In a recent post, I wrote about the “Dangers of Ignorance” when tenants don’t aggressively seek to understand the financial stability (or, instability) and creditworthiness of prospective landlords before executing leases. I wrote about the risks of lenders terminating leases when they take over foreclosed or bankrupt buildings. It is a widely held misconception, and frankly a dangerous and naive one, that when taking over buildings lenders won’t terminate commercial leases. Think so? Read on.
How many times have I heard this:
“If the landlord goes bankrupt, the building can’t go anywhere…we’ll still have our space and we’ll be able to do business!”
Actually, while a foreclosed building won’t likely pick up and move, a company’s lease actually could go away. Very often, when lenders seize buildings in financial distress through bankruptcy, foreclosure, deed-in-lieu-of-foreclosure, or by other means, they often have no obligation to recognize tenants or their leases, and can take a number of steps that may not be in tenants’ best interests.
When taking over buildings, lenders can very often terminate leases; increase, decrease, or change the spaces associated with certain leases; change rents and other lease terms; and a lot more. When they are able to terminate leases, lenders are typically not required to recognize options, rights, or other hard-won protections tenants may have secured from the previous building owner. Moreover, when terminating leases, lenders have no obligation to reimburse tenants for leasehold improvements that they’ve installed in their space at their own expense, relocation costs, business interruption, or otherwise.
Here’s another doozy:
“No lender will terminate our lease in this economy. Our rent will be too important to them! So, we’re safe!” What a naive perspective!
There are multiple reasons why a lender might terminate a lease, even in the current economy. Here are a few:
1. The tenant’s rent is under market
2. The lease contains options or rights that could impede future leasing efforts
3. The terms of the lease are not favorable to future landlords (possible purchasers of the building)
4. The lease term is too short to positively impact value
5. The tenant occupies too much of the building, thereby making the building a potentially unstable or unattractive investment
6. The tenant’s creditworthiness is too risky
7. The tenant’s use of the building doesn’t support that which could optimize the building’s value
8. The tenant’s space is an obstacle to a more important tenant’s growth
9. The lender sees greater value in making entire floors available
10. The lender seeks to empty the building and offer it for lease or sale on a completely vacant basis, because it might yield greater value to a single owner or tenant, or because the lender plans to convert the building to some alternative use
Are there other reasons?
“But, we got a non-disturbance agreement when we signed the lease. So, we’re safe, aren’t we?”
Are you? Did you secure a non-disturbance agreement or just a promise from the landlord that it would provide one? Did you actually receive it? If the lenders changed in your building during your lease term, did you obtain a new non-disturbance from the new lender? Was the landlord obligated to provide a non-disturbance from the original lender AND all future lenders?
Like any written document, the terms of a non-disturbance agreement may not be sufficiently strong to protect a tenant against the actions that a lender may be permitted under the law. And, not every tenant gets a non-disturbance agreement! In fact, in most buildings, only the largest tenants (typically measured by company size or square feet), or the most important tenants are usually successful in securing non-disturbance agreements. Those tenants without non-disturbance agreements can be at significant risk of having their leases terminated by a lender that takes over their building.
What’s a tenant to do? Tenants should consult their attorneys to review their leases and non-disturbance agreements. They would be well advised to ask their real estate advisors to find out what’s going on with their buildings and their landlords. Taking steps now to protect a company’s flank before it’s too late would be a wise move…especially, in the current economy!
What are your thoughts? Have you been through a lender lease termination? How did it work out?
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About Real Estate Strategies Corporation
Real Estate Strategies Corporation is a respected corporate advisory and transaction services firm that provides thought-leadership, decision-making, planning, project management, and transaction execution services to financial and senior executives at management team-led public, private, and portfolio companies, and not-for-profit organizations. Under the leadership of its award-winning CEO, Andrew B. Zezas, RealStrat’s clients engage the firm when acquiring, disposing, renegotiating, or enhancing occupied leased or owned real estate in New Jersey, Pennsylvania, New York, Connecticut, and throughout North America. By creating and executing Business DRIVEN Real Estate Solutions and identifying hidden Opportunities, RealStrat drives greater operational and financial performance in support of its clients’ stakeholder objectives, M&A requirements, and exit strategies.
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