4 Ways Commercial Tenants Can Protect Themselves From The Office Apocalypse

We hate to say it, but for many tenants, there’s not much you can do now.?The time of reckoning is here and if you’re in an existing lease, there’s a 1 in 3 chance that your landlord is at risk of defaulting.

While existing tenants still may get some leeway in renegotiation, if you didn’t have a good representative when your original lease was ironed out,?you may be in big trouble.?In the case that your landlord defaults or hands their keys back to the bank, you’ll likely be subject to the unique circumstances of the new arrangement.

However, if you are still looking for new space despite the rocky environment, you have a lot to benefit from.?Record low vacancies are empowering prospective long-term tenants to drive the best possible deals for their interests.?But, this also means that there’s more pressure than ever to skillfully draft leases to protect these deals. Because if something sounds too good to be true, it just might be. In this article we will discuss some of the tactics and safeguards that can protect corporate tenants, even if tragedy strikes.?

1. Review Prospective Landlords' Financials?

This sounds like a no brainer but, the smartest thing you can do if your looking for new space right now is directing your attention to your prospective landlords’ financials. Because,?According to data from research analyst for Goldman Sachs,?Randall Zisler,?about 30% of U.S. office buildings, which is translated to a collective estimate of $1.1 trillion are at high risk of becoming obsolete.

“Turmoil in the U.S. office market — which has triggered missed loan payments and foreclosure warnings — has meant prospective tenants are now taking a closer look at the financial health of property owners.”

-CoStar

Many tenants are even refusing to negotiate with landlords until they get some proof that the property owner or their lender has the financial capabilities to carry out a long-term lease.

Working with stronger financial backings will increase the likelihood that the rest of the duties on this list are carried out or accepted by them. But, identifying the state of their finances?requires doing your due diligence and conducting research on their current and projected stability.?

This also means?becoming aware of what buildings are at a higher risk of becoming obsolete.?For instance, buildings constructed or last renovated from 1980 to 2009 experience less interest from tenants and investors alike. This means these property owners in the coming years may be less and less able to be maintained, renovated, etc. And?just saying...?

“More than 70% of office buildings in markets such as New York, San Francisco, Los Angeles, Boston, Chicago and Philadelphia are at least three decades old.”

-CoStar

Similarly,?there is a flight to quality taking place.?Premium buildings have higher demand and as a result are more likely to attract a steady stream of tenants. So know that in the future the divide between Class A and Class B buildings will likely widen?(and so will the financial state of the landlords who own them).

2. Include Self-Help Clauses in New Leases

Reviewing your landlord’s financial statements is so critical because protections against declining building services are harder to achieve.?If your lease is assumed by the bank or your landlord is struggling, ?there’s a very real chance that you may experience a disruption in your normal services.

That’s why tenants now need to outline safeguards in their new leases before this happens. Tenants can include a “self-help” right clause in their lease.?This will empower them to upkeep essential services at the landlord’s eventual expense.

The self-help clause is critical because it will allow you the tenant to take over for the landlord if they can’t (because the building is in receivership) or won’t perform certain key services. For example, if the building is in receivership, office cleaning and/or?HVAC maintenance ?may be diminished to the point of being unacceptable. Keep in mind, once the building is in receivership, the receiver’s first responsibility is to pay the mortgage.?All other bills are secondary.?Therefore, you can expect a drop in services in a building that is in receivership.?

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