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Leasing Retail Space - Foreclosures and Lease Cancellations

Date Added: April 24, 2009 10:00:40 AM
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Category: Real Estate
 
In Event of Foreclosure Foreclosure of a mortgage typically extinguishes all claims to the property. In other words, if you've negotiated a lease and started a business, your right to use the retail space is terminated by foreclosure unless there is a separate agreement. Will Lender Cancel? In many cases, the lender has a defined period of time to reject leases or they are assumed to remain intact. Further, lenders often want to retain the leases and tenants to make the property more salable. However, if the rental rate for a lease is well below market rent, and the tenant is clearly successful, the lender would likely terminate the lease and require the tenant to negotiate a new lease at market rent. Negotiating From a Position of Weakness The tenants negotiating position is much weaker than it was when he first negotiated the lease. The tenant has a successful business at this location. Changing the location of the business may damage or destroy the business. The tenant's ability to bargain and negotiate lease terms is a weak. Nondisturbance Clause Tenants can avoid this dilemma by obtaining an agreement that the lease will not be terminated by foreclosure. This is termed a nondisturbance clause. Landlords are reluctant to grant this concession due to the limitation it imposes on the landlord when obtaining financing. Maintenance Standards The definition of maintenance standards is often vague. A typical clause may read that "the landlord will maintain the property in a manner consistent with local practice and a prudent owner". Personal Guarantees Landlords love personal guarantees since they substantially limit the tenant's ability to abandon operations at the retail space. Personal guarantees should be avoided by tenants whenever possible. It is reasonable that the tenant repay the unamortized portion of any tenant improvements and leasing commissions if the lease is terminated early. Further, it is reasonable for a tenant to guarantee a minimal level of performance on a building built to its specifications. Different Rules for Second Generation Space? However, for second-generation lease space, it is reasonable to request that the tenant not be personally or corporately responsible beyond paying the unamortized portion of tenant improvements and leasing commissions. Although this is reasonable, it may not be possible. The strength of the local rental market and local practice will dictate whether landlords can extract personal guarantees from tenants. Purchase Option For single tenant retail buildings, tenants often want a right to purchase the building at a predetermined price. Landlords prefer to avoid this. A compromise is providing the tenant a first right of refusal. Sublease Issues Landlords want the tenant to make rental payments throughout the lease term, but don't want the tenant to profit from subleasing the retail space. In some cases, the tenant has the right to sublease the space subject to the landlord's approval. There's often a clause that the landlord's approval shall not be withheld unreasonably. There's also often a clause limiting the types of businesses which can sublease from the tenant. Sublease payments in excess of payments on the primary lease can be an intensely negotiated item. Minimum Hours of Operation Some retail centers require fixed hours of operations for each tenant. The concept is great. If a shopper visits the mall, they know each store will be open from 9 a.m. until 9 p.m. (or whatever the hours of operation). However, assume you expect to get 90% of your business between 12 p.m. and 5 p.m. In some cases, the minimal hours of operations are nonnegotiable. You may need to consider the excess hours of operations part of your occupancy cost. Dedicated Parking Dedicated parking is another issue where interests almost always diverge. Tenants love to have parking dedicated to their customers and landlords hate having parking dedicated to any one store. Peak traffic for a store may occur in a short period of time. However, the parking spaces are typically dedicated 24 hours per day. A compromise is the right to put portable signs in front of parking spaces several hours per day consistent with the tenant's peak hours of business. This capacity to research, analyze and interpret market trends and the impact of specific transactions is a major reason for why developers and acquisition experts rely on O’Connor & Associates for market studies, feasibility studies, rent studies, tax credit studies, project design guidance, property performance evaluation and lease audits. O’Connor & Associates is an acknowledged source of trends in real estate investing and market activity. http://www.oconnordata.com/corp/mkt/News/San_Antonio_Data.cfm http://www.oconnordata.com/corp/mkt/News/Market_Study_Fundamentals.cfm
 
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