Jessica Estes / April 23, 2021
If you own commercial property, the importance of having financially viable tenants in your property cannot be overstated. Obviously, a stronger tenant is more likely to pay rent and pay it on time – but the financial health of your tenant also impacts your ability to get favorable terms in the event of a refinance and can have a material effect on the price you get for your asset when it’s time to sell. That being said, things are not always what they seem in commercial leasing.
Let’s say that you have a 7,000 SF vacancy in an office building you own and your broker brings you an offer from a well-known company. You’re excited to be leasing to a Fortune 500 firm with a household name and commercials seen on your TV. You’ve spent months negotiating an LOI, dealing with contractors and architects, negotiating tenant improvement allowances, rates, and term. Then the lease draft comes back from the tenant’s attorney and the legal signing entity has been changed to a holding company. You think to yourself, what difference does it make? The sign outside of my building will say “BIG HOUSEHOLD NAME,” so they’re my tenant. Not so fast. That LLC may not actually have any assets, and your lease is not, in fact, with the big company whose sign is on your building.
So, what now?
I spoke with Jason Howe, a Partner at Preti Flaherty who specializes in Business Law and Real Estate, to get his take on the matter. His first piece of advice? “Don’t freak out. This is a conversation, and when a company uses a shell entity as party to a lease, you as the landlord are very seldom the liability they’re hedging against.”
There are a number of reasons that a large company might use shell entities on their leases – which we won’t get into here – but there are ways to solve for this dilemma. Three of the most common solutions are:
Attorney Howe also advised that you do some research in regards to the entity listed as tenant on your lease. Is the person who puts pen to paper authorized to sign on behalf of the LLC? An attorney can search for or request corporation records to ensure that the signor has the authority to execute documents that financially bind the company. Otherwise, you may end up with a non-binding lease.
Ideally, these details are ironed out as you negotiate the LOI, but sometimes surprises happen when the lease document is being reviewed by landlord and tenant’s counsel. It is important to ensure that you thoroughly review each document and have a qualified professional to call if you face a situation like this one.
Contact Jessica today:
Jessica Estes – Partner, Designated Broker