Include 10 Items in 'Event of Default' Definition

Every lease gives an owner certain remedies, such as eviction or the collection of damages, that the owner can use if something the tenant does or fails to do fits the lease’s definition of an “event of default.” But what if your lease doesn’t clearly define what acts or omissions by the tenant are events of default? You could be powerless to do anything even though you think you should be allowed to use your remedies. To ensure that you have remedies against a tenant in situations where you need them—and the power to use them—make sure you include the following 10 items in your definition of an event of default by the tenant in your lease, to make it fully comprehensive.

Default Item #1: Nonpayment

One of the most important events of default by a tenant is its failure to make payments required by the lease. This includes minimum rent, percentage rent, if applicable, and additional rent (such as operating expenses or CAM costs). You want to make sure the clause also defines an event of default to include the tenant’s failure to pay any other money due under the lease, for example, not reimbursing you for an insurance premium you pay on its behalf.

You’ll probably give the tenant a few days’ grace before a nonpayment becomes an event of default. Like most leases, our Model Lease Clause: Draft Airtight Definition of Tenant’s Event of Default, gives five days after the tenant gets notice of its failure to pay [Clause, par. a].

You may have to agree to give the tenant a little more time—say 10 or 15 days—for additional rent payments. While some owners play hardball and don’t give a grace period, most owners start out giving one, especially for good tenants. Ask your attorney about any applicable laws that require you to give notice and if they do, how much. Make sure your clause doesn’t give the tenant shorter notice. If it does, it may be unenforceable.

Default Item #2: All Other Lease Violations

Make sure your definition of an event of default covers the tenant’s violation of any other lease obligation. Again, you’ll give the tenant a certain number of days to cure—that is, correct—the violation before it becomes an event of default. But that number is negotiable. Most leases give a tenant anywhere from 10 to 30 days to cure any nonmonetary violation (that is, lease violations other than nonpayment of rent or additional rent) [Clause, par. b].

Some owners like to make a separate lease violation with a very short cure period—maybe two business days—for the tenant’s failure to have the insurance required by the lease. You may want to do the same. And many leases will make a violation of the assignment/subletting clause a noncurable default.

A sophisticated tenant may argue that it should have more time to cure a lease violation if it’s the type that can’t be cured in the time set. The tenant will want the lease to say that the violation doesn’t become an event of default as long as the tenant is diligently trying to cure it [Clause, par. b (optional)]. If you’re worried about a tenant taking advantage, you can cap the total time to cure at, say, not more than 60 days.

Default Item #3: Chronic Lease Violations

Tenants often commit the same lease violation over and over but then cure the violation before it becomes an event of default. This can be costly and frustrating to you. To stop tenants from chronically committing lease violations, the lease can allow you to treat more than, say, two lease violations in any 12-month period as an automatic, noncurable event of default.

Practical Pointer: You can start off with this hardball position, but expect a savvy tenant to balk. Try to negotiate. One compromise is to say that the automatic default kicks in if the tenant commits the same lease violation more than twice. If the tenant still refuses, you can have the “more than twice” provision apply only for monetary violations, such as nonpayment of rent.

Default Item #4: Tenant Falsifies Report

You may require the tenant to give you certain reports or information during the lease. For example, you may require monthly and annual gross sales reports from a percentage rent tenant. Getting false information can hurt you. But many leases we looked at don’t say that the tenant has committed an event of default if its gives you false reports or information. So make sure you say that the tenant’s falsification of any required information is an event of default [Clause, par. d]. However, expect a sophisticated tenant to demand that the falsification must be “material”—that is, significant.

Default Item #5: Abandonment of Space

You may want the lease to say that if the tenant vacates or abandons the space for a certain number of consecutive days, such as 10, that’s an event of default. You may even want to add that the tenant’s failure to occupy the space by the lease commencement date is a default, too [Clause, par. e]. Both office and shopping center tenants have been known to agree with this.

But some tenants, and especially office tenants, may balk. Keeping this item is generally more important for shopping center owners than for office building owners. Shopping center leases often have a continuous-operation clause elsewhere in the lease that requires the tenant to operate continuously during the lease. So including this item as an event of default works hand-in-hand with the continuous-operation clause. But office building owners generally aren’t as concerned with whether the tenant is in its space, as long as it continues to pay rent and fulfill its other lease obligations.

Default Item #6: Unauthorized Merger, Consolidation, or Transfer

Some owners try to make a tenant’s merger or consolidation with any other entity or a tenant’s transfer of its controlling interest an event of default if the owner didn’t consent to the merger or transfer [Clause, par. f]. Don’t make the mistake of leaving out this language. Although your sublet and assignment clause should clearly require the tenant to get your consent to any merger, consolidation, or transfer, it’s a good idea to also set this out in the event of default definition. It lets you evict quickly if a tenant makes an unauthorized merger, consolidation, or transfer.

Default Item #7: Tenant or Guarantor Dies, Liquidates, or Ceases to Exist

You don’t want to wind up with a tenant or guarantor who no longer exists. So make sure you include the death of the tenant or guarantor (if either is an individual) as an event of default. However, talk with your attorney about how this relates to the guarantor provision in your lease, to make sure that the two provisions don’t conflict. Also, say it’s an event of default if the tenant or guarantor takes steps to liquidate or dissolve its business, or to cease to exist for any reason [Clause, par. g].

Default Item #8: Tenant Can’t Pay Debts

Say that evidence of the tenant’s failure or inability to pay its debts to third parties is an event of default [Clause, par. h]. This is a good way to catch a tenant that’s in a financial tailspin before it files for bankruptcy. Without this language, you may have no choice but to wait for the tenant to file for bankruptcy. What evidence should you say shows a tenant’s failure or inability to pay? You can say in your lease that this evidence shall include, but not be limited to, either of the following events: (1) If the tenant admits in writing that it can’t pay its debts as they come due; or (2) if one or more judgments are docketed against the tenant and not paid, bonded, or otherwise discharged within a certain number of days, for example, 30. Beware that sophisticated tenants won’t agree to this.

Default Item #9: Drop in Guarantor’s Net Worth

If there’s a lease guaranty, say that if the guarantor’s net worth drops below a certain amount, this will be an event of default, at your election [Clause, par. j].

Default Item #10: Catchall

Say that any other lease violation that you describe elsewhere in the lease or in any lease amendment as a “default” is also considered an event of default [Clause, par. k]. You may describe certain events as defaults in other parts of the lease but they may not be mentioned specifically in the event of default definition. Use this catchall to make them part of this definition.