Getting better, cheaper results from your lawyer in real estate transactions

OR, WHY HIRE A SMART LAWYER AND BE A DUMB CLIENT?

Lawyers are expensive, and good lawyers are very expensive. That information comes as no surprise to you, but did you know that there are techniques a client can use to reduce legal costs in commercial real estate transactions? Clients often focus on a given lawyer’s hourly rate when considering the ultimate cost of legal services, which is understandable and appropriate, but the hourly rate is only one factor – there are lots of strategies that a savvy client can employ to keep costs down while at the same time increasing the likelihood of a faster, better deal outcome.

The lawyers in our firm have a combined experience of more than 70 years in handling commercial real estate and business transactions, and what follows is some of our hard-earned wisdom about how to work with lawyers for an optimal result:

1. HIRE THE RIGHT LAWYER.

No lawyer can be an expert in all areas of the law; there’s simply too much law for any one lawyer to know these days. While a purported “general practice” attorney who handles all sorts of matters might charge a lower rate than a lawyer with lots of experience in commercial real estate transactions, it’s a false economy. A lawyer with proven, relevant experience knows which issues to focus on and which to ignore, and what the customary compromises are, whereas an inexperienced one will often obsess over the wrong issues. So, using an experienced attorney could result not only in saving hours of legal time, it will likely yield an outcome whereby the issues on which the experienced practitioner focused have positive economic consequences in the future.

2. CLEARLY (AND CONSISTENTLY) EXPRESS YOUR PRIORITIES IN THE TRANSACTION TO YOUR LAWYER.

Are you interested in being highly protected, or do you just want a quick review? What are the critical issues for you? Clients often say “Don’t kill the deal—but I want to be protected!” That sort of statement does not give meaningful direction to the attorney. A better approach is to identify the issues that are really critical – e.g., a financing contingency in a purchase and sale agreement or a specific “drop dead date” for delivery in a lease.

3. DON’T GET BOXED IN BY THE LETTER OF INTENT.

Since letters of intent are typically nonbinding, clients often gloss over the finer points of such documents, with the expectation that they can always renegotiate the unfavorable provisions later.

Our experience is that such an approach is risky, and often leads to acrimony; no one likes to be re-traded on deal points, and re-trading can undermine the trust that is essential to making transactions go smoothly. We think a better approach is to either insist that the provision be written in a manner that is acceptable to the client, or, at minimum, add language that allows some wiggle room. For example, if the tenant in a lease negotiation insists on attaching to the letter of intent a list of exclusions from operating expenses, the landlord should either take the time to surgically modify the list of exclusions, or add equivocating language such as “the attached list of exclusions remains subject to Landlord’s review” or “subject to review by Landlord’s counsel.”

4. GIVE THE LAWYER THE NECESSARY BACKGROUND INFORMATION.

It’s surprising how often clients are stingy with background information and deal terms. The best course of action is to anticipate what the lawyer will need, and provide it at the outset. An obvious and common example is amendments to leases and purchase and sale agreements. The lawyer can’t prepare the amendment unless provided with the existing documents. If the deal involves a letter of intent, or other correspondence, provide those documents to the lawyer. If you are asking the lawyer to document a deal for which there is no letter of intent, it is a good practice to take the time to think through all the business terms and provide the lawyer with a comprehensive, written outline. The alternative is that you can pay a lawyer to ask a long list of strictly factual questions such as “Who, precisely, is the Tenant?” “Are you charging a Security Deposit?” “Is there a Guarantor?” “Is it Landlord-controlled buildout, or a Tenant-controlled build-out?” No matter how smart your lawyer is, she is probably not a mindreader, so it’s most cost-effective to anticipate what facts she will need to do the best job for you.

5. BE REALISTIC ABOUT THE LIKELY ULTIMATE OUTCOME.

Sophisticated clients generally know how much leverage they have in a transaction at the outset, and have a good sense of how a given issue is typically resolved. Occasionally, however, we see clients who might be inclined to stake out a position that, in our view, is overly aggressive. In that circumstance, we generally counsel them to moderate their position to bring it in line with what we would view as a customary outcome. In our experience, it’s simply more cost effective to reach a fair resolution early in the deal. For example, it’s not generally reasonable for a tenant under a long-term lease to have an early termination option. Because it would be rare landlord who would grant such an option without compensation, the most efficient approach is to offer the landlord a fair buy-out payment in consideration for the option (typically, the unamortized balance of the tenant improvements, commissions and other landlord costs, plus interest and some additional compensation, such as several months of rent).

Using the above tips likely will both reduce your legal fees and ensure a smoother transaction, resulting in a successful result for all parties.

DISCLAIMER

This article does not constitute legal advice. Readers should consult with their own legal counsel for the most current information and to obtain professional advice before acting on any of the information presented.

BIOGRAPHIES

Tom Stewart is a partner of Stewart Ward & Josephson LLP, and has more than 30 years of experience in handling commercial real estate transactions. tstewart@swjllp.com; 916-569-8121.

Winnie Ward is a partner of Stewart Ward & Josephson LLP. She specializes in office, retail and industrial commercial leasing, as well as real property acquisition and divestment. Ms. Ward currently serves as a Director at Large on the Board of Directors for the Association of Commercial Real Estate. wward@swjllp.com; 916-569-8161.

Gregg Josephson is a partner of Stewart Ward & Josephson LLP, and specializes in corporate and finance matters, representing numerous financial institutions, borrowers, corporations and developers. gjosephson@swjllp.com; 916-569-8131.