+1 303-901-1108 & +1 512-614-4883 wgary@MacLW.com
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Dear Sam,

I hope this letter finds you well and in good spirits in Austin. I am writing to share a cautionary tale that may aggravate your ulcer, but also to impart some important, potentially painful lessons about leasing office space from a financially distressed Landlord. It’s a contagious meltdown making its way across many American Office Markets.

Despite overwhelming forces headed your way, we can still figure out creative, and yet practical ways to help you defend yourself. Read on fearlessly.

Once upon a time, in a land not terribly far away, a creative and collaborative office space was up for lease. Rent was very affordable, the location was great. The Landlord and Landlord’s Listing Agent seemed friendly enough. But little did the unsuspecting Tenant know, the Landlord was distressed and secretly in dire financial straits, literally on the verge of bankruptcy and defaulting on its mortgage.

When the Alarms Go Off

At first, everything seemed fine. The Tenant moved in and started working away, but they soon noticed some odd things happening. Elevators occasionally got stuck between floors, the air conditioning ceased working on the hottest summer days, toilets constantly overflowed and, ugh, the toilet paper often ran out. Hmm, were the Landlord and Property Manager perhaps cutting corners and neglecting crucial maintenance and repairs?

But this was just the beginning. Turns out, the Landlord had failed to pay the mortgage on the building for months and it had been repossessed by the bank.

Unknowingly, the Tenant had signed a long-term Lease with a financially distressed Landlord. It was now on the hook for rent payments to some bank it had never even met. The Tenant had even invested some of its own money into customizing the space,

Five Things to Watch Out For

We’re just getting warmed up now. Here are a few more little things that can go wrong when leasing office space from a financially distressed Landlord:

  1. The Landlord might not have proper insurance coverage, which could leave you as the Tenant liable for any accidents, injuries or deaths that occur on the property. And if the building catches on fire or floods, you could lose all of your IT equipment and office furnishings, without the Landlord’s insurance covering your losses.
  1. When it comes to responding to maintenance requests and/or making repairs, the Landlord will probably be unreliable. If something goes wrong with the building, you could be stuck waiting weeks or even months for it to be fixed. That could severely disrupt your business operations and whack your bottom line.
  1. The Landlord may be in legal trouble or facing lawsuits, which could lead to liens being placed on the property. You might not be able to renew or expand your Lease or could perhaps be forced to vacate the property altogether.
  1. Unfortunately, your own business’ reputation could get sullied by association, because the Landlord may have a poor reputation in the community. If people think that you’re associated with a shady or disreputable Landlord, they may think twice about doing business with you.
  1. Finally, leasing office space from a financially distressed Landlord can be stressful and time-consuming. You may find yourself constantly worrying about the stability of your Lease and the security of your space. It can takes a toll on your own mental health and well-being.

The Six Worst Things That Can Happen

In case you’re still not convinced about doing business with a financially distressed Landlord, read about five bonus but common surprises that could be in store for your company.

  • You could be left with an unfinished or substandard office space. If the Landlord runs out of money or goes bankrupt before completing your build-out, you may be stuck in no-man’s land with a space that doesn’t meet your needs or is even unusable. This can be a significant problem, especially if you’ve already invested time and your money into the space.
  • It’s uncomfortable but you could be without essential amenities or utilities. If the Landlord is unable to complete the build-out, you may be left without HVAC systems, lighting or plumbing. This can even make your office space unsafe to work in.
  • You might get kidnapped into paying ransom for additional construction costs. If the Landlord runs out of money during your build-out process, it may ask you to
    cover the cost of completing the Tenant Improvements. This can be an unexpected and significant expense, especially if you have not already budgeted to pay for the final build-out yourself.
  • After all of this disruption, your move-in date could be delayed or cancelled altogether. If the build-out is not completed on time, you may be forced to delay your move-in date plus incur 150% to 200% Holdover Rent at your current building. In some cases, the Landlord might cancel your Lease altogether if it can’t complete your build-out in a timely manner.
  • It really pains me to tell you this one. Your $5,000 or $50,000 Security Deposit will probably go up in smoke, just evaporate, never to be seen again. You won’t get it back, even after you vacate the building upon the expiration of your Office Lease. Your former Landlord will likely spend your Security Deposit and probably will not present it to the foreclosing Lender. It’s just gone.
  • To add insult to injury, you could face legal or contractual issues. If the Landlord is unable to complete the build-out, you may face legal or contractual issues related to your Lease. Ultimately, you may be able to terminate the Lease and seek damages; however, this can be a time-consuming and hugely stressful process.

The Moral of This Story

All things considered, leasing office space from a financially distressed Landlord can be a risky and unpleasant proposition, especially if the Landlord is unable to complete the build-out of your space. If you do decide to take the risk and plunge ahead, be sure to have a solid legal and financial plan in place to protect yourself from these potential issues.

So the moral of this story is clear: leasing office space from a financially distressed Landlord can be a foul-tasting recipe for disaster; it’s wiser and better to say no.

But, if you’re feeling especially bold and brave and want to take your chances, just make sure you have a good sense of humor, extra extra patience and an even better lawyer on speed dial.  Keep plenty of Pepto Bismol and Advil on hand.

My best, 

Will

How We Help You Deal With Distressed Landlords

To avoid doing business with distressed Office Landlords and Sublandlords, contact William Gary, MBA, MIM, at cell +1 303-901-1108 or wgary@MacLW.com to confidentially discuss your needs for either Direct or Sublease Space.

One tool that we recommend to protect Office Tenants is to secure a Subordination, Non-disturbance and Attornment Agreement (SNDA) from your Landlord’s Lender. In the event of a foreclosure, a suitable SNDA would prevent the Lender from changing your Lease, including your rental rates. Switching your cash Security Deposit over to a Letter of Credit (LOC) just might prevent you from losing your Security Deposit altogether in the event of a foreclosure.

We can help you to make the best choices for your next new Lease, Lease Renewal, Expansion or Downsizing. As 100% Tenant Representatives, MacLaurin Williams Worldwide and our offices can professionally advise you in leasing Office and Industrial space in nearly eighty (80) major markets, including in Boulder and Denver, Colorado, and in Round Rock and Austin, Texas.