Tenants Concerned About Landlord Financials
March 4, 2009
The NYT had an article yesterday about tenants scrutinizing landlord’s financials as a precaution against the property owners getting into financial trouble or losing the building to the lender. We’ve discussed in extensive detail over the past year how deteriorating commercial rents, and an increasingly difficult (or impossible for many) lending environment is putting unprecedented amounts of pressure on some landlords. As a result, many landlords are anticipated to lose control of their buildings.
Over the past several years, many properties were acquired at sky high prices that frankly didn’t make much sense. Other landlords took advantage of the extremely liberal and lax lending environment (which also didn’t make much sense) to refinance properties to reinvest in other properties and grow their empire. Now, as rents are falling and prices plumetting, many of these owners are at risk of losing their properties, and some already have.
When a property owners gets into financial trouble, tenant’s are at risk. Building maintenance may become deferred, building services cut, and if a lender takes over, ultimately the tenancy of the tenant might be at risk.
To protect themselves, tenants – particularly those with a significant investment in tenant improvements – should attain a non-disturbance agreement from the property owner’s lender. What a non-disturbance agreement provides the tenant is the assurance that their lease remains in effect should the property revert back to a lender.
In addition, tenants can also negotiate other rights into their lease. A right to offset for instance allows the tenant to offset its rent with any expenses it has incurred for performing a duty which the landlord was obligated to do so (janitorial, tenant improvement allowances, maintenance, etc.).
In the event of a sublease, tenants should also work with the landlord on the consent document (which is often required in the event of a sublease) to ensure that the landlord will honor the subtenant’s occupancy should the sublandlord fail – another form of a nondisturbance agreement.
As sublease spaces becomes more plentiful, and cheaper, this is often difficult to obtain as the disparity between sublease rents and market rents widen; but if a subtenant has significant improvements, it is imperative that they at least get a right to maintain their tenancy with the landlord, at either fair market value or the rate which the sublandlord was previously paying.
These are just some of the issues a tenant will face in a sublease situation. Tenant’s should always engage an experienced real estate attorney to help them with lease negotiations, but some of the other issues which tenants should keep an eye out for are:
- Ensuring that the master landlord provides any notices of default to the subtenant, and that the subtenant has a right to cure the sublandlord’s defaults. (The subtenant should also be indemnified and reimbursed for expenses it incurs to cure any defaults).
- Ensure that as a subtenant, you are not responsible for the restoration obligations of the sublandlord.
- Subtenant’s should work to attain the right to terminate the sublease should the master landlord fail to provide the services it is obligated to under the master lease.
Similar Posts:
- Tenant Concerns About Landlords Sweeping The Market
- SF Chronicle Article Today On San Francisco Office Space Market
- The Incredible Growing Office Building
- Rising Rents Allowing Tenant’s To Exit Leases
- When To Exercise a Lease Option
Tags: Default, landlord, Leasing Tips, Non-Disturbance Agreement, SNDA, Sublease, subleasing, Subordination, tenant, tenant improvements
It can definitely be an overwhelming time for both tenant and landlord. I think it’s extremely important that tenants don’t bury their heads, but continue to educate themselves and potential implications during this economic recession. Tenants need to be aware of what is going on in the micro and macro level; blog posts such as this one are a fantastic way to begin that education process.
Thanks for the comment and stopping by.