The True Cost of a Few Words

Published on Thursday, 22 August 2013 10:10:19    Written by Marc
Back a few years ago in a previous life, we were closing down a manufacturing site which had about nine years left on the lease. This was a large site with over 350,000 square feet of industrial space on the East Coast of North America. When the decision to close the site came, I naturally went back to the lease to verify what special clauses we would have to deal with. In all fairness, this lease had come with an acquisition that included many properties/leases, so we had not negotiated the leases, we simply took them "as is" at the time of the acquisition.

sawmill wood industrySo, digging into the original lease, I was curious to see if there were special clauses that we should know of. I knew we had an opting out in about five years from the closure date, so our main idea was to sublease the site for that period of time, exercise our right to cancel the lease and save the remaining four years of rent (minus the opting out penalty of course). To my surprise, there was a sneaky clause that the landlord had inserted that prevented us from exercising our opting out clause in the event that we decided to sublease the site. Also, to make things worse, there was another clause that mentioned that if we decided to vacate the site and not sublease it, we were automatically in default of the lease and needed to pay the full remaining of the lease at once. I had never heard of those terms, even after more than 20 years in the field. The first clause was bad enough; the second one was reaching the status of insult. To make things even more interesting (as if it was possible), if the Tenant was in default, he could not exercise his opting out right. Strike three. It was damned if you do and damned if you don’t. Now, they had a broker from a large international firm help them write this lease, but clearly the broker did not seem to take the side of the tenant. In our view, it was abusive and although we did try to contest the clauses, it was all in vein! The landlord had been smarter than the negotiators of the tenant at the time. Well, sneakier let’s say.

At that point, since the decision to close down the site was well underway, we had no other choice than to put the site on the market for subleasing, losing our right to opt out in the process. It took us a few years to find tenants and we only managed to sublease a portion of the site, sometimes with short-term leases, since we were in a geographic area that was difficult from the start. The end was a loss of a few million dollars and some clauses forever burnt into the back of my head. I was `lucky’ only in the sense that I was not the one that had negotiated that lease, but the experience was truly a bad one.

Morale of the story: read the lease in detail before signing, just when you think you saw all the possible angles and different clauses, beware! Just a few words could end up costing you a small fortune in the end. CRM9RTDVDBQW