The Agony of Default

The Agony of Default

Ryan Springer, CCIM 

As economic conditions deteriorate and rate hikes start impacting the bottom line for many businesses, lease default becomes a very real fear for landlords and tenants.

Whether you’re a tenant or a landlord, finding a solution becomes imperative when a default is looming – or has already occurred. The most important thing in any default situation is to be proactive. Bad news is like milk: it won’t improve with age.  

Tenant defaults can cause a significant financial burden for the landlord. But, defaulting on a lease doesn’t mean just failing to pay rent. It can mean the tenant has failed to fulfill all of their obligations under the lease agreement, including things like maintaining the property in good condition, managing snow removal, or even locking the building on schedule. When money gets tight, tenants must keep on top of maintenance.

Even a minor slip and fall claim can cause a major disruption in the tenant/landlord relationship. Something more serious, like a burst pipe from improper heating, can create a crisis for both the tenant and the landlord. 

If a tenant defaults on payments or other obligations, the landlord may be entitled to damages. These damages may include unpaid rent, the cost of repairing any damage caused by the tenant, and legal fees incurred in pursuing the tenant for payment.

However, it’s important to note that landlords also have a responsibility to mitigate their damages. 

This means that they must take reasonable steps to minimize the financial impact of the tenant’s default. One option is to try to re-rent the property to minimize lost rent.

Another option is to work with the tenant to restructure the lease. This could involve altering the lease terms, such as changing the payment schedule or reducing the rent. The landlord and tenant would need to come to a mutually agreed-upon arrangement and document any changes in writing.

It’s important for both landlords and tenants to carefully review and understand their rights and obligations under the lease agreement. If there are any disputes or issues, it’s always best to try to resolve them through mediation before a situation enters lawsuit territory.  

One restructuring method is to “blend and extend” a lease agreement. That means a short-term waiver of rent can be amortized over the remaining life of the lease. In that way, a landlord can help a tenant without hurting their own bottom line. But, that may require an extension of the existing lease term. The blend and extend strategy can be complex but may get landlords and tenants through a rough patch. 

Of course, the best way to avoid such a scenario is a clearly defined set of remedies outlined in the initial lease. 

Employing a skilled brokerage to review or help write a lease at the outset of a tenant/landlord agreement can save time and money.