Commercial Leases - Crucial Provisions for Landlords
It is crucial to a landlord that his commercial lease contain provisions for the possibility that the tenant may default. As with all contracts, details are critical because the defaulting tenant will likely seek any avenue to protect himself such as exploiting ambiguous provisions in the lease. Experienced commercial landlords and attorneys understand this but often the less experienced landlord is more focused on his cash flow from the lease than protection if things go wrong. And frequently things do go wrong. Once occupied stores now vacant are the evidence.
The inexperienced landlord should speak with an experienced commercial lease attorney before beginning to negotiate terms with a tenant. The landlord’s game plan for negotiation should include making the prospective tenant aware that he will need to sign a lease prepared by the landlord’s attorney containing protections for the landlord if the tenant should default. This may seem obvious but it is important because it sets the tone and agenda for the negotiations. If a prospective tenant seems unduly concerned about default provisions from the outset, the landlord should ask himself why that is. Is the tenant entering the transaction with concerns that he may not be able to meet his obligations for the full term?
Once the key performance provisions such as rent, property expense obligations, the tenant’s permitted activities and term of the lease have been reached informally then it’s time to put the lease details in writing, including default, notice, cure and remedy provisions.
Defaults are generally classified into two categories: the failure of tenant to perform either a monetary and non-monetary duty. A monetary default is generally any obligation the tenant has to pay money to either the landlord or a third party. A non-monetary default means the tenant has failed to perform some duty which may or may not also include the tenant payment of money. The distinction becomes important when determining the default cure time. The right to cure is often given to preserve a lease with a good tenant who made a mistake but wants to make it right. The tenant may reasonably need more time to cure a non-monetary default.
When focusing on drafting for a monetary default, the landlord wants to accomplish several things: collect the unpaid payment, discourage the tenant from defaulting again and, in serious cases, have the right to retake possession of the property, collect all or a substantial portion of the balance of the rent due for the remaining term of the lease and recoup his legal fees. Good tools for discouraging late rent and other payment obligations are the inclusion of substantial late payment fees and interest.
If the tenant’s missed payments or other neglected obligations become serious and repeated, the lease needs to give the landlord the authority to end the lease, force the tenant out and collect as much as possible on the balance due for the term of the lease. A landlord should consider requiring the tenant to post financial security for his performance of the lease at the beginning. An irrevocable letter of credit in favor of landlord is the best option, especially if the tenant defaults and bankruptcy is imminent. This immediate access to funds will help the landlord pay for legal services, if necessary, to regain possession and collect future rents.
Pennsylvania offers landlords of commercial leases a remedy not available in many jurisdictions; confession of judgment. A confession clause in a lease gives the landlord the right to file documents in court awarding the landlord immediate judgments for both possession and money. The landlord can then take steps to force the tenant out, if necessary, and execute on assets of the tenant to collect future rents. Under Pennsylvania law, the tenant does not give up all legal defenses when signing a confession provision but he has substantially limited them. The confession for money judgment must be coupled with an acceleration of rent clause to truly effective and avoid the necessity of repetitive filings.
No landlord likes to think about a prospective tenant defaulting, but he fails to do so at his own peril.
I have successfully negotiated these provisions into commercial leases with tenants’ attorneys for locations in Pottstown, Reading, Collegeville, Blue Bell, Bethlehem the Norristown area and many others. If you would like to discuss your commercial lease call me at 610-323-7464.