Legal Corner

Written by Jordan on . Posted in Blog

by Stephen C. Duringer, Esq. Question One of my residents wants to replace his roommate with another.  Seems he has already done this, and is just now getting around to asking for my permission.  I don’t really mind, the last roommate was a bit of a flake.  If I want to allow this, what is the best way?   Answer There are several possibilities, but they depend on the type of rental agreement you currently have, and who the parties are.  If your original tenant is the only party to the lease, then you have two possibilities.  The first would be to leave the rental agreement intact, respond in writing to your tenants ‘request for permission’ to sublet by granting permission to sublet to this specific person, and no others.  This keeps the original rental agreement intact, without altering any terms.  It keeps the tenant in a superior position over his subtenant thereby allowing him a remedy to remove him if the subtenancy doesn’t work out, without bothering you.  The second method would be to enter into a new rental agreement, listing both tenants on the agreement as authorized occupants, making them jointly and severally liable to perform.  This is generally a cleaner method for you, keeps it simple, but it elevates the new roommate to the same position as your original tenant, making them equal.  If the original lease included the former roommate, then ideally, you will request and receive a written notice from the former roommate stating that they have moved out of the unit, and that they are relinquishing their right to the security deposit.  Do not just ‘alter’ the original agreement by just adding the new roommates name.  Any alteration to a contract that is not signed and acknowledged by all parties may void that agreement.       Question Most of my challenges come from my residential tenants. I have a question about handling a commercial property situation.  I am about to enter into a ten year term lease for an industrial unit in Southern California.  The unit has been vacant for quite some time now and I don’t want to lose this deal, seems like good tenants are kind of few and far between lately.  We’ve agreed on just about all of the deal points except a couple.   At the last minute the tenant requested the lease be prepared with a subsidiary of his company rather than the parent company, saying it is for ‘tax reasons.’  Additionally, he wants to make the use provision extremely broad rather than specific allowing him to do just about anything in the premises without having to get my permission.   He knows I need to lease the space, but I’m not sure I want to give in on these points, what are my options? Answer Negotiating commercial leases involves a bit of horse trading.  Often, terms that are very important to your tenant may not be so important to you, and vice versa.  Knowing the pros and cons of each deal point allow you to knowingly accept or reject certain risks when considering certain requests.   Generally, parties meet somewhere in the middle of a request, allowing certain concessions, but protecting the interests of the Lessor.  The tenant’s last minute request to substitute a subsidiary in its stead is an attempt to shift the risk away from the financially stable parent company, and obligate a less financially qualified entity, often times a mere shell, with relatively few assets.  Screen the proposed replacement tenant as you would any proposed tenant to determine if it meets your rental criteria.  Is it an existing concern or a new entity recently formed solely for the purpose of signing this lease?  Is it an independent business concern, generating its own revenue stream?  Does it have assets of its own?  Or is it merely a subsidiary of the parent with no independent means of sustainability.  There are many options to offer that would allow the tenant to satisfy his ‘tax reason’ while still protecting the Lessor’s interests.  You may allow the replacement tenant, but require the parent company to guaranty the lease.  The Guaranty can range from an unconditional full term guaranty to a limited guaranty based either on a certain period of time, or a certain maximum exposure.   An increased security deposit adds protection as well.  Options such as an irrevocable declining letter of credit issued by a reputable financial institution allow parties to salvage deals that might otherwise fail.  Use provisions are important for a number of reasons.  It is important that the tenant’s use does not overburden the facility, or interfere with the neighbors.  Certain unacceptable tenant uses may involve high levels of noise, or the use of corrosive or carcinogenic materials, or other toxic byproducts.  As your facility is an industrial complex, parking is no doubt limited.  It is important that the approved uses do not overburden the limited available parking.  Rather than approving a very broad undefined use, it is better to identify the allowed use, but allow the tenant to request approval for a change of use in the event its operations change in the future.   Question I sold one of my apartment buildings and did a 1031 exchange into a single tenant commercial building.  The tenant has been there several years and has a pretty sweetheart lease.  The base rent is way under market, and he has a couple of options to renew that pretty much keeps him under market for the next ten years.  Even though the lease requires the tenant to maintain the property, it looks like hell, not painted, not maintained, kind of a dump.  By the way, he also seems to like paying his rent late, just got last month’s rent yesterday, three weeks late!  What can I do? Answer A building’s value, to a large extent, will depend on the value of the lease in place.  Certainly the price you paid for the building was influenced by the under market lease and the poor condition of the building.  The two options to renew at less than market rents would have negatively impacted the price you were willing to pay as well.  By allowing the building to fall into disrepair, and by paying the rent three weeks late, your tenant has provided you with an opportunity to substantially increase the value of your investment.  Certain defaults, if uncured, will allow you to take legal steps to terminate the existing lease, and along with terminating the current lease, all options to renew would become ineffective.  Go through the lease terms carefully, identify which terms are being violated by the tenant.  Review the requirements for exercising the tenant’s right to extend.  Most options require that the tenant not be in default when exercising an option.  Further, most leases will cancel a tenant’s right to extend if the tenant has been served with three separate notices of default during the preceding term, even if the defaults were actually cured.  Additionally, if a notice to cure a breach is served upon the tenant, and the tenant fails to cure during the relevant cure period, then the landlord will then have the right to file an unlawful detainer action against the tenant and remove the tenant from possession.  Quite often, after the filing of suit, the parties may wish to negotiate a settlement and allow the tenant to remain in possession.  As part of the negotiated agreement, the landlord will want to redraft the lease agreement in a more favorable light, and either eliminate the options to renew, or change them in such a way that would be acceptable to the landlord.  A tenant, failing to cure a notice of breach, has very little negotiating power when faced with the likelihood of being evicted from the premises.     Question With all of the foreclosures going around, I’ve had several applicants with a foreclosure on their credit record.  Is this something I should be concerned with when qualifying? Answer Proper tenant screening involves looking at past credit history, tenancy history and determining the prospect’s ability to perform under the terms of the proposed lease agreement.  A foreclosure on a prospective tenant’s credit report isn’t necessarily an automatic reason for denial.  Many individuals purchased property over the past eight years that clearly were not financially qualified to maintain and own real property.  If the prospect handled the rest of his credit well, no other delinquencies, no collection accounts, and no evictions, and he has sufficient net income to pay the rent, then he might make a very good long-term tenant, he certainly won’t be buying any time soon.  If on the other hand, he has a pattern of delinquencies, several consumer collection accounts, and non-verifiable income, then keep looking.     The foregoing is presented in a general nature to address typical legal issues that affect owners and managers of rental property.  Specific inquiries regarding a particular situation should be addressed to your attorney.  The Duringer Law Group, PLC is one of the largest and most experienced landlord tenant law firms, specializing in evictions and in the collection of debt, representing landlords throughout California.  The firm may be reached at 714.279.1100 or 800.829.6994 or 877.387.4643.  Visit us at www.DuringerLaw.com for the locations of our six offices, the latest in forms, and for copies of our publications “Eviction and Debt Collection, a Landlord’s Guide,” and “Asset Preservation Strategies.”