What do you do when a desirable tenant that you badly want is currently stuck in a lease at another location? One possibility is to enter into a takeover arrangement under which you pay the tenant’s monthly obligations under the existing lease through the end of its term. But while this frees up the tenant to move into your property, it may also expose you to unforeseen risks and liabilities. The additional rent items that a tenant owes to the current landlord, like rent increases tied to the Consumer Price Index, taxes, operating expenses, etc. can rise fast. Result: You have no control over the ultimate costs of the takeover. 

The good news is that there’s an effective way to manage the risk of unexpected takeover costs: Impose a cap on the monthly amount that you’re obligated to pay for the tenant’s rent under the current lease. With a cap, you won’t have to pay for unforeseen increases in rent, taxes, operating expenses, or other payments that the tenant owes to the current landlord. Instead, the tenant bears the risk of any costs over the cap. 

Here’s how to deploy the strategy, along with a Model Lease Clause created and used successfully by a Denver attorney that you can use to minimize your lease takeover financial risks. 

Step 1. Do Your Due Diligence

Don’t enter into a lease takeover arrangement unless and until you take a hard look at the lease that you propose to take over (which we’ll refer to as the tenant’s “current lease”). First and foremost, determine the amount of rent owed under the terms of the current lease so you know how much you’ll have to pay the tenant each month to cover its obligations under the agreement. Read the current lease provisions carefully to identify any potential big cost increases that may interfere with the tenant’s ability to pay rent under the lease it signs with you (which we’ll refer to as the “new lease”).

Going to school on the rent terms of the tenant’s current lease will also enable you to evaluate the costs, benefits, and profitability of an assignment/sublease versus a termination of the agreement. Thus, for example, the current landlord might be more inclined to ending the current lease if rent is below current market value. 

To ensure that you’re getting accurate information, the takeover clause you include in the new lease should require the tenant to list its rent under the current lease, attach a copy of the agreement to the new lease as an exhibit, and state that the attached copy is complete, accurate, and up to date [Clause, par. a].  

Step 2. Set the Monthly Cap Amount 

While the actual amount of the lease takeover cost cap is generally subject to negotiation, it should normally be roughly equal to the amount of rent you and the tenant expect to be due under the current lease [Clause, par. e].   

Example: Under the current lease, a tenant’s fixed monthly rent is $10,000. You expect escalations to go no higher than $1,000 per month. So, you’d set the monthly cap at $11,000. If the actual increase turns out to be $1,500 per month, the tenant will owe the current landlord $11,500, but you’ll be on the hook for only $11,000. 

Caveat: The cap amount is dictated mostly by business considerations and bargaining leverage. Thus, where significant increases are expected—for example, the current lease calls for a major step up in fixed rent or insurance cost escalation—you might have to pay some or all of those additional costs as part of the deal. In this situation, you can modify the Model Lease Clause to cover the increase, while still giving yourself maximum protection by simply raising the cap when you expect the increase under the current lease to take effect.  

Example: You propose to take over a lease that has 18 months left to run. The lease currently requires the tenant to pay $8,000 per month, but the rent is scheduled to increase to $9,000 in the final year. The new lease would set the cap amount at $8,000 per month for the first six months, and $9,000 per month for the 12 months after that. 

Step 3. Negotiate for 9 Lease Protections

The final phase of the strategy is to create a lease clause that gives you solid protection against all contingencies. There are nine provisions you should negotiate for:

1. Tenant duty to repay lower than expected rent. As noted above, the monthly cap the landlord must pay typically covers not just the tenant’s rent under the current lease but also anticipated increases. Those increases may turn out to be lower than expected or may not even happen at all. Result: The tenant gets more from you than it actually owes under the current lease. That’s why the Model Lease Clause requires the tenant to immediately refund any such excess amounts to you [Clause, par. e].  

Example: You set the monthly cap at $11,500, including $10,000 in fixed rent and anticipated escalations of $1,500. In the first month, the tenant pays $10,000 in fixed rent and only $500 in increases under the current lease. The tenant would then have to immediately pay you a refund of $1,000 for that month—that is, $11,500 it received from you minus the $10,500 it paid the landlord. 

2. Tenant duty to cooperate in assignment/sublease of current lease. You may determine that it would be more profitable to assign or sublease the current lease. So, the new lease should give you the discretion to do this and require the tenant to cooperate in the making of such arrangements, such as by taking reasonable steps to help you secure the consent of the current lease landlord for the arrangement. The lease should also require the tenant to pay over to you any money it receives as a result of the assignment/sublease. In return, you should be prepared to pay any brokerage commissions due on the transaction [Clause, par. f]. 

3. Tenant duty to cooperate in termination of current lease. As with an assignment or sublease, the tenant should be obligated to help you secure the current lease landlord’s agreement to terminate the agreement if you decide to pursue that avenue. But expect the tenant to insist on making you responsible for paying any fee to the landlord necessary to terminate the current lease [Clause, par. f]. 

4. Tenant’s duty to comply with terms of both new and current lease. The takeover provision should spell out that your duty to pay the monies owed by the tenant under the current lease are conditioned on the tenant’s full compliance with the terms of both the current and new lease and that any default under either lease relieves you of that obligation [Clause, par. e].

5. Tenant’s duty to use money to pay liabilities under current lease. Stipulate that the tenant must use the monthly payment it receives from you under the takeover provision for the sole purpose of satisfying its debts to the landlord under the current lease. But also clarify that the landlord isn’t a third-party beneficiary to guard against the risk of the landlord’s suing you to enforce the terms of the takeover clause [Clause, par. e].

6. Tenant’s duty to provide notices received under current lease. Require the tenant to give you copies of all notices it gets from the landlord under the current lease immediately after receiving them. This way you’ll find out about escalations and other matters related to the current lease that may have an impact on your takeover obligations and liabilities [Clause, par. c]. 

7. Tenant’s duty to provide verification to landlord. Get the right to require the tenant to provide you “satisfactory” evidence that it’s using the monies you provide to satisfy its payment obligations under the current lease and for no other purpose [Clause, par. e]. 

8. Limits on tenant’s right to change current lease. Ban the tenant from amending, extending, or renewing the current lease or expanding the space it may rent under the agreement without your consent [Clause, par. e]. This is important because changes to the current lease may directly affect the tenant’s ability to pay you rent under the new lease. 

9. Special default protections. So far, so good. But there are further contingencies you need to guard against. Like what happens if the tenant’s warranties and representations about the current lease contained in the new lease turn out to be untrue? Or what if the tenant defaults under either lease? Specify that either of these things constitutes a default under the new lease. This will give you leverage to get rid of a tenant that turns out to be a liar or deadbeat, regardless of whether it’s otherwise in default under the new lease [Clause, par. d].