RECOVERING TENANT ALLOWANCE COSTS – In the event of EARLY TERMINATION or DEFAULT

Downside protection for a Landlord is always good business, particularly when you are committing dollars into a premises build-out on behalf of a Tenant. Using this example, let’s say the request is to commit $50,000 towards a build-out with a lease term of 5 years. Here are some suggestions on how best to handle this and protect the Landlord’s investment:

• Require that the Tenant reimburse all unamortized costs at the time of termination (if termination occurs at the end of Year 3, approximately 40% of the cost remains unamortized and is payable)

• Secure the TA costs through a Personal Guarantee, even if the named Tenant is a corporation

• Letter of Credit from an approved Lender, specifically against the TA amount

• Negotiate a shorter amortization period and not necessarily the same as the term of the lease (as in the above example, amortizing it over 3 years even though the term is 5 years)

Situations when negotiating leases often arise, where a Tenant poses the possibility of an EARLY TERMINATION. This can be due to a number of factors – changing government regulations that negatively impact their business, sales volume issues and business model changes, to name a few. If  this is the reality and it’s part of the discussions upfront, it could still be a viable lease deal and worth considering. The best practice then is to protect yourself against the downside risk.

On the matter of DEFAULT, it’s often difficult to assess upfront and generally is not part of the negotiation and discussion with the Tenant. Even large corporations can fail, so covering for this downside is simply good business. In the case of smaller or newer companies, often Personal Guarantees are what is required and there should be no apologies in requesting them. You are in fact lending the Tenant money by providing a TA and as a result you need to secure this investment.

Again, we welcome your comments on how Landlords handle TA costs in your market and any other approaches you have come across. We're just a click/call away from discussing investment opportunities here in Windsor-Essex!