There are many advantages to obtaining a federal government
lease. Federal government agencies are credit-worthy tenants
(notwithstanding current debt ceiling negotiations) that usually
stay in a space for many years and often attract high quality
tenants. However, there are risks associated with these federal
leases that must be considered upfront (many of these risks also
apply to leases with state and local entities). Among other things,
the federal government does not recognize an assignment of a
government lease (even under a foreclosure) without the
government's written consent. In addition, the government uses
its own lease forms which contain terms and conditions that are
frequently misunderstood. As a result, a building owner may
inadvertently omit key cost elements from its rental rate or miss
material requirements.
Additionally, unlike commercial leases, except in rare cases, no
changes can be made to a government lease after submission of a
"best and final offer." This means that once the
government accepts a building owner's final offer, the building
owner is bound to enter into the lease exactly as drafted. As a
result, any building owner who may be considering entering into a
federal government lease ideally should seek the necessary counsel
before a foreclosure property with a federal lease is
acquired or before offers are made to the government for a
new lease to avoid potential problems. Waiting until the lease is
acquired through foreclosure or until the government has accepted a
best and final offer often puts a building owner at a huge
disadvantage. Conversely, understanding federal government leasing
requirements can provide a building owner with a competitive edge
in obtaining and performing these leases.
We are seeing an increase in cases in which building owners who have not previously leased space to the government find themselves landlords to federal government tenants, either by acquiring a foreclosure property with a government lease or by participating in a government procurement and securing a lease award. There are a host of advantages to housing a government tenant, especially in a "down" economy. Notwithstanding current debt ceiling negotiations, the government traditionally pays its bills on time and, even now, it is hard to find a more secure, credit-worthy tenant. Also, once government tenants move into a location, they usually stay for many years and frequently acquire additional space in the building or in nearby locations. Furthermore, some government tenants attract businesses that also need office space and are often willing to pay whatever it takes to be proximate to the government tenant. As a result, it is not surprising that more and more building owners are actively marketing space to the government.
However, while securing a government lease can be rewarding, there are also risks that should be considered upfront. While not intended to be exhaustive, the issues identified below include key areas that building owners need to be aware of at the earliest stages in the government leasing process. These risk areas primarily pertain to federal government leases (usually those entered into by the U.S. General Services Administration on behalf of other federal agencies). However, a building owner can expect that many of these same issues will apply to leases with state and local governments as well.
Government leases cannot be assigned to a new building
owner without the government's consent
The Anti-Assignment Act prevents all government contracts
(which includes leases), from being transferred from one contractor
to another without the government's written consent, which is
provided through a formal novation. The government is under no
obligation to novate the contract to the new owner, but generally
will do so unless there is a compelling reason to object to the new
owner. Under a novation, the new owner agrees to accept all the
liabilities and responsibilities of the former owner. If the
novation is not in place, the government will not recognize the new
owner. This means that the government will continue to hold the
prior owner responsible and the new owner will not receive rent
(but, as a practical matter, be expected to perform). As a result,
prior to purchasing any property, a building owner should determine
upfront whether there are any government leases, conduct the
appropriate due diligence relating to such leases (to ensure any
problems are identified), and fulfill the necessary novation
requirements. It should be noted that any due diligence should
address the prior owner's compliance with various unique
government requirements that exceed those expected of commercial
landlords.
The government uses its own leasing documents
The government leasing process is very different from the
commercial leasing process. Most significantly, the government uses
its own standard lease documents and will not use a building
owner's lease form. As a result, although government leases
frequently number in the hundreds of pages, it is critical that a
building owner thoroughly review and understand all of the
provisions and their practical effect.
After submission of "Best and Final Offers,"
no additional changes are permitted to government leases
In the commercial leasing process, virtually any issue can
be subject to renegotiation at any time if both parties agree. That
is definitely not the case in the government leasing process, in
which there can be no changes after a building owner submits its
final offer to the government, except in rare situations. In
addition, the government's review and acceptance of the offer
is subject to strict contract principles of offer and acceptance.
If the government accepts the offer, it is binding (unless the
building owner was savvy enough to include particular wording that
will preserve certain rights). In addition, once the government has
accepted the offer, the building owner must enter into the lease
(again, unless the appropriate caveats have been included in the
offer), even if a more lucrative opportunity from a commercial
tenant presents itself. Many building owners would prefer not to
spend the time and effort reviewing a government lease in detail
until after they receive a notice of award. However, because there
are no "do overs" permitted in the government leasing
process, this is a dangerous practice.
Government leases are based on a different pricing
structure than commercial leases and government definitions of key
terms often differ from private sector interpretations
Building owners need to ensure they understand what the
government requires and what is included in their offer. Many
building owners think they know what the government means by
"building shell" or what is included in the "full
service rent," only to find out later that they omitted key
cost elements from their rental rate.
Government leases contain many additional requirements
that are not found in commercial leases
A government lease will include a number of provisions
that are designed to protect the government's sovereign rights.
One example is the "Changes" clause, which enables the
government to make certain unilateral changes to the terms of the
lease. Government leases generally will also include various
socio-economic requirements (such as small business subcontracting
or labor requirements) and often will contain enhanced requirements
relating to life safety and accessibility. The building owner needs
to consider at the time of initial offers how it intends to meet
these requirements.
Failure to properly administer a government lease could
lead to serious financial repercussions
Liquidated damages or other penalties can result from
non-performance of a government lease. In very rare cases, the
government may self perform work that a building owner fails to
perform or a lease could be terminated for default, among other
things. A bad performance record can affect a building owner's
ability to win future government contracts. As a result, a building
owner should never ignore "lease administration" issues
and should take seriously any government complaints about alleged
performance problems.
Additionally, a failure to follow government procedures during the lease administration process, including proper invoicing requirements, could result in non-payment. For example, a building owner will not be compensated for a government modification to the lease under the Changes clause unless the building owner can prove that the change was outside the scope of the original lease and resulted in increased costs.
The lease is a government contract in which statements
or claims made to the government are subject to civil or criminal
penalties
Throughout the life cycle of a government lease, from the
submission of the original offer to the final invoice, a building
owner needs to be exceedingly careful about certifications and
representations made, particularly where a request for payment is
involved, to avoid any allegations of false statements or false
claims, among other things.
Although it may seem daunting to enter into a federal government
lease in light of these risks, it should also be considered that
the federal government follows an extremely consistent process,
using the same basic lease documents which contain virtually the
same requirements for every lease. As a result, once the
government's requirements are understood, in many ways working
with the federal government can be quite predictable and offer
significant opportunities.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.