Many landlords have deep pockets and have weathered the economic storm, but some ownerships (including sublessors) might be on thin ice. Therefore, tenants out there should be more cautious than normal and develop a strategy to mitigate their real estate risk when securing space in today’s environment.

Tenants who are currently securing space should pay special attention in certain areas of the letter of intent and lease document, to ensure the ability to stay in their space should the landlord or sublandlord default on its financial obligation. Furthermore, making sure tenants protect themselves against the loss of any economic concessions that are due including tenant improvement funds. Below are three key risk factors tenants need to understand and protect against when leasing space;

1. Subordination Non-Disturbance Agreement (SNDA)

This document is an agreement betweenthe tenant and the lender of the real estate. The bank will honor lease terms negotiated between tenant and landlord should the bank repossess the property. Without an SNDA, the bank does not have to honor a tenant’s lease if it takes control of the property. Banks may remove the tenant or negotiate a higher rate if the tenant desires to stay in its space. SNDA documents are often difficult to obtain for smaller companies. However, companies who lease above 7,000 – 10,000 square feet, invest a lot of their own money in tenant improvements, or just can’t afford any type of business disruption, should secure this type of agreement no matter how small.

2. Recognition Agreement

Sublet rent might be a favorable concept but could place the company in a risky position of business interruption should the sublessor default, and might make the subtenant think twice. Similar to the SNDA, except this agreement is between the subtenant and the landlord. The landlord will honor sublease terms negotiated between subtenant and sublandlord should the sublandlord default on the master lease. Without this agreement, the landlord can boot the subtenant out or demand a higher rate than the discounted sublease rate. This document is often times more difficult to obtain compared to an SNDA. Why? The landlord is already receiving its rent from the master tenant and has no motivation to honor a discounted rate. Building owners prefer to leave the terms up to fair market value if the master tenant defaults. Often times, fair market value will be higher than sublet rent.

3. Rental Offset

This provides protection to any space user from losing its tenant improvement allowance, security deposit, or any other economic concession it has negotiated. When tenants or subtenants execute a lease or sublease they expect a certain amount of tenant improvement dollars, the return of a security deposit, etc. What happens if the landlord or sublandlord can’t cough up these funds? Aside from the normal legal proceedings which can be lengthy, the tenant or subtenant is out of luck. Consider negotiating rental offset language. Users can counterbalance improvement dollars or a security deposit it is entitled to but has not yet received from its monthly rental payments.

Certainly it’s not favorable for occupants to use their own money to improve the real estate and offset these expenses from its monthly rent, but the alternative of chasing a defunct entity is not any better. Furthermore, tenants who do obtain a SNDA agreement should make sure this agreement honors the rental offset provision.

Keep in mind companies looking to sublease a small space at a highly discounted rate might not obtain all the protection recommended herein. On the other hand, companies that have some muscle to flex or will be in a critical position if the worst case scenario happens, must understand the risks involved when securing space in these current economic times. Tenants who protect themselves by using the above recommendations will be in great shape in today’s leasing market by drastically reducing their risk. One more thing: asking for a SNDA or Recognition Agreement takes time. Request it up front during the onset of the lease or sublease negotiations.