During lease negotiations, a landlord will ask the tenant to present financial statements. This is done to ensure the tenant has the resources to carry out lease obligations. In fact, the review and approval of a tenant’s financials are contingencies in most letter of intent forms. This covers their rear end. Why not cover yours? In this post, we’ll explain why tenants also need to confirm a landlord’s financial position. While some may consider this a “ballsy” move, tenants deserve the same reassurance a landlord can hold up to their end of the deal. Here’s why…
It’s very easy to have the mindset that you’re only renting or leasing out space in a building. If you like the space enough, you may feel there’s no need to rock the boat during negotiations. You may think a landlord’s financial position is the least of your concerns since it doesn’t impact you directly. But it does.
Their Loan Could be in Default or the Property Could be in Foreclosure
Either scenario WILL impact you directly. Here’s how.
If a landlord loses the property in foreclosure, or they have no choice but to sell the property, you’re going to end up dealing with different people and having a different property management firm. This matters if you like the personalities you’re dealing with or how well the property is maintained by the current owners or property management firm.
Secondly, if the loan has defaulted, the lender could very well disrupt the lease negotiations. In fact, they could end up calling the shots. This kind of third-party involvement could complicate and drastically delay lease negotiations. This matters if you need the process to move quickly to move into a space soon.
Finally, the tenant needs reassurance the landlord can carry out their tenant improvement obligations. They need to know the TI allowance being negotiated or any prepaid rent or security deposit being exchanged is solid and secure.
How To Go About It
Whether you’re handling negotiations on your own or through a tenant broker, someone needs to ask the landlord or their leasing agent about the following:
1) Equity Position on the Property
2) Real Estate Loan/Mortgage Status
3) Landlord (or Parent Company’s) Cash Position
Having a title company produce a title report will give you insight into any property liens, mechanics’s liens (not paying contractors), judgments, or notice of intent to sale.
The lease agreement’s letter of intent can also be used as a means of requiring certain financial documentation from the landlord. The following excerpt can easily be inserted into the letter of intent:
Landlord acknowledges that Tenant’s willingness to enter into negotiations with Landlord for the lease of the Premises is expressly dependent upon the following representations made by Landlord: (1) Landlord has the financial ability to perform its obligations contemplated under this Letter of Intent, which ultimately will be memorialized in the lease documents, including without limitation the completion of tenant improvements; (2) Landlord is not currently in default under any real estate loans affecting the Project and has not been in default at any time in the past 12 months; (3) Landlord’s lender has not initiated a foreclosure or trustee’s sale against the Project at any time in the past 12 months; (4) during the past 12 months, Landlord has timely paid all contractors to which Landlord is responsible for payment with respect to the Project; and (5) during the past 12 months, Landlord has timely paid all real estate brokers that are owed a commission for the leasing of space in the Project. Notwithstanding anything to the contrary in this Letter of Intent, this provision shall be binding on the Landlord, shall survive the termination or expiration of the Letter of Intent and shall be enforceable by Tenant.
As always, we remind you that this post was written as a resource to tenants in the process of negotiating a lease. It should not be used as a substitute for an attorney. We highly suggest that you consult with a legal expert before using any concepts or language from this blog post.