Sitting here in our Austin office we’re surrounded by some amazing people, creating amazing companies in verticals very different from our own. I’ve been genuinely impressed by all of the great ideas floating around in the mental space we’re all sharing here at Sputnik ATX. Once of the more interesting (and relevant to us) concepts came up the other day when discussing how the role of standardized agreements in the startup world was soundly disrupted by the company “Clerky”. For those of you not aware, Clerky is a legal assistance company who helps startups and other new companies incorporate, form, fund, and operate in their early stages with the “right” documentation to prepare them for a formal fundraise as they grow and prove their product market fit.
Clerky does the leg work through their app, streamlining an extremely convoluted process into a friendly, shareable and accessible company roadmap to getting going the right way. The problem they are solving is that venture capitalists, and the investment community at large, have certain boxes they need checked when it comes to standardized documents. Not too dive too deeply into this, but the value of having standardized and generally “already” acceptable documents in the capital-finance world makes the lives of founders and company executives eminently easier as well as the investors themselves. Everyone is seeing the same things, understands the same general documents and it provides some grease to the skids to a funding deal. All good things.
It got me thinking however about standardized documents as a whole in commercial real estate. One of the major complaints we hear from Tenants at Tenavox (and we hear from thousands of them annually) is that they don’t understand the lease documents. Now, it should be noted we ALWAYS recommend a professional, commercial real estate attorney review a lease document, but that doesn’t mean we should not have a better system of providing documentation to Tenants. The Texas Association of Realtors (TAR) have worked on this problem here in Texas, and they have a company they engaged (Zipforms) to provide brokerages and stakeholders with easy access to these standardized documents. However, while the residential community and the commercial sale community uses TAR forms regularly, the leasing community is not “that-away” as we might say in a Texas-twang.
We asked commercial landlords, what lease documents do you use for your buildings...almost all of them (almost 90%!) said they have their own lease document they paid an attorney to draft. Not surprisingly, after reviewing these documents we found that they are all very similar and all have shades of the same provisions (some stronger than others in different places, as it relates to property type and use, etc…). So we asked the Landlord’s, why not use a TAR form, it’s supposedly standardized for this very reason. Well, the answers were blunt and all followed a familiar refrain.
“It’s not strong enough on defaults.”
“Not customized for my property type.”
“Would never use it, it’s a weak document.”
We learned Landlords are asking for a stronger document (as it relates to them in terms of default provisions and concessions) and they don’t believe the existing TAR commercial provides them with the level of customization they need for their property types.
So what can be done? We’d suggest a standardized agreement based on the most common points we see in commercial leases, but standardized by property type. We’d suggest exhibits, riders, and letters take up any “changes or adjustments” to this standard lease as opposed to editing a standard document for every deal that comes along...this will account for the very real differences between each tenant and each lease.
So what are the most common provisions in a commercial lease?
Business Terms (like payments, schedules and timing)
Brokerage Role (if any)
Condemnation and Casualty
Notices to Both Parties
Deposits and Escrows
Responsibilities for both parties
Repairs and Restoration
Subrogation and Subordination
Estoppels and Liens
Rights of Both Parties
Compliance with Laws (ADA, Environmental, Municipal/State/Federal)
Warranties and Assumptions
Holdover and At-will Tenancy
Indemnities, Liabilities and Releases
and lots of addendums, riders and customized provisions for each property type (i.e. retail responsibilities vs common area usage in an office lease)
If we had a fully standardized base document, by property type, we may just see some smoother lease transactions, less confusion from tenants, lower legal costs for both sides and ultimately a more efficient lease process...it makes the leasing process easier for both parties.
If Clerky can revolutionize a complicated structure like forming an entity and raising money then we should be able to standardize a commercial lease, by state as it's appropriate, and by property type. Food for thought on a Wednesday night in Austin, TX.
Let us know what you think in the comments...and reach out to us at Tenavox.
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