COVID-19 changed just about everything, the way we shop, socialize, travel and work. In many instances, the changes are readily discernible and quite dramatic. Think of Broadway going dark, and Times Square being virtually deserted.
Other changes will be more subtle, emerging almost imperceptibly over a protracted period of time. For example, the manner in which leases are negotiated is going to evolve. Look for these changes to impact new leases, extensions, as well as negotiations to restructure existing leases.
COVID has accelerated the migration towards digitization in scores of industries. Many sophisticated landlords and tenants had already adopted software products to make drafting, negotiating and revising lease documents more efficient. Expect this trend to pick up steam.
Merit-Based Lease Negotiation Will Become Increasingly Popular
Real estate negotiations have a tendency to emphasize two prominent styles, hard and soft. Hard negotiators tend to value results over relationships. Conversely, soft negotiators attach great importance to relationships and are predisposed to agree to unmerited concessions, incorrectly believing that these sacrifices will improve the relationship.
COVID has underscored the interdependence of landlords and tenants. With such interdependence having been highlighted, parties will increasingly resort to merit-based negotiation. This model emphasizes keystones such as reliance on objective criteria, the development of BATNA (Best Available Alternative to a Negotiated Agreement), satisfying your interests as well as those of your counterparty, attacking the problem not the people and trading items of unequal value.
Lease Negotiations Will Increasingly be Predicated on Objective Criteria
Objective criteria are benchmarks, barometers which can be instrumental in first narrowing and then bridging gaps that divide the parties. With the proliferation of readily available quality information, the quantity and quality of objective criteria will continue to increase. Rather than resorting to the use of force, the parties will negotiate over which criteria to apply. By focusing on interests and standards, negotiators can confront problems collectively, producing more effective solutions.
Following their successful application during lease negotiations, objective criteria will increasingly find their way into lease agreements, embedding themselves there.
Tenants’ pursuit of flexibility can take many forms. Due to COVID, office tenants have been required to remit rent for space they either couldn’t use or couldn’t use as contemplated in lease agreements. Moreover, remote work has emerged as a viable option for at least part of the workforce, at least part of the time. As a result of these and other factors, office tenants will be more prone to pursue increased flexibility. Such flexibility can take many forms including early termination rights and the ability to increase or diminish the size of the leased premises.
Tenants will become progressively more reluctant to lease a set amount of space for a protracted period of time. The longer the lease, the greater the risks, including the risk that the tenant will either outgrow the space or that it will be larger than required. Tenants are aware of such risks, and seek to manage them when negotiating terms, including monetary terms. There is a more efficient means of managing the risk, hence the trend towards increased flexibility and the permanent addition of temporary/flex space as an amenity in class A office buildings.
Landlords will adapt to such trends, ultimately benefiting from the ability to impose higher rates for tailoring lease provisions to tenant needs. Flexibility will be accompanied by customization, for example landlord commitment to satisfy short-term tenant needs. In this way, landlords will be able to charge premium pricing for satisfying occasional spikes in demand, while tenants benefit from being able to tailor the consumption of space to actual needs. Premium priced flex space will ultimately be a more fiscally prudent investment than recurring rent on superfluous “permanent” space.
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Published on: GlobeSt.com By Randall Airst | August 19, 2020 at 07:26 AM