Andrew B. Zezas
Host, Publisher & CEO
www.LinkedIn.com/In/AndrewZezas
CFO Intelligence
PO Box 568
Califon, NJ 07830
@CFOIntelligence
Schedule a Call or Meeting: https://freebusy.io/CFOIntelligence/30min
Andrew B. Zezas
Host, Publisher & CEO
www.LinkedIn.com/In/AndrewZezas
CFO Intelligence
PO Box 568
Califon, NJ 07830
@CFOIntelligence
Schedule a Call or Meeting: https://freebusy.io/CFOIntelligence/30min
No matter what the reason, a lender that has taken ownership of the building may terminate tenant leases. And, that means that subtenant leases will be canceled at the same time.
If your tenant / sublandlord's lease contains a non-disturbance clause or non-disturbance agreement, then the lender may not be able to cancel your tenant / sublandlord's lease, and your sublease agreement may be safe. A non-disturbance agreement is between lender and landlord or lender and tenant, and provides an agreement from the lender not to distrub or cancel the lease to which that agreement pertains.
A non-disturbance agreement for one lease does not apply to any other lease unless the agreement says so. Moreover, a poorly written non-disturbance agreement may contain loopholes that a lender could exploit to its benefit. Absent a solid non-disturbance agreement in the lease of your company's tenant / sublandlord, if a lender takes over your building, your company may need to call a mover.
Landlord Tax Default
If a building's landlord defaults on the payment of real estate taxes, the local taxing authority may use it governmental powers to take over the building. Since local governments tend not to be in the building management business, buildings they most often sell at auction those buildings that they take over. The local authority may have the right to cancel all leases contained in a building they take over. Since non-disturbance agreements are between a building's landlord and its tenant or between tenant and lender, they usually have no standing when a local taxing authority takes over a building.
How Can You Protect Your Company?
If your company already occupies real estate as a subtenant, all you can do now is to keep your eyes peeled for signs of trouble and have a contingency plan in place. Read 32 Signs That The Building Your Company Leases May Be In Serious Financial Trouble. If your company is considering occupying a sublease, do your homework to ensure that your occupancy will be stable. How? Hire superb real estate and legal advisors to research that the building you select and to ensure that your company's occupancy will be safe.
Imagine planning and executing a well designed defensive operational and financial strategy, only to find out that the real estate your company leases may not be under your control and that the space may be pulled out from under you! That's right! Your landlord may not be as good at pruning expenses and could lose your building, throwing your company's rights to remain in its space into question.
"But, we have a lease with many years remaining; we pay rent and have never been late! They can't take our space away from us....can they?
The answer to that question is a resounding....."That depends!" It depends on a number of factors, from whether or not your landlord will really lose its building, to who will end up with it, to what the process will be if the landlord does lose the building, to how thorough your company's lease was negotiated in the first place and what protections that document affords you.
The first step is to read your company's lease. Check all of the clauses that might impact your occupancy, including those pertaining to Non-Disturbance, landlord default, self-help, sublease, early termination, and others. Since your lease constitutes the rules of engagement, be certain to understand your company's rights, privileges, and obligations, in the event of a serious landlord problem.
Make it your business to understand all lease components that could affect your company's ability to remain in the building if the landlord were unable to support it financially. Specifically, does your lease provide for self-help (the ability to secure services that the landlord fails to provide) in the event that the landlord defaults in providing services to you? Can you contract for temporary cleaning and other services? Can you secure utilities directly from the utility provider? Can you do the above without putting your company into default of its lease?
What if the landlord actually goes bankrupt and ownership of the building reverts to the lender? Can the lender terminate your lease? Maybe! Does your lease require the landlord to secure a non-disturbance agreement for you from the lender? A non-disturbance agreement, if written properly, will prevent a successor, like a lender, from terminating your lease. "Why would a lender terminate our lease? Wouldn't they prefer to retain rent paying tenants?" That, too, depends! It is possible that your building could have a greater value or a greater likelihood of being sold if it were vacant. Perhaps a larger tenant, or one that for some reason is more desirable, may want your space. Or, maybe your company's use of its space is not conducive to the lender's future plans for the building. Without a non-disturbance agreement, your company could receive notice to vacate and have little choice.
When commercial landlords experience financial difficulties, the tell tale signs may be easy to spot. In many cases, payments to vendors, service providers, taxing authorities, and others become delayed or are sometimes not paid at all. In others, the building shows signs of neglect.
If you believe you have reason to be concerned, do a little detective work. Check with the local property tax dept, utility companies, and other building services providers to confirm that bills are being paid in-full and on-time. Ask around, too. Are vendors, commercial real estate brokers, contractors, and others being paid in-full and on-time? But, be careful here. You wouldn't want to spook anyone and create concern about your landlord if problems don't exist.
Take a look around your building and ask yourself some of these questions:
These are common indicators that a building and / or its landlord may be in financial trouble. So, what happens if you uncover bad news and find out that your landlord isn't just managing cash flow but, may truly be in danger of losing its building.....YOUR building?!
Here are 9 Defensive Strategies When Your Landlord May Lose The Building Your Company Leases, that might stave off a catastrophe for your company:
So, how bad could it get? What could happen if your landlord DOES lose your building to its lender.....or, to the sheriff for non-payment of property taxes?
Read my next post!