Getting Ahead of the Curve – Leases Prior to Tenant Bankruptcy

In today’s market, rent-relief conversations aren’t just reactive – they are strategic. This article highlights how landlords can use these moments to strengthen financial visibility, enforce performance benchmarks, and preserve leverage ahead of any potential bankruptcy – specifically under net lease arrangements.

With interest rates elevated, input costs fluctuating, and oscillating consumer sentiment, commercial tenants in retail, industrial, and service sectors face mounting pressure. According to Epiq Bankruptcy Analytics, commercial Chapter 11 filings surged by 40% year-over-year as of mid-2024, and distress is not confined to legacy or shrinking industries. In this environment, tenants are increasingly requesting rent abatements or deferrals, presenting landlords not just with a challenge, but with a strategic opportunity:

To support the tenant while simultaneously strengthening the lease in anticipation of deeper distress or even bankruptcy.

One of the earliest signs of tenant distress is financial deterioration, yet many landlords do not learn about a problem until rent payments stop or the tenant volunteers the news. Standard leases often require, or ask for annual financials (if any at all), which may arrive long after intervention would be most effective. That’s why it’s critical to push for frequent, recurring reporting obligations (e.g., quarterly or monthly income statements, balance sheets, and cash flow reports), alongside performance-based covenants tied to metrics such as minimum net worth, EBITDA, or leverage ratios. These tools give landlords early visibility into tenant health and the ability to act decisively if performance declines. In some cases, this means negotiating revised terms; in others, it may justify additional security or preemptive marketing of the space. A covenant breach declared prior to a bankruptcy filing can preserve the landlord’s leverage and the tenant’s runway. Put simply, regular financial transparency can mean the difference between an orderly resolution and being blindsided by the automatic stay.

Importantly, the protections discussed in this article are not standard fare in new leases, especially not with investment-grade tenants in a renter’s market. Instead, they are more frequently negotiated during amendments, when a tenant seeks relief due to distress. At that moment, leverage is shifting back to landlords in many markets (e.g., industrial, logistics, prime office, prime retail). And with that leverage comes an opportunity:

To ask for enhanced financial visibility, performance-based benchmarks, and added security.

Some terms, such as updated reporting or collateral enhancements (e.g., security deposit, personal guarantees (“good guy”), etc), are more feasible to request when entering a lease. Others may require more urgent justification.

Worse still, a bankruptcy-triggered lease rejection can leave landlords holding an unsecured claim for missed rent, capped and discounted by law.

1. Lender Covenant Compliance Clause

Landlords should try to get more transparency about a tenant’s key loan covenants and ongoing compliance with all material lender obligations. This may include metrics like minimum net worth, leverage, or fixed charge coverage thresholds. The lease should grant the landlord a right to notification if the tenant breaches or seeks a waiver for any such covenant.

To deepen visibility, the lease should also mirror key lender KPIs, such as leverage ratios, DSCR, or net worth thresholds, and, to mirror asset-based lending, inventory and borrowing base calculations. The latter may allow landlords to spot a shrinking borrowing base or tightening liquidity before the tenant’s lender reacts.

Additionally, the tenant should be required to certify to the landlord its compliance with material loan covenants on a recurring basis (e.g., monthly or quarterly). However, the landlord should not rely solely on this certification but use the tenant’s (ideally, review-quality) financial statements to independently calculate covenant ratios and identify potential breaches before they escalate.

By incorporating these elements, landlords can turn lender pressure points into actionable lease triggers, gaining a critical edge in navigating tenant distress before it becomes a real issue. Requesting documents that a tenant is already providing to another party would keep the additional administrative burden at a minimum.

2. Frequent Financial Reporting Requirements

Don’t settle for outdated annual reports. Strengthen the lease by requiring regular financial transparency (e.g., monthly, bi-monthly, or minimum quarterly reporting). Key deliverables should include:

• Income statement and balance sheet
  Offer insight into revenue, expenses, debt levels, and net worth. Cash flow can often be derived from these, but a standalone cash flow statement adds clarity.
• Cash-on-hand reports
  Critical for assessing near-term liquidity and solvency.
• Sales data
  Especially vital for retail and wholesale tenants, to monitor top-line performance in real time.
• Backlog and/or pipeline reports
  For service or industrial tenants, these gauge revenue visibility and business continuity.

Regular financial reporting, whether monthly, bi-monthly, or quarterly, keeps landlords informed about their tenants’ operating conditions. These updates can foster early, constructive conversations before problems escalate. But to be effective, reporting obligations must be more than routine check-ins; they must be defined with precision and reinforced with consequences. That’s where timeliness and enforceability become critical.

3. Timeliness as a Material Obligation

Make prompt reporting and covenant compliance material lease obligations. The lease should clearly state that failure to submit required financials on time, or failure to disclose breaches of agreed-upon financial covenants, constitutes a lease default. A short cure period (e.g., five business days) may be appropriate, but delays beyond that should trigger remedies, such as the right to terminate concessions, call additional security, or even terminate the lease. These enforcement rights are especially valuable before a bankruptcy filing, where options narrow under the automatic stay.

Tenants often wait until crises peak before engaging their landlords; these clauses help to prevent that. By making ongoing financial transparency a condition of the lease, the landlord builds an early-warning system into the relationship. And if the tenant refuses to “open the books” or goes silent, that silence itself can become a trigger for action. In some cases, enforcing a reporting-default pre-bankruptcy may allow the landlord to lawfully terminate the lease before a filing occurs, cutting off the tenant’s ability to assume the lease in court, and avoiding the landlord’s entanglement in a bankruptcy case altogether (e.g., automatic stay).

4. Performance-Based Clauses

If offering temporary rent concessions/relief, protect them by conditioning them on the tenant’s financial performance. Require the tenant to meet defined KPIs, such as EBITDA, cash-on-hand, FCF, or sales volume, over a set monitoring period (e.g., 1–6 months). Failure to meet these thresholds should trigger:

• Termination of any rent-abatements or other concessions (i.e., full contractual rent resumes automatically if targets are missed).
• The landlord gains the right to discreetly market the property and/or even terminate the lease with notice.
• The tenant must post additional security, such as a third-party, irrevocable letter of credit or third-party guaranty, to mitigate losses from a potential future tenant default.

These provisions create accountability and give the landlord both visibility and leverage while the tenant is still solvent.

5. Balance-Sheet Health Clauses

Include covenants that monitor a tenant’s solvency on a recurring basis. Two common approaches are:

• Total assets must always exceed total liabilities to avoid “technical insolvency”, a condition where liabilities outweigh assets, increasing the risk that creditors or lenders may initiate bankruptcy proceedings.
• Require the maintenance of a minimum tangible net worth of the tenant’s equity (net assets excluding intangibles) to stay above a fixed dollar threshold, providing a cushion against capital erosion.

If these covenants are breached, the landlord should retain the right to declare a default and, if uncured, pursue remedies, including lease termination. These safeguards ensure the tenant maintains a basic level of financial viability and give the landlord a pre-bankruptcy exit ramp if insolvency risk escalates.

To be sure, tenant financial reporting and the inclusion of financial health covenants in leases, to the extent advocated in this note, are presently unusual. But any landlord seeking to shed light on the stability of its rental stream would benefit from such lease terms. Being proactive is key. Early warnings and lease provisions that create leverage in the event of tenant distress enable the landlord to negotiate new terms, obtain more security, or, in worst cases, repossess and re-lease the property before a bankruptcy filing ties their hands. It’s much better to restructure a lease on your terms than to be dragged into a tenant’s Chapter 11 later.