely common, am I right about that?
T: Absolutely, and I think you bring up a good point about inspection. It’s one thing that the lease says when you move in you’re accepting the build out. It’s another that says you’re it accepting as-is, however I’m going to give you an opportunity for inspection. So the counter to that is if the landlord will not get rid of the “as is” upon acceptance, then make sure you’re negotiating a right of inspection and you’re going talk about cost of it.
C: I agree with you completely that it’s absolutely ridiculous clause to say “you’ve inspected it, it’s all your problem now”. So we always say to put in there that “as-is” doesn’t include hidden defects or changes to the building code. Many times the tenant that was there: everything is fine. But the new tenant going in? Now you have the fire marshal or the building department come in and say “oh well, the way this is done previously is now not grandfathered in and has to be changed. In fact, my most recent problem last week was a client moving in to a new space called and said “Ohh this is terrible! We discovered the exit lights are not right. Or the exit signs. We had to pull out all kinds of wiring. All this is terrible!” And they were prepared to pay thousands of dollars in unexpected costs. I said, “Wait a minute. I think I covered that kind of thing lease. Let me check it out, I’ll call you back.” Lo and behold exhibit B that we added says that landlord still remains responsible for making sure the property is up to code when the tenant takes it, and since all those items were building code related they shifted the burden from tenant to landlord.
So this common problem is simple to take care of, and we’ve discovered it’s an easy negotiation with the landlord because it’s so reasonable. Say, “what if it’s a hidden defect or what if the code has changed? You need to be responsible!” And how can they say NO when it is so reasonable, and in this case, for example, the landlord was surprised just like everybody. It’s not like they’re trying to be dishonest or devious, they didn’t know their property had these problems and now that they do they have to fix it.
T: And if the landlord does say NO on something like that maybe that is an indicator to you that the landlord will be unreasonable or be a problem in the future unnecessarily.
C: Absolutely that’s a really a good one and I appreciate that. What other problems did you see in this lease?
T: The absolute biggest one that your listeners should take away anything from this is: not to waive any counter claims against the landlord. This can take different permutations but I think watch out for the keywords. What you may see is a waiver of what’s called a counter claim or a waiver of what’s called a set off. Again, always coming back to leverage. How can I create leverage to forego a rent payment if there’s a problem in the lease and since the payment rent is very difficult to get out of. What am I going to look to? I’m going to look to other things, any number of things, but we all know that the tenant has the right to quiet enjoyment. What does it mean? It can take many forms. But the tenant will not be able to raise those issues if counter claims for legal action for rent in arrears have been waived, or set off has been waived. This can get kind get kind of legal, I have researched the issue here in South Carolina and other states and you get some rulings where they can wiggle their way out of this and they’re not favorable to the tenant, but here’s the general premise: If there is a civil action there is something called compulsory counter claims, which means if those counter claims are related to the substance of the original action they are waived forever and ever if they are not brought in that action as counter claims. The alternative to that is permissive counter claims which do not necessarily relate to the substance of the lawsuit. So this is just an example: if you are sued by your landlord for past due rents, yet a principal of your landlord just hit your car you and you wanted to sue him for property damages, that will be permissive since it is not related to the substance of the lawsuit. You can bring it but you don’t have to. Now the question is, is a counter claim for the breach of quiet enjoyment a compulsory counter claim to an action for rent? And I believe the answer is yes, absolutely. It’s a compulsory counter claim. Now some courts I have seen let landlords wiggle their way out of that and sort of carve out an exception saying “well it’s not compulsory, they can still bring it and another claim so tenant I’m going to enforce this provision of your lease dealing with counter claims”. I don’t agree with that result but the point is don’t set yourself up for that. Never, ever agree to a waiver of set off that would be set off if someone gives a judgement against you for the amount of accrued rent.
C: It makes a lot of sense and it’s a good reason to go to an attorney have them to look at the lease. Now my question is, when you as an attorney want to have this change made in the lease (and by the way I’m sure you’ll agree most of the leases are written by the landlords), are you usually successful at it and the landlord’s attorney says “Okay, you caught me. We can change that” or do they fight tooth and nail?.
T: Well I remind them that they could potentially limit access to the courts of the United States which is a constitutional right. You have a right to walk into that court house and have your claim heard. It’s a part of our democracy yet you’ve sign an agreement that limits that right to bring that claim? In my view that makes that portion of that lease unenforceable and in that conversation your attorney can explain to the landlord exactly what I’ve said, and 9 times out of 10 they’re going to remove it but there are other things that they may keep in. For instance, along with no set off or counter claim, you often see a waiver of a jury trial. And that is enforceable. A person can agree to waive their right to a jury trial because there are two types of trials. There’s a bench trial which is in front of a judge and then there’s a jury trial.
C: So, let me ask you this, how important is it to not waive that right to a jury trial? That seems somewhat of a non-issue to me but I could be wrong.
T: Well, that’s kind of a loaded question. There are reasons to be in front of a jury. There are reasons not to be in front of a jury.
C: Maybe In general the juries might think the tenants are the good guys and the landlords are the bad guys and so they may lean more toward the tenant’s point of view.
T: I think I would absolutely tend to agree with that. Now, that doesn’t mean that you’re not going to get some super pro-landlord jury so it definitely goes both ways but I would agree with you and the general theory would be probably that and it’s not just the characterization or the nature of being a landlord or a tenant. It’s also sort of who did something wrong because in front of a jury you want to be representing the person that didn’t do anything “wrong”. You know who’s misbehaving here, is it the landlord or the tenant? And juries might hang their hat on someone who’s misbehaving whereas a judge may say I don’t care who’s misbehaving I’m going to go by the four corners of this lease and make my decision.
C: Right so basically if you had your choice you would generally as a tenant you would want a jury trial.
T: I think that’s the easiest way to say it. Yeah.
C: Ok! Alright well great, what’s the next big problem you’ve seen in this lease?
T: Reciprocal attorney’s fees. That’s a big issue. Any provision in any agreement that provides one party’s attorney’s fees, even though it doesn’t say it automatically by statute, provides the other party’s attorney’s fees. I need to clarify that. You always say prevailing party. So in the US each party bares their own attorney’s fees unless there’s an agreement or a statute that says otherwise.
C: Right! I guess that’s a two-edged sword. Generally speaking, I would want the prevailing party to have all their legal fees paid because I’m not going to sue unless I really, really know I’m right or feel very wronged. I guess the problem is the prevailing party is the one that’s safe and the loser pays, but then your opposition goes and hires 10 high powered attorneys from all the big firms and they are billing at ten thousand dollars an hour, I’m not sure if I can afford the risk.
T: That’s right, but the point here is make sure that if in South Carolina if you execute the lease that provides the landlords their attorney’s fees that they prevail in the lawsuit make sure that’s written in there that the tenant will also have the right to attach attorney’s fees against the landlord should they prevail. So what you see often is a one sided prevailing party provision for attorney’s fees. You need to just write in there “Hey if you get the benefit of attorney’s fees if you win I need to have that benefit also” in other words South Carolina is not a state that has some of those statutes that say in any agreement where there’s a prevailing party provision for attorney’s fees from one party, it’s automatically provided to the other.
C: Ok! So some states it is automatic and some states it’s not and if it doesn’t say prevailing party then you pay your own and they pay their own.
T: That’s right. But you’re not going to run into any lease, any commercial lease ever, that does not provide the landlord its right of the attorney’s fees if it prevails. So just make sure that it’s reciprocal.
C: Yeah that’s great that gives you leverage too. Because I remember a commission dispute one time they paid me half and they didn’t want to pay me the other half and it’s like “Hey do you understand those prevailing party fees here. If you don’t pay me soon I’m going to sue you then you going to pay me, plus the attorney’s fees.” It’s like, read your agreement! So shortly thereafter I got the check. Now without that clause they would have said “Fine, sue us, you’re going to pay more legal fees than you’re going to get in commission.”. So in that case it’s very important to have it in there.
T: That’s right! You hit the nail on the head. It’s all about leverage and how do I secure a settlement pre-lawsuit to this dispute I’m having. It’s the leverage that that secures the agreement. That is so clear: you owe me the other half of my commission. If you haven’t paid it, I can’t wait to sue you because I’m not only getting that money, but my attorney is going to have a wind fall.
