We use cookies to provide you with a better experience. By continuing to browse the site you are agreeing to our use of cookies in accordance with our Cookie Policy.
Occasionally, a tenant will want or need to leave its space that it rents in your shopping center or office building. But that can create a financial burden for you. Even if it’s the tenant’s responsibility under the lease to mitigate the damage caused by breaking its lease, it could still be a hassle for you. But don’t give in to a proposed deal from the tenant that’s less than you’re owed! You don’t have to take a worse deal than the current tenant’s deal. A recent Illinois case demonstrated this.
At first, a guaranty from a tenant that you’re unsure about seems like a great safety net. Another party will take over the tenant’s lease obligations if it fails to do so itself, so you won’t be left on the hook trying to mitigate the financial or other damage. In isolation, a guaranty with no limits can work well. But you’re likely to find tenants and their guarantors demanding certain limits on guaranties. There are several common limits they may ask for.
Q: Although I’ve had a good relationship with a tenant at the shopping center I own, I’m reluctant to overlook its failure to exercise its option to renew in a timely manner. The tenant has been pressuring me by saying that it will be incredibly inconvenient and expensive for it to find space elsewhere. Am I required to extend its lease based on its hardship in having to move?
If you’ve negotiated percentage rent provisions in your leases with several of your retail tenants at the shopping center you own, you’re probably relying on these tenants to give you correct gross sales figures so that you can get the percentage rent that you’re owed, and can gauge how well the tenants’ businesses are doing. But there have been scenarios where a dishonest tenant may try to undercut the owner’s percentage rent by lowering its gross sales figures.
On June 6, Commercial Lease Law Insiderreceived the Second Place Award for Best Business Newsletter, presented by the Specialized Information Publisher’s Association (SIPA) at its annual conference in Washington, D.C.
The judges based their decisions on 2016 issues in which editor Elizabeth Purcell explained:
In theory, a sublet seems easy: When you let a tenant sublet its space, the subtenant pays the tenant its rent due under the sublease, and the tenant pays you its rent or percentage rent due under the lease. While that’s the way sublet scenarios are designed and expected to work, you can’t count on the tenant carrying out its part of the bargain. After you’ve consented to a sublet, the tenant could decide not, or be unable, to pay you—even if it’s receiving rent from its subtenant.
Sometimes, when a tenant’s retail business is in trouble, instead of closing the tenant will try to find a buyer. If the owner had previously obtained an eviction order because the tenant had defaulted on its rent obligations, things can get complicated, especially in a situation where the tenant offers to pay the back rent, plus an additional amount in exchange for the owner allowing it to stay in the space until it has a buyer. Owners should be aware that such a scenario can be dangerous.
Q: A tenant that wants to sublet its space has offered a replacement tenant, but the new tenant wouldn’t meet the requirements we had agreed on in the sublet and assignment provisions of our lease, so I have refused to consent to this arrangement. In fact, the new tenant wants to pay less base rent and is insisting that we sign a new lease. The deal is actually unfavorable to me, but now the tenant is claiming that I have a duty to mitigate my risk by accepting the tenant it has provided. Who is likely to prevail in a lawsuit?
It’s an undertaking for any tenant to scout out prospective commercial space, negotiate a lease, and then deal with the logistics and expense of moving into that space. So, after going through all of the effort to get established at a property, it’s not unusual for a big tenant that’s leasing an entire building to ask for a “right of first refusal”—that is, a right to buy the space if and when a third party offers to buy it. If the tenant is happy in its space, it won’t have to move, and presumably larger tenants have the funds to purchase it.
When negotiating your leases, you may want to include a recapture right that you can exercise if the tenant intends to assign its lease or sublet all or part of its space. And you may want to include a profit-sharing clause that will require the tenant to pay all or part of any profit it makes from an assignment or a sublet if you decide not to recapture the space.
RSS