You negotiate a good deal, and move into a clean, bright building. You're ready to reap your reward for many months of hard work. You're especially happy that you won't have live through another relocation until the lease expires, years in the future.
A year later, you're not sure you made the right decision. The elevators start to break down. Security services are cut back. Paint starts to peel. The place starts looking a little dingy. The landlord is having trouble paying the mortgage, and doing everything possible to reduce expenses.
You're not happy. Then things get worse. The landlord goes bankrupt and defaults on the mortgage. The bank takes over the property. Your lease becomes null and void.
What? Null and void? That's right. A lender who forecloses on a property is not bound to honor the leases signed by the defaulting landlord. Tenants can be evicted, and lose their entire investment in the space.
Maybe you're not worried about this. The real estate market is strong, and landlords are making money hand over fist. Well, worry. During the "landlord's market" of the early 1980's, many properties were
purchased or refinanced at values that assumed rents would keep going up, which
is precisely what's happening now. When the market collapsed and rents plummeted
only a few years later, building income suddenly became insufficient to cover mortgage payments. The result was a flood of bankruptcies and foreclosures. It can happen again.
Fortunately, there are ways to protect yourself against at least some of the dangers presented by shaky buildings. The first step is research. Your broker should do this research, and advise you on the financial stability of any property you are seriously considering. If danger lurks, further steps can be taken in the negotiation of the lease.
For example . . .
Self-Help Remedies allow the tenant to pay for services that the landlord is unable to provide, and to deduct the cost from rent payments.
A Non-Disturbance Clause requires the landlord to provide the tenant with a commitment from the lender that the lease will be honored even if it forecloses on the property.
The lender can also guarantee the landlord's commitment to provide construction allowances and rent abatements.
It is not always necessary to raise these issues. It is not always possible to obtain complete protection in the lease. But it is never prudent to ignore the dangers posed by shaky buildings.