Commercial real estate landlords depend on the success of their tenants to continue to pay rent and otherwise satisfy their lease obligations. If the tenant's business is struggling, it may have difficulty paying the rent and default may not be far off. Even if the struggling tenant is able to continue to pay rent, they may come to landlord to request some sort of rent deferral or other relief or perhaps lease restructuring, including downsizing or early termination.
As a preliminary matter, the landlord needs to know its lease and landlord's rights and remedies under the lease as well as at law. The landlord should get its legal advisor involved early and keep its legal advisor aware of potential lease defaults. As time passes, options and remedies may close.
But ultimately every distressed tenant will have a different situation and story to tell. Each will have a different approach to handling its lease obligations. Following is a primer to help the commercial landlord prepare for the default conversation with the tenant by looking at the different potential types of defaulting tenants it may face and advice on how to handle each type.
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The Ghost. The Ghost is a tenant who either just disappears or at least is very unresponsive. This may either just be conflict avoidance or a planned tenant strategy. With the Ghost, it's best to move fast and aggressive. Don't be lulled into inactivity. But, at the same time, the landlord must follow proper procedures under its lease and at law. Be careful not to inadvertently create a tenant claim against landlord. Once the landlord can get on top of a Ghost situation, it will need to make an honest cost-benefit analysis of how best to proceed.
The Fighter. The Fighter will contest everything. Again, either because that's its personality or as a planned tenant strategy to throw the landlord off balance and hopefully cause it to make a costly mistake. With the Fighter, it will be even more important to document everything and be careful about making any statements that could be used against the landlord. Also, watch out for potential defamation or tortious interference claims. Don't let emotions get away from you.
The Eternal Optimist. The Optimist believes its troubles are only temporary and over time will just go away. The Optimist may make unrealistic financial assumptions about the future. With the Optimist, insist on clear, third-party (or verifiable) reporting. Carefully review financial models. Talk to third parties about the tenant's business prospects. Push for credit protections and additional remedies if tenant's projections turn out to be wrong. And, as with any tenant, take care not to waive any rights or remedies.
The Dealmaker. The Dealmaker always believes there is a way to restructure the lease obligations to fashion a "win-win" for landlord and tenant. As with the Optimist, get solid financial reports and test assumptions. Pair any rent modifications, such as deferrals or abatements, with claw backs and other protections. Don't assume other landlords or vendors of the Dealmaker are also cutting deals. Try to avoid being the creditor taking the largest haircut.
There is also the category of the truly insolvent tenant headed toward bankruptcy. In this case, get your bankruptcy attorney involved early, follow the bankruptcy proceedings closely and don't miss deadlines. Handling defaulting tenants is time consuming and can be stressful, but a thoughtful strategy tailored to the type of distressed tenant helps in leading to the best outcomes.
Theodore Yi, Charles Harper, and Adam Falkof are partners with Quarles.
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