Is your commercial lease in default? Is a default looming on the horizon? Here are some practice pointers for landlords and tenants when it looks like a default is looming... or has arrived.
If a default is looming, in many circumstances the best practice is to open communications immediately with the various parties who may be impacted by a default, or who otherwise may assist in any potential resolution or workout; e.g., not only the landlord and the tenant, but the lender, legal counsel, and real estate brokers.
If the default is inevitable, be sure to first review your lease before taking action; not only relative to the event of default and remedies provisions, but to provisions that may have seemed innocuous on the commencement date and have now become very important. For example, the timing and method for providing notice under the lease which may have seemed incidental when the lease was signed, become critical in the default setting. Landlords who send their default notice too soon, or to the wrong address, or who fail to copy any required third parties (e.g., lenders and lawyers), may lose valuable time and rights in the default process; and conversely, tenants may gain much needed time and defenses. Landlords should proceed with due care, and tenants should watch for missteps in the notice and timing provisions of the lease (and any applicable law). In reviewing the lease, consider consulting with legal counsel since you may read certain lease provisions one way, and the law may interpret them another. You don’t want to restrict your options or otherwise misconstrue the rights and duties of the parties under the lease, particularly where “terms of art” may be employed or the law of your state may have an impact on the lease language – have your attorney review the lease to avoid these pitfalls.
As indicated, landlords need to consider the impact of any tenant default on any loan covenants and requirements as well. It is therefore important for landlords to review the loan documents, and particularly the affirmative and negative covenants of their loan agreement (and the requirements of the security documents, like Assignments of Leases and Rents), as early in the process as possible. Consult with legal counsel if you are not clear on the meaning of any loan terms or obligations. Here, not only are open communications the best way to keep a default from becoming a larger problem than need be, but many loan documents have affirmative covenants requiring such communications.
These are just a few of the practice pointers to consider when your commercial lease is in default, or a default is looming. Turn to your real estate professional early in the process to make sure you avoid the potential pitfalls, and maximize your leverage, when considering a default under the lease.