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Lease Strategies

Product Overview

This LARG contains the following items:

Musical Chairs and the Fragile Law Firm Tenant, and the Lease Clause Critique: 3 Lease Clauses for Law Firms That Are Growing, Shrinking, Or Disappearing.

Number of Single Spaced Pages: 12




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:

  • For law firms composed of individual partners and professional corporations, do individual partners have the right to make transfers between themselves and new or existing professional corporations without "transferring an interest" in the premises under the lease's assignment clause?
  • Who exactly is the tenant under the lease, and what assets does it have available to satisfy its lease obligations as the tenant?
  • Are individual partners and professional corporations within the firm liable for leasehold obligations?
  • Can law firm tenants add new partners and delete old partners without needing to obtain the landlord's consent under the assignment clause?
  • Are partners who are removed or who withdraw from the partnership tenant released from personal liability for lease obligations following their removal or withdrawal?
  • Does the assignment clause permit subleases for "office sharing" arrangements (i.e., where sole practitioners or small firms, which do not share revenues or which are not members of the same firm share space in the same premises) without the landlord's consent?
  • Can the tenant bring in temporary or "contract" lawyers and install them in the premises without the landlord's consent?
  • Does the assignment clause of the lease permit a merger of the firm into another firm without the landlord's consent, or at least contain clear standards for the landlord's consent that the tenant can rely upon during confidential merger discussions?
  • Is expansion space available in the building if the law firm tenant grows during the lease term, or if the firm acquires or merges with another firm?
  • If so, what expansion rights (e.g., options to expand, rights of first refusal for additional space, etc.) can the tenant negotiate in the lease for expansion space?
  • If the firm is project-oriented, and substantial down-sizing may be required during the term due to the completion of a major project, does the lease contain an option for the tenant to reduce the size of the premises, or terminate the lease entirely?
  • Can the law firm tenant terminate the lease—with or without a lump sum payment due to the landlord— if its partners decide to dissolve the firm?
  • Is the landlord's normal building service package adequate for the tenant's needs, especially with regard to late night HVAC, heavy HVAC for computer and word processing areas in the premises, security, parking garage operation, elevator operation and building access?
  • Has the tenant provided for installment payments of any lump sum payments under the lease (e.g., for initial tenant improvements, special assessments, tax installments, annual "make-up" adjustment payments for underestimated operating expenses, etc.) to smooth out their financial effect upon the partners?
  • If the tenant must provide some form of security for performance when the lease is signed, can it elect to provide a letter of credit in lieu of a cash deposit?


End of Excerpt