C: Right, and if the attorney is your friend he may be saying, “Please! Let me sue them.”
T: I would say for your listeners, we’re talking this whole thing about creating leverage but at the same time this is leverage you hope you don’t ever need. Litigation is insanely expensive. It is very inconvenient. It can be ugly. It takes you away from your day. There is a monetary value in not having to litigate a claim beyond what the attorney’s fees are.
C: Right. So let’s make it iron clad so we can avoid the lawsuit is really what we’re trying to accomplish.
T: That’s right. I would be doing everyone a disservice if I didn’t mention that your prime goal should be not having to pay a litigator like me money to litigate claim because it’s just really expensive. I couldn’t afford me.
C: Alright. So what’s next on the list?
T: Personal guarantee. Craig, you and I have discussed this previously. It’s one of those things that you’re probably not going to get out of but you absolutely have to ask because I have seen some people get out of them. The reason that it is so important is – we’re using an example of a coffee shop – so you’re Cold Brew LLC. If you have executed the lease of the landlord with a personal guarantee, what you’ll end up seeing is called Cold Brew LLC will be on the lawsuit, but also the owner (who is typically the personal guarantor) or whoever the personal guarantor is. And I would guess that many of your listeners know why that is important but to be clear it is because if I get a judgment against the Cold Brew LLC, the only assets that I can levy and execute on are the assets of the company. In the case of the Cold Brew LLC, what’s that? You’re probably going to lease espresso machines, and in a start-up you’re going to have a lot more debt than assets, so landlord is going to get zero. There’s nothing there to get.
C: If you’re not paying your rent, you probably don’t have a lot of assets anyway so by not having signed the personal guarantee you have a lot more leverage to negotiate yourself out of this deal.
T: Lets go through the what happens if the personal guarantor is on the lawsuit. A judgement can attach to the personal assets of guarantor. That means your car, your home, your boat, all of these things that we work very hard to keep and protect. You are risking those when you sign a personal guarantee. You and I discuss oftentimes perhaps 9 out of 10 landlords won’t agree to waive the personal guarantee and we understand why. They want that threat being there to make sure that you’re not just going to bankrupt the business and you’re going to pay your debts and your rent. But perhaps you can give your landlord some sort of security and remove the personal guarantee. You can certainly give financial information that shows your company as solid maybe after a year or two of timely payments. They’ll say “This is a really good tenant. I would really want this person to be part of my space.” Tenant can use that as leverage and say “I’m renewing you but I don’t want to do a personal guarantee anymore and I have been really good in paying my rent up to this point. Here’s a projected statement for the next year in our business. You can see we’re very healthy, we’re solid. I don’t want my personal assets at risk if something should happen.
C: Right so at the time of renewal that is one of the negotiable points that you address. What we do is say is, if the company has assets – if it’s multiple units or whatever – and if the landlord has not put much money into the space, then many times we do get the personal guarantee waived and when we can’t get it waived then we have it terminate or expire after a certain length of time, like the end of year two in a five year lease or maybe automatically at renewal. If it’s a five year lease, the renewal already states that you won’t be personally guaranteeing it. Or a certain dollar amount – the guaranty is for up to X dollars which is usually the amount of money the landlord has put in the deal, or an evergreen lease guaranty for a rolling year. So there’s a lot things that can be done and we can almost always do something. It’s a rare landlord in my experience, and I guess it depends on the market – how hot the property is and how much vacancy the landlord has – but it’s a rare landlord that won’t do something to address the personal guarantee. Would you comment on everything I’ve said, but also about “contingent liability” where maybe I want to go finance something else or expand or do something and a lender looks at that contingent liability of that personal guarantee. I believe that’s a real issue and a real reason that we want to get off that personal guarantee.
T: I’m following you there. The irony of that is that lender is going to want a personal guarantee too.
C: Right, exactly. But how can you give it if you’ve already given it elsewhere? And ironically enough, the wealthier the person, the less likely they’re going to sign a personal guarantee. It’s just not going to happen.
