Getting Reimbursed for Lease Costs from Tenant that Walks Away

Q A prospective tenant seemed very interested in the space it planned to rent in my office building, but dragged out negotiations for longer than necessary. Although it signed my letter of intent, after my attorney drafted the lease, it announced that it found a better space in another building. I've started the leasing process all over again, but I can't afford to pay the costs of preparing, negotiating, and revising another lease that will never be signed. Can I make a prospective tenant reimburse me for my costs if it backs out of our deal?

A Yes—if you make the prospective tenant sign an Agreement to Reimburse Costs and Expenses, obligating it to pay your lease costs if it doesn't sign the lease by a set date. Remember to get the prospective tenant to agree to pay the costs before you start drafting the lease. Send the agreement to the prospective tenant as soon as you both sign or agree to a letter of intent. Remember to attach a copy of the signed letter of intent to the agreement. It proves that you already have some sort of agreement with the tenant about renting the space.

What Agreement Should Include

Stop the prospective tenant from justifying withholding payment of lease costs from you by claiming that you needlessly incurred costs for a lease that it never requested. You can do this by making it clear in the agreement that the prospective tenant asked you to prepare the lease on your standard form, to which you'll add the terms of the letter of intent. Ask your attorney about using this language to specify who requested the lease form in your agreement to reimburse fees and expenses:

Model Language

Landlord has submitted a proposal (the “Proposal”) to Prospect, a copy of which is attached hereto as Exhibit [insert #]. Prospect has requested Landlord to prepare and submit to Prospect a Lease on Landlord's standard form based upon and incorporating the terms of the Proposal.

Don't let a prospective tenant that's stringing you along cause you to pass up other opportunities to rent the space. Because time is of the essence in finding a viable tenant, require the prospective tenant to quickly commit to a lease. Consider giving a prospective office tenant 30 days and a prospective shopping center tenant less time—for example, 15 days, because you'll probably have more negotiating power for retail tenants—to sign the lease.

You should also set a deadline for payment of lease costs in your agreement. It's key to include a requirement that the prospective tenant signs the lease by the deadline, or pays your lease costs if it doesn't. Give the prospective tenant a short deadline, like within 10 days, to pay for your lease costs after getting your bill, which can include legal and professional fees and expenses, such as attorney's fees to prepare, negotiate, and revise the lease, and your architect's or engineer's fees for preparing any needed plans for the space.

Model Language

To induce Landlord to prepare the Lease, Prospect agrees that if Landlord submits the Lease to Prospect and if Prospect fails to sign the Lease for any reason whatsoever within [insert #, e.g., 30] days after the date Landlord submits the Lease to Prospect, then Prospect will reimburse Landlord within [insert #, e.g., 10] days after billing for all professional and legal fees and expenses paid or incurred by Landlord to prepare, negotiate, and revise the Lease.

Make sure to say that the agreement isn't a lease. Note that it doesn't amount to a lease or an offer or option to lease, or require you to reserve space for the prospective tenant. Make it clear that the agreement is meant to obligate only the prospective tenant to pay your lease costs. And clarify that you're not required to rent space to the prospective tenant until it signs your lease.

Model Language

Nothing contained herein is intended nor shall be construed to constitute a lease, offer to lease, option to lease, or reservation of space by or between Landlord and Prospect. Neither Landlord nor Prospect shall be bound to lease any space in [insert address of building/center] to or from the other, unless and until the Lease is signed by both Landlord and Prospect.

Prepare for Tenant Pushback

A prospective tenant may argue that, since you're drafting the lease and have so much control over the deal, you should bear the risk of the deal's falling through. It may also argue that it would be unfair for it to pay the costs of preparing a lease that obviously will be drafted in your favor.

A strong prospective tenant may also demand that, since the agreement refers to your standard form of lease, you must attach the lease form to the agreement. But think twice before doing this. It allows the strong prospective tenant to see the lease form you'll use for its deal. And be prepared to make the tenant responsible for reimbursing only your “reasonable” fees and expenses and to cap them. Most important, it's essential to get the prospective tenant's signature on the agreement, which you can't enforce unless you have proof that the prospective tenant agreed to it.

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