The past decade has seen great efforts made across the property industry to streamline the commercial lease negotiating process. Some landlords, tenants and their respective solicitors have become less adversarial. But it’s also true to say that progress has been slow and inconsistent.
However, both within and outside the industry, there is no doubt that the cultural zeitgeist is starting to shift, and the commercial lease negotiations that I am involved in are often less combative and more collaborative – perhaps, even, more enjoyable.
We all know that healthy long-term relationships can be the key to success in this industry, so why do we so often get off on the wrong foot with a confrontational lease negotiation? Labels such as “demanding tenant” and “difficult landlord” start to form during the lease negotiation process and can be hard to shake – a situation that is normally unhelpful for both parties.
More pressingly complex modern challenges, such as improving the energy efficiency of buildings or creating social places that make people happier, will require high levels of co-operation, with landlords and tenants working together throughout the term of their leases in ways that we haven’t seen before. Good relationships will be critical to success.
Pioneers
New sectors are leading the way. Self-storage is a good example. It was almost non-existent in the mid-1990s and is now booming. Goodman Derrick recently acted for a well-known self-storage company on a letting to an international retailer. This was no ordinary letting; the clues are there in the press releases – phrases like “shared use” and “collaboration” reflect that this deal is the offspring of the more amicable approach. Ultimately, both parties would be occupying the site together so good relationships were vital to the site’s success. The documentation had to reflect and enhance that ethos.
The thriving serviced office sector also exemplifies the collaborative letting process. The occupancy documentation (which may well not be a lease at all, rather a contract for the provision of services) is generally shorter and simpler, so it can be easily understood by businesses not well versed in the language of real estate legal documents, and so fostering co-operation.
The more collaborative legal negotiation process complements the other more tenant focused aspects of the serviced office sector. From our experience of acting for flexible office providers, occupiers are referred to as “clients”, not tenants, with the landlord often called the “service provider”. These aren’t empty labels. A flexible office provider has to be client focused. Negotiating lawyers should support the client (or perhaps, more accurately, customer) and not score points to defeat “the opposition”. This doesn’t mean cutting corners or taking risks. We just alter our approach to fully take into account the commercial needs of the client and the transaction, to save hassle and confrontation for all parties.
I’m confident the new approach will spread across the industry in time.
Can the old school embrace collaboration?
Contrast the above with taking a lease in a multilet office building. The traditional institutional investor landlord collects the rent but has little interest in the tenant and their business. Landlord duties and the management of the tenant relationship are subcontracted to a managing agent. Yield and asset valuation are what count. This is typified by a drawn-out lease negotiation process focused on 50+ page “institutionally acceptable” full repairing and insuring leases, where such negotiations are largely conducted by exchanges which are, at best, impersonal and which easily descend into confrontation.
How can a more collaborative and less combative approach to lease negotiation be adopted? Part of the answer to this lies within the legal documents themselves.
When a landlord’s solicitor issues draft documentation that is one-sided, is not in keeping with trends towards more tenant-friendly leases or, worse, doesn’t reflect the carefully agreed terms of the parties, negotiations begin on the wrong foot.
Providing a more balanced first draft demonstrates a degree of respect to the other party and their solicitor, and is also likely to lead to quicker and cheaper negotiations. Leases can still be acceptable to an institutional investor, while allocating costs (for example, for repairs and services) transparently and fairly, or preventing the landlord from causing delays to the tenant’s operations.
An early adopter of this approach was the Clearlet lease in 2011 – designed to be a form of rack rent lease that also met the needs of the tenants. The lease sought to be more balanced at the outset, and to try generally to reflect the position that a typical draft lease might reach after two rounds of amendments. More recently, the Model Commercial Lease project was devised with similar aims, and we increasingly use its standard-form leases when acting for landlords and encounter its documents being utilised by landlords when we act for tenants. Similarly, a number of landlords are developing their own pro-forma short-form leases that they seek to use where they can.
What else can be done?
Simply providing a more even draft lease will not guarantee a more affable lease negotiation process. My further tips include:
- Both parties (and by extension their lawyers) must consistently act respectfully towards each other.
- All-party meetings to work through points of contention are to be encouraged to build positive relationships that will allow for better exchange of information. Body language and facial expressions can be crucial. And who enjoys conference calls anyway?
- Wherever possible, keep email negotiation to a minimum in order to disarm any keyboard warriors involved in the transaction.
Outside influences
Wider trends are also having an impact. Organisations are increasingly developing and publishing their corporate values, and aspirations such as “build relationships”, “challenge and collaborate” and “thrive together” do not sit well with a hostile lease negotiation where both sides end up falling out.
The growing emphasis on soft skills and their importance to success in the workplace will also increasingly have an impact on lease negotiations. Conflict resolution, teamwork, problem solving and communication skills are now revered just as much as hard skills and technical ability and, as employees with these soft skills rise in organisations, it is inevitable that they will bring them to bear in the lease negotiation process.
The advances in technology that will come may not necessarily aid collaboration and may suck out what little human touch there is involved in lease negotiation. But not necessarily so. Generation Z (born 1995-2010) became the largest population group globally in 2019, and they will become increasingly involved in real estate deals – their greater engagement with technology may surprisingly enhance a collaborative approach with the likes of Zoom, FaceTime and other products which emphasise the importance of face-to-face communication (even if it is via a screen) over email and instant messaging.
Don’t get left behind
It may be difficult to make lease negotiation a completely collaborative process – the core of legal negotiation is allocating risk and responsibilities between the parties, and in some aspects the interests of a landlord and a tenant will always conflict. But, as we kick off the new decade, the direction of travel is towards a more collaborative and less combative lease negotiation process, and I’m firmly of the belief that landlords, tenants and solicitors who treat lease negotiation as a dispute to be won or lost will appear increasingly old fashioned.
Tristan Wark is a senior associate in the real estate team at Goodman Derrick LLP
