Partner liability has emerged as one of the most important issues for law firms and is increasingly the crucial factor that determines building selection and the structure of other economic lease terms. Arguments over liability complicate — even kill — otherwise easy lease transactions. Law firm decision-makers contemplating a relocation or renewal would be well-served to understand and carefully consider how they intend to deal with partner liability from the outset.
There are key factors driving whether a law firm tenant may need to consider allowing a landlord to penetrate the firm’s LLP liability shield.
First, it depends on the landlord’s amount of capital outlay for tenant improvements, free rent, commissions and other concessions and inducements. A renewal with a modest refurbishment allowance and no “free rent” should take the liability issue off the table for most established firms. A well-established firm with many partners contributing revenue would not likely need to provide partner liability.
Some institutional landlords engage specialists to analyze firm revenue, partnership structure and other factors for a more qualified assessment of risk. The largest driver is usually the number of competing spaces and landlords for the firm’s size and timing. In this regard, large size may work against the tenant’s interest and preclude viable relocation alternatives thus requiring some security from even a very strong firm.
Finally, a frequent driver is the firm’s attitude regarding liability -- not all law firms recoil in horror at personal guarantees and may see value in this “glue.”
There are several methods that tenants and landlords use to structure partner liability. Landlords prefer a Letter of Credit to facing the prospect of chasing multiple partners with professional legal skills.Landlords may “cap” the exposure but will want to cover all of their capital expenses. In cases where a tenant must consider liability, agreements are often reached with a cap equal to some percentage of capital costs. In any event, the tenant will want to avoid “joint and several” liability for the agreed-upon cap but may agree to “several” liability where the cap can be negotiated to amortize over the term of the lease and often shorter periods.
Given the importance of this issue, law firms should be represented by the most qualified tenant representation specialist available with extensive market knowledge on partner liability including insight into the practices of the major landlords in the market.
Develop a clear partner consensus regarding the importance of limited liability. Face this issue clearly and early, not just with the partners, but with the landlords. The firm’s ability to say “no” or limit exposure is greatest at the outset of the process. Address the firm’s position on partner liability limitations in the initial RFP.
Finally, while partner liability is critical, do not let minor variations of it interfere with securing the best economic terms for office space that promotes best-in-class service to clients, attractive retention and recruitment of the best talent, and a lease document with all the terms that stand the test of time.