Landlord’s Tool Kit for Dealing with Cash Strapped Tenants (2009-02-09)
(Part #2: From the Landlord’s Perspective)
1.Review Your File. Pull the lease file out. What do you have to work with? Lease, guaranty, security deposit, duty to replenish security deposit, defaults to raise the heat? Consider a credit report and an asset search. Check the file for tenant complaints and other potential defenses and evaluate their viability. The threshold question is do they have sufficient asset strength to enforce the existing lease terms? The second question is, do they have defenses against enforcement? Consider eviction time and impact on your cash flow vs a workout with them and continued cash flow. Are they threatening bankruptcy? Evaluate impact of same.
2. Do You Have Other Options. Do other tenants need to expand? Are other parties interested in the space? Do you really want to work with this tenant to try and make it happen?
3. Make the Tenant Do Its Homework. If the tenant is asking for concessions, you may want to demand certified financial reports from the tenant to see for yourself how bad it is. Are there other assets available to cover their obligations? Do the principals have assets? Let the tenant convince you that there are no other assets but that the concessions it is asking for will save the day. You must determine that with your assistance they can in fact survive, and that there really are no other assets to cover their obligations.
4.Just Say No. If the tenant is financially strong or you have other viable options for the space, the tenant is probably out of luck. There is no incentive to a landlord with an equal or better alternative other than the hassle of litigation and then putting new tenants in.
5. Agree to Rent Reduction. A simple lease modification reducing the rent, reducing the space, drawing down the security deposit, reducing the term, etc. This is a simple, permanent fix. Consider limiting it to the named tenant. Consider other lease enhancements in exchange for this concession.
6. Change the Term. Reduce the rent but extend the term or agree to reduce the term and start looking for new tenants.
7. Reduce Rent Now, Increase Rent Later. Reduce the rent now in exchange for an increased rent later. Tack interest on. Extend the term as well. With interest, it is just a time value of money issue.
8. Abate Some Portion of the Rent for a Stated Period. Allow the differential between the reduced rent and the stated rent to accrue for a period of time and make it due and payable on a date certain. Extract a personal guaranty and other collateral for the accrued and unpaid rent. Tack on interest to mitigate the time value of money. Consider financial reporting covenants and trigger a recapture or abatement termination if the business improves or some other relevant event occurs. Consider adding a right to take-back the space following notice and start marketing.
9. Rewrite the Lease. Rental concessions in exchange for a tighter lease. Take back all those lease concessions you made when you really wanted them and they had other choices. Financial reporting; guaranties; security deposit; elimination of termination, expansion, contraction, renewal options. Go back to that first draft of the lease you liked so much and see what you gave up.
10. Collateralize or Improve the Credit Behind the Lease. Demand a full or limited guaranty if none is in place. Eliminate the cap or concessions you made in the old guaranty. Consider credit enhancements such as a larger deposit either in cash or by letter of credit (perhaps built up over time or burning down over time).
11. Equity Kicker. If the business stabilizes because of your assistance, perhaps you should share in the profits up to some amount for some period of time.
12. Reduced Rate Sublet or Assignment. Encourage the tenant to assign the lease or sublet a portion of the space at a reduced rate thus allowing the tenant to pick up only a portion of the rent while the sublessee or assignee picks up the rest. But, don’t agree to non-disturbance with the new occupant.
13. Consider a Stipulated Judgment. Consider putting the lease into eviction, then settle on terms and incorporate those terms into a judgment of eviction which is stayed and ultimately dismissed if they live up to their bargain. This will permit a quick resolution if they default again shortly after the deal is cut.
14. Your Lender. Don’t forget your lender and the covenants in your loan documents prohibiting lease modifications and terminations without lender approval.
The above solutions are all that space will allow. There is no limit to creative win win solutions.