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— Retail Properties Quarterly — August 2016
A
lease usually represents a
significant financial under-
taking by the party signing
the lease. When consider-
ing whether to enter into
a retail lease, a landlord needs to
carefully analyze whether the ten-
ant has the ability to perform the
obligations of the lease, especially
if the tenant’s business turns out to
be less successful than anticipated.
n
Financials statements should be
those of the tenant or guarantor.
Per-
haps the first step in analyzing a
prospective tenant’s ability to per-
form the obligations under a lease
is to review the tenant’s financial
statements. These can vary widely
depending on the sophistication of
the proposed tenant.
The landlord should confirm that
any financial statements provided
are, in fact, for the proposed person
or entity that will be the tenant
under the lease. Often, a proposed
prospective tenant will be a subsid-
iary or location-specific entity, but
the financial statements provided
either will be those of a parent
company or consolidated with a
parent and other related entities.
n
Guaranties.
After analyzing a
prospective tenant’s financial con-
dition, if a landlord still feels addi-
tional financial strength is required,
a guaranty from a related entity or
an individual may be necessary. In
this case, one possibility is to have
the parent, whose financial state-
ments have been provided, guaran-
tee the lease. As a cautionary note,
guaranties have
many nuances
and care should be
taken in drafting
and negotiating
the guaranty.
Sometimes, the
parent is not will-
ing to provide a
full guarantee of
the lease and, in
that case, a limited
guarantee may
be the solution.
These limitations
could be based on
time passed without a default. For
instance, if the tenant has not had a
default in the first five years of the
lease term, the parent’s guaranty
would be released.
Another method is to limit the
parent’s guaranty in terms of dol-
lars. For instance, the parent might
guarantee one year of rent (which
may need to specify if any pass-
through amounts are included), or
the amortized amount of the tenant
improvement allowance, leasing
commissions and other lease costs.
n
Other benefits of a guaranty.
When the proposed tenant is a new
business or franchisee with limited
financial resources and is operated
by one person or a couple, landlords
should consider obtaining a per-
sonal guaranty from the individuals
who will actually operate the ten-
ant. First, this allows the landlord to
collect from the financial resources
of the individuals who operate the
tenant. Second, it provides a strong
incentive for the individuals to
remain involved with the tenant if
the business struggles.
Although it is possible to have
the individual operator named as
the tenant, it may benefit the land-
lord to have the tenant be a limited
liability company or corporation,
as long as the landlord retains the
ability to pursue the individual
through a guaranty. (Note that it
does not make sense to have the
tenant also serve the guarantor.)
This would protect the landlord’s
ability to collect even if an accident
or other occurrence involving the
tenant’s business makes it difficult
to collect from the tenant himself.
Thus, the combination of a limited-
liability entity and a personal guar-
anty in favor of the landlord can be
beneficial to both the tenant and
landlord.
n
Always have guarantors consent to
lease amendments.
Once a guaranty
is in place, it is important to obtain
the guarantor’s consent to any
amendment. Absent language to the
contrary in the guaranty itself, the
modification of the underlying obli-
gation can result in a full release of
the guaranty. If the individual sign-
ing for the tenant and the guarantor
are the same person, it is important
that the person signs in the two
different capacities as if there were
two different people. If the guaran-
tor is not the person signing for
the tenant, it also is important to
obtain the guarantor’s consent to
be sure the guarantor is aware of
the change in the lease and that
the guarantor remains liable on the
guaranty after the change.
It is possible a properly worded
guaranty can protect the landlord
if it does not obtain the guarantor’s
consent to an amendment. Many
guaranties include waivers of a
number of different defenses the
guarantor may have to the land-
lord’s ability to enforce the guar-
anty. One of those waivers should
be to future amendments, and it
is worthwhile not only to have the
guarantor waive any defense to an
amendment, but also to consent
to the amendment. However, even
if a guaranty contains language to
address future changes in the lease
obligation, it is still advisable to
have the guarantor consent in writ-
ing to amendments.
When entering into a retail lease,
it is important to consider the
financial resources of the tenant.
That involves both the review of
financial statements and consider-
ations as to whether a guaranty is
necessary. If a guaranty is neces-
sary, there are options available to
both landlord and tenant to reach
a reasonable compromise as to the
extent of that guaranty. Once the
guaranty is in place, care should be
taken to avoid a loss of that guar-
anty through a modification of the
guaranteed obligation.
s
Christopher T.
Toll
Attorney, Otten
Johnson Robinson
Neff + Ragonetti
PC, Denver
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