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Steps to be Considered at the Time of Leasing to Protect Landlords in the Event of Default

On Behalf of | Jun 13, 2014 | Business Law

In the first part of the “Ounce of Prevention for the Commercial Landlord” series, Kevin J. Mahoney explains what commercial landlords should consider at the time of leasing.

Financial Statement

Although all landlords are sensitive to the competitive nature of the market, consideration must be given to requiring a prospective tenant to provide a detailed financial statement before a lease is signed. While this may not be necessary with larger, well-established or national businesses, a local business owner, particularly one who is just starting in business, is an unknown quantity and the landlord can best protect himself by requiring detailed financial information. Having this information gives the landlord a significant head-start if it has to pursue the tenant for non-payment of rent. At a minimum, the landlord should know where the tenant banks. This can be accomplished by asking the tenant or by making copies of checks when the rent is paid to the landlord.

Personal Guaranties

Most commercial leases are entered into by corporate entities, many of which are set up for the sole purpose of entering into the Lease.  The corporation has little or no assets and is only as good as the individuals behind it. As such, it is often advisable that the landlord obtain personal guaranties from the actual owners of the business in question. Unfortunately, many commercial landlords stop there and do not consider the fact that most property owned by a husband and wife cannot be used to satisfy a judgment against one spouse only. Therefore, it is usually advisable, when obtaining personal guarantees, that the guaranty of both the husband and the wife be obtained to properly protect the landlord’s interests under the lease.

Security Deposits

Although commonly used in residential settings, many commercial landlords do not require security deposits from their tenants. A security deposit in a commercial lease can afford the landlord similar protection against damage to the premises or non-payment of rent. Although commercial security deposits do not have the same strict requirement under the Maryland Code as residential security deposits, it is still prudent to retain these deposits in a separate account.