May 06, 2016

4 Landlord Considerations When a Tenant Defaults

When a tenant defaults, landlords have a difficult choice: do they immediately repossess the tenant’s space, sometimes referred to as self-help, or do they wait until they are formally awarded the right to possession? It’s a vexing dilemma. Leases often specify that the landlord has the right to re-enter or to repossess the leased space in the event of a default. If repossession is inevitable, most landlords want to get on with the process of finding a new tenant and reletting the premises. However, self-help carries some big risks — particularly in a commercial, industrial or retail tenancy — so remember these key considerations:

1. Avoid confrontation.

In many jurisdictions, courts frown on a landlord’s exercise of self-help. The reason is simple — aggressive repossession can lead to conflict. Accordingly, a prudent landlord needs to be aware that if unauthorized repossession becomes an issue in court, the tenant is likely presumed to be in the right. Many courts frown upon a landlord’s intrusion on leased property until the Court authorizes reentry. Unauthorized repossession that causes confrontation can result in the avoidable and regrettable scenario in which a landlord dealing with a defaulting tenant suddenly is liable for damages to the defaulting tenant.

2. Regaining possession of premises often creates new responsibilities for the landlord.

One important area of liability has to do with personal property or tenant possessions that remain on site after repossession. It can often be unclear whether a tenant has abandoned property on site — particularly if the tenant is locked out of the premises. Under these circumstances, the landlord unexpectedly shifts into the role of the tenant’s bailor and has the same obligations that a storage company or movers would have while in possession of another’s property. If the tenant’s property is damaged while under the landlord’s control, the landlord may have liability to the tenant. Moreover, absent some sort of security interest in the property or a court order, if the tenant demands the property’s return, the landlord must return the property even if the tenant owes the landlord money.

Responsibility of this kind is often something that a landlord should avoid. The risks of this responsibility are further complicated when a third party’s interests are concerned. A landlord can become responsible for another secured creditor’s interests if the landlord seizes property secured by the creditor. Moreover, some third parties — for example, a customer at a repair shop or a patient at a health care facility — can often have property on site that substantially exceeds the value of the landlord’s claim against a tenant.

3. Improper or contested repossession can carry serious liability for the landlord.

A landlord’s exposure gets worse if there is any ambiguity about the landlord’s right to possession. A landlord who repossesses leased space before a tenant is given the opportunity to cure a breach of the lease can be found in violation of the parties’ contract. Under those circumstances, the landlord may also be found guilty of trespass — which in many jurisdictions can carry independent and substantial damages, including attorneys’ fees, treble damages, and a range of other costs not normally recoverable under a lease or common law. Additionally, a landlord who repossesses space and exerts control over personal property without authorization may be found liable for conversion — in essence, for the “theft” of the tenant’s property. Many states award substantial damages for this kind of liability, too — including treble damages and attorneys’ fees.

4. Sometimes, self-help is the best course of action.

Under certain common scenarios, however, self-help is not only appropriate, it’s necessary to avoid further damage to the leased property. A landlord may actually benefit the defaulting tenant by repossessing the premises if the landlord is acting to mitigate the tenant’s liability for further damages for rent and for damage to the premises. An initial consideration in deciding if self-help is proper is to determine whether the tenant has abandoned the premises. If so, then the risk of confrontation or conflict lessens. Secondly, it’s worth assessing whether the tenant has left behind any valuable property. If the abandoning tenant has taken most or all of his or her personal property, then self-help may make sense. Lastly, it is important for a landlord to assess whether immediate action is necessary to preserve the leased premises. For example, a tenant that abandons leased premises and turns off the utilities can expose leased space to considerable damage if the space is left unattended for an extended period of time.

Many landlords routinely employ self-help. Self-help comes with risk, particularly in commercial, industrial or retail tenancies. The risks increase substantially the more that self-help is employed. For this reason, the prudent property manager looks before it leaps to engage in self-help.

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