The upturn in the economy has created more possibilities for the commercial real estate market. Landlords that have endured the effects of the Great Recession are eager to place tenants in unused space. However, that eagerness should be tempered with the realities on how best to protect the commercial landlord’s rights for issues that could arise later in the tenancy. Following are some issues to address prior to execution of the commercial lease.
1. Financials. Has the tenant provided appropriate financial information? An astute retail tenant will provide a landlord with a business plan to show how they intend to make a profitable location. However, it is important for a commercial landlord to conduct their own proper and thorough background checks of the tenants financials, including credit reports, bank statements, profit and loss statements and cash flow reports, as well as to talk with prior landlords. A landlord may want to request a personal guaranty or letter of credit from a tenant if there are concerns about their finances.
2. Insurance Coverage. Has the tenant obtained and provided a copy of their insurance coverage? In most every commercial lease, there is a provision to provide insurance coverage. However, so often is the case that the policy is provided with the lease execution, but the policy is never really examined. It is important to review the policy prior to entry of the lease. What are the limits? Are their endorsements for certain coverage, like hurricane coverage? What is the deductible? Are their exclusions? If an incident occurs at the landlord's commercial space, it is vital that the landlord know what coverage is in effect.
3. Liens on Equipment. Landlords can also request a contractual landlord's lien for equipment. In New Jersey, a landlord automatically has a statutory lien for unpaid rent under N.J.S.A. 2A:42-1 and N.J.S.A. 2A:44-166. However, if the tenant were to file for bankruptcy, these liens are subject to a bankruptcy trustee’s avoidance powers, which could leave the landlord with nothing. To further protect and ensure payment, a commercial landlord can request a contractual lien compliant with UCC requirements. Such contractual liens can protect a landlord in the event of a bankruptcy filing and ensure a right top payment ahead of other creditors.
4. Buildouts. Often, retail tenants will require certain improvements at the premises, including HVAC, electrical wiring, plumbing, etc. These buildouts can add time to the rental commencement date, costing a commercial landlord much needed rent. Developing a plan for the buildout early on, including any concession(s) by the landlord for improvements can save time and effort. In addition, clearly denoting with the tenant the ownership of such improvements is important. Normally, such improvements will incur to the benefit of the commercial landlord, unless a provision is made with the tenant at the start of the lease for the tenant to retain ownership.
These are just a few of the issues that commercial landlords and tenants should address prior to entry of a commercial lease. Sound legal advice and counsel prior to drafting and execution of a commercial lease is essential to ensuring a commercial landlord’s rights are protected. Stark and Stark’s Commercial Landlord and Tenant Group can help assist you all aspects of the commercial lease process, as well as enforcement of your rights.
Feel free to contact Thomas S. Onder, shareholder and member of the litigation and bankruptcy & creditor’s rights groups of Stark & Stark, regarding these issues at 609- 219-7458 or firstname.lastname@example.org.