Negotiating Small Deals: Winning the Battle but Losing the War

February 2014

In a perfect world, a prospective tenant or landlord would have an unlimited budget to negotiate a lease and make sure that the execution copy addresses all of the potential issues that may arise during the term of the lease. But that is almost never the case.  Even the most sophisticated tenants and landlords typically allocate a budget toward many of the “standard” deals and expect that the expense of lease negotiations will fall within such budget. Once in a while, negotiations end up being significantly more complicated than the parties had originally anticipated and the parties make budget adjustments. The amount at risk for landlords and tenants in getting the deal right is substantial enough that the budget, while always in the back of everyone’s mind, is the tail that does not wag the dog. If a lease provision does not adequately protect a landlord or a tenant, the parties will work to get it right, rather than simply ignore the risk because it will cost more fees to fix it. But what do you do when you are negotiating a short-term lease or a lease for only a few hundred or even a thousand square feet? How do you balance the benefit of avoiding risk versus the practical reality that it would cost several thousands of dollars to address those risks?

While the amounts at stake for a 10,000 square foot deal are relatively much higher than for a 1,000 square foot deal, many of the issues are the same. Still, there are some situations where a small tenant would generally be wise to assume the risk and avoid the negotiation expenses. For example, when a tenant signs a small or short term lease, the tenant may not need to worry about what will happen in the event the property is condemned, or if there is a casualty, or if there is a foreclosure (SNDA). One reason is because while a 10,000 square foot tenant could easily invest $500,000 – $1,000,000 in building out a single location, a 1,000 square foot tenant would probably invest less than $50,000 – $100,000.  While $50,000 to a small tenant may be the equivalent of $500,000 to a big tenant, the actual difference in monetary amounts at stake changes the analysis. With that in mind, the lease provisions addressing these issues are usually very complicated and may not be “fair,” but it may not be worth it to incur the costs to try to negotiate changes to these sections given the low risk that these events will occur and the actual amount at risk. Of course, if these events do happen, the parties will look back and feel differently. But the reality is that even if the tenant tries to negotiate those changes, most landlords tend to reject such changes outright without even trying to be fair because of the size of the deal. There is simply no way to address all of the potential risks on the very limited budget that comes with the territory of small deals. The list of provisions that are unlikely to be relevant during a short term or small lease is extensive.

So what are the provisions that matter the most? The answer is: It depends. Each deal is different and will raise its own unique concerns. Generally, however, the biggest bang for your buck will often come down to issues related to construction. This area tends to be the one where the most amount of surprises arise between the parties. Parties should be very careful to ensure that the lease accurately describes the parties’ expectations for the condition of the premises upon delivery, and that all related construction costs to be allocated to each party are clearly spelled out. Resolving this category alone will likely save each client the most amount of expense, time, and frustration. There are plenty of other areas to focus on, especially those that affect a tenant’s day-to-day operations, their bottom line, or their exit strategy, such as repair obligations, radius clauses, exclusive use clauses, assignment and subletting, co-tenancies, and pro rata share definitions – these types of provisions may be worth spending the time and money to negotiate, as they are more likely to be relevant during the term of the lease. Nevertheless, at the end of the day, a small tenant would be making a mistake to fight for every single change that a larger tenant would normally ask for to make a provision balanced, because by the time you win that battle on a remote risk (if you win – big if), you will have already lost the war on staying within your budget.