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How Sweet Is the Pot?

By Andrew R. Allen

The underwriting and due diligence involved in determining the financial viability and creditworthiness of a prospective commercial tenant and the methods by which landlords obtain comfort with regard to a prospective tenant's ability to perform its obligations (payment or otherwise) under a lease are concepts that all commercial leasing lawyers come to understand very early on in their careers. If a landlord questions a tenant's creditworthiness but is otherwise willing to move forward with the deal, the landlord will require ' or even the most novice leasing attorney will advise ' that the tenant provide security for its obligations under the lease, which typically takes the form of either an up-front security deposit or a guaranty from a creditworthy entity or individual, and sometimes even a combination of the two.

An issue that is not nearly as developed as that of tenant's security, but one that has become increasingly relevant during and in the aftermath of the recent economic recession as vacancies have forced landlords of commercial space of all types to “sweeten the pot” by offering sizable tenant improvement allowances, rent concessions and other kinds of tenant inducements, is how to address a situation where the tenant has reason to question a landlord's creditworthiness or longevity in the marketplace and must take steps to protect its ability to realize the benefits of the inducements promised. A tenant faced with such a situation in light of the current economic climate must downplay the allure of the offered inducement, take a cynical view of the world and think through how certain events (for example, a landlord bankruptcy or lender foreclosure) could negatively impact its ability to receive the benefit of its bargain.

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