Updating A Lease: Why Do It And How Often
Abe Schear

Landlords and their counsel often discuss updating lease forms, yet seldom have the time to perform a thorough review. So, how often should the form be updated? A noted retailer has a policy of changing each store manager every 5 years, believing that staleness and complacency set in at this point. Leases lose their edge as well and while every 5 years may be too often (or not quite often enough depending on its initial quality and the scope of changes to the governed properties), it is a place to start.

Leases set the contractual terms of an agreement, but are also representative of the style, professionalism and priorities of the company. This intangible perspective is not always considered, but can have a true impact on the tone and speed of lease negotiations. Just as the terms of leases change, the leverage and attitude of the landlord can change over time and a change in the lease form for that reason alone may be well advised. A very long, detailed, landlord-oriented lease can be intimidating to a small tenant and incomprehensible to a lawyer not used to handling these types of documents. An overly simple, short form may encourage experienced tenants and their counsel to make zealous (and over zealous) comments, thus taking more time and creating a more contentious negotiation.

There are numerous reasons warranting periodic review of the lease form, among them:

(1) Changes in the law. We think most often of changes to available remedies and procedures in the event of default and/or bankruptcy laws, but other laws change as well. Environmental requirements and exposure have changed significantly over the years, as have the types of insurance available to the parties (or at least the terminology used to identify it). Even without changes in law, properties age and are modified, making them subject to various issues which might not concern the new or former property.

For instance, what about condemnation? That issue might not have been a concern when you had a new, vibrant, city-supported center, but a struggling, not fully occupied property may face different threats and need lease provisions that deal with them. The Supreme Court of California has just held that amusement ride operators are held to a much higher standard of care; should that directly or indirectly necessitate a change in the lease? Without a standard practice of reviewing the form on a regular cycle, these issues are likely to be missed and cause aggravation, expense and exposure that might otherwise be avoided.

(2) Changes in the project. Projects start as development models, hopefully become construction projects and later operational projects. Leasing can occur at every stage and a form designed during the early visionary period may not work for the up and running center. Even early in the center's life, you may be dealing with critical issues like relocation of existing tenants, expansion of other tenants, replacing a building, relocating parking, changing access points, creating new or different signage, revising the common areas and other important, center-saving changes that may not be fully contemplated by the initial form. Although tenants will want to limit the landlord's right to do some of these things, if the form does not start with language supporting the landlord's ability to manage, develop and redevelop its center, the viability of the project may be challenged. What tenants may not allow in a form during pre-leasing will be very different from what they may allow in a center facing redevelopment and new positioning.

(3) Changes in tenant mix. In today's fluid market, with office and retail often mixing, sometimes with residential components being part of the total package, and with the character of the retail alone changing, leases designed for traditional retail projects do not always work. Landlords may want to focus on hours of operation, rules and regulations, co-tenancy issues (with an increased focus on hours of complimentary uses), use of the common areas (including noise levels), parking concerns (think “valet”) and signage rights, to name but a few impacted terms. Many properties are now adding a greater component of medical office, where the credit worthiness of the tenant is often far greater than for the standard retail tenant.

(4) Presentation. The presentation of the lease leaves a lasting impression, a factor that is often underappreciated. It is important to present oneself to the public, particularly to the tenant, in a manner that maximizes the chances of successfully completing the lease in a timely and thorough manner. Whatever way the form is received for review, whether by fax or email, it should be legible and professional and allow the tenant to make changes directly upon the document. The exhibits should be complete, clean and clear. As the landlord, think about the impression you'd have if you received the lease. The lease, after all, is often the first impression the tenant and its legal counsel have of the landlord from the legal perspective, not an unimportant view given the importance of having proper documentation.

(5) Internal governance. The best, most effective and thorough leases are negotiated by landlords who fully understand their lease forms. Unfortunately, many landlord representatives are not familiar with their lease form and may be presenting a form inconsistent with their own notion of the property and the deal. If the tenant comes to understand the lease better than the landlord, the tenant will have a leg up in the negotiation. By periodically reviewing the lease (in a process that includes all landlord employees working with it, not just a designated representative to work with counsel), the landlord has an opportunity to better train each individual who is in any way empowered to make deals happen, and to more completely and accurately negotiate the text. Having recently had the opportunity (as a tenant) to explain a landlord's lease form to the landlord and to modify the landlord's lease (instead of the landlord making modifications), I can readily state the perils to landlords that lose control of their process.

(6) Style of lease form. Sometimes leases should be longer, sometimes shorter. Remembering that the goal is a signed lease, the landlord should periodically analyze its presentation to the tenant making sure the lease isn't too long or too sophisticated for the quality of tenant being solicited. Organizing the lease in a user-friendly manner with defined terms clearly identified and used consistently throughout the document helps tenants understand the lease. It's important to make sure that even if they are technically correct that construction exhibits aren't too complex. If possible, incorporate the construction exhibits by reference, leaving the review to the tenant's construction (rather than legal) personnel. This helps move the lease forward more quickly.

(7) Foreseeing the future. Landlords should always consider the future nature of the project. Will parking be a concern (what about new parking decks)? Is it possible there could be a significant expansion of the project? Is there adjoining land that could some day be incorporated into the project, even if not presently controlled by landlord? If an anchor tenant was lost, what are the possibilities for replacing it? Does the center adjoin roadways that could be widened or have access points change?

(8) The lender. While the lender may not have too many concerns, it surely will want to have its subordination form in place and perhaps incorporated into the lease form. Of course, this means that a change in lender will likely mean a change in that form, so the lease needs to provide for that or be revised at that time. Lenders are also concerned with tenant rights to terminate, to purchase any part of the property, and changes to the standard payment provisions. The lender's funding is key to the viability of the project, so its concerns should be taken into account in preparation, review and revision of the form. Although they will focus only on select provisions of the form, the landlord will likely have to provide its lender with its “standard” lease form upon origination of the loan.

It probably sounds fairly simple and perhaps unnecessary to be recommending that landlords review their lease forms thoroughly and frequently, but experience shows that in a day where time and money are increasingly precious, this work is not often accomplished. Finding the discipline to do it, and do it well, will likely reap rewards that make the effort well worth it. Even if the review results in a determination that material changes are not required, the landlords' personnel will have been refamiliarized with the document (and those new to the company will have a useful initiation) and better equipped to do their jobs effectively.

Abe Schear is a partner with the law firm of Arnall Golden Gregory, based in Atlanta.