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Industrial / Commercial Building Lease Space: The Negotiation & Unforeseen “Due Diligence”…Not Knowing and What It Just May Cost You

Due to the cost of a warehouse / distribution center space today, the matter is taken very seriously. Having said that though, and speaking quite frankly, I’m still amazed at the missed opportunities made by the Lessee, Tenant or Building Operators.

As adults, certainly as a professional in a chosen field or pursuit, we are expected to learn from our mistakes and life experiences. Allow me to share a true story with you. I do so with the sole intent that it never becomes a mistake you need to learn from. Or most importantly, need to justify to someone or pay for it yourself.

Scenario:
● A Customer decides to move. His lease is expiring and he didn’t care for his relationship with the Landlord / Property Management representation group. So much so they decide to absorb the cost and relocate. For a number of reasons, they wanted to stay geographically close to the prior location.

Makes perfect sense…however, their Due Diligence lacked the in-depth analysis required. It simply was not as thorough as it should have been. Issues surfaced immediately.

Herein lies the key, pivotal consideration…they had already signed the Lease for the new site. By doing so they, for all intents and purposes, forfeited a large part of their negotiating position.

Proper “due diligence” would have revealed that the building, without significant infrastructural improvements, could not support their “intended use” and/or application (which, for your reference, was the distribution of Finished Goods).

What was the end result? They litigated their way out of the brand new lease. Not an inexpensive process. Also, paid a premium to stay in the “old” building (they were again taken advantage of by the same Landlord, no surprise) while they looked for a new space. Approximately 5 ½ months later they moved into a new building.

How much did this mistake cost them? While we were not privy to their entire exposure, the portion we were aware of was nearing $321,000.00. Again, with proper and informed due diligence, this entire calamity was 100% avoidable.

Why did such disconnect exist between the Parties, the Lessee & the Lessor?
As a potential Lessee / Tenant why should you be concerned?

Simply, the Landlord / Property Management, the Lessor, has their interests which they naturally protect. Plus, they are ‘professionals’ at leasing space. Are you? If not, then you, the Lessee / Tenant need the same level of representation.

While the story depicted a more extreme case, I witness the missed opportunities in the negotiation of Leases all too, too often.

What you, the Lessee, may assert is a market ‘standard,’ they, the Lessor; typically refer to as a ‘tenant improvement.’ Further, the moment the Lease is executed, you’re now under the obligation of current UBC & NFPA Code requirements for that specific location. By signing, the obligations are now all yours. It is stated right in the terms of the lease language itself.

So what would be WCWC’s approach or advice?

Please consider…
● If at all possible, allow yourself at least two or three building options.
…and
● Have each “final candidate” thoroughly analyzed by a professional.

The building lease typically represents one of the top two monthly obligations you’ll have for any warehouse / distribution facility. WCWC is suggesting you don’t “stick yourself” with what is otherwise an unnecessary and avoidable expense.

The Summary (and the Irony): Thorough legal review and involvement of a lease document is a fundamental procedure. A given. Suffice to say, no one would make such a long term commitment without it.

Yet, after all of the events and negotiation that occurs prior to the signing of a lease document…professional physical analysis and thorough technical building review…while factoring your application or intended use into the equation…is largely overlooked. It is unknowingly ignored or most simply believe they’ve done enough.

Please remember the case outlined. Involve a professional. These cost exposures, if not completely avoidable, are certainly largely negotiable.

RJL 5/13/13