10 Reasons Why a Lender Might Cancel a Commercial Tenant’s Lease?

In a recent post, I wrote about the “Dangers of Ignorance” when tenants don’t aggressively seek to understand the financial stability (or, instability) and creditworthiness of prospective landlords  before executing leases.  I wrote about the risks of lenders terminating leases when they take over foreclosed or bankrupt buildings. It is a widely held misconception, and frankly a dangerous and naive one, that when taking over buildings lenders won’t terminate commercial leases.  Think so?  Read on.

How many times have I heard this:

“If the landlord goes bankrupt, the building can’t go anywhere…we’ll still have our space and we’ll be able to do business!” 

Actually, while a foreclosed building won’t likely pick up and move, a company’s lease actually could go away.  Very often, when lenders seize buildings in financial distress through bankruptcy, foreclosure, deed-in-lieu-of-foreclosure, or by other means, they often have no obligation to recognize tenants or their leases, and can take a number of steps that may not be in tenants’ best interests.

When taking over buildings, lenders can very often terminate leases; increase, decrease, or change the spaces associated with certain leases; change rents and other lease terms; and a lot more.  When they are able to terminate leases, lenders are typically not required to recognize options, rights, or other hard-won protections tenants may have secured from the previous building owner.  Moreover, when terminating leases, lenders have no obligation to reimburse tenants for leasehold improvements that they’ve installed in their space at their own expense, relocation costs, business interruption, or otherwise.

Here’s another doozy: 

“No lender will terminate our lease in this economy.  Our rent will be too important to them!  So, we’re safe!”  What a naive perspective!

There are multiple reasons why a lender might terminate a lease, even in the current economy.  Here are a few:

 1. The tenant’s rent is under market

2. The lease contains options or rights that could impede future leasing efforts

3. The terms of the lease are not favorable to future landlords (possible purchasers of the building)

4. The lease term is too short to positively impact value

5. The tenant occupies too much of the building, thereby making the building a potentially unstable or unattractive investment

6. The tenant’s creditworthiness is too risky

7. The tenant’s use of the building doesn’t support that which could optimize the building’s value

8. The tenant’s space is an obstacle to a more important tenant’s growth

9. The lender sees greater value in making entire floors available

10. The lender seeks to empty the building and offer it for lease or sale on a completely vacant basis, because it might yield greater value to a single owner or tenant, or because the lender plans to convert the building to some alternative use

Are there other reasons?

“But, we got a non-disturbance agreement when we signed the lease.  So, we’re safe, aren’t we?” 

Are you?  Did you secure a non-disturbance agreement or just a promise from the landlord that it would provide one?  Did you actually receive it?  If the lenders changed in your building during your lease term, did you obtain a new non-disturbance from the new lender?  Was the landlord obligated to provide a non-disturbance from the original lender AND all future lenders? 

Like any written document, the terms of a non-disturbance agreement may not be sufficiently strong to protect a tenant against the actions that a lender may be permitted under the law.  And, not every tenant gets a non-disturbance agreement!  In fact, in most buildings, only the largest tenants (typically measured by company size  or square feet), or the most important tenants are usually successful in securing non-disturbance agreements.  Those tenants without non-disturbance agreements can be at significant risk of having their leases terminated by a lender that takes over their building.

What’s a tenant to do?  Tenants should consult their attorneys to review their leases and non-disturbance agreements.  They would be well advised to ask their real estate advisors to find out what’s going on with their buildings and their landlords.  Taking steps now to protect a company’s flank before it’s too late would be a wise move…especially, in the current economy! 

What are your thoughts?  Have you been through a lender lease termination?  How did it work out?

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Where is Andrew Zezas?

 

Copyright Real Estate Strategies Corporation 2010.  All Rights Reserved.

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2 Responses to “10 Reasons Why a Lender Might Cancel a Commercial Tenant’s Lease?”


  1. 1 Tassos Efstratiades April 28, 2010 at 1:29 pm

    I agree that a well crafted non-disturbance agreement is something that commercial tenants should request from the landlord. In order to be fully protected, the non-disturbance agreement should be in recordable form and should be recorded. In that way future lenders or title holders will have notice of the rights of the tenant. Of course all that is subject to negotiation with the landlord. For that reason, tenants should not be entering into commercial leases without representation by an attorney, in addition to the other real estate professionals who may be working with them.

    • 2 RealStrat April 28, 2010 at 2:00 pm

      Hello Tassos:

      It’s been a while. So nice to hear from you. I completely agree with your comment. Given the girth of most commercial lease documents nowadays, and their ability to turn on a single clause, phrase, or word, it is absolutely imperative that corporate occupants assemble teams of serivce providers to protect their interests. Depending on the nature of any project, serivce providers most often include real estate advisors, attorneys, architects, engineers, and others. Whether those serivce providers are internal or external is really of little consequence, so long as they are appropriately qualified.

      Thanks for writing in. We hope to hear more from you.

      Yasou!


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THIS WORK IS DESIGNED TO PROVIDE PRACTICAL AND USEFUL INFORMATION ON THE SUBJECT MATTER COVERED AND REPRESENTS THE OPINION OF THE AUTHOR. HOWEVER, IT IS PROVIDED WITH THE UNDERSTANDING THAT THE AUTHOR IS NOT ENGAGED IN RENDERING LEGAL, FINANCIAL, ACCOUNTING, OR OTHER PROFESSIONAL ADVICE TO THE READER. IF LEGAL, FINANCIAL, ACCOUNTING, OR OTHER PROFESSIONAL ADVICE IS REQUIRED, THE SERVICES OF A COMPETENT PROFESSIONAL SHOULD BE SOUGHT. THE AUTHOR SPECIFICALLY AND EXPRESSLY DISCLAIMS ANY LIABILITY THAT MAY BE INCURRED AS A RESULT OF THE USE OR APPLICATION OF THE INFORMATION THAT IS CONTAINED IN THIS WORK.

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