When A Tenant Goes Dark
Why would a tenant go dark you might ask?
I have seen a strong national university sign a renewal after having occupied a property for 10 years, and after a year into the renewal make the decision that they no longer want to be in that community. There was no notice, and no warning or discussions to its property manager. However, the steps were taken, and I am happy to say, they are paying rent.
I have seen a family restaurant with a gourmet chef close their doors after 28 years of occupancy and signing a 10-year extension, decide to close their doors because the area had become so expensive they can no longer attract people to work in the restaurant.
When a tenant makes a business decision that it is cheaper to close the doors and continue paying rent than to continue to operate the business at that location, it is a decision that usually comes as a surprise. The fear the Landlord experiences can be professionally handled and minimized by a strong understanding of how these matters are handled by its property management company.
Dr. Mary Sawyer, CCIM
CEO, President
Portfolio Properties
Broker Lic. #01355272
How You Can Replace Your Triple Net Lease (NNN) Tenants
Read The Lease
- Look for a clause that covers the event of early move out, or closing of the business, commonly known as a Go Dark clause.
- Look for a right to sublet clause.
- Read the underlying loan documents, like Deed of Trust, Promissory Note, Commercial Collateral or Personal Guarantees the owner of the property signed with their lender.
- You are looking for the description of an event under DEFAULT heading. In some loan documents an event of default is deemed to occur if the tenant vacates the property, terminates occupancy early, or closes its doors for business.
- If the loan documents have such covenants, then this is a dangerous position for the owner to be in. The tenant’s actions have put the owner in a position of Default under the terms of its loan.
- The Deed of Trust will also contain covenants with regard to whether or not the Trustor must provide written notice to lender that the tenant has moved out or closed its doors for business.
- Many loan documents will give lender the right to request such notice; however, the documents will dictate if this is mandatory.
- The Deed of Trust will also contain a clause that the owner may not collect advance rents of more than 30 days rent. This is important because the tenant may ask the owner, or asset manager, or property manager to commence negotiations with tenant for an early buy out of the lease.
- They may owe another 10 years on the lease, and they would like to settle with a lump sum payment to be paid now. This is a net present value calculation that the property manager can calculate discounting the future stream of cashflows back to today’s values. However, if the Deed of Trust prohibits this, there may be language prohibiting the trustor, or its agents, from entering into any negotiations, or even having discussions about this.
Going Forward
- After having reviewed these documents the Property Manager will then contact the owner of the property to advise them in writing that the tenant is vacating the property early. It means the tenant is still obligated to pay rent and is responsible for the upkeep of the property. That is the good news.
- It is up to the tenant to contract with a leasing company, known as the tenant rep to lease the property to an acceptable tenant. Acceptable tenant to landlord means one with a credit rating as good as the tenant which is leaving.
- Many national credit tenants who lease NNN properties will have an alliance with a national brokerage house that offers tenants representation they will want the cooperation to the property management company. They will want keys and access, which they can get from the tenant, and they will want to place signage on the property. They will want to put a “For Lease” listing on commercial property listing sites.
- Landlord also has the right to protect its property and the cash collateral of the rents and cash flow on the property; therefore, Landlord has the right to enter the property, to have keys and security code information, and to hire its own agents to market the property for lease.
- Landlord has the right to ask the tenant to provide financial statements regarding its solvency.
- The biggest problem may arise is in the insolvency of the tenant, and potential for filing for protection from its creditors. Bankruptcy is to be avoided by all parties and is a game changer.
Preparing The Property
The next thing the property manager will address is the issue of removing its sign, trade fixtures and business furniture. For example, a sign removal company could simply cut electrical wires and otherwise damage the sign structure. The contractor and moving company should have proper insurance for liability and worker’s comp and provide those to Landlord, naming Landlord as additional insured on the certificates before entering the
property to do any work.
Finally, with the proper team in place you can go from DARK to “LET THERE BE LIGHT” quickly and without pain.
