Avoiding Tenant Problems by Planning Ahead

With only a few uncommon and rather bizarre exceptions, landlords find themselves in a landlord tenant relationship with a specific tenant only after having voluntarily chosen to enter into the relationship. As a result, landlords have the luxury of being able to pick and choose those people with whom they choose to do business. Careful planning and the use of properly prepared documentation can be invaluable in avoiding problems. Always remember, however, that none of the suggestions set forth in this paper can serve as a substitute for the most significant thing that a landlord can do in avoiding tenant problems. It is a concept which may seem to be obvious, yet it is often overlooked in the rush of day to day business affairs. It is critical that the landlord maintain an ongoing relationship with each tenant. The landlord, or its property manager, should be known to each tenant not simply as a rent collector, but as a business professional aware of the issues confronting each tenant and eager to address those issues. Landlords and/or property managers should make it a goal to meet with each tenant at least monthly. This meeting, which should occur other than at the time when rent is due, is for the purpose of building bridges of communication. The tenant should be made to feel comfortable talking to the landlord so that if issues arise which could present problems, relationships will already exist, thereby making it easier to resolve these issues before they become serious problems. A good landlord prevents issues from turning into problems through the use of open communication in existing relationships.

A. Credit Checks and Entity Verification:

In today’s world of prepared forms and mass standardization, landlord’s counsel frequently has no involvement in the process or lease negotiation, preparation and execution. Instead, counsel’s first involvement with the tenant occurs only after a breach has occurred and the landlord has decided to seek legal remedies to enforce its rights. Not infrequently, the biggest challenge facing counsel is the question of trying to determine who to sue. Tenants, particularly retailers, tend to do business under trade names without the benefit of fictitious name registration. As a result, the tenant as identified on the lease may literally be a nonentity. Under these circumstances, counsel must investigate and/or guess at the legal ownership which should be named in a lawsuit. This potential problem, and the delay in proceeding which can be the result of it, is completely avoidable. Prudent landlords obtain not only detailed credit applications (of a form readily available at business supply stores) but also verify the information given to them. At a minimum, tax returns should be examined and credit references should be confirmed with an eye toward determining credit worthiness. The prospective tenant’s status as a legal entity can easily be confirmed on-line through the office of the Florida Secretary of State at www.dos.state.fl.us.doc.

B. Guarantees - Who Signs the Lease:

Not uncommonly, new entities are formed for new business ventures. As a result, it may be impossible to verify the credit worthiness of the new entity. Even if the entity is not newly created, however, it is always in the landlord’s best interest to obtain additional security for the obligations created under the lease. Business assets of the entity signing the lease may be diminished or nonexistent, either as the result of the careful planning of a tenant, the aggressive collection efforts of other creditors, or simply the general decline in business of the unsuccessful tenant. If the landlord is to have any recourse in the event of nonpayment or other material breach of its lease, it must be able to look beyond the entity of its tenant to guarantors.

Florida law recognizes and enforces the promise of one to meet the obligations of another U.S. Home Acceptance Corp. v. Kelly Park Hills, Inc., 542 So.2d 463, (Fl. App., 5^th Dist., 1989). In order to be enforced by our courts, however, this guarantee of obligations must be in writing, Fla. Stat. §725.01. The obligations undertaken should be clearly and unambiguously stated. While a guaranty agreement must be supported by consideration, the execution of the lease is sufficient to constitute consideration for a contemporaneously signed guaranty agreement Gordon v. Corporate Ins. Services, Inc., 374 So.2d 603 (Fl. App. 3d Dist., 1979). The more practical question is not whether guarantees should be obtained or how the documentation should be written, but rather, deals with the questions of "who" and "how" the document should be signed.

Every sophisticated tenant resists the idea of personally guaranteeing a corporate lease. In an attempt to compromise with the landlord, tenants may be persuaded to provide the personal guarantees of principal officers. Landlord’s should be aware, however, that financial obligations undertaken by married persons in this state may be of little practical value unless those obligations are also undertaken by the guarantor’s spouse. In other words, John Doe’s personal guarantee of a corporate lease may be of little practical value if Mr. Doe is married and Mrs. Doe has not joined the guarantee. As a general proposition of law, jointly held assets are not subject to the claims of the creditors of only one spouse. Amsouth Bank of Florida v. Hepner, 647 So.2d 907 (Fl. App., 1^st Dist., 1994). As a result, in order for a guarantee to have a meaningful effect on the landlord’s ability to compel payment of rent or related expenses, the spouses of married guarantors should also guarantee lease obligations.

C. Amount of Security Deposit

In the experience of the author, Central Florida landlords routinely require first and last month’s rent as a security deposit to assure performance of the lease. Most tenants will agree to this request with little hesitation. The real issue, therefore, is under what circumstances landlords should seek deposits of more than first and last month’s rent.

A number of factors should be considered in assessing the realistic need for a large security deposit. These factors include the nature of the tenant’s business, risks to the landlord inherent to the tenant’s business and the tenant’s credit worthiness.

Most commercial leases provide, or should provide, that in the event of monetary default, the landlord can draw against the tenant’s security deposit. For example, should a tenant fail to pay common area maintenance assessments, the landlord frequently has the right to charge those assessments against the security deposit. When this is done, many landlord’s fail to require the tenant to replenish the security deposit to the predetermined amount. If this replenishment is not required, over the term of the lease, the security deposit held by the landlord will wither to an insignificant amount. If a significant default then occurs, the landlord finds that it is unprotected.

