Strengthen Landlord's Self-Help Right to Protect Space, Avoid Wasting Time in Court

A tenant’s lease violation is never good news for commercial real estate owners, but each type of violation has different consequences—ranging from annoying to disastrous. If your lease doesn’t give you a “self-help” right, you might find yourself facing the difficult situation of not being able to fix problems that the tenant is responsible for, and incurring unnecessary damage and costs in the meantime, and wasting time and energy. Here’s what you need to know about negotiating and drafting a self-help right that will protect your interests and property.

Reap Benefits of Being Able to Step In

“A self-help right is important because it allows the landlord to deal with a tenant’s default fairly quickly, as opposed to suing a tenant, which will take time through the court process—regardless of whether the landlord or tenant wins—and might not be worth it in the end,” explains Toronto attorney Stephen J. Messinger. He notes that self-help is also a better option in many cases than termination of the lease--for example, if the tenant is in default with respect to making repairs. In that scenario, if the landlord sends a notice to the tenant to do certain repairs and the tenant fails to do them, the landlord can try to get an injunction to mandate the repairs, or get the right to terminate the lease for nonperformance of covenants. But a self-help right that allows the landlord to take matters into its hands and complete the repairs may be easier.

There are risks, however, Messinger warns. For example, if the landlord spends a hefty amount for repairs, it will have to collect that cost from the tenant, which could roll over into another default situation if the tenant refuses to pay. But self-help is a great remedy in many cases because it allows the landlord to control what’s going on, whereas if there is no self-help right the landlord can’t enter the premises—as the tenant has exclusive possession—and so the landlord may have to go to court again, Messinger points out.

If you’re concerned about serious pushback from a tenant, don’t hesitate to negotiate this point. Messinger says that a self-help right is commonly used in commercial leases. And a self-help right won’t necessarily mean more work for you in the case of a default because you should specify that it’s a remedy that’s available to you, but you’re not required to use it. In fact, since most landlords don’t like to get involved unless a lack of repair is causing possible further damage, they’ll give the tenant a “cure” option—that is, a reasonable period of time to fix the problem, before stepping in, which saves time and money for both sides.

Practical Pointer: If you negotiate a cure period with the tenant, give it five to 10 days to either cure or begin curing the default. And require the tenant to prove that it is diligently curing. Remember to carve out exceptions such as an emergency situation in which case you would be able to go into the space as soon as possible. Remember that issues involving repairs that could cause physical damage to your property aren’t the only things that can be subject to a self-help right. Non-continuous operation is a default that you can require the tenant to cure within, say, 24 hours. Be prepared to negotiate according to the bargaining power of your tenant: Tenants with some clout will want the right to cure, notice of the default, and a reasonable opportunity to cure or commence to be cured before the landlord steps in.

Include Nine Key Items in Right

Like our Model Lease Clause: Include Key Items in Comprehensive Self-Help Right, your lease’s self-help clause should cover the following items that will render your self-help right airtight in the event of a tenant’s lease violation:

Trigger right if tenant commits any lease violation. Some leases allow the owner to use the self-help right only if the tenant doesn’t pay rent or commits a “material”—that is, major—violation. But you’ll want the self-help right to apply even if the violation is minor. So make sure you say that the self-help right is triggered when the tenant fails to comply with any lease obligation or commits any lease violation—not just a monetary or material one [Clause, par. a].

Don’t waive other rights. Say in the lease that the self-help right is in addition to all your other rights and remedies under the lease. And make sure you say that you haven’t given up—in legal terms, waived—your right to treat the tenant’s lease violation as a “Default” if the tenant fails to correct the violation [Clause, par. a].

If you don’t clearly spell this out, a tenant may argue that once you exercise your self-help right, you can’t then exercise another right or remedy you have against it, such as terminating the lease or suing for damages. For example, you may want to sue the tenant for damages that were caused by the lease violation before you fixed it.

Don’t obligate yourself to exercise right. Say in the lease that you’re not obligated to exercise your self-help right [Clause, pars. a, d(1)]. Otherwise, the tenant may argue that your failure to step in to fix a broken window, for example, is a lease violation. And add that you won’t be responsible for any damages sustained by the tenant or any third party if you fail to exercise your self-help right [Clause, par. d(2)].

