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Evaluating Landlord’s Financial Condition

Evaluating Landlord’s Financial Condition

Early on in the lease negotiation process, the landlord will require the tenant to produce its financial statements showing that the tenant has the ability to perform its obligations under the lease.  Most letter of intent forms contain a contingency for the landlord’s review and approval of the tenant’s financials.

In the current real estate market, a tenant also should be concerned about the landlord’s financial position.   The landlord’s financial position could impact the lease negotiations or the landlord’s ability to perform its obligations under the lease.  It is relevant whether the landlord is in default under its loan for the property or whether the landlord’s lender has initiated foreclosure proceedings by recording a notice of trustee’s sale.  First, the tenant likely considers the reputation of the landlord as a property manager in its selection of space.  If the landlord is likely to sell the property or a lender is likely to take over the property, then the tenant will be dealing with a different property management firm.  Second, if the landlord is in default, it is more likely that the lender is overseeing the leasing of the property, so it may be more difficult and time consuming to negotiate the lease depending on who is calling the shots during the negotiations.  Further, the negotiations could stall or cease entirely if the lender takes over the property by a deed in lieu transaction or foreclosure.  Third, and most importantly, the landlord may have tenant improvement obligations, and/or hold pre-paid rent and/or a security deposit.  If the landlord is having financial problems, the tenant should be concerned about the security of its own funds and the landlord’s ability to perform its TI obligations.  (see also blog entry on timing of payment of TI allowance at https://azleaselaw.wordpress.com/2010/02/22/timing-of-payment-of-ti-allowance-to-tenant/).

A tenant should perform its due diligence on the landlord and the landlord’s financial position.  A tenant and tenant rep broker should ask the landlord and landlord’s leasing agent about the landlord’s equity position on the property, status of its real estate loan and cash position of the landlord and its parent company (if applicable).  A tenant may want to order a title report on the property from a title company to find out if a notice of trustee’s sale has been recorded (or if mechanics’ liens have been recorded, which tend to show the landlord is not paying its contractors for tenant improvements).  Also, the tenant should require that the landlord make certain representations about the landlord’s financial position in the letter of intent.  Following is a sample provision to insert in the letter of intent:

Landlord acknowledges that Tenant’s willingness to enter into negotiations with Landlord for the lease of the Premises is expressly dependent upon the following representations made by Landlord: (1) Landlord has the financial ability to perform its obligations contemplated under this Letter of Intent, which ultimately will be memorialized in the lease documents, including without limitation the completion of tenant improvements; (2) Landlord is not currently in default under any real estate loans affecting the Project and has not been in default at any time in the past 12 months; (3) Landlord’s lender has not initiated a foreclosure or trustee’s sale against the Project at any time in the past 12 months; (4) during the past 12 months, Landlord has timely paid all contractors to which Landlord is responsible for payment with respect to the Project; and (5) during the past 12 months, Landlord has timely paid all real estate brokers that are owed a commission for the leasing of space in the Project.  Notwithstanding anything to the contrary in this Letter of Intent, this provision shall be binding on the Landlord, shall survive the termination or expiration of the Letter of Intent and shall be enforceable by Tenant.

Prior to using any language or concepts from this blog entry, consult with an attorney.

Ryan Rosensteel is a real estate and construction attorney licensed in Arizona.  You can contact him at rrosensteel@rrlawaz.com.

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One Response

  1. Thanks for all information, it’s very useful for every one

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