Tenant's Overlooked Risk: Landlord Default

In the balance of power between landlords and tenants, the risk of default is usually higher for the tenant. While many landlords have accrued wealth and invested in low-risk assets, many tenants are embarking on a new business venture with the hopes of starting the next billion-dollar enterprise. Conventional wisdom holds that 9 out of every 10 of these ventures will fail. Commercial leases reflect this imbalance, providing a laundry-list of protections for the landlord to address a potential tenant default without giving as much attention to the risk of a landlord default.

The risk of a landlord default, however, is not zero. More prevalent in times of market tumult, landlords can run into performance issues if they have taken on too much debt, invested in assets with underlying defects in the condition of the property, or have not reserved enough liquidity to address unanticipated issues. These issues can plague landlords large and small.