What is Black Swan Theory?
The Black Swan Theory of Office Leasing is an important concept to understand when considering office space. It is a framework that explains how big and unexpected events can have a drastic impact on the real estate market. The theory was created by Nassim Nicholas Taleb, a finance professor and author who has written extensively on the topic. This article will explore what this theory means for office leasing, including its advantages and disadvantages.
Rarely will tenants focus upon or negotiate the office lease’s most innocuous section, the ‘compliance clause.’ Generally, this clause lulls the Tenant to sleep by requiring that they comply with all laws, regulations, codes, etc. Who among us are not law-abiding?
Problems arise, however, when landlords use the compliance clause as a cudgel to shift legal and financial burdens onto the Tenant’s shoulders. The problem begins when a Tenant signs the lease without any representation that the Landlord will deliver the premises in accordance with all applicable building codes. If, after the Tenant takes occupancy, a building inspector discovers that the premises do not comply with prevailing building codes. According to the Compliance Clause, since the Tenant is obligated to comply with all laws, rules, regulations, etc., the Tenant can be on the financial hook to make the necessary improvements.
As a result, it could cost tens if not hundreds of thousands of dollars to upgrade life-safety systems, including costly fire alarms, sprinkler smoke, carbon monoxide detection systems, and ADA alterations. What’s the worst that can happen? Well, think of it this way…first, what if the building inspector shuts down your operations until the corrections are made or, from a financial perspective, what if your office lease expires in 6 months. Still, you must invest $50,000 into the suite so it complies with current building codes. Will you ever see the return on that investment?
To avoid such surprises, add a provision within the compliance clause that stipulates that the premises, as of occupancy, meet all applicable building codes. And; explicitly excludes modifications mandated by governmental authorities after occupancy; if such changes are not related to your particular use or alterations to the premises.
