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How Commercial Landlords Can Position Themselves to Deal With Current Marketplace Conditions

By Suzanne M. Amaducci
August 18, 2003

The uncertainty of the duration of the downturn in the commercial leasing market, the vast amount of available first-and-second generation space and the increasing number of tenant bankruptcies have resulted in a situation where landlords must position themselves to endure potentially devastating economic times. Cutting rental rates and providing previously unheard of tenant concessions such as short-term leases and long periods of 'free rent' may seem like the only alternatives, but they are not. Landlords can enforce existing provisions in their leases and incorporate additional provisions into their lease forms that will improve their position in the marketplace.

Monitor and Review Leases

Because the real estate market was booming for so many years, landlords did not have the time or the desire to monitor their tenants closely or to enforce certain lease provisions. Landlords need to make the time to clean up their records, familiarize themselves with their tenants and enforce existing lease terms. Specifically, landlords should:

  • Request updated financial statements from their tenants and monitor tenants' current financial status more closely. A hotly sought-after tenant a year or two ago could very well be on the brink of bankruptcy today.
  • Make sure leases have not been improperly assigned or the premises unknowingly sublet. Each landlord should always know who its tenants are in case it has to evict one.
  • Check the existing amounts in all tenant security deposit accounts and require tenants to bring any security deposit shortfalls current.
  • Confirm the expiration dates of any letters of credit and the location of the originals. Make sure each letter of credit has been assigned to the current landlord; a generic assignment of security deposits is not sufficient. Each issuing bank has strict assignment procedures that must be followed closely. If a letter of credit has not been properly assigned, the prior landlord (beneficiary) will have to be located and the letter of credit formally assigned or endorsed pursuant to the issuing bank's internal requirements before the current landlord can make any draws under it. In many instances prior landlords no longer exist and it may take several months to locate the former officers or company officials to accomplish this task.

These common sense 'housekeeping' suggestions may seem overly simplistic, but they will save precious time and prevent unnecessary aggravation when dealing with defaulting tenants.

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