Practical Tips for Enforcing a Commercial Lease

By Jeff Bennett

	Learn about our Commercial Lease Enforcement Program

For several months now the calls have come in at a significantly greater rate than we've seen since the tech wreck of 2001-02. Commercial real estate tenants are defaulting in the payment of rent. We will leave it to the economists to explain why this is happening, but we will offer a few practical tips from a legal perspective for commercial landlords who may be dealing with this situation.

First, try to get a fix on your tenant's situation. If the rent payment is late, call and ask why. If a credible, satisfactory answer is not forthcoming, ask about the tenant's financial condition and demand financials as backup. (This is the reason it is important to have a lease provision which allows you to demand financials upon any late payment.) The bottom line is that any late payment in this economy is a signal that you need to have a face-to-face conversation with the tenant. It will help you size up your risk of lost rent down the line.

Second, make sure you have a well-considered position about occupancy and cash flow for your asset. Some landlords reject outright any notion of negotiating with a struggling tenant, while others will do anything to protect even a reduced cash flow and some will consider each tenant on a case-by-case basis. The bottom line is that most landlords have a position that ties directly to the project's financing. Know your approach. Don't just react to the situation.

Third, quickly size up whether this is a lost financial situation or one where cooperation between landlord and tenant makes sense. In most cases this will not be a difficult task. Financials, the tenant's business history, and credit and asset searches will tell the story. Is insolvency looming? It is decision time. Do you hold the tenant in default, or attempt a workout?

Fourth, as you decide what to do, make sure it is consistent with achieving your desired result. Identify all your objectives (i.e., do you want to get the space back, collect default rent, preserve post-default rights against the tenant, assert a landlord's lien before the tenant leaves with valuable assets, relet the premises, get additional financial commitments (a guarantor) from the tenant, identify your tolerance for a workout, etc?). This plan will dictate all future actions.

Fifth, no matter what you decide to do, make sure you understand what your lease requires in order for you to commence and conclude enforcement action. Timely compliance with its requirements will help minimize losses.

• Written notice of default is almost always required. Follow lease notice requirements precisely. Some leases include cure rights. Make sure these are specified in the default notice. Give notice as soon as a default occurs. A squeaky wheel gets the grease, and the party that takes the initiative is more likely to get paid than the party that delays. If there are nonpayment defaults by the tenant in addition to rent defaults, make sure these are specified in the same notice. Finally, calendar cure dates and deadlines you include in the notice. If the tenant has not cured the default, be ready to act immediately with the next step of your plan to achieve your desired result.
• Apply the security deposit if the lease allows it.
• Analyze your remedial alternatives.
• Decide whether to lock the tenant out. This can be a difficult call if the tenant is a solid going concern that has hit a rough patch. Don't make this decision before you talk to your lawyer. Lockout commonly triggers a decision as to whether to assert your landlord's lien or allow the tenant to remove its personal property from the premises. Lockout decisions may adversely impact the personal property abandonment provisions in the lease, so make sure your actions do not foreclose your options.
• Decide whether to terminate occupancy or terminate the lease altogether. There is a distinction when calculating damages, so be careful.
• Consider litigation to recover damages. The lease may require arbitration, but most do not. Decide carefully whether to pursue litigation at all. If it is a "go," then decide when to proceed. The terms of your lease, the amount of money coming due for the lease term, and the market for reletting the space will influence this decision. The lease itself may dictate how damages are calculated. If the lease is silent or inadequate, common law provides guidance on what damages are available. The lease will determine whether you can recover attorney fees if you win.
• Once you gain possession of the space common law requires you to make reasonable efforts to relet the space even if the lease does not. This obligation is commonly referred to as "mitigation of damages."

Sometimes a tenant walks away, making the landlord's decision easy. When this happens, it's time to apply the security deposit, hope the tenant has cleared the space, order an asset search, and decide whether to pursue litigation. If the well is dry, send a default letter terminating the lease. Take possession of the space and make reasonable efforts to relet it. And hope the tenant will resurface at some point with assets.

Published Spring 2008

This article is intended to inform the reader of general legal principles applicable to the subject area. It is not intended to provide legal advice regarding specific problems or circumstances. Readers should consult with competent counsel with regard to specific situations.

BACK TO TOP | BACK TO ARTICLE INDEX | PRINTER-FRIENDLY PAGE