Evidence of the overlooked “middle child” of the commercial real estate industry

Aug 5th, 2014 | By Paul Miron

Last week we touched upon the role of the commercial tenants in a real estate transaction – the so-called “middle child” of the real estate industry – wedged between the mandated requirements of the lender and the well-protected needs of property owners.

In this post we’ll look at anecdotal evidence that reveals the importance of a leasehold endorsement and just how it delivers all the care and attention the commercial tenant “middle child” needs.

 

Consider the consequences: A hypothetical claim

A telecommunications company signs a 10-year lease on an area of vacant land surrounded by a residential community with a plan to build a cell phone tower.

The company obtains the appropriate permits for the use and begins construction on the site, paving an access drive to the tower site, bringing in utilities, constructing the tower, installing its antennas and subleasing tower space to two smaller cell phone carriers.

A week after the site is operational, the telecommunications company is sued by neighbouring property owners who claim that the property is subject to a restrictive covenant prohibiting commercial use of the property. The company receives a court order prohibiting the use and is forced to cease operations, dismantle the tower and return the land to its original state.

As a result of this, the company is also sued by two of its sub-lessees for breach of lease. Not only is the company out of pocket for the massive construction it has undertaken, but also for the loss of future rental income based on the subleases and the damages it may be liable for to the subtenants.

With a leasehold endorsement in place, the company would make a claim to its insurer and have its expenditures and legal costs covered as set out in the endorsement, and then proceed to set up elsewhere. Not a simple solution, but far more attractive than the alternative.

Endorsement coverage

Coverage includes but is not limited to the following:

  • Transportation of tenant’s personal property to a new leased space, up to 200 km away
  • Rent payments due to the real landlord because the tenant made payments in good faith to someone other than real landlord due to fraud, impersonation, title defect, etc.
  • Payments to the end of the lease if a condition in the lease, to the landlord, even if tenant is no longer in possession
  • Payment of fair market value of sublease payments to tenant
  • Damages claimed by subtenants who are dispossessed
  • Payment of improvement costs paid out by tenant if not substantially completed when evicted, including:
      • Permits
      • Architect, engineering and construction management fees
      • Environmental testing fees and reviews
      • Landscaping
  • Payment of tenant’s reasonable relocation costs, including agent fees, higher rent etc.

 

Get a new lease on protection

If you’d like to learn more about leasehold endorsements, or simply want to share your own personal middle-child-syndrome stories, comment below. We want to hear from you!

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