Most commercial lease agreements contain acceleration clauses which the landlord can trigger upon an event of default. An acceleration clause allows the landlord to declare immediately due and payable all future rent and additional rent such as CAM charges, taxes, and insurance payments due under the lease.
The landlord can even commence a lawsuit if necessary to collect these items, plus costs and, in many cases, attorney's fees. While the landlord has a duty to mitigate its damages by attempting to secure another tenant to lease the space, that could prove difficult in this economy.
Tenants should be wary of acceleration clauses. If you anticipate problems paying rent or going into default on other provisions of the lease, be proactive and discuss the issues with your landlord. It is much easier to negotiate solutions before going into default than it is afterwards.
Tenants are Wielding Leverage to Negotiate More Favorable Lease Terms
The state of the economy has created an abundant supply of available space, giving tenants leverage in negotiating favorable modifications and extensions of existing leases, especially if a lease is nearing the end of its term. In current market conditions, a landlord has a strong incentive to retain a tenant in order to maintain cash flow and comply with loan covenants. There is far less risk in renegotiating with an existing tenant than there is in trying to procure a new one. If a tenant wants to negotiate a reduction in rent, a postponement of a rent increase, or a lease renewal under more favorable terms, it should arm itself with data to support its position. Such things as revenue trend analyses, future revenue projections, expense histories, and budgets will strengthen a tenant's case.
Be flexible and creative in negotiating lease terms. A landlord may be willing to accept reduced rents for a limited period of time, but it will want protection for the time when the markets recover and rents rise again. Take the long view - you may not get everything you want, but if you can save money, preserve cash flow, defer moving and upfit expenses, and ultimately help your business survive, you will have accomplished your objectives.
Be Aware of Sublease Issues
When tenants find that they can't afford the costs of their leases or don't need all of the space they are renting, they have been increasingly turning to subleases as a means of relief. The rights, responsibilities and duties of each party to a sublease should be clearly defined in a sublease agreement. Lease agreements almost always require that subleases be approved in writing by the landlord, so the landlord should be involved in the entire sublease negotiation process.
While subleases are contracts between a tenant and its subtenant, they are entirely dependent on the continued existence of the lease between the landlord and tenant. If for some reason the lease is terminated, the sublease will be terminated as well. The terms of a sublease agreement should be consistent with those in the lease agreement, and should include the following provisions: (i) notice to all parties of any defaults; (ii) the right of the subtenant to cure a default by the tenant so that the underlying lease will remain in effect; (iii) requirements that the subtenant maintain casualty and liability insurance on the sublet premises consistent with the terms of the lease; and (iv) requirements that the subtenant indemnify the landlord and tenant against personal injury or property damage arising out of its use of the premises. Finally, and most importantly for the landlord, the tenant should not be released from its liability and obligations under the lease.
Problems Caused by Foreclosure
A foreclosure extinguishes the landlord's rights in the property and could have an adverse effect on the lease. To avoid problems caused by a foreclosure of the property, a tenant should insist on a subordination, non-disturbance and attornment agreement ("SNDA") with the mortgage holder when entering into a lease. A SNDA allows a tenant to attorn to, or become the tenant of, the new property owner. As long as the tenant is not in default, a SNDA will protect its lease in the event of a foreclosure and subsequent sale of the leased property.
Even with a SNDA, the change in ownership caused by foreclosure could have adverse consequences for a tenant and its leased property. The new owners could have significantly different plans for the property, leading to changes in such things as the tenant mix and class of tenants. Also, management of the property would likely change, which could have a significant impact on the day to day operation and maintenance of the property, and would require a tenant to establish a new working relationship in the use of the premises. When entering into a lease, a tenant should conduct extensive due diligence on the prospective landlord. In particular, learn about a landlord's financial strength and its history of managing similar properties. Such knowledge will help you avoid future problems.
