The recent upswing in San Diego’s commercial real estate market makes it all the more important that commercial tenants understand the benefits that only an attorney can offer in reviewing their next commercial lease or lease amendment.
Many tenants do not realize they inherently begin the negotiation process on footing unequal to that of their landlord. Landlords have a far greater incentive than tenants to pay an attorney to create a lease that favors the landlord because a landlord can use one favorable lease as a template for multiple different leases it executes with dozens of different tenants. For example, in a single shopping center, one landlord might execute ten similar leases with ten different tenants, changing only the term, rent, and tenant name but otherwise leaving all other contract language exactly the same. The average commercial tenant, on the other hand, only enters into one or two leases at a time. As a result, it is more cost efficient for a landlord to pay an attorney to draft a commercial lease than it is for a tenant to pay an attorney for the same amount of work because the landlord is able to spread the cost of the attorney’s work over 10 or more deals, whereas the tenant may only be able to use the attorney’s work in a single deal. Landlords understand this inequity and, as a result, often end up with a better end of the deal than their tenants.
Perhaps to save on costs, commercial tenants often rely solely on real estate brokers, and not attorneys, for the negotiation of commercial leases. A good broker is an indispensable asset to a tenant in the negotiation of any commercial lease. Brokers and attorneys, however, have different skill sets and using one without the other can lead to unexpected exposure for a tenant.
Above all, tenants should understand that attorneys can provide advice that no one else can provide because attorneys see firsthand how breach of contract lawsuits bear out in court when commercial leases go bad, and can advise their clients based on this experience. As one example, attorneys are adept at spotting issues relating to indemnification provisions, which generally function to shift responsibility for damages (including significant amounts of attorneys’ fees) arising out of certain occurrences from one party (like the landlord) to another (like the tenant) in certain situations. Similarly, attorneys provide unique insight as to how to best structure dispute resolution provisions that dictate whether parties to a lease are required to mediate their disputes, arbitrate their disputes, or litigate their disputes, and, in each instance, where and under what restrictions. Attorneys can provide invaluable counsel as to many other lease provisions as well. As a result, the best practice is for commercial tenants to use both an attorney and broker in the negotiation and drafting of any commercial lease of lease amendment.
Attorneys at Lincoln, Gustafson & Cercos routinely perform the review and negotiation of commercial leases, or lease amendments, and work with a variety of different brokers to suit the needs and budget of every client. For more information, contact Patrick Klingborg in LGC’s San Diego office.