Real Estate Course: Analyzing Landlord's Options and Tenant Rights

This report examines a real estate scenario involving a landlord and a tenant in a commercial lease agreement. The tenant, operating a carpet shop, has been in occupation since 2010 under a ten-year lease and is facing financial difficulties, including struggles with rent payments. The landlord is presented with two options: repairing the building as per the tenant's suggestions or offering the building to Tesco at a reduced rent. The report focuses on the first option, analyzing its advantages, such as maintaining market-price leasing and avoiding legal trials, and disadvantages, including negative impacts on liquidity, potential vacancy of other properties, and introducing uncertainty into the investment due to the tenant's financial instability. The report concludes that the disadvantages outweigh the advantages, suggesting the landlord consider interventions to ensure the occupation of vacant buildings to mitigate negative impacts on asset value. The report also references relevant sources to support its analysis.

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REAL ESTATE
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Real Estate
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Real Estate
In the scenario provided, there are two options for the client (Landlord). Firstly, the
landlord can anticipate repairing the building as per the tenant suggestions. Secondly, the
landlord may decide to provide the building to Tesco at a reduced rent. However, this paper
sticks on the analysis of the advantages and disadvantages of the first option (repairing the
building and as per the tenant’s suggestion and moving on with the lease as usual.
Anticipating to repair the building and carrying on with the business as usual has two
major advantages. Firstly, the repairs shall be completed. Completion of the repairs will provide
the landlord with all the rights lease the building at the market price which is more profitable
unlike when leased at a reduced price. Secondly, the landlord shall avoid trials in the courts of
law in two major ways. Firstly, the landlord shall avoid trials on the base of breach of contract. A
party is said to have breached a contract if it fails to meet any of the contractual obligations
(Findlaw, 2018). Providing the repair operations to another party is likely to terminate the ten-
year agreement with the tenant thus creating a path for trial. Secondly, completion of repair is
likely to prevent the landlord from suits. The landlord would be considered reckless and
irresponsible had he failed to meet the claims of the tenant.
Despite the above advantages of repairing the building and proceeding with the lease as usual,
the negative implications are numerous. Firstly, the option negatively impact liquidity as the
landlord will be forced to make use of the personal cash in the repair processes as suggested by
the tenant. The term liquidity is used in this case following the fact that cash is the standard unit
of measuring liquidity (Chen, 2019). It, therefore, means that an effect on the cash of the
landlord consequently impacts his liquidity. Often, cash is used to carry out the day to day
operations like cleaning the building and repair of equipment’s such as switches and taps.

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Therefore, a negative effect on the liquidity of the landlord is a predisposing factor for
incompliance. Secondly, the option opens the way for the vacancy of the next building that is
owned by the same landlord. The vacancy of the building has a negative implication on asset
value figuring the fact that all fixed assets depreciate. The only exception in the accounting for
depreciation is land. Depreciation refers to the drop in the cost of a fixed asset (Profitbooks,
2018). Therefore, repairing the building and proceeding with the lease, as usual, will leave one
unit unoccupied thus promoting depreciation while getting read of the profitable pay. Usually, an
unoccupied building is likely to depreciate at a higher rate compared to an occupied building.
Thirdly, repairing the building and proceeding with the lease as usual introduces uncertainty into
the investment. Even though investors take risks, it is imperative to ensure there is a system to
limit the risk and protect capital from downfall (Petch, 2016). There is a likelihood of the tenant
failing to pay for the rent due to his financial instability state. Therefore, the landlord is at the
risk of untimely rent payment. Following the advantages and disadvantages above, it is
clear that the disadvantages associated with this option (repairing the building and proceeding
with the lease as usual) outweigh its advantages. However, if the landlord has to take on this
option, he must consider placing intervention to ensure occupation of the vacant buildings in
order to avoid the negative implications of the choice on the asset value.

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Reference
Chen, J. (2019). Liquidity [online]. Retrieved from:
https://www.investopedia.com/terms/l/liquidity.asp [Accessed 11 March 2019].
Findlaw (2018). Breach of contract and lawsuits [online]. Retrieved from:
https://smallbusiness.findlaw.com/business-contracts-forms/breach-of-contract-and-
lawsuits.html [Accessed 11 March 2019].
Petch, K. (2016). Investment risk management strategies-five ways to play defense [online].
Retrieved from: https://www.moneycrashers.com/investment-risk-management-strategies-
defense/ [Accessed 11 March 2019].
Profitbooks (2018). What is depreciation [online]? Retrieved from:
https://www.profitbooks.net/what-is-depreciation/ [Accessed 11 March 2019].