United States: Corporate Headquarters Leasing : Key Considerations For A Post-Pandemic Workplace

Abstract

Among the many impacts of the COVID-19 pandemic on the corporate world, an unprecedented number of offices were left empty as, for months on end, thousands of employees worked from home. Today, as the number of vaccinated employees rises and mask mandates loosen, many employers are revisiting existing headquarters leases - or seeking out new ones - amid a heightened push for hybrid work policies and open and flex-office spaces. In the wake of this rapidly changing landscape, this paper examines the key legal and business considerations companies must keep in mind when leasing their corporate headquarters, including: what to consider in selecting premises; tips and details around the process of interviewing leasing brokers, designers, engineers, architects, construction professionals and project managers; and how best to assemble internal and external teams. As the world continues to wrestle with the long-standing impacts of the pandemic, the decisions companies make now about their headquarters will sketch a critical roadmap for the corporate world for years to come.

INTRODUCTION

The phrase 'a once-in-a-lifetime experience' may conjure up images of dream vacations, exotic locales and great opportunities, but its application to the leasing of corporate headquarters would seem, at best, misplaced - unless, of course, the year is 2020 or 2021.

Typically, at the executive level, the handling of a headquarters commercial lease is often a first-time - and mercifully, one-time - experience for the tenant's executives and staff, with the leasing term generally extending well beyond the careers of the executives who handled it - a welcome fact for those working on such lease. In the wake of the COVID-19 pandemic and its widespread impact on the corporate world, however, many employers began re-evaluating their existing headquarters leases amid mandated work-from-home orders, and even now, as remote and hybrid work policies continue to gain steam.

The challenge of a headquarters lease assignment, particularly in today's environment, is compounded by the fact that the counterparty, the landlord, has substantial and current experience in the negotiation of major (and lesser) leases. What is more, the landlord has the competitive advantage of knowing their building inside and out - information upon which the landlord no doubt relies during lease structuring and negotiation. This paper will examine the process of procuring a headquarters lease amid these challenges and provide a suggested framework for assembling the internal and external expertise and data necessary to define, understand and overcome them.

To begin, a 'headquarters lease' is intended to include leases of office space of significant size or importance to the tenant in that the premises will house senior executives and administrative staff of the business units involved and be regarded as the 'corporate hub' for the tenant. Such premises tend to be leased for relatively long terms (typically anywhere from 10-20 years, not including customary extension options), require substantial investment in leasehold improvements, and involve personnel who require a high level of service. Importantly, the premises may represent a projection of the image of the business units, and thus, the lease may involve intangibles that counterbalance standard economic issues.

The toughest part is generally figuring out where to begin, and while there are myriad articles on substantive lease issues, that information is not very relevant at the commencement of a leasing process.

As such, it is important to keep two initial goals front of mind:

• To build an internal and external team; and
• To define essential transaction criteria.

The internal team must consist of those who can provide or develop, from within the organisation, the information needed to establish the transaction criteria, including not just financial experts, but also those who are able to define and project the needs of the businesses which will occupy the premises. Therefore, assembling this team properly and understanding the premises criteria at the outset will help provide tenants with a sound basis on which to execute the project. It is, of course, easier to state the obvious than to achieve it.

To begin, the size of an internal team depends on the size of the company and lease space requirements; however, one key consideration is to ensure input from the IT/ audio-visual (AV), security and office or operations departments. Over the course of the last year, each of these departments has taken on an increasingly significant role in the workplace - given the recent emphasis on technology, cyber security protections and the rise of remote work. As such, drafting them into the initial stages of the process proves critical.

Locating outside experts - such as real estate brokers, real estate lawyers and architect/space designers - is also key, as a landlord may be an expert, but not impartial. Most executive officers will not intuitively think to start with a real estate lawyer (until they have read this paper, perhaps), but doing so can prove immensely helpful in ensuring a successful process. Begin with an interview to not only determine which candidate feels most qualified, but also to test relevant questions and issues to help refine and focus them.

Initial interviews with counsel should cover:

• The qualifications and experience of the law firm and the particular lawyers, including specialties such as construction, outsourcing and other relevant service contracts, finance and other areas not directly within a real estate practice, but perhaps relevant;
• Whether work extends beyond the principal documentation to preparing and negotiating related architectural,consultant, project management and construction documentation, including contract documentation for the purchase and maintenance of sophisticated communications and software systems, governmental incentive programs, moving contracts, and the other agreements often ancillary to a corporate relocation;
• The proposed staffing of the project relative to the contemplated timetable for the transaction and the reasons for such staffing (eg is there an appropriate mix of seniority that seems relevant); and
• Fee estimates and budgets, including special fee arrangements (such as fixed fees), but keeping in mind that the costs 'saved' up-front may be modest compared to the costs that may be 'saved' over the term of the lease.

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