Drafting Commercial Leases in 2017: Growing Complexity

 

Negotiating and Drafting Office Leases - In the News

“Learning concepts and dangers from the litigation of such transactional documents and from real malpractice cases is professionally essential...”

Drafting Commercial Leases in 2017: Growing Complexity
By John Busey Wood

The fundamental and critical building blocks of value for most commercial real estate are the property commercial leases. Rarely are investment properties or owner developed and operated properties valued for transfer, investment or financing on their brick and mortar components. So it is not a surprise that designing lease forms, negotiating and implementing leasing programs, and maintaining vigilant compliance monitoring are all essential for investors in real estate. It follows that such foundational concepts are equally essential and critical for those businesses occupying leased commercial space. Just as income from leases is sophisticated and multidimensional, so too is the understanding of the full and complete occupancy costs and risks that are attendant to a tenant's lease agreement.

Commercial leases have grown over the last four decades from small demising contracts to over 300 pages of owner cost, maintenance, compliance, and risk transfer and have become the obligations of the tenant occupant. Not all of these transfers of costs and obligations are apparent, but when they are understood, they can be cost/price analyzed to evaluate the true long term occupancy costs of space. These costs, obligations, and risk analytics become apparent when viewed from working knowledge and transactional experience. Such knowledge and transactional experience can be obtained over time by practicing in the area, as well as by reading and obtaining commentary and analytics on real transactional documents and forms that have been drafted and tested by experts in the commercial real estate field. Gaining access to such transactions and forms as well as creator tips and commentary is a rare gift. However, learning concepts and dangers from the litigation of such transactional documents and from real malpractice cases is professionally essential.

The Killer Lease: Theft by Lease
Long term commercial leases are replete with costly and risky surprises within the text, as well as important items omitted from the text. Commercial leases have evolved in the United States and principally in New York City for over 400 years, beginning in the Dutch Colony days, and have been nurtured in a legal and business environment of caveat emptor—they have been completely unregulated or refereed. The result has involved some of the most creative stripping of profits known to man, as a result of the language used. Layers of definitions and mixed professional disciplines, together with a mismatch of standards of cash flows, tax treatments, and accounting terminology to make lease language sound nice and feel good, actually rip the financial heart out of tenants. It is truly the extreme sport of multi-dimensional theft by lease.

Lease forms over the last forty years have not gotten shorter or fairer in the slightest bit. Value, costs, and risk can be found in the small print and it is truly the case that one of the hardest things for the human brain to identify is "what is missing in the text or formulae.” However, this work will result in the savings of multiples of its cost, as it will guide you through the process of the evaluation and accommodation of the difficult task of living with commercial leases.

For almost twenty-five years, Negotiating and Drafting Office Leases, authored by John Busey Wood and Alan M. Di Sciullo, has provided the investment, operating, legal, accounting, and brokerage communities in depth research, form analytics and transactional evaluations, as well as current topics and malpractice awareness. In 1994, author James Busey Wood was named "the father of the modern Killer Form of Lease" by the Wall Street Journal.

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