Lease Workouts in Troubled Times - Property Management Tips for Troubled Economic Times

Property Management Tips for Troubled Economic Times

During troubled economic times, property managers need to anticipate the fallout of struggling tenants. Following is a brief list of suggestions that property managers should consider to prepare them for responding to a struggling tenant:

• Have the on-site personnel observe the tenant and report deviations from the norm. Observations such a less trash, less use of access cards, changes in signage, reduced inventory for retail tenants, and empty spaces are cues that the tenant is in trouble.

• Review and update your lease files. Property managers should take the opportunity to review its leases now to determine the notice requirements and owner's remedies in the event of a default. The review should focus on when and how the security deposit can be utilized and a letter of credit may be drawn upon. Note that the failure of certain larger tenants to operate may not be a basis for default and accordingly, property managers should understand which leases do not contain operating covenants. If information is missing from the lease file, updating it now will avoid complications if enforcement is required down the road.
• Act promptly upon a tenant default. Immediate action should be taken when a tenant fails to pay rent or comply with the material lease terms. However, property managers should not automatically send a Notice to Pay Rent or Quit as termination of the Lease may not be in the landlord's best interest (see discussion in Part III above). Leases should be closely reviewed to identify the appropriate notice requirements, as it is critical that written notice of default be delivered to the tenant strictly conforming to the notice requirements of the lease. Failure to comply with such provisions could extend any applicable cure period of the tenant and prevent the landlord from timely exercising its remedies. Moreover, if prompt action is taken upon a tenant default and, as a result, the lease is terminated, it may be possible to successfully prevent the lease from being included as property of the bankruptcy estate should the tenant subsequently seek bankruptcy protection.
• Act promptly upon a tenant bankruptcy. Any bankruptcy notice that is received by a property manager should be promptly reviewed and addressed to insure that the landlord's interests are protected. Many important events in a bankruptcy case occur in a hearing called "first day" motions, which typically occur on one of the first five days following the filing of a bankruptcy case. Once a bankruptcy proceeding is filed, the landlord's rights will become subject to jurisdiction of the bankruptcy court, and the owner no longer has the right to pursue any remedies or otherwise enforce any of its pre-bankruptcy rights under the lease without permission from the bankruptcy court. If, notwithstanding the bankruptcy filing, an owner takes action in a non-bankruptcy court or otherwise takes an action against the tenant without the approval of the bankruptcy court, the owner may be subject to penalties and sanctions by the bankruptcy court.