Previewing a lease helps prevent headaches
“Who agreed to this language?”
How many times have each of us been handed leases containing terms which cause us to ask , “Where did these provisions come from?” or “This is the first time I’ve seen these stipulations, did the transactions group understand the costs of compliance?” The answer is: probably more times than we’d like to recall.
What are the results of not reviewing lease terms prior to execution? Certainly, a lot of headaches and difficulties result; but these headaches can come with pretty hefty price tags. In many instances, these problems can be dealt with at the “front end” during lease negotiations.
Our industry has a current process whereby lease administration typically receives leases only after the agreements have been executed. Some lease administrators advocate a new lease process – a proactive process – that has the potential to identify unfavorable lease clauses while, at the same time, allowing for inclusion of best-in-class lease language to be added prior to the lease being executed.
Following are the goals of a proactive review process:
1. Eliminate negative surprises which tenants may have not budgeted in a given lease year;
2. Provide clear definitions so there are no vague or gray areas in the lease which many times bring disputes into legal, costing more money.
How does this new process work? A proactive model encourages reviewing lease language by the lease administration department prior to the lease signing event. The first step in this process is to submit a letter of intent to review. Reviewing a lease just prior to the document signing is too late. As soon as the initial draft of the lease is prepared, submit a letter of intent to review.
Prior to the lease review, develop a checklist of best practice language and communicate it to the appropriate parties. You may also think about customizing the items to review depending on the retailer and the type of lease being reviewed. It is always a smart practice to adhere to GAAP: Reconciliations should be reimbursements to the landlord, not profit.
Benefits of migrating to proactive lease language review process:
However, if this language has not been discussed and agreed to prior to executing a lease, it’s going to be very difficult to challenge should problems arise. The benefits of migrating toward my suggested model of lease administration review most certainly outweigh the costs. The most important item you can do in order to get buy-in is to provide the internal and external transaction group with an understanding of the value of this process. Second, educate the deal makers that lease language directly affects the costs to the tenant over the lease term. Next, obtain a high level of support in the organization for the change management.
You may also want to break down the language into deal points and costs associated with “less than acceptable” language so that the transactions group can make informed decisions. Finally, developing a tracking tool to quantify the value the lease administration department is bringing to the negotiating table on a lease-by-lease basis is something you certainly want to consider.
In summary, migrating toward a proactive review of lease language by the lease administration group will drive cost savings throughout the portfolio. I recommend developing a tracking mechanism to document the value offered by your group in this endeavor. Although calculating the precise savings may not always be measurable, tracking and documenting the language changes will demonstrate the increased value provided by the lease administration department.
Al Stabile is managing director, Strategic Portfolio Solutions Group, Studley, and a member of the National Retail Tenants Association (NRTA). He can be reached at email@example.com.