Commercial foreclosures and the chain reaction caused by non-performing tenants

USA (SANEPR.com) July 2, 2008 -- “It’s the “cause and effect” principle. A slow economy weighs on a commercial tenant’s business which, depending on its financial strength and the depth of the slow-down, impacts the tenant’s ability to pay rent and perform other obligations under the lease. Enough non-performing tenants will affect the property owner’s cash flow, which is necessary to pay debt service. If debt service is not being timely met, foreclosure looms,” said John Blake, a Member in TBHR’s real estate group.

Adds Blake, “However, there are steps a commercial property owner can take to minimize the damage a non-performing tenant can do, but those steps require paying attention to the warning signs and intervening before the problem escalates.

Warning signs that a tenant might be in trouble include the obvious—non-payment of rent, checks returned for insufficient funds—and the not so obvious— slumping sales, shorter hours or reduced staff. In a good economy, a one-time occurrence of any of these events may not be cause for alarm, but in the present economic environment the foregoing occurrences merit attention.

“When a tenant falls behind on rent, the tenant may be bracing for eviction. However the property owner’s objective is to have the space occupied with a tenant paying rent. Exploring alternatives with the tenant such as reducing space or temporary rent reductions may be the better path for the property owner,” said Blake.

Some of the possible settlements for a non-performing tenant can include:
? Moving the tenant to a smaller, more affordable space within the property, freeing up the larger space for a new tenant.
? Negotiating a lease break (e.g. tenant agrees to vacate in 30 days instead of the remaining lease term, in exchange for a liquidated payment).
? Structuring a payment plan for a rent arrearage.

“The property owner’s best defense against non-performing tenants is the lease itself,” said Blake. “Requesting financials from the tenant on a periodic basis is one safeguard. Another is to secure a tenant’s performance under the lease by pledging collateral in addition to the security deposit (in the form of a lease guaranty, which itself could be secured by a mortgage on a home). Also, performing due diligence on the tenant is important, including credit checks, lien and litigation searches. In today’s economic climate, the property owner needs to keep their cash flow strong, thereby minimizing their own risk of foreclosure.”

Adds Blake, “While a mutually agreeable solution between the property owner and the tenant is generally better than resorting to remedies under the lease, or litigation, that’s not always possible. In those cases, the property owner does have the recourse to begin eviction proceedings and sue for lost rent, it’s just not always the fastest and most cost-effective means to a resolution.”

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