T: Yup, the long and short of this is as a litigator, nothing gets my attention more than seeing a person’s name as a defendant on the lawsuit. That’s just, it’s so much more real. Businesses come and businesses go all the time. Failure is a part of business and the way the law is set up, any failings on part of a business, unless there’s a personal guarantee, only can reach the business assets.
C: Let me ask you this too, you’re the litigator: You’re thinking of suing the company – the tenant – and there is no personal guarantee. Say you’re thinking at taking that lawsuit on a contingent’s basis. If you see that the assets of the company are nothing and there’s no personal guarantee, I’m guessing you’re not going to take that lawsuit.
T: That’s right! My line of work is not typically contingent on a result just for that very reason. You never know if there’s ever going to be collectability in a judgement.
C: But sometimes people they get their ego involved and they want to sue no matter what.
T: We’re dealing with businesses here. You got to check your ego at the door because all it will do is cost you a lot of money and what will your ego accomplish?
C: Make you feel better! This is not me speaking – this is a psychology I’ve heard. It’s like, “you’re not paying attention to me? I’ll get you to pay attention to me! Here’s your lawsuit”.
T: And all it does is make the lawyer rich.
C: That’s not good at all but the point would be if you’ve got major leverage. If you’re not personally guaranteeing that deal – whether it’s a lease or not – then you have some leverage with negotiating something new with the other party.
T: I think so. That’s right.
C: Well, that’s fantastic, what’s the next one in line?
T: I’ll comment briefly on this one. We always see a waiver of claims against the landlord for negligence. Why would you ever waive any negligence claim against any one. The point of negligence law is to recompense people who have been done wrong, but it’s also to say “Hey watch out what you’re doing out there. Don’t drive around with your eyes closed.”
C: It’s about gross negligence versus negligence I see as that argument made.
T: I agree with you and I’ve made that argument I think at the very least you leave gross negligence and recklessness in there but, this maybe just a personal issue, I just can’t believe leases have a waive of negligence claim – I’m speaking from the perspective of the tenant. You’re my landlord. I’m paying you a lot of money every month to make this thing work out for me and now what you’re telling me is if you don’t pay attention to the details, if you don’t do what you’re supposed to, if you don’t follow the standard of what a reasonable person would do with their property, what happens? Lets play out an example, I have a coffee shop. People are coming in my coffee shop every day to get their coffee. One of them has an injury on the premises and what we find out is that it’s from the maintenance of the property. I’m just trying to provide an example here because you never know what’s going to happen. Something that the landlord was supposed to do – repair, build out on the property whatever it is – and now that’s the cause of an injury. My business is getting sued for negligence. My insurance is kicking in, and now landlord, you’re telling me that this condition was your fault – something you did – and my insurance can’t subrogate against you? Or this judgement now that I have against me from this person who injured themselves from my property – you’re not liable for it? So that one is just totally of the wall.
C: I agree. I guess what I was wondering is, maybe the landlord feels there’s a difference between a lawsuit if they are to be held to the standard gross negligence, they might be protected from frivolous lawsuits or something.
T: I see that for sure, but I guess conceptually we’re all bound by this duty to one another not to behave negligently. Like I said it’s the reason you don’t drive down the street with a blindfold on because you’re going to hurt somebody. Why that duty goes away because I’m entering on your property and signing the lease with you – I don’t get it.
C: Well that’s great advice.
T: But I will tell you that I have not been terribly successful in negotiating that portion of the lease.
C: Right. I run into more of a brick wall on this one than others. Landlord will just say “Well then fine let’s not do this deal.” They need to be protected, and I think it’s because of a prevalence of lawsuits that claim negligence, and now we have to prove it wasn’t.
T: So, you and I agree then, that negligence will probably stay, but make sure you’re not waiving quote unquote “gross negligence & recklessness” wording, and you just make sure to see those type of words.
C: Both of us see and note we should say “Wait a minute, you could be grossly negligent and I can’t sue you for that? That doesn’t make sense.” And the opposing attorney will usually agree. It’s like “Alright fine, you caught us.”
T: I certainly agree with you.
C: Right. Cool.
