How to Make Tenant Responsible for Loan-Default Damages

Q: I defaulted on the mortgage loan for my office building because a major tenant didn’t pay its rent, leaving me short of money to make a loan payment. It seems only fair that the delinquent tenant should have to reimburse me for the loan-related damages I had to pay to the lender. But my lease doesn’t address recovering loan-related damages from a delinquent tenant. Have I missed the chance for reimbursement?

A: Most likely, but check with your attorney to see if there is anything you can do to recover from the tenant. In future leases, make sure that you address who’s responsible for paying loan-related damages if the loan default was caused by the tenant’s lease default. Loan-related damages are a form of “consequential” damages, which 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.

There are two ways to set up this right. First, 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. Then, get the right to add your loan-related damages to any other damages that the lease requires the tenant to pay if it defaults. 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.

To add these points, put the following language in the lease clause that describes your remedies if the tenant defaults. Show this language to your attorney before using it.

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.