Posts Tagged ‘default’
It is not unusual for me to get a call from a commercial landlord battling with a tenant who is in arrears asking whether it is OK to accept a check from the tenant for less than the rent that is owed. Typical of most answers in the law, I tell them it depends. Initially, it is important to distinguish between “receipt” of rent and “acceptance” of rent. If a tenant simply mails in a check to the landlord, who holds it or brings it to court then that check will be deemed as only having been received by the landlord – not accepted. The reasons underlying this distinction are clear – any tenant behind on rent or otherwise in default of the lease could get out from under the default by simply mailing a check to the landlord. A landlord’s mere receipt of rent should have no impact on the status of the tenant’s default.
A Letter of Credit (“LOC”) is simply an agreement from a bank guaranteeing that Party A’s payment to Party B will be received on time and for the correct amount. LOC’s are used primarily in sizeable international trade transactions, i.e., a supplier in one country and a customer in another. LOC’s, however, can also be useful, and are regularly employed, in long-term commercial lease situations. For a tenant, an LOC may help it secure a particular lease it might otherwise have been unable to secure. An LOC could also free up cash the tenant can use to run its business, instead of parking it in the landlord’s account as a security deposit. LOC’s are attractive to landlords, because they allow a landlord to get its money notwithstanding the tenant’s insolvency or that it might dispute the landlord’s claim of default. Not even a bankruptcy filing by the tenant will prevent the landlord from drawing on a properly drafted LOC (although this may reduce the tenant-debtor’s obligations to the landlord under the Bankruptcy Code – more about that in a later post).
In good times and in not so good times, a well drafted and negotiated commercial lease will contain various exit strategies available to the landlord and tenant. These strategies will come in handy in situations where a tenant’s business is booming causing it to grow out of its current space (good times) or where the space is too big or expensive for the tenant to continue because business has dropped off considerably (not so good times).
Exit strategies can include the following:
- Contraction rights
- Right to go dark
- Right to expand
Below is a very brief overview of how each of the foregoing strategies operates.
The Wall Street Journal recently reported that a total of $58.3 billion of the commercial-mortgage loans sliced and diced on Wall Street are currently delinquent. More than $1.4 trillion in commercial mortgages will come due by 2013, with as much as 65 percent of those deals finding it difficult to refinance. The delinquency rate of 8.58% is still nearly twice as high as the year-ago level of 4.8%. In New Jersey, the delinquency rate for borrowers of commercial mortgages increased to 7.65% in August 2010 from 0.52% in August 2008.1
The foregoing figures show that the fallout from the Great Recession continues to hit the commercial real estate industry hard, forcing some owners of office buildings, shopping centers, and industrial properties simply to walk away from their properties. What happens to a tenant who operates a business out of such a property? Put another way, what are the tenant’s rights vis-à-vis the lender and vice-versa? In New Jersey, a lender whose mortgage pre-dates a lease, and where the parties did not enter into a Subordination, Non-Disturbance & Attornment (SNDA) agreement, may repudiate the lease and consider the tenant a trespasser subject to eviction. A lender cannot, however, evict a tenant whose lease pre-dates the mortgage.
In the previous blog entry, I highlighted the need for commercial landlords to specify in their leases the manner in which the tenant’s personal property is dealt with upon termination of the lease, either by its terms or by way of court action (summary dispossess). Doing so gives the commercial landlord the flexibility needed to get the newly vacated space ready for re-letting.