Commercial Leases and How They Affect The Coverage Under Your Title Policy
Select an SECTION
(i) LEASE PURPORTEDLY TERMINATED
(ii) LEASE STILL IN AFFECT
(iii) LENDER ISSUES
Joshua Stein, a real estate and finance partner in the New York office of Latham & Watkins, was recently elected to the American College of Real Estate Lawyers. He chairs the Practising Law Institute’s annual seminar on commercial mortgage finance and the New York State Bar Association committee on commercial leasing. His articles have appeared in Real Estate Review, The Practical Lawyer, The Practical Real Estate Lawyer, and numerous other publications. He gratefully acknowledges the contributions to this article made by Donald H. Oppenheim and by the author's colleagues Richard L. Chadakoff, James I. Hisiger, and Roger H. Kimmel.
In every real estate negotiation, a "Negotiator" needs to figure out how to sell, persuade, neutralize, or in some other way satisfy someone else - "The Other Side." Often the Negotiator must satisfy a whole roomful of Other Sides, each with its own agenda: a lender, a tenant, an equity investor, another equity investor, other participants. Sometimes one party needs the deal as much as the other. Other times one party holds all the cards, or thinks it does.
(For ease of exposition, this article assumes a negotiation between two parties: "Our Side," represented by the "Negotiator"; and "The Other Side," represented by its "Representative.")
Whether the negotiation involves a lease, a workout, a purchase or financing of a multistate portfolio, or even a contract for the sale of a house, the Negotiator's goal is always the same: to convince The Other Side to go along with him, on terms that work for Our Side.
Negotiators have many names for that process, including "making a deal," "selling," "horsetrading," "getting to yes," and manipulating. Each label says something about the negotiator who uses it. But negotiating always boils down to understanding The Other Side's psychology and agenda, and persuading The Other Side to accept the Negotiator's view of the solution.
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FWHO REPRESENTS THE OTHER SIDE?
The experienced Negotiator begins by asking exactly who represents The Other Side. Does the Representative have authority to make a deal? Or have the real decisionmakers merely sent someone whose job is to extract a first round of concessions, but is authorized, in turn, to make only negligible concessions? This ploy allows someone higher up to step in to finish the job and, possibly, to take back some of the first Representative's concessions.
If The Other Side's Representative's hands are tied, Our Side would be foolish to send someone with the authority to trade away points, make concessions, and get the deal done. Our Side's Negotiator would do what he has the authority to do, while the Representative might concede little, reserving much for further discussion.
Even if the low-level Representative does in fact have the authority to try to make a deal - subject to confirmation and approval by a senior person - Our Side may suffer simply because of The Other Side's internal organizational dynamics.
The Other Side's Representative may make a deal that is perfectly reasonable, logical, and appropriate under the circumstances. When a subordinate makes a deal and explains it to her superiors, however, those superiors often need to show that they are tough and responsible, and that they know how to add value to a transaction. (Otherwise, why does the organization need them?)
Therefore, The Other Side's executive (second-guesser) might scrutinize and question the proposed deal much more critically than if they had been on the firing line initially. Indeed, the senior person might well have made the same deal on the same terms and deemed it perfectly good under the circumstances.
For these reasons, a Negotiator should try to have The Other Side send to the negotiation the highest-level Representative that he can reasonably request. In any case, he should assure that the authority levels of negotiators on both sides are reasonably well balanced.
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THE NEGOTIATING TIMETABLE
If both parties want to close a deal quickly, they should probably bring in their higher level negotiators at the outset, and in other ways try to do everything possible to move the process along.
If Our Side is in no hurry but believes The Other Side needs a quick deal, Our Side may want to slow the process by starting the exchanges with low-authority negotiators. The Negotiator would work through each issue deliberately and carefully, taking his time about setting up meetings, not expediting the process. The Negotiator might suspend negotiations while the attorneys redraft, then study the redrafts carefully to assure they are as complete and correct as possible before circulating them for review and discussion.
This approach might set the stage for a time crunch that may ultimately work in the Negotiator's favor.
A time crunch can also sometimes explode in the face of the side dragging its feet. The more unstable and tense a situation, the less anyone can predict and control it. The Negotiator may think that instability and tension gives Our Side an advantage, but he could be missing a crucial piece of information, about the deal or about The Other Side's options, that changes everything.
Whether and how to set up instability and tension is a delicate strategic decision, more art than science.
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PERSONAL RELATIONSHIPS AMONG NEGOTIATORS
As early as possible in negotiations, the Negotiator should get to know the people on The Other Side as individuals. He should find out about their families, their roles in their company, their hobbies and interests, and what is going on in their lives. The Negotiator should build friendly relationships to the extent possible. If he notices that someone has to leave a meeting early, he might ask if they feel like saying why.
Most people want to please and help their friends. Good feelings among the negotiators make the rough and tumble of negotiating smoother and more pleasant and may produce better results for everyone. At a minimum, good interpersonal relationships may lead both parties to skip the posturing and gratuitous confrontation, so common in many negotiations, that can waste time, create ill will, and even frustrate transactions.
Good negotiators make "small talk" with the opposing sides. When the formal meeting recesses, though, they discuss anything except the business at hand. They don't talk shop. They avoid any topic remotely close to the subject of the negotiation - such as similar transactions that they recently closed.
Casual remarks, if relevant to the transaction or any similar transaction, can suggest concerns, issues, or ideas about the transaction that The Other Side might otherwise not have raised and that Our Side may prefer not to face. So skilled negotiators talk about weather, family, golf, baseball, music, concerts, anything as long as it is irrelevant to the business agenda.
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WORKING TOGETHER
The Negotiator should try to develop a sense of shared achievement, treating the participants as partners who are working hard to get to a reasonable middle ground. When the two sides reach a compromise, both sides "own" the outcome.
Once the parties have agreed about substantive issues, a Negotiator will treat the differences as history, emphasizing instead the mechanics and logistics of how the parties will document and close their new agreement.
The more the parties talk about logistics, process, and timing, the more they cement their shared commitment to the resolution reached. This reduces the likelihood that The Other Side will reopen issues. It also produces positive momentum and a state of mind that moves the process along.
Positive momentum and positive states of mind often peak shortly after the parties have achieved, recognized, and confirmed a breakthrough. This may be the right time for the Negotiator to raise any troublesome or awkward issues that remain.
During the negotiations, the parties may have agreed to set aside temporarily certain sticky secondary issues. A successful Negotiator must not let these issues fester. If they are not resolved, the judgment that they are secondary may turn out to be wrong. They may instead turn out to be fundamental, particularly if the parties finally focus on them at the last minute. If these issues will not get resolved, the parties might save time, money, and effort by recognizing the deadlock early and moving to a completely different approach or to a completely different transaction.
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