I recently came across a blog post on Honestbuilding.com that was so true, it was funny and made me laugh. 6 Absurd Things CRE Teams Say About Approvals and How to Address Them describes excuses we have all heard about why applications and the documents that go with them are delayed. These excuses are also used when you’re waiting for any documents, whether its signed contracts, draft loan documents or due diligence packages.

Let’s stick with development approvals for this post. Luckily, most of the development teams I work with are prompt and professional. We meet regularly, if not in person, by conference call or e-mail. One person, usually the land planner, keeps us on task and assures that we have what we need on time and deadlines aren’t missed. We are all accountable to each other. However, when the team is spread out around the state or the country for a project that is not local, we come across these kinds of problems from time to time.  The person who is most harmed by this is the client, the developer, as deadlines are missed. When a purchase agreement is contingent upon obtaining approvals and there is an outside date to obtain the approvals, it is often difficult to obtain the extension due to someone failing to submit a document because an administrative assistant was unavailable to send the Fed Ex.

But I want to focus this post on some of the strange, sometimes outrageous requests that the municipalities place on the development team in order to obtain the approvals. We generally spend a great deal of time reviewing ordinances and code requirements before submitting an application for approval. We will have met with planning and zoning staff to get thoughts and ideas as to what is likely to be approved and what the requirements will be so that our applications will be as close to perfect as possible and that the review staff won’t be surprised when they see the application. And, when possible, we meet with elected officials to assure that there will be support at the board level when the time comes. Nevertheless, when applications are submitted, the comments, generally technical requirements, are often laughable.

For example, one application we are working on came back with comments reminding us that the Owners & Encumbrance Report (the title report submitted with the application) must include the names of the current owner and all mortgagees. I scratched my head because if the O&E didn’t do that already, then what did it do? The same report noted that our plan showed the storage/janitor’s closet but that it did not show a mop sink. We’re asked to confirm, following application review, that we aren’t seeking variances, when the application does not ask for variances.

The point here is that in reviewing development applications, most municipalities have set processes and checklists.  There are boxes to check and even if it should be apparent that the boxes have been checked when the application is submitted, it is our job, as the representatives of the developer, to make sure that the staff receiving the application understands that all of the boxes have been properly checked off and all requirements satisfied. If a request seems silly, we have to grin and bear it. Fix the problem and move on to the next one!

Many real estate and lease transactions begin with a letter of intent (LOI). An LOI is supposed to be a non-binding expression of interest between a buyer and seller of real estate or a landlord and tenant.  In a perfect world, the LOI should outline, in as much detail as possible, the salient business terms of the proposed transaction.  These would include the parties, purchase price or rent, closing date or lease term, contingencies, due diligence period, financial accommodations such as tenant improvement and who is responsible for closing and other expenses.  However, LOIs often are bare bones and leave many business points to be negotiated with the final contract or lease.  In these cases, what was the purpose of the LOI in the first place?

Sometimes, clients and brokers ask my input on preparation of LOIs. When they do, I try to make them as detailed as possible to that when I prepare the contract or lease later, I don’t have to re-negotiate.  More often, I am given a signed LOI and asked to prepare the contract or lease or worse, negotiate someone else’s document.  These LOIs regularly have missing or incomplete essential terms or ambiguities.  Therefore, we have issues that will have to be negotiated at the contract stage that the client and perhaps the broker intended to have put to rest with the execution of the LOI.

Another pitfall to LOIs is a negotiating strategy some people like to use. When I include a term in a draft of a document that the other side might not like, a common response is “that wasn’t in the LOI”.  These “strict constructionists” can’t honestly believe that a non-binding LOI acts as list of exclusive terms of the deal.  Similarly, if a client wants to modify or even tweak a term, the obstructionist won’t allow it because “that’s what the LOI says”.  People get too hung up on the 4 corners of the LOI, they ignore the provision that says it is non-binding or they just don’t want to make a deal.  Circumstances change between the LOI stage and the final contract.  The parties have had an opportunity to do a bit more due diligence, to talk with their partners, attorneys, bankers and other experts.  They have a more complete understanding of what needs to go in the final, binding deal.  The LOI is designed only to be a road map.  If one party gets too stuck on every word in the LOI, the deal will not get signed.

