Commercial real estate brokers are hired to handle a variety of responsibilities. And some brokers are willing to offer more after-transaction services for owners and landlords as sales and leasing activities lead to property management, tax protesting, speculative construction ideas and other non-transactional needs.

One responsibility I haven’t seen any broker take on, though, is insuring against tenant default or offering rent payment protection. But I’ve been asked in the past to do exactly that.

 A commercial broker’s primary duties to a landlord are to find a tenant that’s ready, willing and able to sign a lease contract.

But sometimes — usually after a landlord has a tenant default on a multi-year commitment — the landlord will ask the broker to take on some of the risk and expenses in the form of rebating commissions or finding a replacement tenant at the broker’s expense. 

This request typically comes when a tenant defaults or otherwise prematurely stops paying rent and vacates. Depending on commission structure, the landlord might have paid lease commissions on a long-term lease, but only realized part of the income upon which those commissions were based.

Who’s responsible for the remaining gap? Landlords ask if the broker will give it back, while brokers would very much like that to not be the case — although there’s certainly some give and take in broker-landlord relationships. 

The logical outcome is to bring this cost to the attention of and hold responsible the party that caused these commissions to go unrealized — the defaulting tenant. 

By agreeing to a longer-term lease, a tenant has caused the landlord additional upfront expenses. That cost recovery can be achieved through different legal instruments when lease clauses are negotiated. 

What happens if a tenant doesn’t have the ability to reimburse the landlord for those costs? 

Every investment comes with risks and rewards. Investors shoulder those risks either individually or with co-investors because they also enjoy the rewards when the investment produces a return. 

Managing and accepting tenant risk is really what being a landlord is all about. If it was risk-free, the returns would be much lower, and that trend can be seen in properties with low-risk tenants versus high-risk tenants.

After talking to several insurance agents, I couldn’t find any policies offering protection against commercial tenant default.
I conducted some additional research and located one insurance company that offers rent protection and security deposit insurance for four- to 24-month leases on residential rental properties, but none for commercial property landlords with business tenants. 

Evaluating a tenant’s financial history and capabilities constitutes a good first step to mitigating risk. A national retailer with 4,000 stores that’s expanding its existing presence in the market poses a lower risk than a two-employee startup making the jump from operating in a garage and scraping together enough money to pay the first month’s rent.

This can be determined by gathering the right data from the tenant, something real estate brokers recommend landlords do. From there, the landlord can decide the risk level they’re willing to accept and balance their desired return with what market alternatives will bear.  

No one can predict the future — as Sears and Circuit City  have taught us. But we can gather data to help make a more informed decision.