LEASE AGREEMENT REFERENCE GUIDE 1310: LAW FIRM TENANTS THAT SHRINK, GROW OR EXPIRE $24.95
STRATEGIES FOR LAW FIRM TENANTS THAT SHRINK, GROW OR EXPIRE
This LARG focuses on law firms that are office tenants, and what happens to them and their landlords when they expand, contract or implode. The first section lists a number of practical issues that both office landlords and law firm tenants should consider in the negotiation of their leases. The Lease Clause Critique contains three clauses which give law firm tenants the right to expand their premises, the right to terminate the lease for a portion of the premises, and the right to terminate the entire premises in the event the firm dissolves.
Musical Chairs and the Fragile Law Firm Tenant
Law firms—particularly the biggest ones— have traditionally been prime users of Class A office space. Prestige office space was important to the image of powerful counsel, and it helped attract and retain affluent clients. Impressive offices attested to the firm's status as part of the power establishment.
Shea & Gould, the New York City law firm with 350 lawyers, fit the glamorous office, glamorous client stereotype perfectly. The firm had extensive political connections—and blue chip clients to match. They included Deloitte & Touche, Toys "R" Us, and a slew of banks, including Marine Midland Bank and Apple Bank for Savings. To welcome these clients, S&G rented four floors of prime space in the late 1980's in the Exxon Building in Manhattan for its offices. The annual rent bill was approximately $18 million. 1993 revenue for the firm was $85 million. Just the kind of tenant any landlord would want, right?
S&G Up & Dissolved
As it turned out, not exactly. At the end of 1994 the firm's partners voted to go into dissolution. Not because of financial difficulty, but because the partners couldn't agree among themselves on how to manage the firm and split the profits. After the firm closed its doors, it had just two creditors. One was its lender, Chemical Bank. The other was its landlord, Mitsui & Co., owner of the Exxon Building.
Expansion and Contraction
S&G's partners were not individually liable for the firm's lease obligations, and they went elsewhere after the dissolution. Some were absorbed by other Manhattan firms; other partners some set up new ones. This created a demand for expansion space in Manhattan office buildings populated by law firm tenants that were swallowing and digesting new lawyers.
S&G wasn't the only law firm to slide into dissolution in the recent past. Kostelanetz Ritholz, a prominent tax litigation firm started in 1946, folded its tent in early 1994. Despite its national reputation, the partners could not agree on the division of profits. The result? Dissolution.
Lord, Day & Lord, Barrett Smith, a victim of rapid expansion, also recently closed their doors. Morgan, Lewis & Bockius, originally based in Philadelphia, but now with offices in New York, and Washington, snapped up sixty Lord, Day lawyers in one bite.
Thinking About Your Steps Before the Music Starts
This process of law firm dissolutions, expansions, and contractions will likely continue throughout the foreseeable future. Both the law firm tenants and their landlords should plan for cataclysmic changes in the landlord-tenant relationship. Each party would be well served to consider the following issues during their lease negotiations: