Bracing for Impact: A Tenant's Guide to Landlord Default

Nearly $1.5 trillion in commercial real estate debt was forecasted to mature by 2025 — the highest volume since the financial crisis of 2008–09. This, coupled with a decline in office values and rising interest rates, has put tenants in a precarious position. Office, retail, and multifamily properties comprise the majority of defaulted CMBS debt transfers, and tenants in those buildings are often the last to know their landlord is in trouble.

I have represented tenants in buildings with CMBS debt in special servicing, maturity defaults, and outright foreclosures. The tenants who navigate these situations successfully share one thing in common: they acted before the crisis, not during it.

Here are 15 things every commercial tenant should understand and address — whether you are evaluating a new lease or managing an existing one.

15 Critical Considerations

1. SNDA — Subordination, Non-Disturbance, and Attornment Agreement. Ensure an SNDA is in place with the current lender and building owner. This protects your occupancy rights in the event of a foreclosure. Critically — make sure your lease requires SNDAs from future lenders. If it only covers the current lender, the initial SNDA is worthless as soon as the building trades or is refinanced.
2. Ground Lease Recognition Agreements. While ground leases are less common than mortgages, many large properties are subject to them. If there is a ground lease, make sure you have a recognition agreement from the ground lessor so your lease won't terminate if the ground lease terminates.
3. Subleasing Considerations. If planning to sublet, bear in mind that the absence of an SNDA can deter subtenants due to the associated risks. If you are entering into a sublease, ask the sublessor about the status of its SNDA.
4. Rent Obligations. Even if building ownership changes, your duty to pay rent continues. Understand to whom rent should be directed and document that direction carefully.
5. Building Maintenance. Pay attention to building maintenance and notify the landlord of significant changes which could justify constructive lease termination. Also — be sure to require self-help rights in your lease.
6. The Lender. If a larger bank is the lender, they are likely to continue funding maintenance in the event of a landlord default. If the bank itself is at risk of failure, your risks are significantly higher.
7. Your Occupancy Share. The larger your occupancy share of the building or loan portfolio, the more leverage you have in renegotiating lease terms during a distress situation.
8. Sale Negotiations. If the building is being sold, there could be an opportunity to negotiate terms with the new owner — including rent concessions, TI allowances, or lease restructuring in exchange for early renewal commitment.
9. Lease Buyouts. Early lease buyouts in a distressed building situation need lender approval. Proceed cautiously and understand the approval chain before initiating any negotiation with the landlord directly.
10. Lease Security. It is unlikely a landlord would let a paying tenant out of a lease — however, understand the building's stacking plan as other tenants could have expansion plans that make your space valuable to negotiate around.
11. Landlord Concessions. Utilize or escrow any outstanding concessions from the landlord. Require the right to offset tenant improvement allowances in your rent if your landlord fails to fund what was promised.
12. Lease Audit. Regularly review your lease for possible renegotiation points, potential issues, and expense reconciliation opportunities. Distressed landlords often make errors that benefit the tenant if caught.
13. Backup Documentation. Keep a record of all communications, notices, and agreements with your landlord. This documentation can be crucial in resolving any disputes that arise from a potential default.
14. Tenant Associations. Consider joining or forming a tenants' association in your building. By banding together, tenants may have more leverage to negotiate with landlords or potential new owners.
15. New Leases and Contingency Planning. For new leases, negotiate rent abatement or termination clauses should the landlord fail to maintain the building's quality or deliver promised improvements. Request access to the landlord's credit rating and financials. Closely monitor the Debt Service Coverage Ratio (DSCR) for any CMBS debt — a DSCR less than 1 is a significant warning sign.

How I Have Used This in Practice

In one recent transaction, I represented a full-floor technology tenant in a CMBS building where the loan had matured into default and was held in special servicing. The landlord's renewal proposal was internally contradicted by their own asking rents — a discrepancy they assumed we would not catch.

We countered at $48–50/sf against a $63/sf proposal. More importantly, we required a fully executed SNDA from the special servicer and secured TI funds held in escrow at lease execution — protecting our client from the building's cash management controls, which would otherwise have allowed the servicer to divert tenant improvement funds before they were disbursed.

That outcome required understanding the building's debt structure, the servicer's incentives, and the tenant's leverage position — before the negotiation began.

What to Do Right Now

If you are currently in a building with a CMBS loan, or evaluating a space in one, the first step is to understand the debt structure. Pull the CMBS loan data, check the DSCR, understand the maturity date, and determine whether the loan is in special servicing. This information is publicly available and takes one hour to gather. Most tenants never do it.

If you are renewing a lease, this is your moment of maximum leverage. A landlord in distress — or approaching distress — is not in a position to lose a paying tenant. Use that position deliberately.