Expert: Jim Avancena, CPM - 11/10/2008

Question
My parents are planning on leasing our commercial building to this guy, but he has a history of bailing out and not paying rent EVER. What kind of security measures can i take so that my parents get payment every month in a timely manner?

And my parents have been duped by their last tenants so I do not want the same happening to them again.

Answer
Jonathan-

It is always best to avoid doing business with those parties that do not honor their lease obligations.  I personally suggest that you skip this tenant and find another to lease the premises.  Regardless of the protections you attempt to create with special text added to the lease, troublesome business people always find a way to make your life difficult.

First, require that the tenant provide you with a personal credit report.  This may be helpful to give some additional evidence to your parents to understand who they are considering.

There are several things you can do to assure that the tenant performs in accordance with the terms of a lease that your parents prepare and have them sign.  The lease will have to include a few non-standard lease provisions, which means you will need to add some special text to whatever form of a "standard" lease that your parents have used in the past.  

This text is essential if you want to avoid a loss of rent or other expenses incurred on behalf of the tenant.   Note that if this prospective tenant has a high risk rent paying history, the tenant will identify the added lease language and indicate that it will not sign the lease with the special text included.  Your parents must understand that a tenant that doesn't pay its rent is worse than having a vacant space because of other problems that can occur.  If they believe you are exaggerating the prospective tenants occupancy risks, perhaps if you give them some specific evidence they will take your suggestions.

First, do not have your parents spend any of their own funds to prepare the premises for the tenant.  This means your parents should not repaint or re-carpet the premises, or do any other kind of improvements prior to the tenant taking possession of the premises. The lease will need to stipulate that the tenant agrees to lease the premises in their "As-Is" condition, and that the tenant will prepare the premises at its own expense.

Do not include any rental abatement, also know as "free rent", as one of the conditions of the lease.  Many landlords will offer rental abatement for a certain number of months during the initial period of the lease to give the tenant time to prepare the premises before opening for business, and perhaps additional months of rental abatement once the tenant is operating in the space.  You should not give the tenant any rental abatement for the period after the interior space is prepared, and be certain to specify that the tenant may not perform any sales or other business activity during the construction period.  The construction period must be brief, perhaps 30 days maximum.  Demand, and stipulate in the lease that the monthly rent begins to accrue after the agreed thirty (30) day period, or other brief agreed period for construction.  Often tenants drag out the time it takes them to improve the premises by providing a continual parade of excuses.

Require, BEFORE signing the lease, that the tenant provide the landlord (your parents) with detailed plans and a detailed work description of what they intend to do to improve the premises.  If your parents find the planned improvements acceptable after they review the plans, the lease should provide that both the landlord and tenant will approve the plans and the work description by signing their names to the construction documents, and attaching the documents to the lease as an exhibit.

The lease must require that the tenant provide the landlord with the first months rent and the Security Deposit at the time the lease is signed; the deposit to be held by the landlord over the full term of the lease.  The deposit shall be either: 1.) the equivalent of six months of the first years rent in cash or cashiers check, or 2.) provide the landlord with two(2) months rent in cash plus an irrevocable letter of credit provided by a bank that you approve, that is equal to four (4) months of the first years rental.  

Whichever the tenant chooses to provide, these funds shall be held by the landlord (your parents) as the security deposit for the lease and shall be used by the landlord to reimburse itself if the tenant defaults in its obligation to make its rental payments as prescribed by the lease, or for any expenses incurred by the landlord on behalf of the tenant.   

Provide that the rent is due on the first of each month and that the tenant shall pay a five percent (5%) penalty after the fifth of any month during the term in which the monthly rental or any other expenses are past due.  The amount of the penalty shall be calculated on the amount of the monthly rent and/or expenses due.   

The tenant must then pay the past due rent plus the late fee in cash or cashiers check no later than the twentieth (20th) day of the month or the landlord shall have the absolute right - as agreed by the parties - to declare in writing by certified mail to the tenant at the address of the premises, that the lease is null and void and of no further effect.  

The tenant agrees that upon receipt of the landlord's notice, it shall vacate the premises within the next following fourteen (14) days and return the premises to the same condition as it was prior to the commencement of the improvements it made to the premises.  If the tenant fails to return the premises to its previous condition, the landlord shall deduct the cost of the removal work at the expense of the tenant.  (This means that your parents can deduct to cost of having a contractor do the work from the security deposit.)   

Stipulate that the tenant may NOT sublet or assign the lease to another entity without the landlord's ADVANCED written approval, which your parents may withold for any reason whatsoever.

There are endless other provisions that can be included in the lease to protect your parents, however, inclusion of a six (6) month security deposit (or longer if you wish) will do much to limit your parents exposure for loss of rent or other expenses.  

It would be best to have a local Landlord / Tenant Attorney ("L&T")
prepare the new lease to assure that the unique provisions specific to your local jurisdiction are included or adjusted as necessary.

Finally, and this is only a suggestion since I do not know your parents, it may be that your parents do not have the appropriate skills and demeanor to effectively interact with difficult business people and it would be wise to have an attorney negotiate the lease terms for your parents.  

Good luck.

-Jim