How to protect yourself from costly surprises and unwelcome litigation
Leasing commercial property brings a whole range of considerations that never muddy the waters when you’re renting to residential tenants. For a start, the stakes are much higher and the amount of expense you can incur from an unreliable tenant can be astronomical. Knowing your rights as a commercial landlord, and enforcing them, can go a long way to protecting you from costly surprises and unwelcome litigation.
These are a few of the things many commercial landlords wished they’d known before they invited a tenant to sign the lease.
Do Your Homework
Never enter into a commercial lease without doing a thorough background check on the company that wants to rent your property. No Exceptions.
Just as in residential transactions, ask for references from previous landlords. If you’re dealing with a new start-up, ask for letters of recommendation from their investors. Do a social media search to find their LinkedIn profile, and Google both the company name and those of its owners or CEO. Find out if they’ve been in the news, and why.
Make sure you have a face-to-face meeting with the person who has the authority to bind the company, not just their representative. A prospective tenant has no obligation to answer all of your business-related questions, but one who’s happy to do so inspires more confidence than one who won’t.
Everything is Negotiable
The biggest difference between commercial and residential leases is that commercial leases don’t have as many standard clauses. That means you can negotiate terms and conditions that will protect your interests and address any potential problem areas that could lead to disputes.
Limit the rights of your tenant to sublet or assign the lease and make sure they can’t do so without your approval. Outline who’s responsible for repairs, property damage and upgrades. Define the common elements, like elevators and parking garages, and any limits to their use. Include all of the costs you expect your tenant to cover beyond their base rent if you want them to pay for maintenance, insurance, taxes, or other expenses. And finally, give yourself an out. Include a break clause that gives you the ability to end the lease before expiry if certain conditions are breached.
Bankruptcy Issues
The failure of a tenant’s business is the principal reason commercial landlords accumulate bad debt. Bankruptcy is governed by federal law and provides several provisions that give immediate relief to the debtor. If your tenant declares bankruptcy, you must immediately stop trying to recover any back rent and you can’t evict them from your property. Anything owing to you at the time the bankruptcy is filed will be dealt with down the road through a bankruptcy plan. Also, you can’t use a tenant’s deposit to recover any of the money they owe without the court’s permission.
Be sure to keep a separate account of what you’re owed after the bankruptcy petition is filed. The debtor is obliged to pay any further debts, and if they don’t, you can ask the court to order payment or to allow you to start the eviction process. Once the lease expires, you will also be able to ask the court to order that the tenant vacate. Make sure to file a claim, even if you’ll only be able to recover a portion of your losses and have to wait in line to be paid.
Ultimately, the power balance in commercial leases lies with the landlord and it’s up to you to leverage that advantage. Talking to a commercial real estate attorney if you’re drafting a lease or have encountered problems with your existing tenants will help you in the long run. Professional advice will help to both protect your assets and give you some valuable peace of mind.
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