STRATEGIES FOR LANDLORD REPRESENTATIONS
This LARG looks at landlord representations in commercial leases, chiefly as a vehicle to give the tenant some comfort regarding operating costs under the lease. The first section discusses this approach, and suggests negotiating strategies and specifics for the representations. The Lease Clause Critique looks at a pro-tenant clause containing extensive landlord representations.
Are Landlord Representations the Tenant's Antidote for Pro-Landlord Operating Cost Language?
Every office tenant negotiating a new lease breathes a weary sigh when it turns to the operating cost sections of the lease, and finds that they run on for four pages of fine print. The tenant has been there before in other deals. It knows that, unless it is blessed with extraordinary leverage, its protests about the "excessively broad and unconscionable" language concerning operating expenses will largely fall on deaf ears, and that efforts to modify the landlord's operating cost verbiage will prove difficult.
That is not to say that the tenant will not have some success changing the language of the clause (e.g., to exclude items of a capital nature, or marketing expenses to lease space in the building). It's just that, in view of sheer amount of operating cost language that needs surgical attention, only the largest and most obvious problems will get the alterations they deserve.
The language in the operating costs sections of the office lease is sacred to the landlord and its lender. They have been resisting frontal attacks by tenants on those clauses for years. They have sophisticated and endless arguments why the language is reasonable, and even desirable for the tenant. By this point, even the landlord's management people know what's in the clauses, and have mastered the calculations used to pass those costs through to the tenants. So the tenant had better have good counsel and charming ways to get the language modified in more than a cursory way, especially if the tenant wants to get the deal done in a reasonable amount of time.
Time for a New Strategy?
Maybe, in lieu of (or in addition to) their customary assaults upon the operating cost sections of the lease, office tenants ought to focus upon negotiating representations from the landlord that will increase their level of comfort concerning operating costs and their manner of computation by the landlord.
The tenant can do this in several ways:
- Negotiate representations from the landlord which specify the exact square footage of the demised premises. The amount of such square footage will be the numerator in the fraction that represents the tenant's pro-rata share of operating expenses for the office building. If that number is specified in the lease by the landlord, there won't be any controversy about it later.
- Of course, the representation concerning the amount of square footage should be linked to the lease's definition of rentable square footage, so the tenant knows that the space is not measured with a rubber ruler. If the lease does not contain such a definition, the tenant should insist that an equitable one be included.
- Similarly, the office tenant can negotiate representations from the landlord which specify the amount of rentable square footage in the entire building (i.e., the denominator of the tenant's pro-rata share of operating expenses). As above, the number should be tied to the lease's definition of the applicable term for square footage (e.g., rentable square feet, gross leasable area, etc.).
- The tenant should also try to get the landlord to specify numbers for the amount of square feet in the common areas of the building and in adjacent structures, such as parking garages. Such information establishes a bench mark that can be used by the tenant to review changes to the amount of common area shown on operating cost statements prepared by the landlord over the term of the lease.
- The office tenant should try to get representations from the landlord concerning historical operating costs for the building, and projections of operating costs for at least the first year of the tenant's lease (or projections of certain key components of operating costs).
- Finally, the tenant should request representations concerning the landlord's policies regarding sensitive elements of operating costs (e.g., services provided by affiliates of the landlord, items the tenant may regard as capital items, etc.).
The Office Tenant's Rationale
Why should the landlord make any representations at all concerning operating expenses or other matters (except for warranties dealing with quiet enjoyment, which are customary)? For several good reasons, the tenant says, running through the arguments:
- The landlord and the landlord's broker are certainly willing to discuss such matters orally during lease negotiations—why shouldn't they be willing to put at least some of the contents of those discussions in writing in the lease in the form of representations that the tenant can rely upon?
- The operating cost sections in the lease will almost certainly give the tenant the right to audit the landlord's records concerning operating costs—why should the landlord and the tenant have to go through the brain damage and the expense of a full blown audit just to give the tenant some basic facts about operating costs and how they will be administered and collected by the landlord?
- Why is the landlord unwilling to give any sort of representation concerning the amount of operating costs for the building and how they are collected—is the landlord trying to hide something? Are the building's operating costs out of line with (i.e., higher than) the market?
- Isn't the tenant obligated under the lease to provide an estoppel letter containing representations by the tenant establishing several crucial facts about the lease (e.g., the amount of rent, the fact that there's no prepaid rent, the fact the lease is in full force and effect, the absence of any claims or offsets against the landlord, etc.) within days after the landlord requests the estoppel? Can't the landlord require the tenant to furnish as many estoppels from the tenant as the landlord desires during the term of the lease? Why shouldn't the landlord be able to make a few representations that the tenant can rely upon concerning operating costs?
- Isn't the tenant at a complete disadvantage to the landlord concerning knowledge of operating costs for the building when the lease is negotiated? Doesn't the landlord prepare operating costs statements for the existing tenants in the building anyway? What's the big deal about giving some of that information to the tenant?
- Wouldn't the landlord rather make representations about operating costs than make wholesale tenant-oriented changes to the operating cost sections of the lease? Isn't it better to leave those sections largely intact, and make some representations that increase the tenant's comfort level regarding operating costs for the office building?
End of Excerpt