Negotiating Office Lease Contracts: From a Game-Theoretical Towards A Behavioural View

At its core the profitability of every tenancy agreement is determined by a negotiation about the provisions of the lease contract. A profound knowledge about the mechanisms of this strategic decision situation and the decision making behavior of the participants can help landlords, tenants and brokers to close the deal and enforce their interests against their counterparts in order to derive an optimum utility from the tenancy. The paper aims at modelling a game-theoretical framework that covers the basic mechanisms of lease contract negotiations while making allowance for relevant behavioral aspects. In this way a systematic examination of these bargaining processes is conducted and recommendations for landlords, tenants, and brokers are given. For this purpose the work initially demonstrates that tenancy contract negotiations show characteristics of a conflict with competitive as well as cooperative interests that with respect to general assumptions of game theory can be modelled, analysed and solved as a basic non-cooperative game situation. In the following a game-theoretical model is developed based on the simple bi-matrix normal form and the Rubinstein bargaining game while successively approximating real estate practice. The behavioristic model of the zone of possible agreement is integrated and several behavioral aspects of decision-making in negotiations are considered. In the course of this paper several mechanisms and interdependences of lease contract negotiations are uncovered and recommendations for landlords, tenants and brokers are derived.