Get Right to Recover Loan-Related Damages from Tenant

If you default on your mortgage loan, you may have to pay many types of loan-related damages to the lender to avoid foreclosure. For instance, besides paying the overdue principal and interest on the loan, you may have to pay default interest, late charges, collection costs, legal fees, and any other costs the lender incurred because of your default. And all of those loan-related damages could take a big bite out of your revenue.

But suppose you defaulted on the loan because a major tenant didn't pay its rent, leaving you short of money to make a loan payment. In that case, you would want the delinquent tenant to reimburse you for the loan-related damages you had to pay to the lender. But many leases have a loophole that could end up derailing your chance for reimbursement. They don't address who's responsible for paying loan-related damages if the loan default was caused by the tenant's lease default. That omission could be a big problem for you, warns New York City attorney Robert C. Epstein. Loan-related damages are a form of “consequential” damages, he notes. (That means they're losses you suffered as a consequence of the tenant's default, rather than as a direct or immediate result of it.) If you want the right to collect consequential damages from the tenant, the lease must specifically give you that right, says Epstein.

Add Two Points to Lease

There's an easy way to plug this loophole, says Epstein. Add the following two points to the lease to make the tenant responsible for reimbursing your loan-related damages. Then if the tenant refuses to reimburse your loan-related damages and the dispute escalates into a court battle, you'll be in a good legal position to recover those damages from the tenant, says Epstein:

Point #1: Get tenant's acknowledgment. Have the tenant acknowledge in the lease that if it causes an “event of default” under the lease, you may end up incurring loan-related damages, says Epstein. It's a good idea to also list examples of potential loan-related damages in the acknowledgment. This undercuts a tenant's argument that it had no idea what those loan-related damages might be and that it would be responsible for reimbursing them if its default caused your loan default, explains Epstein.

Point #2: Get right to add loan-related damages to tenant's default damages. Get the right to add your loan-related damages to any other damages that the lease requires the tenant to pay if it defaults, says Epstein. This way, the tenant must reimburse you the full amount of your loan-related damages—it can't argue that they're already covered in the other damages that it must pay you because of its default, he warns.

To add these points, put the following language in the lease clause that describes your remedies if the tenant defaults (but first show the language to your attorney), advises Epstein: CLLI0059

Model Lease Language

Tenant acknowledges that an Event of Default under this Lease may cause Landlord to incur damages under its mortgage and related financing documents, including, but not limited to, the payment of default interest, legal fees, late charges, collection costs, and sums necessary to maintain Lender's yield on the loaned amounts. Accordingly, Tenant agrees that Landlord has the right to add such loan-related damages to the damages for which Tenant is responsible hereunder as a result of an Event of Default.

CLLI Source

Robert C. Epstein, Esq.: Partner, Finkelstein Newman LLP, 225 Broadway, 8th Fl., New York, NY 10007; (212) 619-5400; repstein@finkelsteinnewman.com.