Over the past many months, I’ve taken more than one occasion to talk about the need for office tenants to be properly represented when negotiating leases with landlords — especially in situations where the broker also represents the landlord.
I’ve asked rhetorically how a landlord’s agent can equally represent the interests of a tenant beyond relaying his landlord client’s terms to his tenant “client” on a take-it-or-leave-it basis? It’s like an attorney trying to represent both the plaintiff and defendant in the same trial. I’ve been so concerned that unwary tenants think they are being equally represented in dual representation situations that I’ve neglected until now an even bigger danger tenants face — not being represented at all.
The comic strip character Pogo alluded to this tenant peril many years ago when he declared something to the effect: “We have met the enemy and the enemy is us.” Adapting it to the world of commercial real estate, Pogo would have been talking about tenants who attempt to represent themselves when dealing with landlords. A tenant who attempts to represent himself or herself in negotiating office space lease provisions turns out to be his or her own worst enemy. To roughly paraphrase an equally appropriate adage from legal circles: “A person who represents himself in a court of law has a fool for a client.”
What on earth possesses an office tenant who is not a real estate leasing professional to think he or she is able to negotiate with a building manager or owner whose profession is to obtain the highest rent possible and give away as little as possible in the way of concessions or benefits? This same tenant doesn’t hesitate to consult an attorney for even the most minor transaction, an employment service to find permanent and temporary employees, and even a professional indoor plant specialist to care for the office flora. Yet, when it comes to getting help in handling a major, long-term financial commitment such as leasing office space, an alarming number of tenants think nothing of trying to go it alone. If you think hiring a bad receptionist or having a dead ficus plant in the lobby are bad outcomes, try an overpriced lease with inadequate benefits and flexibility.
In just the past few weeks, I’ve heard enough examples of “self-brokered” tenants to devote at least this column to warning others about trying to go it alone.
What follows are a couple of examples of tenant disasters. The names have been withheld to protect the ignorant.
Example one was a full-floor client who needed more space. He called the building manager to tell him so, indicating that he needs to move fast. Predictably, the building manager was only too happy to oblige. Without another word spoken, the tenant received on his desk a completed leasehold agreement ready for his signature for a half floor with no tenant improvement allowance, no relocation provisions or protection — and at a rate well over market level.
“What’s this?” the tenant squawked. “Take it or leave it,” was the terse response. In telling the building manager, of all people, that he was desperate for more space, the unwary tenant played all his cards face up, leaving himself no negotiating power and putting himself squarely at the mercy of the landlord.
Another company grew from an original 1,200-square-foot office space to several floors, all within the same building. The tenant represented himself during those expansions and received inadequate allowances to improve and reconfigure the office space, thereby requiring hundreds of thousands of dollars out of pocket.
These expenses could have and should have been borne by the landlord if the office user had used a tenant broker. Adding insult to injury, the tenant paid an average of 15 percent over market rate for the additional spaces. Not only that, the tenant no longer has any right in his leasehold agreement to expand.
The third example was a law firm client who chose self representation in an arbitration with the landlord over an option to renew a lease. At issue was the large disparity between the true market rate for the space and what the client was being offered in the option. This client along with an alarming number of other tenants are not aware that tenant brokers can and should represent tenants in such arbitrations. The outcome of this case is still pending — now that they have seen the light and hired tenant representation.
Many tenants labor under the notions that they usually have to pay tenant brokers to represent them in negotiating leases and that tenant brokers don’t do renewals or expansions. Not so on both counts. Landlords build real estate commissions into their costs whether they are paid to their own leasing agent or to a tenant’s agent and whether it’s for a new deal, a renewal for existing square footage or a lease for additional space.
Truth be known, many landlords can save enough in concessions and charge enough over-market rental rates in dealing with tenants who represent themselves to be able to give tenants who are represented by their own broker a fair-market deal and pay that broker’s commission as well. In effect, the ignorant subsidize the informed.
That there are tenants who, in effect, pay for the benefits of other tenants is an interesting concept. The question to office tenants reading this then is obvious: To which group of tenants do you belong?
Jason Hughes is chairman, CEO, and owner of Hughes Marino, an award-winning commercial real estate company with offices across the nation. A pioneer in the field of tenant representation, Jason has exclusively represented tenants and buyers for more than 25 years. He writes about topics in commercial real estate from a tenant’s perspective on his blog, Downtown Dirt. Contact Jason at 1-844-662-6635 or email@example.com to learn more.