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Strategies for Securing Against Tenant Defaults

BY Raymond J. Werner
September 01, 2003

This two-part article describes some of the strategies that a landlord might utilize to protect itself from the impact of a tenant default or bankruptcy as it structures leasing transactions. The realization that landlords have become more security conscious will cause tenants to prepare themselves better to structure a deal that will accommodate the landlord's needs with the least possible burden.

In the past, landlords and their lawyers did not focus on the need for protection from the effects of a tenant default where the tenant was financially strong and well established. The belief that they were dealing with high-credit tenants gave landlords comfort against the economic consequences of default. The fallout from the failures of the likes of Enron and Arthur Anderson caused landlords to exercise a renewed caution in their dealings with even the strongest of prospective tenants, and of course, the subsidiaries and affiliates of those entities.

The protection of the landlord's interest begins with the review of the lease provisions to measure the tenant's performance of its monetary and non-monetary obligations and moves on to the analysis of the lease's default provisions and economic security devices such as security deposits and letters of credit. The first part of this article will discuss the early warning signals and the use of guaranties to protect the landlord. The conclusion will describe several other devices available for the landlord's protection.

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