How to Best Screen Commercial Tenants

With an increase in office environment vacancies due to hybrid work changes, it’s also increasingly important to evaluate your commercial tenants.
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Office buildings are currently in a state of transition. With the ever-evolving pandemic restrictions, many organizations are contemplating who gets to come back to the office and who stays home. Truth be told, most employees going through this transition now will likely find themselves somewhere between being in the office full-time and being at home full-time. Ultimately, this results in an increase in vacancy rates.

As such, landlords and their agents will develop creative ideas for keeping the extra space occupied and rent money rolling in. While creativity will lead to more potential occupants, landlords still need to be selective with their potential tenants.

Incompatible or Prohibited Uses

Property ownership comes with many responsibilities. The landlord as owner of property is ultimately liable for the condition that the tenant leaves a property, including covering damages or repairs and the future marketability of the property. If a tenant is particularly damaging, and it conflicts with applicable zoning and covenants, or exclusive uses or becomes a nuisance, the costs for a landlord can add up quickly.

In addition, local laws might restrict the types of businesses allowed or condition specific uses in certain areas. Certain uses might be prohibited altogether — for instance, a kennel, bar, gas station, or marijuana shop. Sometimes local zoning might permit the use, unless the use is prohibited by private covenants imposed on the property.

Upsetting Existing Tenants

Tenant turnover can be exhausting. There are many benefits to keeping a reliable client for as long as possible, if they abide by their lease and pay rent on time. Good landlords attempt to attract tenants that complement the existing or desired tenant mix. Those that end up renting to less than ideal clients risk upsetting the current tenants and being portrayed as unfair or unattractive. Be selective with potential candidates to ensure that existing tenants remain satisfied, and that landlord does not inadvertently breach an agreement with other occupants sharing the property.

Financially Questionable Occupants Lead to Financial Burdens

Unfortunately, some prospective tenants are not going to succeed. If a prospective occupant is unable to demonstrate financial ability, then the landlord should not rent the space to them. While there is a contractually obligated to pay rent even if the business fails, the landlord may soon be facing the headache of replacing another tenant, paying a commission, expending funds for tenant improvements, and legal proceedings to recover possession.

Of course, landlords hate empty space, but there is always the risk of making a bad situation worse. Landlords often consent to the assignment or subletting to maintain a steady stream of rent payments. An occupant who cannot make those payments does nothing to better the landlord’s position. A financially strapped business is more likely to:

  • Cease making payments
  • Fail to maintain the premises
  • Fail to properly insure the premises, placing greater liability on the landlord

The Additional Administrative Costs

Landlords or property managers must keep track of the obligations imposed on the parties under their lease. An inability of the landlord to control the transfer prevents from landlord from ensuring that:

  • They are collecting rent from the proper party
  • The proper party is insured
  • The proper party is given notices as required under the lease and by law

Often, the landlord will pay someone to keep track of this information. Without landlord review on the front end of the transfer, the landlord must constantly have someone investigating properties to confirm that their records are accurate.

Generally Making a Bad Situation Worse

Renting property comes with inherent risks. Landlords are always searching for ways to minimize these risks. Extra caution is imperative when screening potential occupants. Lease agreements should require landlord approval. If landlord approval is delegated to a tenant, then think about conditioning such consent on factors such as the financial strength of the tenant, compliance with laws, providing landlord prior notice, and whether the transferring tenant is released from liability.

 

Robert FischerRobert Fischer is an attorney at the Fischer Law Office. With two decades of experience, Fischer is one of Colorado’s leading commercial real estate attorneys. He provides a full range of transactional legal services for professionals looking to buy, sell or lease commercial real estate.

Categories: Industry Trends, Real Estate