Use Three Key Lease Sections in Rent Acceleration Strategy

So they can enforce the lease terms they’ve negotiated with their tenants, office building and shopping center owners build remedies into their agreements. But even though an owner’s remedies can redress many situations, it still behooves you to give your tenant a strong incentive to stick to the lease terms in the first place—especially for big-ticket obligations like paying rent.

Getting the right to accelerate the tenant’s rent, which allows you in the case of its default to immediately collect all of the rent that’s going to be due through the balance of the lease term without having to wait for it to be paid in monthly installments, can really motivate a tenant. That's because being forced to pay such a large lump sum will probably deal a financial blow to the tenant, which might have defaulted because it’s already having financial problems.

But in order to make rent acceleration work in your favor, you should carefully draft three sections of your lease that will work well together to require a tenant to adequately compensate you for your losses if it defaults on its rent obligation. Consider using the following strategy and adapting our Model Lease Clause: Ensure You Can Accelerate Tenant’s Rent in Case of Default, below, for your leases.

Prepare for Common Compromise Suggestions

While the idea behind rent acceleration is fairly simple, it can be complicated to get a tenant to agree to it. “Rarely will a tenant say that by its default the landlord will get every single payment due to it for the balance of the lease term—which could be several years,” says Ohio commercial real estate attorney Abraham Lieberman. Consider working with the tenant by agreeing to one of the following, if it’s feasible for you:

Agreement #1: Discount. Sometimes, an owner and tenant will agree that in the event of a default the accelerated rent will be discounted to present value [Clause, sec. 2, par. 1]. “In other words, if the landlord receives the money up front, there is a discounting factor for interest,” Lieberman explains.

Agreement #2: Mitigation of damages. “If the tenant has some negotiating power, it would ask that the landlord make efforts to mitigate the landlord’s damages by re-renting the space, and the defaulting tenant would be responsible for only the rent due until the new tenant’s obligation to pay rent commences,” says Lieberman.  

Agreement #3: Fair market value calculation. A savvy tenant would suggest that the owner get as an accelerated amount the difference between what the rent is under the lease and the “fair rental value of the premises on the market.” So the only way the owner would collect is if the rent under the lease exceeds market value, Lieberman warns.

Solution to Strong Tenant’s Leverage

As with many lease provisions, negotiations over rent acceleration will differ depending on the strength of the tenant. “A strong tenant will probably say no to a rent acceleration clause,” Lieberman warns, “taking the position that it can’t be certain that the owner won’t quickly re-rent the premises. The tenant fears that it’ll pay the entire rent amount and a short time later the landlord will get a new tenant, providing the landlord with a double recovery," he explains.

Lieberman suggests asking the tenant to agree to a monthly check-in; it’ll pay you what is reserved under the lease if, after using reasonable efforts, you haven’t found a tenant. The compromise means that, basically, there is no real acceleration, but the tenant still pays you—just on a monthly basis.

But if the tenant won’t agree to a monthly payment arrangement, there is a way to meet halfway: You must find a new tenant and when you enter into a lease with it, you and the defaulting tenant will look at the difference between what the defaulting tenant is obligated to pay and what the new tenant is obligated to pay; the difference will be accelerated and paid to the owner immediately—as long as it’s discounted to present value.

Make Lease Provisions Work Together

Used together, three sections of your lease can protect your interests when a tenant defaults and you want to accelerate its rent as a result.

Section #1: Remedies. The remedies section of your lease can help you do two important things:

Increase security deposit. Lieberman recommends getting an ample security deposit if an owner is at all concerned about a tenant’s ability to pay rent. Make sure that the security deposit is maintained at the same level throughout the lease term and get the right from the tenant to require it to replenish the deposit if you have to dip into it, he adds [Clause, Sec. 1, par. 3]. That way, you’ll at least have a healthy amount to offset your loss if the tenant defaults. You can cut at least some of your losses with money from the security deposit.

Secure a right to possession. Although acceleration clauses are usually included in most leases, many owners ultimately don’t worry about whether they’re going to collect the balance of the term or, if they don’t, how much they will ultimately collect after the situation is resolved, says Lieberman. Rather, the main concern ends up being how to get the tenant out of the space so it can be rented to a replacement tenant. That’s why it’s important to negotiate a default provision that’s strong enough so you can recover possession pretty quickly, Lieberman stresses [Clause, Sec. 1, par. 1(b) and (c)].

Some owners adopt a “wait and see” attitude, but make sure to include language saying that you can take possession of the premises without terminating the lease [Clause, Sec. 1, par. 1(c)]. That way, you can collect rent and apply it to what’s owed by the tenant, Lieberman suggests.

Practical Pointer: A strong default provision is a better alternative to using self-help, which sometimes results in a tenant suing the owner when it perceives a problem. “While there’s too much danger in self-help because it’s prone to tenant claims, you can use it as a stick to get the tenant to vacate in a timely manner,” Lieberman notes [Clause, sec. 1, par. 1(a)].

Section #2: Damages upon termination. Your damages upon termination section should at the very least spell out two things that the tenant owes upon default: (1) accrued rent that is payable; and (2) damages. In an ideal situation, damages would take the form of an acceleration amount that is the balance of all the rent that would have been payable under the lease “but for” the termination, and discounted to present value [Clause, sec. 2, par. 1]. For some tenants, and especially strong tenants, you may have to negotiate something less onerous, like the compromises above, but make sure that your lease language spells out exactly what you’ve agreed upon and the methods you'll use to calculate the amounts owed.

Practical Pointer: Reserve your right to continue collecting rent after the lease has been terminated. It’s crucial to indicate that by terminating the lease, you’re not terminating the rental obligation of the tenant. A court could take the position that you terminated the lease and so the tenant isn’t obligated to pay rent above what has accrued up to that point, Lieberman warns. “Make sure the lease indicates that you can continue to collect rent,” he advises.

Section #3: Re-letting of premises. Use the re-letting of premises section of your lease to make the tenant pay for new improvements. If you’re planning on mitigating, take into account the fact that you might need to make expensive improvements to get a new tenant; therefore, if there’s going to be mitigation based on what the new tenant is paying, make sure the cost of remodeling the premises for the new tenant’s needs comes off the top of what you get from the old tenant—and don’t credit that amount against what the old tenant owes, says Lieberman [Clause, sec. 3, par. 1].

Insider Source

Abraham Lieberman, Esq.: Member, O’Toole, McLaughlin, Dooley & Pecora, 5455 Detroit Rd., Sheffield Village, OH 44054; www.omdplaw.com.