Limiting Tenant Exposure to Landlord Defaults

When you lease space, your landlord usually includes a great deal of language in the lease to protect them against you defaulting. On the other hand, they frequently gloss over what will happen if they default — and landlords do default. Landlord defaults tend to fall into two broad camps — when they default on their obligation to provide you with your space in the agreed-on condition, and when they default on their obligations to others and it affects you. In either case, you can protect yourself at least to some extent.

Space Issues

Most landlord defaults occur when they don’t take adequately good care of your space or the common area. These are problematic because having space that is in disrepair or that is hard or unpleasant to access can impact both what your employees and your customers think about your business. When you run into an issue with your space that your landlord is responsible for fixing, the first thing to do is to notify your landlord or the property manager. Hopefully, the issue will be resolved.

If the problem does not get fixed, review your lease. Look carefully at its procedures for reporting issues and problems and make sure that you follow them. In addition, your lease may have language pertaining to your options when your landlord defaults under his or her obligations by failing to repair the space or common area. The three most common options are as follows:

1. A right to fix the problem yourself and bill the landlord. This is better than having nothing, but it still puts you in the position of having to come out of pocket and then have to go back and collect your expenses from the landlord.
2. A right to fix the problem yourself and reduce your rent by the cost of the repairs. If possible, try to include this clause in any lease you negotiate. The ability to offset rent gives you a great deal of power as a tenant to ensure that your landlord follows through on his obligations.
3. A right to cancel your lease. At first glance, this might seem to be the best option, but it has a downside. If your landlord wants you out of the building so that they can lease your space to someone else, they could fail to maintain your space to get you to choose to move out of your own volition. Further, your operations are left without a home.  As such, this option is not always an effective way to get your landlord to take care of your space and his building.

If your lease doesn’t say anything, you can still take your landlord to arbitration or to court. You’ll be at the court’s mercy, but you do have some rights under both statutory and common law in most states.

Large-scale Landlord Defaults

If your landlord defaults on large-scale obligations like a mortgage it can ripple through the entire building and catch you. To protect yourself, never sign a subordination agreement that does not also include a non-disturbance agreement. The subordination agreement is a necessary evil that places your claim to the property below the claim of another party — usually a lender. Non-disturbance agreements bind the party to which you made yourself subordinate to not disturb your occupancy and follow the terms of the lease. In other words, if the lender takes over the building, they’ll leave you and your lease alone. To protect yourself against the other major default risk — unpaid property taxes — look up the property tax records for the building to ensure that they are being paid on time. If they aren’t, you’ll have enough notice to protect yourself.