T: The one more I had on the important list was default. Make sure that your lease will provide for certain conditions that are a default under the lease. Not keeping the premises insured would certainly be something that any landlord would want, and make sure they can kick their tenant off the premises if the tenant is not properly insuring the premises. That’s perfectly reasonable – something that I would want if I was a landlord – but here’s the kicker: You want to make sure that in the event of these various conditions that you provide an opportunity to cure a default or a defect. So the way this would play out is you’d say “Okay you cannot file an eviction or some sort of piece of litigation until you the landlord send my lawyer (the tenant’s lawyer) a letter saying the tenant is in default of the lease because of x y and z. He now has – call it ten business days – to fix whatever is the condition of default before we move forward. The point I’m making here is make sure a lease provides some provision that will permit you to cure an alleged default before declaring a default.
C: Right and that’s pretty easy to do. It’s hard to argue with that. How often do you see that already in a landlord lease?
T: Pretty often.
C: So, not a big deal.
T: Well sometimes it’s not in there.
C: That’s what I’m saying. It’s not in there so how often is it not even mentioned at all and you need to have it put in there?
T: I would say 50% of the time. A landlord has no reason to send a tenant a default provision with an opportunity to cure. Many guys think the landlords just want everything their way.
C: Well, I agree. The way we look at it would be: What if the landlord wanted you out and was looking for an excuse, and then the postal carrier made your rent late it or it got lost in the mail. I don’t know, from a legal stand point whether they could say “You defaulted, out you go”, and then they stick to their guns. I don’t know the idea but it is we always do try to put in that they give notice to cure. And then they get to: how many times a year, and how much notice for penalties and things like that. But you’re absolutely right, that is an area of the lease that may not ever matter, but then again it might so you may as well do it right.
T: You have more likelihood of that mattering than some of these others because there are so many ways that you can default under a lease, and things may have just been caused by inadvertence. You know, a total accident, and now I’m in technical non-compliance with the lease. Just make sure that you have an ability to cure a default. Speaking of default, you always see a provision that says “The tenant will keep the premise free from liens”. I have a problem with that and this is something that I often try to negotiate because I can’t prevent some of the public that liens against the property. It’s like we were talking about frivolous lawsuit. There is also the frivolous lien. So now some contractor that I hired to come and fix something – and maybe they did a poor job – or maybe they didn’t get paid on time, and now has a mechanics lean on the premises. Anyone can follow a frivolous lien.
C: What do you suggest?
T: I think a clearer provision here would be something like “the tenant will make or take all reasonable steps to free a lien that’s been filed”. Whether that be litigate the lien, deal directly with the person, the vendor, the contractor in that example. To be in default on a lease simply because some third party has done something unilaterally without communicating is not right.
C: Right. It does make sense when you say it that way.
T: That’s never sat very well with me. Now, certainly we would agree that if I didn’t pay the contractor or a vendor they can lien against the property. I have the duty to landlord to resolve that lien, and quickly, because if your listeners don’t know, a mechanics lien, when it attaches to a certain piece of property, you can foreclose on a lien, which means whoever the lien holder is can step in and sell your property out from under you to cover or satisfy the amount of the lien. And you can imagine that that will get the landlord’s attention.
C: Yeah, or the landlord’s lender’s attention.
T: Yup, that’s a good point too. I’ve been in situations where the lender finds about a tax lien or something like that and realizes there may be a claim against the priority of theirs and they push getting lien like this resolved very quickly.
C: They have very little sense of humor about that.
T: Yup! Nor should they, but you get the point. It’s just “How can I prevent someone from filing a lien”. What if the lien was accidentally filed against the wrong property? You know it was contractor-vendor for the job next door and not on my property. Now there’s a lien and now I’m in default of the lease.
C: Yes. So it’s a good point and I’m glad you brought it up.
T: Okay! We talked about the importance of writing a renewal period or some prevision for renewal because the last thing that you want to do as the coffee shop owner is have great, wonderful business from all the residential areas around you, and a great road visibility, and easy access to your site on the way to work at 7:45 in the morning. That’s the main part of your business, and then BOOM, your lease is up and you have to move and you can’t find a suitable and comparable space.
