Mark Mengelberg Published in California Real Property Journal

The winter issue (Volume 24, Number 3) of the California Real Property Journal features an article co-authored by Mark Mengelberg [“25 Years of Commercial Leasing: What A Long, Strange, Cyclical Trip It Has Been”] on the history of commercial leasing in California, including a thorough overview of significant issues and terms of commercial leases.

The authors begin by describing leasing practice in the 1980s, when there was a significant increase in investment capital to build office buildings in California based on demands from the entertainment, defense, financial and computer technology industries, as well as an influx of international money. A rapid rise in the sophistication and complexity of legal documentation lead to the need for real estate attorneys to focus on commercial leasing and keep up with educational training. “The end result was that leases grew exponentially to address these series of unending concerns and to reflect the history of the negotiations experienced by landlords.” The 1990s began with an over-supply of inventory and subsequent recession until the economy turned and “another wave of optimism and construction” took place primarily in Los Angeles and San Francisco. A new tenant class emerged, introducing “a new set of lease issues for landlords to consider and attempt to guard against, such as minimal or no credit to back the lease obligations; cash flow problems; extensive, customized tenant build-outs for technology tenants; and high density in the leased premises as tenants expanded rapidly.” Landlords engaged in a new round of construction of office space in the late 1990s, but the sudden demand disappeared quickly as a result of the “dot-com meltdown” in 2000-2001.

“The 25th anniversary of the Real Property Law Section of the State Bar of California finds the cycle continuing with the economy having strengthened and new buildings being constructed for office space once again. … We therefore, currently find ourselves in a healthy market for both landlords and tenants, where neither side is experiencing dominant position in the market.” Looking to the future, “as new areas of liability for landlords develop as a result of class action litigation and changes in statutory law (such as liability for mold related injuries), landlords will continue to modify the risk management provisions of their leases, most certainly making leases longer and more landlord-favorable.”