We are in the process of negotiating a commercial lease for our office in Sydney. We really, really dislike this process. It is just something we must do every three to five years.
At the same time, every now and then it is ‘good for us’ to be in the shoes of our clients and feel the cut and thrust (and frustration) of negotiation as a ‘principal’ rather than as the lawyer.
Our recent lease negotiations have reminded us that there are two phrases you should never use in the negotiation process – ‘industry standard’ and ‘non-negotiable’.
Let us explain why.
Industry standard
The phrase ‘industry standard’ has several possible meanings in the context of a negotiation. None of them good.
People who use this term think they are saying ‘You are naïve or stupid if you don’t accept this clause because everyone else knows what it means and why it’s important’.
But what this phrase really means is ‘I have no real basis for asking for this, other than everyone else has accepted it’. Sometimes it means ‘I am not sure why I am asking for this, but it is just something that seems to come up each time’. When a lawyer uses this phrase it’s equivalent to them saying ‘I don’t really know what I am doing, and I hope you don’t really want me to explain why we need this clause or what it does’.
If you are negotiating with someone who is spending their own money (as opposed to government and big business), and who knows what they are doing, this statement is not acceptable. In fact, it signals weakness and futility.
If you cannot explain rationally (without reference to other people’s acceptance) why you require a specific term, and why it makes sense in the context of your deal, then you have a problem.
Sometimes a senior professional or lawyer uses this phrase when they know they are asking for something they cannot justify rationally.
Take for example, the escalation of commercial rents based on the ‘rack rate’ rather than the discounted true effective rate. By escalating on the rack rate (a commercial fiction), the real increase per year is not CPI (or 4%), but some other artificial number, like 6.23%. Can you justify this above CPI increase per year? Maybe, (probably not). But a rational counterparty will ask you to justify this higher number, rather than negotiate around a fiction based on ‘industry standard’.
What about an all-inclusive ‘gross rate’ of rent, that does not include your contribution to things like common area or window cleaning? Is that a ‘gross rate plus’, or simply a fiction? No, apparently, it’s ‘industry standard’. Even though a gross rate is meant to be what you pay, including outgoings – apparently windows and common area cleaning is not such an outgoing.
What about you having to pay the landlord’s legal fees (as well as your own)? Also, ‘industry standard’. Stay tuned for our post on agreeing to pay someone else’s legal fees. Spoiler alert – it invariably ends in tears. If you were a rational landlord, why would you give negotiation ground by asking someone else to take responsibility for a cost that they cannot control (and which you can control)? This sort of clause only benefits your lawyer, who will invariably charge your tenant more than they would charge you as the client. The landlord is effectively negotiating on behalf of their own lawyer.
Non-negotiable
This brings us to ‘non-negotiable’.
In the worldwide bestselling book, ‘Never Split the Difference’, Chris Voss instructs: if a hostage negotiator says to the terrorist that something is ‘non-negotiable’, someone usually dies. This is for good reason. ‘Non-negotiable’ is like a full stop on a conversation. Maybe this is how you feel, but everything is and should remain negotiable. When we hear non-negotiable, that is the end of the negotiation, no matter how small the point – maybe even a point that we would otherwise be willing to concede if justified or put in another way.
Put simply, the use of ‘non-negotiable’ is a sign that you are dealing with either a hothead or an amateur negotiator. Seasoned negotiators who get what they want never use this phrase.
As noted by Chris Voss, a better way to put this position in a negotiation is ‘I can’t do that, because…’. You could even just say ‘I can’t do that’, or ‘I can’t see a way to do that’. This puts a simple (relatively) hard stop on the issue but leaves the door open to finding out what is really motivating the other side. It encourages the other side to propose other solutions. You are appealing to the rational side of your counterparty, rather than to their emotional combative side. You may even find out that your counterparty has a way through this impasse. They may provide you with what you want in a different form.
True negotiation is about discovery and exchange (maybe even of ideas, if not always value), not position staking.
In one of our negotiations, we were told that a 6-month bank guarantee by way of security was non-negotiable. This is a great example of when discovery would have easily met everyone’s needs. Bank guarantees originated as a form of finance. A landlord would require something ‘equivalent to a lump of cash’ but the tenant could not afford to provide the cash. Rather than borrowing the cash from a bank and providing it to the landlord, the tenant’s bank simply promised unconditionally to pay it to the landlord if demanded.
But if you are a small-medium sized business, you will know that a bank will not provide you with a bank guarantee unless you lodge the full amount of the cash with them interest-free, or provide them with unencumbered security over real estate of the equivalent value. A bank guarantee is not a form of finance for SMEs. It is an expensive service. To provide a bank guarantee you must lodge cash with the bank for no or very little return, and then pay the bank an additional fee (usually around 3% pa) for the pleasure of having them provide an unconditional promise to give your cash to the landlord when demanded. This is a very expensive waste of everyone’s time. Who benefits? The bank – a third party who is not otherwise involved in the negotiation. The landlord is effectively negotiating on behalf of their own bank.
What is an alternative to an expensive cash-backed bank guarantee? What about offering the landlord the cash directly, (or having the agent hold it in their trust account)? What about a personal guarantee? This saves the tenant the bank fee, and the hassle of procuring the bank guarantee, (have you tried to get something from your bank lately?). This negotiation point is not about limiting the security given to the landlord. It is about avoiding an unnecessary cost to a third party. Getting stuck in the ‘non-negotiable’ groove means you miss the opportunity for both parties to get what they want – at no cost to anyone.
In our experience, most people in a genuine negotiation will easily find common ground if they remain engaged in a process of communication and discovery. The phrases ‘industry standard’ (aka ‘I will not rationally justify this position’) and ‘non-negotiable’ (aka ‘that’s the end of the conversation on this issue’) represent the amateur approach.
The information contained in this post is current at the date of editing – 7 January 2025.
