Get Right to Reject Undesirable Prospects After Tenant Breaches Lease

Unfortunately, at some point you may have to evict a tenant or pick up the pieces if a tenant abandons its space. It’s hard enough to have to regroup and find a new tenant quickly. But being forced to take on an undesirable tenant—one with a bad credit rating or that doesn’t help the synergy you have established at your shopping center or some other part of your business plan—is worse. And if you’re in one of the many states that force owners to try to lessen—that is, “mitigate”—their damages when a tenant defaults, that could happen. If you plan to sue the defaulting tenant, you may fear that a court will view your rejection of any applicant as a failure to mitigate damages. And that could jeopardize your right to collect full damages from the defaulting tenant and recover all of the rent due while the space was vacant.

Follow these tips for negotiating limitations on the type of prospective tenant to which you must relet and give yourself the right to reject a prospective tenant with specific characteristics. Ask your attorney about adapting our Model Lease Clause: Limit Your Duty to Relet After Abandonment or Eviction for your leases.

Veto Inappropriate Prospective Tenants

By getting the right to reject specific prospective tenants, you can make it clear that the rejection doesn’t mean you failed to satisfy your duty to mitigate. This means you can wait to relet the space until you find an acceptable new tenant without jeopardizing your right to damages. Negotiate terms that allow you the right to reject prospects that:

Have insufficient resources, experience. Give yourself the right to veto any prospect that—in your opinion—doesn’t have sufficient financial resources to run a business. For example, you’ll want to be able to say no to a prospect that has only enough funds to pay a few months’ rent. You’ll also want the right to turn away a prospect with inadequate experience to operate a business in a first-class manner. For example, you’d probably be leery of a start-up restaurant where the owner has no previous experience running a restaurant—or even working in one [Clause, par. b(5)].

Disrupt tenant mix. You may also want the right to reject a prospect that doesn’t fit into the tenant mix in your shopping center or building. Tenant mix is crucial in shopping centers. It’s also crucial in certain office buildings—for example, a building where all tenants are in the same line of business. If you have a shopping center or a specialized building, you’ll want your lease to say that you don’t have to relet to a prospect that would disrupt the tenant mix [Clause, par. b(7)(A)].

Violate other tenants’ leases. You may have agreed to lease restrictions—such as exclusives—with other tenants in your shopping center or office building. Be sure you can say no to any prospect that would violate any restriction or covenant that’s in the lease of another tenant in the building or shopping center [Clause, par. b(7)(B)].

Are incompatible with building or center or hurt its reputation. If you have an upscale shopping center, you won’t want to rent to a bargain-basement type of store that will clash with your shopping center’s reputation. So give yourself the right to turn down prospects that are incompatible with, or might hurt, the reputation of your shopping center or office building [Clause, pars. b(7)(C) and (D)].

Demand below-market rent. You may want to refuse an otherwise acceptable prospect that’s demanding a below-market rent. True, you might be able to recover the lost rent from your tenant as damages. But a below-market lease can hurt your building’s reputation. To avoid this problem, give yourself the right to reject a prospect demanding a rent that’s below the current fair market rent for similar tenants—such as other retailers or restaurants—in comparable buildings or shopping centers [Clause, par. b(3)].

Demand unacceptable lease terms. A prospect may demand lease terms that you find unacceptable and contrary to your current leasing policies. For instance, your standard lease requires a tenant to get your approval of any sign it plans to display. But the prospect demands the right to put up any sign it wants. For protection, give yourself the right to refuse to relet to a prospect that demands any lease provision that’s contrary to any of the current leasing policies in your office building or shopping center [Clause, par. b(4)].

Demand remodeling or alteration of space. An otherwise acceptable prospect may demand that you make certain alterations to the space before it moves in. You don’t want to pay for these alterations. Give yourself the right to reject any prospect that wants remodeling or alterations unless either the prospect or the tenant pays for the alterations in advance or you believe that the alterations are financially justified—that is, the rent from the substitute tenant will be more than enough to cover this added alteration expense [Clause, par. b(6)]. This gives you the flexibility to spend money on the prospect if you want to—but you’re under no obligation.

Restrict When You Must Offer Space

You’ll also want to include other provisions that limit when you must offer the vacant space for rent. Spell out these scenarios where declining to look for a substitute tenant doesn’t violate your duty to mitigate:

You don’t have possession of space. There may be times when a tenant is fighting your eviction lawsuit in court and the matter isn’t resolved yet. You could lose the lawsuit. Must you look for a substitute tenant while the lawsuit is pending? You won’t have to if the lease says that you’re not required to pursue any substitute tenant until you get possession of the space. That means that any legal dispute between you and the tenant must be fully resolved before you must begin to look for a substitute tenant [Clause, par. b(1)].

You have other vacant space you want to fill first. You may have vacant space that’s similar to the tenant’s space. And you may want to fill that other space before you relet the tenant’s space. But if you fill the other space first, a tenant may argue that you didn’t mitigate damages. Give yourself flexibility by adding lease language that says you’re not obligated to relet the tenant’s space if you have suitable similar space elsewhere in the building [Clause, par. b(2)].

The tenant may demand that you define “similar” space in the lease. For example, you have to spell out where or how big the similar vacant space must be. Try not to give in on this point. If you must, keep the definition as broad as possible.