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Self-Help and Set-Off Rights: A Primer
'Rent is an independent covenant.' These are words historically coveted by nearly every landlord. In most cases, interestingly, the independent nature of the payment of rent is not troubling to tenants or their counsel. In some jurisdictions, the concept of 'dependant covenants' is surfacing if the parties do not specify otherwise. From time to time, however, a tenant will require the landlord to insert provisions providing the right to self-help and/or the ability to set-off against rent, concepts that are contrary to the independent covenant doctrine. For well-heeled landlords, this is problem enough. Add a lender to the mix, particularly in instances where consent to the lease is required, and the matter quickly becomes complicated. The landlord's interests lie in keeping others from acting on its behalf with respect to its property and preserving its cash flow. The tenant's interests lie in making sure that the landlord performs its obligations under the lease and, if the tenant is required to act for the landlord, that the tenant has a source of funds to reimburse it for doing so. Finally, lenders are most interested in stable cash flow, continued loan repayment, and the avoidance of disputes to which they may become a party.
Reasons for Tenant Requests
Though reasons for tenant requests for self-help and the right to set-off against rent vary, the main reason for tenant self-help rights is to complete an unfinished landlord maintenance or construction obligation, while the main reason for the right to set-off against rent is related to the initial construction of the tenant's space. With tenant improvement allowances exceeding $50 per square foot for new construction or complete renovation, a 10,000-square-foot-tenant will recognize a half-million dollar construction risk. If the landlord does not perform its construction obligation, and the tenant takes over the work and pays for it, the tenant will not recover its half-million dollar investment for 20 months, assuming a $30-per-square-foot annual gross rent to set-off against. On the other hand, and notwithstanding its default in performance, lost rent is a disaster for both the landlord and the lender who is counting on the same to service its debt.
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