In most states, landlords are usually down at the bottom of the list of repayment – after suppliers and other vendors – when tenants default in their financial obligations. In “normal” economic conditions, and especially in these economic down times, landlords should be particularly diligent in evaluating and strengthening commercial leases for their own financial protection.
A significant security deposit is an important safety factor to make up for lost rent and expenses involved in finding another tenant for the vacant space when a lease has to be terminated. When a space is modified to accommodate a particular tenant and this modification will not suit the average tenant, a larger security deposit is appropriate to pay for restoration of the premises for potential future tenants.
Before an initial lease is signed, the landlord should evaluate the financial strength and credit of the tenant and the signatory of the lease agreement. Reviewing this information is an important part of the landlord’s due diligence and a clause in each lease should provide for submission of updated financial statements for tenants and guarantors.
Well written leases should include provisions for late charges and late payments. A short time period should be stated for tenants to cure default in payment which, if not done, allows the landlord to terminate the lease and take back the space. The leases should also include a clause that allows the landlord to recover attorney’s fees from a tenant in default.
In addition to protecting the landlord in economic down times, strongly written leases are also valuable assets. When the market ultimately improves and investors are seeking to purchase commercial properties, financially solvent tenants and solid lease agreements will help to increase property values.