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The pitfalls of verbal commercial real estate negotiations

I’ve had two requests in recent weeks to enter into discussions around the price and terms of a t...

I’ve had two requests in recent weeks to enter into discussions around the price and terms of a transaction.

I declined both requests.

Let me explain why.

One was for a lease renewal negotiation and one was for a building purchase.

There are limited occasions where it can be an acceptable strategy, when it has become necessary to finish a deal. But often it is not a viable solution; often it can result in causing hard feelings between parties to the negotiation and, at worst, blowing up the deal entirely.

Typically I’d categorize a verbal offer as more of a fishing expedition that is far less likely than a written contract to lead to a transaction that closes.

When it can work, why to avoid it

There are occasions when an in-person meeting between parties can result in finalizing a complex negotiation.

If most of the terms of an offer have been hammered out on paper, and there is clear motivation between both parties to complete a deal, I will sometimes recommend an in-person meeting.

It can work if the conversation is solution-focused and properly facilitated.

I want some compatibility between the parties that come to the table and do my best to stay clear of a meeting where that compatibility does not exist.

I had a situation a couple of years ago where a landlord insisted on being present during a pitch to a potential corporate tenant. A couple of well-intentioned statements that individual made during the meeting eliminated any hopes of securing this corporation as a tenant.

Risk of a misunderstanding

A quick review of a standard offer to lease reveals about 15 details that are likely to be overlooked in a verbal negotiation. It’s easy to start a business relationship on the wrong foot by forgetting to talk about essential elements of a deal.

Both parties can walk away feeling like they have an understanding only to find out when the paper gets drafted that too many details were left out of the discussion that materially impact the transaction.

When negotiating a lease with third-party management in place, I’ll ask the property manager to review the offer before proceeding.

There can be issues such as the number of electrified or non-electrified parking stalls available to contract for staff, exclusive use clauses that may have been previously negotiated by other tenants in the development, or a first right of refusal may have been granted to adjacent tenants.

The list of essential considerations is long.

And, finally, have I been granted the authority to negotiate if the client I’m representing isn’t present?

Where there are only one or two elements to discuss, obtaining that authority from my client before a discussion is easy.

If, however, there are many elements to be determined, I simply can’t engage in the negotiation unless I have a written power of attorney.

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