A Cleveland-area landlord was offering a year's free rent for a somewhat urban restaurant space (Shaker Square for the locals here). I presume a longer-term le

A Cleveland-area landlord was offering a year's free rent for a somewhat urban restaurant space (Shaker Square for the locals here). I presume a longer-term lease was required at the beginning of the deal. For the tenant, it was like some mix between venture capital and an option. If he fails, he can leave and not have spent as much compared to a normal lease deal. But, if he is successful, the landlord wins with a long-term tenant, and the tenant sticks around because of the signed lease and the switching costs of moving. I don't know a lot about lease deals, but it seems that some additional complexity would make the market more efficient. The article repeated the question, "What restaurant would sign a one year lease?" I presume the restaurant owner was referring to a contract that offered no guarantees about renewability or the price at renewal time. Why not structure a lease as a combination of rent and an option on a future contract? At the end of a one-year lease, the restaurant could pay $X to get out or sign a similar contract for no more than $X/month. This is just one of many examples. In general, markets are less efficient because parties stick to contractual terms that are standard for an industry rather than being creative for mutual benefit. Fear, stupidity, and irrational doubt lead to this. When I bought my house, I modified the contract (at an attorney's suggestion) to include a "liquidated damages clause" which limited both the liability of both sides to the amount of earnest money provided. And, I provided a significantly above average amount of earnest money to reduce the seller's risk of taking the home off the market. The seller's real estate agent did not understand the economics of the change and therefore did not help the seller understand the mutual benefits. So, the seller ended up hiring his own attorney to review the contract, and the deal was almost delayed.