It’s also a good idea to say that your failure to exercise the self-help right won’t relieve the tenant of its lease obligation to indemnify you—that is, defend you and pay your costs—in connection with any claims brought against you that were the tenant’s fault [Clause, par. d(3)]. So, for example, if you didn’t fix the broken window on the tenant’s behalf and a tenant’s employee sues you after being injured by a criminal climbing through the window, the tenant would have to indemnify you.

Limit time you must wait to perform self-help. Typically, leases may make you wait as long as 30 days after you’ve given the tenant notice of its lease violation before you can sue the tenant for defaulting on the lease. But if you have a self-help right, you don’t want to have to wait that long after you’ve given notice that you’ll exercise this right. You’ll want to perform the self-help relatively quickly to avoid further damage to the space.

A better solution is to give the tenant five days to correct the lease violation (after you’ve notified it that you’ll exercise the self-help right). After that you can perform the self-help. Also say that in an emergency you can exercise the self-help right immediately—without any notice [Clause, par. a].

Get right to bill tenant for all your costs. Get the right to bill the tenant for any money you pay or expenses you incur in connection with the self-help [Clause, par. b]. Your lease should provide that additional rent includes not just the usual items like taxes and utilities, but also the costs that the tenant is responsible for because of work done by the landlord on the tenant’s behalf, says Messinger, who recommends including this in the repair section of lease. “If the landlord does the work, it should charge the tenant for the reasonable cost of doing the work, which includes materials, a 15 percent administrative fee for arranging estimates or taking other related efforts, plus legal fees if attorneys are required, and the cost of an auditor for those retail tenants whose default has to do with incorrectly reporting percentage rent figures, or not reporting them at all." Financial defaults—not just those involving physical property—need to be taken into account when drafting a self-help clause.

You may also want to try to collect interest on this money. The interest should run from the date you pay the amount or incur the expense until the date the tenant pays you; it’s an incentive to get the tenant to repay you quickly [Clause, par. b].

Practical Pointer: Be aware that a tenant will try to angle for the right to ensure that you got an appropriate number of appraisals for the work, and did it with a company that’s at arms’ length, Messinger cautions. While that may be fair, push back on the tenant’s request that the cost be paid over a period of time; insist on the amount being repaid within 30 days. 

Get right to bill monthly or immediately. Say in the lease that you can bill the tenant either monthly or immediately—at your option [Clause, par. b]. Otherwise, if you don’t send the bill immediately, the tenant may argue that you waived your right to bill it for your self-help costs.

Require tenant to pay you promptly. Set a deadline for the tenant to repay you after it gets your bill. Messinger typically sets it at five days after the bill is sent [Clause, par. b].

Make self-help costs “additional rent.” Make sure you say that the money the tenant owes you is “additional rent” [Clause, par. b]. That way, you’ll have an easier time suing the tenant if it doesn’t pay you by the deadline. Courts in most states offer quick procedures—often called “summary proceedings”—for owners that sue for rent or additional rent. So owners typically have a faster and easier time suing a tenant for additional rent than they do trying to make a court force a tenant to perform a lease obligation. And the tenant’s failure to pay additional rent would be considered a material lease default. So you can evict it.

Get right to collect for insurance damage. One lease violation tenants often commit is failure to pay their insurance premium on time. If a tenant commits this lease violation and you step in and pay the premium, you’ll want to be able to recover more than the amount of the premium. You’ll also want to recover any damages you incur because of the lack of insurance. So have the self-help clause allow you to recover the amount of any uninsured loss or damage to the space during any period when the tenant didn’t pay the premium [Clause, par. c].

Make sure the security deposit clause gives you the right to make withdrawals from the security deposit to reimburse yourself for these self-help costs if the tenant doesn’t pay you.

Insider Source

Stephen J. Messinger, Esq.: Partner, Minden Gross LLP, 145 King St. W., Ste. 2200, Toronto, Ontario
M5H 4G2; www.mindengross.com.