Keeping the lights on – When is it worth it to allow a defaulting tenant to continue operating in your premises?

ImageIn a vibrant pro-landlord market, the question of letting a defaulting tenant stay in the premises after failing to pay rent or otherwise violating the lease would not be a topic of debate. However, in today’s recovering economy, many landlords are choosing to let tenants operate while they make partial payments of rent or in some cases no rent at all. The rationale behind this course of action can spring from a number of sources: the negative effect of dark space on re-letting, loan covenant contingencies or investor pressures to keep some income stream alive until a good replacement tenant can be secured. However, landlords faced with these pressures should also consider the pitfalls that may come with this course of dealing including waiver of the contract rent amount and requests by other tenants to pay reduced rent or receive abatements for paying their contract rent.  Non-waiver agreements may offer a creative solution to this dilemma, but they are not bulletproof. Therefore, careful consideration should be given to letting the slow pay or no pay tenant continue to operate.

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