LOIs can be valuable tools, but only if they are drafted with the appropriate detail and only if the parties understand that until the contract is signed, nothing is final. If they are used otherwise, they can be costly and an obstruction to completing potentially valuable deals.

I was negotiating a lease for a client last week. Of course, it was a “rush” job.  Always is.  The landlord sent us his tried and tested form.  The client had his in house people take a first stab at review.  But general counsel would not send comments back to the landlord until I had offered my comments.  The client sent me their mark up of the lease.  The mark up was the track changes version.  It was easy to follow the client’s revisions, comments and concerns.

Not surprisingly, the landlord’s form was a typical landlord form.  The person who reviewed the lease in house for the client was perhaps a little over zealous.  I did my thing.  I softened many “over reaching” landlord provisions.  I corrected business terms that weren’t drafted accurately or most favorably to my client, the tenant.  I added some typical tenant favorable provisions.  And, I changed many provisions that the client’s in house person had made.  Where there were total paragraph strikes, I reinserted them when I knew that the landlord would not agree and the provisions would not harm the tenant.  I took out inserted provisions that were unusual or overreaching by the tenant.  Frankly, I wanted to be reasonable and fair.

But, I encountered a problem.  The landlord had locked his document so that I could not simply “reject” the changes that the client’s in-house person had made.  I had to delete the change and then reinsert, where applicable.  The result was that track changes left me with a multi-colored document showing more changes than we actually had made.  The actual changes that and revisions that I made were mostly common changes and revisions.  Certainly, there were some that would have to be negotiated, but for the most part, an experienced and savvy landlord would not be surprised to see many of the changes I had requested.

This was not the case, however.  Upon receipt of our revised, track changes lease, the landlord and his representative refused to even review the revisions or consider our requests.  They simply looked at the document and assumed that I had “re-written the lease”.  They responded to me that this form has been used to lease over 2,000,000 square feet of space and they were not about to change it.  If we were serious, I would be limited to 5 “deal killer comments”.  The landlord also told me not to bother correcting any “perceived grammatical errors or typos” (I had corrected numerous defined terms that had not been properly defined or capitalized.  Might as well clean things up as you are doing revisions and fix inconsistencies).

My client owns and leases hundreds of thousand of square feet as well and is a billion dollar company.  While we tried to explain the issues with the track changes and locking the document, the landlord’s agent pretty much told me to look for other space.   This did not go over well with my client.  As an experienced negotiator, I don’t want to negotiate against myself either.  So, there was no way that I was going to limit my comments to 5 comments.

Ultimately, I re-did my comments on the original draft of the lease, without including the objectionable changes by the client’s in house reviewer.  However, all of my other changes (sans the “perceived grammatical errors and typos” and one large change that I decided that I could live without), were included in this revision.  Landlord’s agent immediately responded that this was much better and that they could work with this draft.

Though it was more work for me, I think that we will now come to terms on this lease.  I had to put on my “old school” hat to make this lease work.  Sometimes, technology can be a burden.  I should have realized that my first time through the lease and worked off the original version of the lease rather than the client’s mark up.  I might have been more sensitive to this had I been working with the landlord’s agent prior to submitting my revisions.  On the other hand, it is also common courtesy to let the people you are working with no what restrictions you have placed on your documents when providing them with drafts.   While it certainly makes sense that a document should be protected from third (3rd) party edits, it is not common that it would be locked so as to prevent a subsequent editor from undoing or changing his/her edits.  Lesson learned, and I have written about this before, know who you are dealing with before entering into negotiations and know their expectations.  In this case, the landlord (and even his agent) were not very technology savvy and nearly walked away from a deal over pride of ownership in a trusted form.

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    Welcome to Assouline & Berlowe’s Florida Real Estate Law and Investment Blog with news, insights, and commentary for investors, developers, and their advisors.


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