Meeting The Challenge Of A Lease Expiration

Editor: Would you tell our readers about your professional background?

Maltz: My first law firm experience was with Dreyer & Traub, a Manhattan firm with about 110 lawyers specializing in handling complex commercial real estate transactions for local developers. I handled all types of commercial real estate transactions at Dreyer & Traub, including sales, acquisitions, financings and leases. I was there for three years before joining Davis & Gilbert.

Editor: How did you come to Davis & Gilbert?

Maltz: After three years at Dreyer & Traub I realized that I had an affinity for commercial leasing. My practice at that point, however, was a bit more broad-based than what I wanted. In 1991 a real estate partner with whom I worked at Dreyer & Traub had left for Davis & Gilbert. He called me shortly after his move and asked if I would be interested in making a switch. When I learned about the growing real estate practice at Davis & Gilbert, with its particular concentration in commercial leasing, I was interested. After having met many of the people with whom I would be working, the decision became clear. Fifteen years later I am still at Davis & Gilbert and very much enjoying the practice of law and working with the other lawyers in the firm.

Editor: How has your practice evolved over the course of your career?

Maltz: Over the past 15 years my practice has become increasingly concentrated in the commercial leasing area, although I still handle acquisitions, sales and related financing transactions for my clients. I represent institutional and non-institutional owners and tenants of all sizes, shapes and types.

Editor: What should a company do to prepare for a lease expiration?

Maltz: The way to prepare for a lease expiration is to start early. The company that waits until its lease is just a few months away from expiration is not well advised. Certainly in New York, it is impossible to find office space, negotiate the business terms of the transaction with the landlord, negotiate the terms of a lease agreement and build out the space in four months. This process could take anywhere from 12 to 36 months, depending on the size of the space. The search process should start with the retention of a real estate broker. I recommend this step to my clients, even if they are strongly considering renewing their existing lease, because a real estate broker will provide them with expertise on the current market for rental properties, the availability of such properties and the ability to assess, in a practical way, whether to go or stay.

Editor: What is a real estate broker's role in the company's search for space?

Maltz: A real estate broker analyzes the rental market for the company and provides current information on the cost of available space, in addition to determining what types of available space are best suited for the company. The broker will meet with the company's facilities people, human resources staff, executives, and others as appropriate, to determine the number of people involved, the desired space configurations, the budget parameters, desired location and so on. With this information in hand, the broker then looks at the database of space coming available when needed by the company and will come up with a list of possible locations.

Editor: How does the company go about choosing the right real estate broker?

Maltz: There are many good real estate brokers. A company contemplating a large office move - one involving tax incentives and considerable financial analysis - may be better off with a large brokerage firm. They tend to have the ancillary support services that large deals may require. Seasoned brokers are important - and they reside in both the large brokerage firms and small boutique firms. I recommend that the company interview at least two or three brokers to find the best chemistry because the facilities people are going to be living with the broker over the next 12 to 36 months.

Editor: Who pays the broker's fee?

Maltz: Typically the broker is paid by the landlord. That may lead people on the tenant side of the equation to believe that this entails a conflict of interest. They may wonder, in addition, whether the primary incentive for the broker is getting the deal done, not necessarily getting it done right, because if the deal fails to close the broker does not get paid. In my experience, this should not be a concern. Brokers have a reputation to uphold and most of their business comes through referrals and repeat business from companies they have served in the past. It is in the broker's best interest to do a good job.

Editor: After seeing office space in different buildings how do you choose the right one?

Maltz: It is generally easy to determine the ones that are not right. Depending on the size of the transaction, there may not be much of a choice. A company looking for 600,000 square feet may only have a few options; one in the market for 5,000 to 20,000 may have many possibilities. Once the company has narrowed its list to just a few it would be wise to hire an architect or construction consultant to examine fit-out costs, potential construction impediments and compatibility of building systems with the company's needs. This will serve to narrow the choices even further.

If the company is still torn between two spaces, it might make sense to request proposals from each landlord. Significant differences between them may determine the final choice.

Editor: What ensues after the space is selected?

