June 8th, 2012
By Courtney G. Forster
In my time representing commercial landlords, tenants, and property managers, I’ve seen every side of a commercial real estate lease. Although the vast majority of these landlord / tenant relationships end well, far too often I see the same problems crop up again and again when they don’t. These tips will help you avoid some of the biggest – and costliest – mistakes that can occur when leasing your property to commercial tenants.
1. Read Your Contracts Carefully Before You Sign.
This cardinal rule applies to every contract you sign as a property owner, from a property management agreement to the lease itself. What powers and responsibilities does your property manager have? If your tenant makes improvements to your property, which of those improvements must stay and which can the tenant take with her? Is there a personal guarantee on the lease? What specific actions create a default in the lease? Unfortunately, owners frequently don’t realize there are holes in their contract until a problem comes up.
2. Keep Negotiations in Writing.
Landlord-tenant disputes can often devolve into a he-said / she-said mess. If your negotiations with the tenant mostly happened over the phone or during in-person meetings, you might not be able to prove that you never promised all the things the tenant now claims. Try to keep negotiations entirely over email or in writing if possible. When meeting in person or on the phone, take detailed notes during the conversation (not afterwards – courts require these notes to have been taken during the meeting itself) and keep them in your file with the lease. If a problem comes up later, you will have very strong evidence of what exactly happened.
3. Protect Your Security Interest.
Lease agreements often give a landlord a security interest in their tenant’s furnishings, fixtures, and equipment in case the tenant stops paying rent. Unfortunately, landlords almost never “perfect” this security interest by filing a UCC-1 Financing Statement. Filing this UCC statement is relatively simple and will better protect your interest in that equipment if the tenant later defaults, especially if that tenant also used that same equipment as security to subsequent lenders. Talk to your lawyer about how to protect your security with a UCC filing.
4. Track Problems as They Occur.
This rule is simple, but critical: if your tenant is consistently late with rent payments, bounces checks, or otherwise violates their lease, make sure to keep a written record of every problem as it occurs. Far too often I meet with landlords who have had problems with their tenants for years, but they can’t prove it because of poor recordkeeping.
5. Follow Your Lease.
A typical commercial lease has certain requirements a landlord must meet before a tenant can be considered in default of its lease. Even if a tenant has stopped paying rent entirely or is otherwise in breach, a lease commonly requires a landlord to send written notice of the default (often by certified mail) and give the tenant a certain amount of time to cure. Until that written notice is sent, courts may not consider a tenant to be in default of the lease. This led to a very strange situation for a client of mine a few years ago: because he started eviction proceedings on the non-paying tenant before sending the formal written notice (and before I got involved in the dispute), the court found that my client breached the lease first. Although we ultimately won at trial, there is no reason to put yourself at this kind of disadvantage.
Courtney Forster is an Associate at Gunderson Law Firm. She earned her Juris Doctorate from Notre Dame Law School, and can be contacted directly at firstname.lastname@example.org or 775-829-1222.