Challenges in Commercial Leases During Workouts - Risks in Delaying Remedies FAQ
Guest Writer, Laura P. Sims, Winstead PC
(CAVEAT: if this blog seems familiar, it probably is because after we posted it last week, it "mysteriously" dropped off our site - after I messed up on the posting of March 7. And I apologize. So, here it is again!)
This is a series of blog entries [link] in which we provide quick answers to lenders' frequently asked questions related to tenant leases (FAQ). Leases are "the" whole point of income producing property—and this series is pointed to the simple goal of helping you protect the basic value building block of your collateral—which are the leases. Of course, two things should be kept in mind. First, none of these questions can be answered in a vacuum. Questions should be considered with a thorough review of the file. And secondly, many of the questions are worth revisiting from time to time because subsequent events will impact the answers.
What are the risks involved in delaying the exercise of remedies?
A period of delay between declaration of default and exercise of remedies increases the chance that some action or omission by Landlord or its representatives will be claimed by Tenant as evidence that:
- Landlord has waived the default or
- Tenant reasonably believed (and relied on its belief) that Landlord did not intend to strictly enforce the Lease.
Either one is a bad, bad result.
So, what should you do during any time period when landlord remedies are being deferred (or not exercised)?
Here are some tips:
- avoid sending e-mail correspondence involving discussions of modification of the Lease
- avoid in-person meetings involving discussions of modification of the Lease
- don't accept partial or late cure
- don't promise to forgo exercise of remedies (in other words, don't say "we won't exercise remedies")
Ideally, if rent failure is the issue, then monthly notices of failure to timely pay and demand for payment in full can and should continue during the period of delay - in order to combat any suggestion that Landlord will not strictly enforce its rights.
One final word of warning: at some point, the Landlord will need to get off the stump and act - or waive the default.
If you have thoughts, suggestions or questions on this topic, please post a comment below.
