September 29, 2015

6 Things to Know When a Tenant Defaults Under a Lease

Tenant problems and defaults are inevitable challenges for successful commercial and industrial landlords and property managers. A bad tenant situation can be a potentially expensive problem and the ultimate outcome ― eviction ― is a potential minefield for the unwary landlord. Knowing what to do and what not to do is essential to effective and profitable property management.

Here are six points to remember:

1.   Make sure that the tenant is in default.

It seems self-evident, but it is essential to make sure that a tenant is in default before taking further steps. Many leases contain conditions precedent to default ― like notice requirements. If a lease requires written notice of the tenant’s failure to pay in a certain format (like certified mail) that provides a period of time in which the tenant can cure this breach of the lease, then a landlord must follow those steps before taking further action. There may be non-monetary breaches that require some notice but that allow a landlord to evict a tenant. Under any circumstance, it is important to review the lease and to understand what the lease requires of the tenant and the landlord before taking further, more aggressive action. A landlord who does not follow the terms of the landlord’s own lease is setting him or herself up for a potentially expensive and embarrassing counterclaim.

2.   Undertake self-help only if it is clear that acting unilaterally is appropriate.

Assuming that a tenant is in default, the landlord may be tempted to take action to evict the tenant without resorting to process of law. Some jurisdictions permit self-help in this context and, if it works, it works. However, it is a good idea to check with an attorney before employing self-help because many jurisdictions frown upon a landlord taking matters into his/her own hands. Absent a court order authorizing eviction of a tenant, a landlord may be liable for trespass as well as liability under the parties’ lease if the landlord takes steps to evict a tenant ― even if the tenant is in default under the lease and would otherwise be subject to eviction.

3.   “Abandoned” personal property carries its own risk.

Even when it appears that a tenant has “abandoned” real estate, it is important for a landlord to take careful steps to recapture rental property. Many tenants may leave behind valuable personal property that belongs to either the tenant or to a third party. For example, restaurant tenants often have thousands of dollars of personal property in the form of expensive appliances and equipment that the tenant owns or leases. Landlords that take possession or dispose of this kind of property may become liable to the tenant or the third party if the landlord was not authorized to seize or to dispose of the property. The unwary landlord can be found liable for conversion or breach of the parties’ lease or be liable to the claim of a third party if the landlord simply seizes and disposes of property that the landlord ― in a technical sense ― does not own or have a right to possess.

If a landlord decides to sell a tenant’s property without authorization to mitigate the landlord’s losses for unpaid rent, a bad situation can be made worse. A prudent landlord may need to obtain direction from a court ― for example, by obtaining an order of attachment ― before disposing of personal property that appears abandoned on the landlord’s property. At the very least, it makes sense to get a tenant’s explicit authorization to dispose of property if it appears that the property is of some value and the landlord wants to proceed without court authorization. If proceeding in formal in-court eviction proceedings, it is a good idea to have the court make an explicit determination that property remaining on-site after a specific date will be deemed abandoned.

4.   Understand the applicable laws governing formal, court-administered eviction.

Many states and some municipalities have laws that explicitly govern how landlords may evict a tenant in court. Some may even have a court or courts that are specifically set up to handle these kinds of cases. Many jurisdictions distinguish between types of tenants ― residential tenants, for example, may have explicit statutory protections governing their property in jurisdictions that have passed “anti-slum lord” statutes. These protections may or may not apply to commercial or industrial tenants. Knowing whether an evicting landlord has the obligation to store a tenant’s property for some period of time after eviction is an essential, potentially expensive question to be answered before a landlord decides to evict the tenant. Some states also provide for a statutory period of cure or redemption during which a tenant can cure a default and before which eviction can occur. The key is understanding what the applicable jurisdiction permits and requires of an evicting party.

5.   Consider prejudgment possession of premises in eviction proceedings.

Where there is no meaningful question about the tenant’s default, many jurisdictions permit a landlord to reclaim possession of property in eviction proceedings prior to entry of a final judgment so the landlord can relet premises. This option carries its own set of logistical issues and concerns ― notice, a separate hearing in court and the posting of a bond are all often required where this prejudgment relief is permitted. Nevertheless, reclaiming and reletting rental property as soon as possible is often the best way to limit a landlord’s losses ― particularly if the evicted tenant is effectively insolvent and judgment proof. The risk of imminent prejudgment possession can also often be the event that triggers a meaningful landlord/tenant negotiation to resolve the parties’ dispute. So, prejudgment possession is a valuable tool for landlords to know and understand.

6.   Be open to informal resolution at every stage in the landlord-tenant dispute.

As discussed above, unilateral or formal judicial enforcement of a landlord’s rights can be difficult, expensive and risky. Landlords and property owners should be open to informal resolution whenever it is a viable option. Even after formal eviction proceedings have begun, landlords should be open to discussions with tenants concerning whether the rental situation can be resuscitated and, if not, how to move the old tenant out so that a new tenant can move in. Again, particularly with insolvent tenants, it is often a good idea to informally work out how and when the tenant will move out. Formal eviction proceedings are expensive and time-intensive.

Contacting an attorney can be the first and most important step in deciding what a landlord should do when confronted with a defaulting tenant. Faegre Baker Daniels’ real estate litigation lawyers advise property owners and managers every day in these situations and have represented clients’ interests in dozens of jurisdictions.

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