Maltz: At this point the company begins to negotiate the material business terms of the lease with the landlord. The negotiation is coordinated by the broker, but the company should retain a real estate lawyer, preferably a commercial leasing specialist, to review the letter of intent or business term proposals. An experienced practitioner can look at the business term sheet and pick out potential pitfalls, things that should be determined and worked out during the pre-lease business negotiation process. Very often it is important for the parties to reach a clear understanding on some ancillary business issues, such as renewal and expansion options, security deposit, electrical costs and the tenant's right to assign or sublet during this stage. Once the material business terms are agreed upon, the landlord's attorney drafts the lease agreement.

Editor: Should there be a fallback position - another space - in case the deal falls through?

Maltz: Most tenants do not want to put resources into negotiating two leases at the same time, and no landlord with whom the tenant is negotiating will take kindly to a parallel negotiation. That is why starting the process early is important. If the deal falls through then the company should quickly turn to the other front runners surveyed earlier with the broker.

Editor: What can the company do to prepare for occupancy of the new space while the lease agreement is being negotiated?

Maltz: The lawyer for the company takes the lead role in negotiating the lease agreement and will involve the company and its consultants as needed. However, the architect should be formulating a space plan and working toward construction drawings. Since construction cannot begin until the drawings are completed, approved by the landlord, filed with the municipality and a building permit obtained, it is important to have the architect involved as early as possible.

In addition, the company's insurance manager should be reviewing the insurance provisions of the lease and lining up appropriate coverage for the new space. In addition, any lease long lead items such as special furniture and communications installations should be coordinated.

Editor: How long should the process of lease negotiation take?

Maltz: There are a number of variables here; including how aggressive the parties wish to be. In my experience, smaller transactions typically take from 3 to 8 weeks to negotiate and large lease transactions - where a variety of pieces have to fit together - involve a process of from 8 to16 weeks. Having seasoned real estate lawyers on both sides of the transaction help to streamline the process. They know where compromises can be made, and tend to get to the middle quickly.

Editor: What are some of the more important provisions to focus on in lease negotiations?

Maltz: Obviously cost provisions in a lease merit focus. The base rent is something that the parties understand and agree upon prior to preparation of the lease, but typically the landlord's initial lease draft will attempt to pass on to the tenant as much in the way of ancillary costs - such as maintenance and operating expenses - as possible. The tenant's share of real property tax and operating expenses escalations is almost always the subject of vigorous negotiation, and it is important to get this right. Electricity provisions are also important from a cost and adequacy of power standpoint. The tenant has a strong interest in having as much flexibility as possible with respect to its ability to assign the lease or sublet portions of its space. An experienced real estate lawyer will be able to save the company a great deal of money, and trouble, by focusing on the key lease provisions.

Editor: What happens once the lease agreement is signed?

Maltz: The tenant should have its insurance coverage in place to coincide with the execution of the lease. All arrangements with respect to the security deposit - usually a letter of credit - should be completed, and the tenant's construction drawings should be nearing completion.

Editor: And what happens if the company's existing lease has expired before the new office space is available?

Maltz: I cannot stress enough starting the process early so as to avoid settling on space that is not ideal or being subject to paying double rent. Holding over in the original space - which may involve extensive financial penalties - is a very expensive proposition. Nevertheless, it is not always possible to plan for the old lease to come to an end at precisely the same time as one moves into the new premises. There are also times when the new space is ready before the prior lease has expired.

As soon as the company determines that it is going to face a problem of this kind, it is essential to open up discussions with its current landlord. The company must get to the landlord before the landlord signs up another tenant for its space. Most landlords are willing to work out a reasonable arrangement to permit the company to stay for an additional period of time, subject to the payment of a market rent.

Many companies overlook the importance of being prepared for an office move, notwithstanding the fact that occupancy costs are one of its biggest expenses after payroll.

Handling this process in the right way - mobilizing the requisite forces within the company, hiring a broker, surveying the market and bringing a seasoned leasing lawyer into the picture, all at an early point in the process - will result in a very substantial savings for the company, in time, money and trouble.

Published January 1, 2007.