Over the last few years corporate space downsizing and hybrid working trends have created a precarious ownership environment for some office building landlords worldwide. When office buildings don’t have enough tenants paying rent, there is a real possibility that a foreclosure could occur.
Most landlords don’t own their buildings outright. Instead, they have a loan from a bank or some other type of financial institution, and if the landlord is unable to pay the monthly mortgage the lender could foreclosure on the property.
Lenders have the choice of whether to foreclose on the building or not when the loan is in default. While some lenders do foreclose, many decide to modify the loan terms with the existing ownership to avoid a foreclosure situation. So even if your building is 50% vacant, a foreclosure isn’t necessarily going to happen as the lender might work out new loan terms with the current landlord.
If your company is leasing space in a building that is (or might be) facing foreclosure, here are some tips to keep in mind:
Know Your Options
Review your lease to make sure there is a non-disturbance clause. This clause protects the tenant from being evicted from the property, provided that the rent is paid up to date and no other lease defaults exist. This is a fairly standard clause in most leases.
In most cases, the foreclosing entity wants to keep the tenants in the building as long as they are paying the rent each month. The lender uses this money to pay the building expenses. However, there could be instances in buildings with very low occupancy where the lender might consider closing the property down or try to sell it to a single user or developer, in which case they might want to try to cancel the existing leases to complete their objectives. In this instance you are not protected if you do not have a non-disturbance clause in your lease.
Changes in Ownership
In many cases, the foreclosure process does not immediately disrupt the day-to-day operations of businesses within the office building. However, changes in ownership or management could occur, and tenants may need to communicate with the new owner or property manager regarding lease agreements, rent payments, maintenance issues, and other matters. If the lender forecloses, a notice with new payment instructions for the rent will be delivered to your notice address. At this point, the new payee entity should be contacted for verification and no additional funds should be sent to your prior landlord, including any past due amounts when your company received the notice.
Should You Renew?
Many tenants have renewed leases in buildings that have been foreclosed on so your company shouldn’t necessarily rule out that option. While lenders aren’t necessarily the best landlords, they almost always use a third-party management and leasing firm to handle the day-to-day operations, so it’s possible that your company might not notice much of a difference in the ownership change. Given the softness of the office leasing market, it might be worth shopping around for a building with a more stable ownership situation.
What About Your Security Deposit?
If your lease is expiring and your company intends to move out, check your lease to see if a security deposit was paid to the landlord. If a deposit was paid and your leased space is in good condition, the landlord is responsible for refunding your security deposit. If a foreclosure situation is pending, you should consider shorting your last monthly rent payment by the amount of the security deposit. You should consult an attorney before deciding so they can outline the legal risks of this strategy. Otherwise, you will be relying on either a financially distressed landlord or an irritated lender to refund your security deposit after you move out¾which isn’t a great option in either case. Keep in mind that the landlord doesn’t have your original deposit sitting in a bank account until your lease expires. On the contrary, security deposits paid to the landlord at the beginning of your lease are immediately spent to pay for building expenses, tenant improvements, taxes, etc.
If you find yourself in a foreclosure situation, contact one of our commercial real estate experts for guidance. Find an expert in your area here. All ITRA Global members exclusively represent tenants and provide principal-level expertise based on transparency, integrity, and trust. With members worldwide, ITRA Global is uniquely positioned to meet all your real estate advisory needs.
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Article submitted by Wayne Teig / ITRA Global Minneapolis-St. Paul, Minnesota USA