C: Yeah, you’re out of the business. Sam Walton made that mistake early in his career.
T: Ok! How’s that exactly?
C: Well, in his first store he didn’t have a lease option and it was booming and the landlord came in and said “No, I don’t want to renew your lease. I think I’m going to run a store here.” So that could happen anywhere. It’s like “I think my son would like to run a coffee shop here, or a bar or whatever you’re doing. So lease renewals are pretty darn important. And if you want to sell the business then you want to have some term left. That’s valuable to the buyers so no doubt that’s an important good thing.
T: Yeah and that latter point is great too. There is a value in your location and if you lose that location you may not be able to sell your business.
T: I’d like to mention excess late fees in the lease. Sometimes you’ll see $150 a month or 5% of the lease payment. Just make sure the late penalty which is fair. Also, we’re all familiar with CAM and utilities. Well, what happens when, let’s say you are in the business suite and your CAM and utilities are a percentage that’s a ratio of your square foot of the total property. Well, I’ve been in situations where the landlord refuses to provide any substantiation of what the utilities bills are and what the cost of running the place is.
T: So that has been an issue and I think the point here is make sure that there’s a provision in the lease that requires the landlord to provide you some sort of substantiation. Maybe it’s annual, at the end of every year you get to see the utility bills. Sometimes the lease will say that, but there’s no teeth. Landlord will provide utility bills. Well, at what cost? Does that mean if you don’t I could get out of the lease? Does that mean if you don’t, I don’t have to pay rent? There needs to be some teeth to that provision otherwise the landlord has motivation. They’re just going to say “So what? I lost the bills. Sorry”.
T: But, I think that’s important especially as energy prices rise.
C: It all depends on the honesty of your landlord. I think most of them are honest but some of them aren’t. I have run across situations where, for instance the insurance for the property, it wasn’t for JUST the property. That landlord was insuring all kinds of stuff under that blanket policy that you’re paying for.
T: Great point!
C: He would absolutely need to keep that fact hidden. So, you like to trust but verify.
T: Exactly! One thing you always see is consent provision on assignment and sublease. I don’t necessarily, I don’t have any problems with that. I think if you’re a landlord you want to know who’s on your property, but here is why I do have a problem with. These leases always say that the tenant remains liable for rent in the event of an assignment!
T: That’s not an assignment!
C: Exactly. That’s kind of nutty.
T: Yup, that’s a sublease.
T: So, call it what it is. Landlord, if you want to have consent to whom I’m assigning my lease to, I certainly get that. But once you consent that’s it, you always see that and I just wondering what are they thinking?!
C: Well, you’ve hit a hot button for me, because I’m thinking in terms of, let’s say I want to retire from my business. I think if I bring a buyer to the business that has my net worth, my cash flow, my experience, there’s good as me in running this business. I’d like to see the landlord just check off the boxes and say “Yup, okay fine. We’ll l do that.” But if the landlord can step in the way and prevent me from selling my business without re-negotiating things or just completely refuse anyway, that can be a very serious economic detriment to me.
T: Yup! I’m certainly liking all your examples. I’m talking on more general levels and you really kind of hit that nail on the head with some important nuances, you know may not be obvious but they’re going to be a real big problem. If you really want to do it right you could say “Well these are the conditions upon which you can or cannot consent, and put some sort of objective standard on it.
C: Right. That’s what I’d like to see. Many times the landlord goes looking for an excuse to renegotiate something or raise the rent, and so if they have to give you permission to assign the lease and they go “You know I’m not really interested but here’s what I will do. Let’s renegotiate this and raise the rent.” Well, that lowers the income, so that lowers the value of the business, and it’s a real thing! So I’d like to see specific parameters that will allow an assignment period. You know – you can’t say no, “We met these parameters that were reasonable” Or let’s say you have an LLC and I sell my beneficial interest in my LLC . . . maybe it’s none of your business. If you haven’t signed personally, or if the guaranty has burned off that makes pretty easy to do. By the way, you may find this interesting and I sure hope you’re sitting down. It used to be, when you’d ask the landlord to approve an assignment, they’d just do it at no cost. Then somewhere along the line they decided “Wait a minute that’s costing me some legal fees. I need the tenant to reimburse me for legal fees.” Fair enough. So maybe you’ve seen that. What do you consider to be, roughly, a fair legal fee for landlord to review a lease assignment?
