Leasing Nightmares: Curse of the Forgotten Lease
5 Min Read By Daniel Teitelbaum
Blackacre LLP is a boutique fixed fee real estate law firm with a restaurant leasing specialty. From its experience serving as counsel to numerous restaurant clients, Blackacre’s attorneys know that a good lease is crucial to a restaurant’s success, while a bad lease can doom an otherwise successful restaurant to failure. In the coming articles, Blackacre’s attorneys will write on how to prevent a restaurant lease from becoming the next “Leasing Nightmare."
In the course of many years as a real estate practitioner, I have had the tremendous privilege to work on some of the toughest, largest and most involved commercial real estate leasing transactions. Every single page of the lease is marked with revisions, certain sentences are revised ten or fifteen times, multiple all-nighters occur, and gallons of caffeinated beverages are consumed. From the countless hours spent by brokers, lawyers and the business principals bringing the deal together, every possible detail of the lease has been considered, reconsidered, and negotiated to the greatest possible extent. At some point, after all of the negotiation and efforts by all parties, the transaction is complete, and the lease is executed by all parties.
At this point, it would perhaps seem intuitive and obvious that the lease, the same lease which all parties just spent the last few weeks or months vigorously detailing and expending an extensive amount of time, effort and money into, would remain on the top of everyone’s desk along with a detailed summary, ready to serve its purpose on a routine basis as the reference guide for any relational issues that would arise in the future between the parties. Unfortunately, for deals both small and large, this is usually not the case. Despite the time, effort and energy expended, much like a pet rock sealed in a 1970s-time capsule, the lease is stored (either physically or electronically) in some either physical (or metaphorical) back office desk drawer, never to be seen again.
It is often months or even many years later that the Leasing Nightmare of the Curse of the Forgotten Lease makes its return. The landlord reviews the lease and realizes it underbilled the tenant by hundreds of thousands of dollars in the past few years. The tenant reviews the lease and realizes it missed the option to extend the lease at a rent which is 50 percent of the market rents now charged by its landlord. It is at this point that the landlord and tenant realize a fact that should be self-evident from the outset, the lease is only as good as the parties’ active following of the terms of the lease. As discussed in this article, while lawyers do make every effort to place the lease form in as much of an “auto-pilot” state as possible, certain active and passive lease tracking strategies are needed to avoid this Leasing Nightmare.
Common Categories of Lease Tracking Errors
The following errors are some of the most common errors in restaurant tenant lease tracking:
- Assuming the landlord’s rent bill is correct without confirming with the lease: Property managers often will adjust the rent on the wrong dates, charge amounts which are not due under the lease documents, or otherwise make erroneous billing errors.
- Failing to submit plans on time or otherwise abide by timing in permit contingencies: Most buildout periods are contingent on timely delivery of plans (and become accelerated if plans are not timely submitted), and permit contingency termination options generally have strict termination guidelines.
- Forgetting to exercise an extension option: Most leases have very strict rules about timely exercise of extension options, with absolutely no grace period if a tenant forgets to exercise.
- Forgetting to formally notify landlord of a property repair issue: Most leases require a formal written notification of a landlord’s failure to act (e-mail is usually not permitted) before a tenant can avail itself of remedies.
Implementing Systems To Manage Leases
While the appropriate systems of lease management are not the same for a three-restaurant tenant as a 300-restaurant tenant, all restaurant tenants need lease management systems. The following are some of the lease management systems and strategies restaurant tenants should rely on.
With leases often reaching 50-100 pages in length, having a quick reference guide to all the economic deal points and notice periods in the lease is crucial. A tenant should task its attorney on preparing a summary, or alternatively, have someone with extensive leasing experience within the company prepare a summary.
It is advisable to have a construction meeting between tenant, its architect, and its contractor, where all crucial architectural and construction timelines under the lease are communicated. It is important that these parties understand the serious damages that can result from their failure to act in a timely manner.
Lease Tracking Software
For extension options and remembering lease expiration dates and other crucial dates, some form of lease tracking software should be utilized. There are numerous programs in the marketplace available for tenants of all sizes. Given that extension options are often five-to-ten years out, it is highly likely that the person tracking the lease now will be employed in a new company by the time the option comes around, so have a centralized database to send reminders to whomever is administrating leases at the company at the time is crucial.
Call Your Lawyer
With respect to maintenance, repair, or other operational disputes which occur, clients often make the mistake of not contacting their lawyer. Most of these inquiries received by our firm take very little time to provide an educated and strategic answer to the issue, and most attorneys have dealt with the same exact issue or inquiry numerous times before.
Auto-Pilot Your Leases
Tenants should work to make their leases less management intensive. To the extent possible, all important lease provisions should have the similar, if not the same exact, language. By developing standard language addressing certain issues which will not be negotiated, tenants can reliably know an answer to a question without picking up the lease. Many leases also contain sales, financial or repair reporting requirements.
Tenants should always place the burden on the landlord to have to make a written request to ask for the relevant reports, as it is too administratively burdensome to affirmatively track these lease reporting requirements.
But Say No To Auto-Pay
A lease is not a trivial electric bill, Netflix subscription or iTunes subscription. While it may seem old-fashioned in an increasingly automated world, the amount of economic commitment intrinsic to a restaurant lease merits someone spending at least a couple minutes a month verifying the bill. If your landlord absolutely insists on automatic payment (some landlords are following this trend), task someone on reviewing the monthly debits from the business checking account to check for errors.
No amount of effort placed into lease negotiations can justify not having a lease management process after lease execution. While it is understandable that a person passionate about starting and managing a restaurant business would likely not be passionate about lease administration, with overhead increasing in all other areas for the restaurant industry, effective management of this significant item of overhead has never been more crucial.
While it is important to keep in mind the common lease tracking errors and strategies to address and prevent such errors set forth above, it is even more crucial for a restaurant owner to understand that lease administration is a fundamental pillar of the restaurant business which requires time and effort. For larger restaurant chains, there should be staff tasked solely on providing effective lease management.
For smaller restaurant chains, some employee (or the owner at the outset), should allocate at least a certain amount of dedicated time each week to handling lease administration. Above all else, those restaurant chains which recognize that it is their job not only to be an outstanding restaurant, but also to be an exemplary and savvy tenant, will have the most success in avoiding this Leasing Nightmare.