D. Verbal Promises:

Verbal promises are worth the paper they are written on. Good landlords and property managers create a paper trail so that disputes, or the absence of disputes, can be documented. Financially distressed tenants will frequently seek to avoid their obligations by asserting that the landlord has failed to comply with verbal promises previously made. While this potential problem can never be completely eliminated, its occurrence can be reduced. The signature page of each lease should contain a conspicuous statement such as:

TENANT SHALL NOT BE ENTITLED TO RELY ON ANY REPRESENTATIONS OR WARRANTIES OF LANDLORD OTHER THAN THOSE EXPRESSLY SET FORTH IN THIS LEASE OR AS FOLLOWS:

_________________________________________________________________________

________________________________________________________________________.

Oral agreements not otherwise incorporated in the lease should be inserted in the blank provided on the signature page. On the other hand, if there are no additional oral agreements, the word "NONE" should be inserted in the blank. Ideally, this language should be conspicuously placed on the page close to the tenant’s signature.

Landlords and property managers should be encouraged to document all meaningful communications with tenants. Conversations relating to tenant complaints should always be confirmed in writing with particular emphasis paid to the landlord’s response to the complaint. For example, it will be difficult for a tenant to argue that the landlord agreed to replace the roof when confronted with a letter agreeing to make only spot repairs.

E. State of the Premises:

Most leases provide the landlord with the right to inspect the leased premises in order to assure compliance with the lease. A skilled property manager will inspect the premises without the tenant even realizing that an inspection has occurred. During the course of regular visits with the tenant, the landlord and/or property manager should pay careful attention to the condition of the premises. Safety hazards or other obvious violations of the lease terms should be addressed. Obviously, a certain amount of discretion is required. For example, many commercial leases routinely prohibit the tenant from keeping food or beverages on the premises. Nevertheless, it is a rare tenant who is in complete compliance with this provision and under most circumstances, landlords acquiesce. Obvious violations, however, may lead to pest infestation affecting other tenants as well. These problems can be minimized as the result of routine visits from the property manager.

F. Subletting and Assignment:

An assignment is a transfer of all of the tenant’s interest under the lease, that is, for the full lease term and subject to all of the conditions of the lease. A sublease is a transfer of a part of the tenant’s interest on terms which may vary from those contained in the principal or "prime" lease. In either event, the landlord finds that it is dealing with a party other than that with which it originally contracted. Since most landlords are appalled at this prospect, virtually all leases prohibit assignment or sublease without the landlord’s express written consent. The factors to be considered by the landlord in consenting to an assignment or a sublease are usually the subject of extensive pre-lease negotiation and should be set forth in the lease document with specificity.

A more interesting problem sometimes arises when the tenant is corporate rather than personal. While the landlord may believe that it is dealing with specified individuals, in the absence of preventative language in the lease agreement, the principals controlling a corporation can transfer the enter interest in the lease through a sale of their shares in the tenant corporation. As a consequence, the individuals previously dealing with the landlord on behalf of the corporation are no longer involved in the venture, new individuals are involved, and the corporate tenant remains unchanged. Landlords can prevent this occurrence by including language in their lease agreements which expressly deal with the question of significant changes in the ownership of the tenant corporation. For example, the lease may provide that if there shall occur any change in the ownership of, or power to vote a majority of the outstanding stock of the tenant corporation, this action shall constitute an assignment requiring the landlord’s express consent. While the precise terms of such a provision are obviously subject to negotiation, the subject should be addressed in the lease.

E. Default and Remedies - Drafting Consideration:

The incidents of default should be carefully and specifically addressed in the lease, and the document should clearly provide for the consequences of default. A number of issues are of particular significance:

a. Notice: Most landlords hope that a default will never occur, and in the event that it does, they want a prompt cure. As a result, the lease should provide a notice mechanism sufficiently broad to insure that the tenant and its principals receive prompt notice of any problems raised by the landlord. The lease should provide multiple addresses for the tenant so as to assure that actual notice will be received even if the bookkeeper is on vacation or the president is home with the flu. Routinely provide for notice to the principals at their homes as well as the leased premises.

While responsible tenants will promptly proceed to cure unintentional defaults, less responsible tenants will seek delay. The lease must not provide that notice is effective only upon receipt. Instead, notices should be deemed to be received within one or two days of mailing. In this way, the recalcitrant tenant can be forced to act promptly.

b. Cure: Commercial leases typically provide for a specified period of time within which the tenant must begin to cure the defect specified by the landlord. This provision, if it goes no further, can be problematic. The lease should also provide a specified time within which the cure must be substantially completed.

c. Accelerated Rent: Most commercial leases provide that in the event of default the landlord has the right to accelerate payment of all future rent. Many trial judges are reluctant to accelerate rent without making an adjustment to present value, and if the formula for adjustment is not set forth in the lease document, a trial may be necessary so that witnesses can be presented on the issue. A trial on the question of reducing future rent to present value, and the delay and cost occasioned by it, can avoided by including a formula within the lease.

d. Other Issues. Just like others who find themselves defendants in an unwanted lawsuit, tenants frequently take the position that the best defense is a strong offense. As a result, claims and counter-claims are frequently asserted to delay the proceedings and increase the cost of litigation to the landlord in the hope that this will lead to a more easily negotiated settlement. To minimize the effect of such a strategy on the landlord, the lease should obtain a conspicuous waiver of the right to trial by jury. Such a waiver is enforceable C. & C. Wholesale, Inc., v. Fusco Management Corp., 564 So.2d 1259 (Fl. App., 2d Dist., 1990).

Additionally, the lease should provide for venue where it is most convenient to the landlord or its counsel. For example, many Seminole County property owners who regularly use Orlando counsel provide for venue in Orange County rather than Seminole. Even though the leased premises may be in Seminole County, the actual venue elections are enforceable.