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The most disputable clauses in lease agreements for office space

The most disputable clauses in lease agreements in 2018 (Source: Argon Legal, RICS)

Consequences of delayed delivery of premises, contractual penalty for early termination and impact of interference with the use of premises were rated the most difficult to negotiate when signing office space lease agreements by participants of this year’s edition of a survey conducted by the Warsaw-based law firm Argon Legal and RICS Poland. Other clauses that made it to the top of the list include the degree of wear and tear releasing the tenant from its obligations under the agreement and the standard of the fit-out works. A significant decrease in negotiation difficulty was reported with regard to survival of a guarantee upon expiration or tenants’ liability.

The commercial office space market is seeing a dynamic change, which brings both new chances and new threats to entities operating on it. Compared to the previous survey edition (The most disputable clauses in office premises lease agreements 2015), the percentage of respondents who consider consequences of delayed delivery of premises as “difficult” or “very difficult to agree” has grown by 5 percentage points, making the clause the winner of this year’s survey. Instead, the percentage of respondents seeing contractual penalties for early termination as difficult to negotiate has fallen by 8 percentage points. Although the clause continues to hold a spot in the top most difficult clauses to negotiate, this year 53% of respondents have rated it as difficult to agree and three years ago the figure was 61%.

“New office buildings or multifunctional projects that make up large swaths of today’s urban fabric also mean an increasing presence of foreign institutional investors and increasingly common institutional lease agreements. The word “institutional”, as used here, brings “complex” into mind and for a reason. Such agreements have already swollen into bulky books approximating 100 pages or more, including all schedules and exhibits, a fair chance for lawyers to show off their drafting skills, but a daunting challenge for tenants who see such contracts no oftener than once in a couple of years”, says Seweryna Afanasjew – Member of the Management Board of RICS EUROPE.

“Today, to close a lease, lawyers on both sides spend long hours, not to say weeks, negotiating. Additionally, financing institutions as key players in the property market initiate incorporation of further clauses, covenants and restrictions into lease agreements”, adds Seweryna Afanasjew.

There have been significant changes in the perception of the scope of tenants’ liability. Back in 2015, 42% of respondents believed this clause to be “difficult” or “very difficult to agree” whereas this year’s survey has found that only 18% consider it “difficult” to negotiate with tenants, which indicates a decrease by 24 percentage points. An even more significant decrease has been observed in the number of respondents perceiving survival of a guarantee upon expiration as difficult to negotiate. This clause was rated as difficult by 2% of respondents against 33% in 2015.

“It seems to be a sign of further maturing of the office lease market; parties to negotiations know each other’s positions and are aware what conditions can be considered to be market standard and what they stand a chance to get”, explains Sławomir Lisiecki, Partner at Argon Legal.

“At present, the supply of office space in Warsaw alone exceeds 5 million square meters, with additional 700,000 sqm under construction. You have to negotiate a lot and fast, look for compromise solutions, eliminate impractical or long-winded provisions covering situations which never (or hardly ever) really happen and work out rules which provide sufficient protection of “your” party but are still acceptable to the other”, he adds. 

Compared to three years ago, there have been more than three times less indications of problems with delivery of bank guarantees. Back in 2015, 33% of respondents found this clause problematic, as opposed to just 9% in this year’s survey. The service charge caps (a decrease from 30% to 24%) and termination of agreements by landlords (down from 40% to 24%) have also become less difficult to negotiate.

“The market situation has been evolving, but the basic aspects of its functioning, both for tenants and landlords, have remained the same. Securing business continuity and the continuity of lease are the main elements indicated as important by the tenants. This is reflected in the increasingly long periods of lease included in lease agreements or the planning of lease processes more and more in advance. This shows the strategic changes that have recently taken place in the creation of policy in the commercial real estate segment”, sums up Bartłomiej Zagrodnik from Walter Herz.

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