Don’t Lose Money on Commercial Condo Deal that Falls Through

Q: I recently bought a building comprised of several commercial condo spaces. A restaurant tenant has expressed interest in one of the spaces, but I’m apprehensive. The space is subject to the governing documents of an association, and restaurant tenants have more hoops to jump through, such as getting approval for improvements that typical retail tenants don’t need, like gas lines. The association has already determined that it won’t allow me to lease the space to a restaurant tenant if it can’t get those approvals. I’m concerned that the deal could fall through if the tenant isn’t able to get the required permits after I’ve paid for my agreed-upon portion of the cost of architectural plans and other initial lease costs. How can I protect myself?

A: You can specify in the lease that you’ll recoup all of the money you’ve laid out if the tenant has failed to get the permits required by the association. (Be prepared for a strong tenant to negotiate for a full return to apply only if the failure to get the permits is a result of its own fault.) As a compromise, you can also include reasonable timelines within which the tenant must provide its permits, and events that would be considered the tenant’s fault if it couldn’t get the permits. You can negotiate an automatic termination, so in the event the tenant can’t get approval from the association because of necessary permits or approvals from any other authority, the lease will immediately terminate and you’ll be free to rerent the space. And include a provision specifying which exact amounts the tenant will owe you for plans and other initial costs if the deal doesn’t work out, and how that amount will be calculated.

For a case on point, see “Prepare for Return of Funds If Commercial Condo Association Won't Approve Lease,” available to subscribers here.