The real estate market is perking along at a fairly healthy pace. Even so, property managers must manage struggling tenants from time to time. While this is inevitable in any market, there are some steps that property managers can take to manage these tenants and mitigate risk to the ownership.
Review the lease at the outset
Leases generally are drafted and negotiated by the owner, the owner’s lawyer, or a real estate broker and then provided to the property manager. The property manager is well-advised to read the lease at the outset to confirm that all of the boxes have been checked, all “blanks” have been completed, and the language is clear. If the parties used a standard form of lease (such as BOMA or CAB), pay particular attention to any addendum that is specific to the lease at hand. If the lease is unclear or incomplete, it is much easier to approach the tenant to amend it and clarify it before a dispute arises. This protects both the tenant and the landlord because, not surprisingly, any blank or ambiguous provision is often the subject of future controversy.
Watch mounting rent arrearages closely
The further behind a tenant falls on the rent, the more difficult it will be to collect. While this seems obvious, tenants often lure the landlord into believing that there are upcoming events that will allow them to catch up on their obligations. Retail tenants may hope their next big annual sale will allow them to dig out. Manufacturing tenants may be anticipate a big order “any day.” As with human nature, hope springs eternal. Unfortunately, oftentimes this optimism is unfounded. The bottom line: If a nonpaying tenant is on the premises, the ability to lease the space to a more financially stable tenant is hampered.
Use self-help cautiously
While the lease provisions may permit a lockout, this remedy should be employed cautiously. The risk of retribution from the tenant will depend on the facts and circumstances of each case, and legal advice is recommended. Although an eviction proceeding may prolong the process by a few weeks, unlawful use of self-help remedies may compound an already difficult situation for the landlord.
Beware of bankruptcy
While tenant bankruptcy is a topic that probably deserves a separate article, suffice it to say that the threat of bankruptcy should be watched closely. If a tenant files bankruptcy and the lease has not been terminated, the procedures of the bankruptcy court will significantly delay the owner’s ability to re-let the space. When the possibility of bankruptcy seems clear, the property manager should give serious consideration to lease termination. In that situation, the ownership will still need to stand in line with the tenant’s other creditors to recoup any monies owed, but at least it can move on with leasing the premises to a more creditworthy tenant.
While it is impossible to entirely avoid losses due to tenant default, taking the steps above may help property managers mitigate at least some of the ownership’s risk.
Jill Laney is a partner at the law firm of Cosgrave Vergeer Kester LLP. She specializes in real estate and corporate law. Contact her at email@example.com.