These are uncertain times in the markets and landlords, tenants, lenders and investors continue to be in a cycle where one eye should be focused on preservation of assets and asset values.
As an analogy, assume its time for your annual medical check-up. Your Doctor tells you “the news is not good – your overall health is deteriorating and if you don’t make changes, your future will be short and bleak”. However, she does offer you hope, as there is a course of action you can take to reduce the risks. It includes exercise, eating better, reducing fatty foods and regular check-ups with your medical team. Most of us would take some or all of these steps and change our present lifestyle to some degree – if it meant a better chance of avoiding the unpleasant prognosis.
The analogy is comparable to the economic situation in the World today with countries financial strength being eroded by large debt and needing re-structuring from time to time as in the case of Greece, Spain, Portugal and possibly even England.
The situation has improved in the United States but the “recovery” is slow and fragile and there is news that Canada is on the “watch list” due to unprecedented high consumer debt, and a yet-to-cool real estate market. The concern is shown by the recent downgrade of the credit rating of our Banks due to perceived risks in the lending market.
So, simply put, overall, the global real estate sector is still “sick” and we don’t know when we will fully recover or even if we will suffer further relapses.
Prudent landlords and property managers ought to be reviewing their tenant portfolios for tenants of concern and developing a plan to deal with struggling tenants to minimize the damage of a pending lease default, insolvency or bankruptcy and then vacancy.
With that in mind, I offer you: “The 6 Step Prevention Program” to assist in identifying potential problem tenants, minimizing the damages that can result on tenant default and preserving your asset base.
The 6 Step Prevention Program:
1. Know your Tenants – Review your portfolio regularly and identify those major tenant groups or entities that are or are likely to be seriously affected by the current economic climate. A tenant’s business may not appear to be tied to another industry but that determination requires a careful analysis. Get a Corporate search done annually to confirm the Directors and Officers of the tenant and have the Tenant confirm the information is current. You may have to serve these persons with notice so you want current information. The cost of the search is nominal in the overall picture. It is important to understand the nature of the tenant’s business, be aware of who its major clients and suppliers are and whether the business is tied to one or a few large clients or spread amongst many smaller ones.
2. Know your Leases – If the Lease has not been reviewed for a few years then do a fresh review and prepare or update the Lease Summary – especially to include sections dealing with addresses for service, default terms, notice periods and remedies. I often do that for clients and it serves as a simple and quick reminder of the lease terms and rights and options where key exercise dates are critical.
3. Know Your Security – Is there a rent deposit, security deposit, letter of credit or indemnity under the lease? If so, have they been received and held accordingly? Have they ever been drawn upon and then replenished or have they been increased as the rent increases if the lease provides for that? Are there any issues with the forms used e.g. in a letter of credit, what is required for you to call upon it, if needed? Are you in a position to do so quickly?
4. Know Your Tenant’s Creditors – Order a PPSA search to determine who the tenant’s secured creditors are. This should be done annually – and when concern about the tenant’s continuing viability has arisen. The cost is nominal. Determine if you entered into any Landlord Waivers/Postponement or Tri-party Agreements with creditors as they may provide for notice to you and to the creditors prior to enforcing remedies for tenant default. Failure to comply with such an agreement can invalidate the actions and possibly expose you to damages.
5. Know Your Property – Your lease form likely provides for them so exercise the right and more than just annually. Make regular visits to determine if the tenant is complying with its repair/replacement and environmental obligations. Chances are a tenant will prolong that work while paying the rent but then the Landlord might find itself with large repair or remediation costs later on. This is even more important where there is a security deposit or time limited Letter of Credit. Waiting too long can result in loss of the security.
6. Know your Owner – If you are a property manager on behalf of one or more owners, make sure you know what your management agreement says and then make sure you are in compliance with it including monitoring and dealing with default, notifying the owner and seeking instructions where necessary. A failure to do so may not only cost money in terms of a defaulting tenant, but it may also expose you to damages to your owner and that is not good for client satisfaction or good business practice.
The Lessons: Its very simple – be proactive and not reactive, to use the line form the old Maytag commercials – “you can pay me now or, you can pay me later” – and paying later is usually much more expensive in terms of money, time and manpower.
Disclaimer: This article is for general information purposes only and not intended as or to be relied upon for legal advice. Consult with a lawyer for your unique situation.
[*If there is a general real estate or leasing related question you would like to see addressed in a future article in “The Legal Corner”, please contact me directly by e-mail at [email protected] with your suggestion. Not all requests can be accommodated.]