T: Well, again along with the question, we have an ethical duty to make sure the fees are reasonable but that can mean any number of things.
C: But if you have a job, a broad range and I guess it depends on the complexity of the team, what about $20,000?
T: That’s just nonsense!
C: Exactly! I’ve seen that number. I called the landlord and the landlord’s attorney and said there was a typo there in paragraph number 32, “you have $20,000 in there” and she said “No, that’s not a typo. That’s what we want.”
T: Yeah that’s a deterrent to assign the lease.
C: Yeah! That’s just nutty. I’ve also seen where if you even request an assignment, then the landlord can then terminate the lease.
T: Certainly I wouldn’t agree to that. You’ve seen some interesting things.
C: Ok! What’s next on your list?
T: Just kind of to sum up the last point. Make sure that if there’s a lease provision that discusses consent for assignment and all these things, make sure that you do not stay liable for an assignment. That simple.
C: Right! Absolutely.
T: That’s what an assignment is. Now, a sublease of course, you stay on the hook.
C: Now by the way, for our listeners, when you go back to the landlord and said “Hey, during an assignment, we get released.” Do you have fairly good luck in getting that term accomplished?
C: Because it’s so reasonable.
T: Yeah, I don’t know why it’s even in there. As if the landlord doesn’t know what the word assignment means. Anyway, we move on. I think the final point is do not expect your lawyer to be the only resource that you will need in this process, I don’t know the nuances of the local market like Craig will. I do not provide tax advice if you are a small, medium sized business. Let’s say you’re a start-up coffee shop, you need to get in touch with Craig!
C: Well I don’t believe you’ve said that. To our listeners: I didn’t ask you to say that. But I agree and what I tell people – and feel free to argue with me if you want – the attorney does the legal review (and you’ve given us excellent examples of why you need that) but the attorney doesn’t necessarily negotiate the business terms of the lease because they change so much. You might not know what is fair in today’s market as compared to six months ago.
T: That’s right, or a particular market. I’m in agreement. What if I’ve got a client in Charleston.
C: So you don’t want that liability. You don’t want to be the one that tells that client “Oh yeah this is a fair deal.”
T: It’s not even about the liability. I don’t have the expertise. I’m going to tell the tenant “You think this is fair? You think this is right? I don’t know.” That’s not our business.
C: Hey I’m liking you better already!
T: The take away is the lawyer is not the exclusive resource. I’ll tell you about the law. I’ll tell you what to look out for.
C: You know what else I need to bring up is when I’m negotiating the deal, at some point I might hit a brick wall and I can talk until I’m blue in the face but I’m not getting anywhere. But when we bring the attorney into the deal, the attorney can say the exact same thing, but now everyone’s paying attention or especially if it’s the other attorney involved on the other side. They don’t want to talk to mere mortals. But if another attorney is talking to them, alright now they have to pay attention and we’ll work something out here.
T: I think that brings up another point of just in general style of negotiation. You’re not going to get everything that you want. That’s one side of negotiation. You got to give a little and it’s just a matter of figuring out what’s most important. How do I get that, and oftentimes that means giving up a little bit over here that may not be super important to you, or could be important just not as important as those particular line items. So just make sure that you exhaust all of the professional resources that you have which are more than just a lawyer.
C: Right, okay. Well I really have enjoyed this and I think our listeners will too. You’ve done a great job of giving us examples of why a lawyer should look over the lease before you sign it. I remember you’re licensed in Florida and South Carolina and of course you have a referral system probably everywhere. How can people reach you if they want to talk to or have you represent them.
T: They can reach me directly at my office. I have a direct line 864-552-4618. Email is, my first name is Taylor last name is Speer, so it’s firstname.lastname@example.org.
C: Great! I appreciate that very much and I hope to talk to you again in the future about and the new items that come up!
T: I look forward to it! Thank you so much for having me Craig.