Modern office building near Great Portland Street in London, UK. (Photo by BuildPix/Construction ... [+] Photography/Avalon/Getty Images) Getty Images
This is the market standard for handling this issue. We have always solved it in this manner in the 10 previous deals we've completed. You can't ask for anything different if you aren't on the market.
This is the argument that you hear in every interesting commercial real estate document negotiation. Instead of trying to argue based on the structure of the deal, one hears the argument that the problem was solved in the same way in all other deals.
The argument is more complex than the surface. Perhaps the listener doesn't know what they are doing. They might be able to see the bigger picture and not feel so dumb.
What if the listener isn't a stupid or a nave? The listener often has the same experience as the person making an argument. In fact, the listener's experience with similar deals is exactly the opposite. Listeners have reported that the problem has been solved in the same way they want it to be resolved over the last 10 transactions. According to the listener, that is market standard.
So were even. Argumentative party believes the other party doesn't know the market standard. The person hearing the argument will often have their own knowledge of market standards and some doubts as to whether the other party is actually knowledgeable.
It's a draw. It's a draw. This is the most common argument in commercial real estate negotiations.
In these cases, the parties will have to settle their dispute in one of two ways.
First, one party may have all the leverage regardless of which party views what is market standard. In such a case, the party without leverage may have to agree to the deal or not.
Both parties often have leverage and other options available. They will just need to decide what is reasonable given the overall logic of the transaction. Each party can pontificate as much as they like about the other's approach to the issue. However, these parties must negotiate the issue in a way that makes sense for them.
Counsel to the tenants lender tried to use the "market standard argument" against the landlord in a recent ground lease negotiation. Negotiated ground lease stated that the lender had to make all payments the tenant/borrower failed to make under the ground leasing if it wanted to protect its collateral. So far so good. It's quite normal.
The lenders counsel added a nuance. If the tenant owed money the landlord due to some obligation (i.e. to pay any claims against him because of that risk), then it would not be necessary for the lender to make the indemnification payments. These payments could be canceled and the lease could be preserved.
If the landlord agreed to this position, who would bear the risk? Answer: The landlord. The landlord could write a check to cover the risk. If that happens, the lender could take over the tenant's shoes and keep the lease intact without insuring the landlord.
This idea was rejected by the landlord because it ran against the structure of ground leases as well as leasehold financing. These leases are meant to transfer all risks from the landlord. Lenders of ground leases simply need to agree with the tenants.
According to the lenders counsel, it was the market standard for the lender to handle the matter in the same way as the lender desired. The landlord was therefore being unreasonable.
The landlord remained true to its word. The landlord's counsel, which handles many ground leases had never solved the problem the way the lenders wanted. The landlords counsel stated that the lenders proposal was not only unmarketable, but also strange.
The landlord won this time. Maybe that's the market standard for the next transaction. It may not be, but it might.
