Plugging Loopholes

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With the summer approaching fast, power outages can be a daily occurrence. If the power in your area is shut off, tenants with an axe to grind might try to sue you for any resulting damage to its equipment and business. Or the tenant could argue that it has been “constructively evicted—that is, the power outage in its space was tantamount to an eviction by you—and try to terminate the lease or demand a rent abatement, says Sacramento attorney Thomas F. Stewart.

By Benjamin F. Kursman, Esq.

Given the precarious credit situation of many tenants today, it is more important than ever that a tenant's security deposit be as secure as possible and immunized from the consequences of a tenant bankruptcy. There are several techniques owners can use to accomplish this, but a novel method—using the security deposit to secure the guaranty of the lease—reduces many risks and administrative burdens.

Bounced rent checks are a major hassle. Your bank will charge you a fee for a bounced check, and then you will have to spend more time actually collecting the rent from the tenant. Also, by the time you redeposit the bounced check or get a new one from the tenant, the rent is way overdue.

Standard lease remedies often are no help, and it may not be in your best interests to use harsher remedies like terminating the lease and evicting a tenant. And collecting damages from the tenant may not be enough of a deterrent to stop it from being careless and/or bouncing another check.

Franchisor tenants in today's market are demanding that their leases give them ample freedom to sublet or assign to any franchisee they choose without your prior consent. Franchisors make this demand because they don't want you putting any limitations on which franchisees they can do business with.

Time was, commercial property owners weren't terribly concerned about which bank issued the letter of credit securing its tenant's obligations under a lease. Banks were assumed to be solvent and well capitalized.

Many tenants these days demand a tenant improvement allowance (TIA) that is substantially bigger than what you want to give. For example, you may want to give the tenant a $30-per-square-foot TIA, but the tenant demands $45 per square foot. If the tenant has good credit, you may give in and loan it the extra amount ($15 per square foot in our example) as an additional TIA. To ensure repayment, you would amortize the additional TIA amount (with interest) in the tenant's rent over the initial lease term.

You might agree to give your retail tenant a rent concession—such as below-market minimum rent—to persuade it to sign your lease. And in return for the concession, you would expect the tenant to pay you a lot of percentage rent if its business takes off.

If you and a tenant wind up in court, it's usually to the tenant's advantage to have a jury—not a judge—decide the dispute. That's because juries are typically biased against the owner. Therefore, if your lease is like most, you've included a protective clause that requires the tenant to waive its right to a jury trial.

Before signing a lease with you, a savvy prospective retail tenant may independently investigate your center's business operations, rather than relying solely on what you say about them. Therefore, the tenant should have only itself to blame if its store fails.

Your lease may make a tenant responsible for doing all interior maintenance work at its space, while you're responsible for doing all exterior maintenance work. Although you may think that distinguishing between the interior and exterior of the tenant's space is a snap, think again. Certain elements of a tenant's space can have both interior and exterior characteristics. For example, windows and automatic glass sliding doors at entrances and exits may face both the interior of a tenant's space and the outside of the space and the center's common areas.