Covid-19 is having a devasting impact on the global economy. It raises significant implications for commercial landlords and their tenants facing the crisis. The landlord is placed in a precarious situation during these times and is encouraged to improve their lease negotiations to protect their rights. There are several measures to help with protection, including comprehensive credit reporting, ensuring a guarantee or indemnity and requesting letters of credit and larger security deposits. These measures can assist should a tenant become delinquent or bankrupt.
Comprehensive Credit Reporting for the prospective tenant will reveal essential information to assist in making an informed decision. Confirm the creditworthiness of an applicant based on a full credit profile, including bank accounts, landlord ratings, plus a full disclosure of liabilities, including credit card balances, mortgages, term loans and credit lines. Also important is uncovering derogatory information including collection claims, tax liens, legal actions, judgments, and bankruptcy history. It is equally as important to conduct the same due diligence while renewing a tenant or subleasing space.
Indemnity agreements and or guarantees are essential protection in today’s market. A guarantor is responsible to fulfill the obligations of the tenant and will be liable to pay the landlord the arrears to the date of a tenant’s bankruptcy. When a tenant declares bankruptcy, the obligations of the tenant and guarantor will come to an end. However, with indemnity agreements it can enable the landlord to pursue an action against the indemnifier immediately following a tenant’s default under the lease. The indemnifier remains responsible for the terms of the lease, irrespective of a tenant’s bankruptcy.
Letters of Credit can also be a consideration, wherein the commercial landlord acquires the letter from the tenants’ lender or indemnifiers’ lender. A letter of credit has some precedent to survive a bankruptcy, but landlords often prefer to take an indemnity.
Security Deposits and PPSA Registration is also an option in an effort to create a security interest in favour of the landlord. If a tenant defaults the landlord may rely on the security to cover unpaid rent during the course of the lease. It is vital to register the interest to protect and perfect the security interest, in the event of a bankruptcy, making it more likely that the landlord will benefit from the security deposit.
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Tags: Property Management
