Forced out of their pricey commercial office buildings for months and grappling with the sudden COVID-19 recession, law firms have been negotiating over their leases—or even winding up in litigation—in search of relief from real estate costs.
Firms are trying to work with their landlords, with varying degrees of success, according to several legal consultants. Real estate is the second-largest cost for law firms after personnel, and at a time when many firms are reducing both salaries and employee positions, it would be "managerial malpractice" not to look for a break, said Tom Clay, a principal at legal consultancy Altman Weil.
"You do owe it to your partners to go to the landlords," Clay said. "You really have to search every avenue and crevasse you can to find some relief."
Law firms made up 8% of the tenants who sought rent relief from Jones Lang LaSalle between March 6 and May 12.
But not every firm has been successful in those efforts. On May 20, Hart 353 North Clark LLC sued Jenner & Block in Cook County Circuit Court, accusing the firm of not paying the rent on its 416,200-square-foot Chicago office in April and May. The plaintiff, which is an affiliate of Heitman, a real estate investment management firm, is seeking $3.7 million plus late fees and interest.
Heitman is committed to working with its tenants and understanding their challenges during the pandemic, said John Riccione, a partner at Taft Stettinius & Hollister and one of the attorneys representing the real estate firm. He said the lawsuit against Jenner was "not something that came out of nowhere."
"When parties are unable to resolve their differences, they seek help from the courts," Riccione said. "And that's what we're doing."
Jenner has not formally replied to Heitman's lawsuit; a Jenner spokeswoman said a reply might be coming this week, although Riccione said the firm's deadline is June 23. In a statement, co-managing partner Randy Mehrberg said the firm invoked a rent abatement provision within its lease that is meant to be used "in the event of a situation, like the global pandemic, that renders the firm unable to use and occupy the space for its intended purpose."
"We have credited the landlord for the limited space we have been able to use for its intended purpose," Mehrberg said. "Jenner & Block has a very strong financial position; this dispute is exclusively about the enforcement of that provision in the lease."
A Jenner spokeswoman said the firm is paying rent at its other office locations in London, Los Angeles, New York and Washington, D.C.
The degree of flexibility firms may have with their landlords depends on a variety of factors, said Ryan Hoopes, director of the legal sector advisory group at Cushman & Wakefield, another global commercial real estate services firm. Those factors include the financial health of both the firm and its landlord, the terms of the lease, how far the firm is into the lease, as well as the future outlook of the space and the market.
"It's interesting that you only reference one lawsuit in Chicago," Hoopes said, referring to the Jenner case. "I think that's pretty telling. If it was some sweeping issue, you'd be seeing a lot more of it."
Jenner might be unusual in getting sued over its unpaid rent, but it's not the only company facing down a complaint. Last week, clothes retailer Gap Inc. was sued for allegedly stiffing Simon Property Group on $66 million after not paying rent in April, May and June.
Clay said Heitman's lawsuit against Jenner is likely a sign that negotiations broke down and it's meant to prod Jenner back to the negotiating table. Hoopes expressed doubt that Jenner and Heitman would take their dispute all the way to trial, saying the cost of litigating over the rent would be far costlier than the rent itself. He said these disputes are usually settled.
The real estate company is not seeking to evict the law firm from its office, Riccione said.
Clay indicated that law firms often have an advantage over their landlords.
"In the end, if they play such hardball to cause you to go under, what have they won? A bunch of empty space they can't fill," Clay said.
Both Clay and Kent Zimmermann, a Zeughauser Group consultant, said the pandemic has shown that law firms can easily work remotely. As firms look to drive up their margins, they're going to look at paring down their real estate footprints, putting pressure on landlords, Zimmermann said.
"Landlords in this kind of market often can't easily replace law firm and other business tenants," ZImmermann said. "As a result, the landlords may be more flexible in many cases to a lease modification and a lot slower to vigorously pursue other rights under the lease."
Hoopes separately concurred, but he said this pressure won't really be felt on landlords until 2021 and beyond. "Most of the triaging we've seen is about the here and the now," he said.
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Law Firm Leasing Activity Craters as Industry Rethinks Its Real Estate Footprint
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David Thomas
I'm a reporter covering the business of law, with an emphasis on national and global law firms for The American Lawyer, Law.com and other ALM publications.
