New “Lease Pendulum” report on relative fairness of German contracts
Law firm Hogan Lovells have teamed up with property advisor JLL to produce what seems to REFIRE to be a useful new analysis tool for scrutinising the relative ‘fairness’ of commercial office lease agreements in Germany’s largest cities – to determine whether they tend in favour of the landlord or the tenant.
The Lease Pendulum, or “Mietvertrags-Pendel” is planned as an annual report which will analyse and evaluate shifting patterns in German commercial contracts, in light of the relative advantage they confer on one party or the other. The partners have developed a benchmark tool which will enable landlords and tenants alike to figure out where they stand in a negotiation against a series of market standards.
The first such report has just been published, and analyses more than 250 major office leases covering 300,000 sqm concluded over the time period 2007-2013. The study concludes that, over this period, given all the effective risk and cost distributions, the contracts can be deemed – on balance - to have been “landlord-friendly”.
The study examines a host of factors, including: rights of withdrawal and penalties due, tenant option rights, notice periods, maintenance and repair of communal areas and facilities, flexibility of duration and special termination rights, rental security, competitive protection, maintenance of the rental object itself, indexation and rental hand-back.
In the study, all the above factors showed wide discrepancies as to which party was more favoured. For example, in the case of non-punctual handover, the tenant benefitted disproportionately – whereas the landlord had much stronger cards in the eventuality of the tenant breaching conditions of the hand-back of the property on lease expiry.
According to Philipp Ueberschaer, associate director for tenant representation at JLL, “Leaving aside the influence on individual contractual clauses, the contracts we studied showed only marginal tendencies in either direction in respect of rental price, location, or lettable area. In other words, a tenant leasing a small space in a top location is not necessarily discriminated against.”
“On the other hand, a landlord renting a large amount of space in perhaps a secondary location, has plenty of leeway to skilfully negotiate a lease agreement that is decidedly advantageous to himself”, he added.
Dr. Dirk Debald, a partner in the Hamburg office of Hogan Lovells, commented on the purpose of the new benchmarking tool: “The negotiating of what may turn out to have been quantifiable lease conditions has a large bearing on the cost and risk distribution in the subsequent tenancy, and is thus an open field on which each party to the contract – regardless of location, market phase, leasable area and rent level – can employ skilful tools of negotiation, which will subsequently either give him an advantage or render him at a disadvantage.”