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Cautionary tales for commercial property managers

By Jill Laney
BridgeTower Media Newswires

The current real estate market is chugging along at a fairly strong pace. Even so, property managers must manage struggling tenants from time to time. Although this is more or less inevitable, there are fortunately some steps that property managers can take to manage tenants and mitigate risks.

Review the lease at the outset

Leases generally are drafted and negotiated by an owner, an owner’s lawyer, or a real estate broker and then provided to a property manager. Property managers would be wise to read these leases at the outset to make sure all the boxes have been checked, all “blanks” have been completed, and the language is clear. If the parties used a standard form of lease — such as BOMA or CAB — you should pay particular attention to any addendum that is specific to the lease at hand.

If the lease is unclear or incomplete, it would be much easier to approach tenants to amend it and clarify it before a dispute arises. This protects both tenant and the landlord because, not surprisingly, any blank or ambiguous provision will often become the subject of future controversies.

Watch mounting rent arrearages closely

The further behind a tenant falls on rent, the more difficult it will be to collect. While this seems obvious, tenants often lure landlords into believing that there are upcoming events that will allow them to catch up on their obligations.

Retail tenants may hope their next big annual sale will allow them to dig out. Manufacturing tenants might expect a big order “any day.” Hope springs eternal. Unfortunately, oftentimes this optimism is unfounded. The bottom line: If a non-paying tenant is on your premises, your ability to lease your space to a more financially stable tenant will be hampered.

Use self-help cautiously

While the lease provisions may permit a lockout, this remedy should be employed cautiously. The risk of retribution from tenants will depend on the facts and circumstances of each case, and legal advice is recommended. Although an eviction proceeding may result in a delay of a few weeks, the unlawful use of self-help remedies may compound an already difficult situation for a landlord.

Beware of bankruptcy

Although tenant bankruptcy is a topic that probably deserves a separate article, suffice it to say that the threat of bankruptcy should be watched closely. If a tenant files bankruptcy and a lease has not been terminated, bankruptcy procedures will significantly delay an owner’s ability to re-let a space.

When the possibility of bankruptcy seems clear, property managers should give serious consideration to lease termination. In that situation, owners will still need to stand in line with the tenant’s other creditors to recoup any money owed, but they can at least move on with leasing the premises to a more credit-worthy tenant.

Although it is impossible to entirely avoid losses stemming from tenant defaults, taking the above-listed steps may help property managers mitigate at least some risks for owners.

Jill Laney is a partner at the law firm of Cosgrave Vergeer Kester in Portland, Ore. She specializes in real estate and corporate law. Write to her at jlaney@cosgravelaw.com.

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