My commercial tenant abandoned or “walked” its lease, what are my rights?
When acting as a landlord or property manager for a commercial property, one of the most frustrating business realities is the tenant abandoning the leasehold, often in the middle of the night, and failing and refusing to pay rent as promised in their lease. This happens frequently enough that commercial property managers even have their own shorthand term for the practice, that the tenant “walked” its lease. Walking a lease causes all sorts of problems for the owner and property manager including cashflow, business planning, refinancing, and issues with other tenants.
Well if you are a commercial property owner or property manager, what do you do when the tenant walks? As is common with legal matters, the answer is, “it depends,” but this article will outline some of the typical responses and tactics Waranch & Nunn have used to secure payments from commercial tenants who abandon the property.
The first, and most important, is to get ahead of the problem with a well-drafted commercial lease agreement and personal guarantee. Check out our other blog post, “What to look for in a well-drafted commercial lease agreement and personal guarantee” for detailed information about how to protect yourself and your company before a lease gets walked.
Assuming you have a valid and enforceable commercial lease and personal guarantee, how do you collect from a tenant who has abandoned? The first step is typically the drafting and sending of a demand letter. Such a demand letter should specifically describe the event of default (abandonment, nonpayment, violation of non-monetary provisions), and provide an accounting demanding exactly what should be paid. The demand letter should demand accelerated payment in full, referencing the default provisions of the lease.
Sometimes accounting for the exact number to be demanded upon acceleration can be complicated, and it will benefit you to work with an attorney experienced in these matters to ensure you are not under or over-demanding monies. A triple-net lease will require the property manager/owner to calculate estimated future ongoing expenses. Leases with several amendments will require careful adherence to the written terms. Leases with changing rental rates during the term will require more careful accounting. The demand letter should reference the personal guarantee and make clear that payment is demanded not just from the business entity, but also from the tenant individually. Finally, the demand letter should provide a short deadline for a response, a threat to file a lawsuit if no response is forthcoming, and a statement that such a lawsuit will request not just the amount demanded in the letter, but also costs of court, attorneys’ fees, interest, and all other monetary relief to which the landlord is entitled under law.
Following the demand letter, one of two things will occur: (1) the tenant will run, or (2) the tenant will negotiate.
If the tenant negotiates, the landlord’s best bet is to have them either pay a lump-sum cash settlement or execute a promissory note. Abandoning commercial tenants typically do not have tens of thousands in cash to pay their landlords, so landlords accepting cash settlements often do so at a discount. That said, depending on the specifics of the landlord’s business and the identity of the tenant, such a discounted lump-sum settlement is often the best deal for both sides. Such a settlement is typically advisable when the tenant is unsophisticated and does not have significant funds from an ongoing business. If, however, an abandoning tenant wishes to negotiate and the tenant owns an ongoing business or businesses, or is otherwise sophisticated and successful, the landlord will likely benefit more from a settlement in the form of a promissory note rather than a lump-sum at a discount. Promissory notes are formal legal documents with detailed legal rules necessary for their enforceability, so if you are considering offering a promissory note style settlement, it is critically important that you engage an attorney to assist in its drafting. Such a promissory note style settlement will have significant business and personal benefits to both sides – the tenant does not have to worry about a lawsuit or collection efforts against him individually, and the landlord gets a steady stream of income without having to provide commercial space.
If the tenant runs, refuses to negotiate and ignores the demand letter, or negotiates a settlement but then refuses to actually pay, the only real option is to file a lawsuit to use the awesome power of the courts to force the tenant’s compliance. Such a suit can be quite economical in terms of legal fees and costs when compared to typical business to business litigation, as most “running” tenants do not properly respond to the suits and lose procedurally on default judgment. Moreover, even if the tenant does hire counsel and formally respond to the suit, with simple evidence such as the lease, personal guarantee, notice of monetary default, and tenant or occupant ledger showing delinquency, many of these lawsuits can be resolved through the filing of a Motion for Summary Judgment. Summary judgment means, essentially, that there are no factual disputes, and the movant should win without a trial on the merits because it is so obvious based on the evidence and lack of a valid defense.
However, as many astute readers know, just getting a judgment against an abandoning tenant is very different from actually collecting money from that tenant. For more information about how Waranch & Nunn can assist you or your business in collecting on a judgment from a delinquent tenant, please read the blog post “I won a judgment; now how do I collect?”
If you have a commercial tenant who has abandoned or walked its lease, call Waranch & Nunn today to set up a free consultation and discuss your legal rights and options.