BRUCE KIRSCH: The devil’s in the details in all business. And the same goes for in leases and signing a contract for space. And one of the things that I would ask my students is, just for a show of hands, how many of you have ever truly read your apartment lease word for word, from start to finish? And you’ll get maybe 10% of the people.
And you know, it’s a boring, dry document. And so why would you read it? Well, you would read it because you’re promising to carry certain things out. And you don’t realize the seriousness of that until you get burned, like–
PETER LINNEMAN: Yeah, your percentage is higher than my percentage in my classes. Usually it’s maybe one person, sort of sheepishly. And then you find out they were a law student, and they were forced to do it for their class or something.
But it is. It’s a serious document. It’s a very serious document. You’re agreeing to some very serious things, and then you always get– even with the lease, you always get the people who said, oh, I didn’t know that I couldn’t leave early, or gee, I didn’t know I’m responsible for the damage if it’s greater than my deposit. I thought my deposit was all I was liable for. Or, you know, there’s a whole laundry list.
And not reading your lease is not a smart thing. It’s like not reading your loan document or your credit card. If you’re going to sign a credit card agreement with a credit card company, read it. And yes, most of it’s boilerplate. Fine. Know what it says your obligations are as a good idea in life.
And then on commercial leases, every once in a while you’ll run into somebody who hasn’t read their commercial lease. And either they’re buying a building and they haven’t read it, or they’re developing a building and they didn’t read it, and there are horror stories out there. And like most horror stories, they don’t happen very often, because most people have somebody who is knowledgeable really reading the lease, not just a lawyer, even, in some cases, an outside lawyer, but somebody in the firm who knows the normal way they conduct business.
And the horror stories are always things like, gee, I buy a building, I didn’t really read the leases carefully, nobody really went through them carefully, and I find out that one of the tenants has the right to leave with no penalty if their sales drop below a certain number, or a tenant– even in an office building, right, if their sales– or by the way, I find out that I just assumed it was Coca-Cola on the lease because Coca-Cola is renting, but it turns out it’s not Coca-Cola. It’s a special purpose entity company created by Coca-Cola for the sole purpose of leasing this space for Coca-Cola. And then you find out, gee, they couldn’t sell enough Coca-Cola in the country to stay in business, or they want to move to a new office building in the city they’re in, and they roll up that special purpose entity and close it down, and you’ve got no asset to collect against, and it’s not Coca-Cola.
Or the other one is right of first refusal. You find that a tenant has been given by a landlord or a developer years ago the right to have a right of first refusal to buy the entire building. So you go put the building on the market, and you get notified by the tenant that they have a right of first refusal, which means you go out, get the best offer you can get, and the tenant can buy it at that.
You say, well, why does it matter? It matters because what outside bidder is going to go through all the brain damage of figuring how much to bid for the building if they know all anybody has to do is meet their price and they have a legal right for the building?
BRUCE KIRSCH: Right.
PROFESSOR 2: Therefore, a building encumbered by a right of first refusal will never attract a top price, because it scares away most bidders. And those are the kind of horror stories that you run into. I don’t want to say it’s the norm, but it is why you have a knowledgeable person read those leases.
BRUCE KIRSCH: I agree. You know, when I did a very small real estate transaction, you go to the closing table, and then you’re presented with a stack of documents. And I guess that sort of the expectation is that you just sort of gloss over them and you sign the papers.
PETER LINNEMAN: Right.
BRUCE KIRSCH: But I mean, if you’re really taking it seriously, you should say, all right, guys, leave me alone for a couple hours. I’m putting my net worth on the line here, and I’d like to read these.
PETER LINNEMAN: Interestingly, in Germany, by law, they go to the opposite extreme. By law, you have to have a notary read everything in the contract and all attachments, which can often be quite lengthy, like leases can be attachments, has to read them all out loud in the presence of a corporate officer, because they don’t want, under their law, anybody to come back saying, well, I didn’t know.
BRUCE KIRSCH: It’s not a crazy thing to do.
PETER LINNEMAN: Yep. It’s a– no, I think it’s a– think the German is a bit extreme, but it does cut out this, gee, I didn’t know, right?
