How to Enforce Lease of Tenant on Verge of Eviction

Evicting a struggling tenant is never easy. Handling an eviction poorly may create a contentious situation for you and your property manager, or even result in a lawsuit for wrongful eviction. In this economy, it is critical to take action as soon as a tenant sends a partial rent payment or misses a rent payment altogether. Nonpayment of rent is the most common breach of a tenant's lease, and a major signal that it is on the verge of a default. Protect yourself by following a two-step plan to enforce the lease for a tenant experiencing financial difficulty.

If you want or need to retain the tenant, first try to create and implement a plan that will help it continue to operate in your strip mall, shopping center, or office building until its business improves. However, if you can't come to an agreement, closely monitor the eviction process so that it is as efficient and painless as possible for everyone involved—and you don't suffer financial or legal damage as a result.

Step #1: Protect Your Interests First

When determining whether it is feasible or in the best interest of your center or building to try to keep a tenant that is breaching its obligation to pay rent, don't forget to enforce its lease terms at every point in the process.

Affirm the lease. Regardless of how important your tenant is to the building or center, worry about yourself first. Quickly deal with the issue to prevent the tenant from inadvertently modifying the terms of the lease, advises Peter D. Morris, a small business marketing expert with over 30 years of experience in the commercial real estate industry and the founder of Greenstead Group LLC.

For example, if you allow the tenant to pay late every month or accept partial rent payments, it could argue that the lease has been modified by an oral agreement. Prevent this by immediately meeting with the tenant to affirm the terms of its lease as soon as it makes a late or partial payment. For language you can include in your affirmation notice, see our Model Notice: Affirm Lease with Tenant. Tell the tenant that rent will continue to be due on the day of the month specified in the lease, but that you are accepting the late or partial rent payment as a one-time consideration.

“It's very important to affirm the lease so that it doesn't become modified, particularly if the tenant thinks that it can pay one week's rent at a time throughout the course of the month,” says Morris. “Don't turn this into a week-to-week tenancy,” he warns.

Base enforcement on cotenancies. In some cases, however, it's more advantageous to help the tenant to some degree, rather than enforce the lease in its entirety and then evict the tenant for nonpayment. You should base your decision to enforce your struggling tenant's lease (even though you know that it cannot pay), help it, or let it out of its obligations altogether on the outlook of your whole property. This is especially important at retail properties that have tenants with cotenancy clauses or other occupancy requirements in their leases. Create a tenant strategy manual with your property manager that includes information about cotenancy clauses that tie the struggling tenant to the overall occupancy of the center.

“If you look at a tenant in isolation, you may not realize that by letting it go dark it might be tripping up another tenant's cotenancy clause,” warns Morris. “Even if the tenant isn't paying rent, it might be advantageous to keep the lights on, depending on the wording in certain cotenancy clauses,” he points out.

Practical Pointer: Don't talk to tenants about an eviction that is or may be happening in your center or building. The owner and its property manager are under no obligation to talk about what is happening with another tenant's lease. “I've held this rule sacrosanct throughout my career,” Morris says. Even if a tenant's cotenancy clause may be affected by the eviction, it is the tenant's responsibility to enact the clause—not yours.

Step #2: Stick to Lease Terms, Local Law

If you ultimately have to let your struggling tenant go dark, it may become contentious. Protect yourself by enforcing all of the tenant's lease terms during the eviction process and following eviction requirements in your jurisdiction—and document every transaction. Require your tenant to sign for hand-delivered notification. For an example of a proof of service form you can use, see our Model Form: Use Proof of Service to Document Eviction Process.

Discuss move-out provisions. Prior to its eviction, meet with your tenant to discuss move-out requirements, most of which should be dictated by the lease. The removal of the tenant's chattels (that is, inventory and equipment) is a major issue. Find out what equipment is leased or under a sales contract so its owners don't accuse you of aiding and abetting in the unlawful removal of their property. Keep in mind that, generally, equipment like cash registers or photocopiers is encumbered in some way.

During the meeting, determine what chattels must stay and provide your tenant with notification that anything that has been left on the premises will be “deemed to have been abandoned” by it and that you will be “free and clear to dispose of it however the owner sees fit.” This language frees you from having to apply the value of any remaining chattels to liquidated damages or penalties that might be accruing.

Don't forget to review all other provisions in the lease that pertain to the tenant's move-out. Make it clear that moving out under eviction circumstances does not change the terms in the lease governing chattels, fixtures, the condition of the space, security deposits, or other end-of-lease obligations.

Comply with tenant's legal options. “Protect yourself with written documentation, because a tenant can always turn around and say that it was unfairly evicted from the premises,” warns Morris. And local laws may be on its side. Certain jurisdictions have relief from forfeiture, allowing your tenant to go to a court after you have given it notice of the breach of its lease and argue that you are being unfair or that the breach isn't deserving of a default. If the court agrees, it will grant relief from forfeiture that puts the default in abeyance for only that instance and that particular type of breach, such as nonpayment of rent.

For example, as long as your tenant resolves its breach for nonpayment of rent by paying the balance that it owes, it can't go into default—but it can't ask for relief from forfeiture for nonpayment of rent again. The tenant could try to get relief from forfeiture for only other types of breach from that point on.

Morris has told some tenants when handing them notices of breach of lease that they can seek relief from forfeiture, if he and the owner have agreed that they want to keep those tenants, but also want them to start fulfilling their lease obligations. Morris says that using the court system to back him up sometimes is more effective than repeatedly asking a tenant to change its behavior.

Practical Pointer: If your tenant is breaching its lease in more than one way, include them all in a single notice of breach of lease. That way, you don't have to send separate notices and then deal with the tenant's election of relief from forfeiture for every breach, prolonging the pain. While your tenant may get relief from forfeiture for all of the breaches in that notice, the tenant won't have any remedy for repeating them in the future.

Be Courteous But Cautious

Be effective and efficient when enforcing your troubled tenant's lease throughout the eviction process. Understand that an evicted tenant loses its investment and its employees lose their jobs. And be as pleasant and professional as possible when performing the actual eviction, and instruct your property manager to do the same. However, continue to document whether the tenant has complied with the move-out provisions in its lease and any further steps that you may have to take.

Insider Source

Peter D. Morris SCSM, SCMD, CLS: Greenstead Group LLC, 1528 Ard Eevin Ave., Glendale, CA 91202; pmorris@beyond-the-building.com; http://www.beyond-the-building.com.

Sidebar

Set Reporting Guidelines for Property Manager

Because it is providing financial information to you, a third-party property manager is obligated to report to you at least monthly regarding financial issues and any other predetermined topics. However, if your property manager works directly for you, it probably has a tendency to check in more often. But both types of property managers should communicate more frequently if there is an impending default, and you should set specific guidelines for reporting in that situation in addition to customary reporting requirements.

“The general rule is that a property manager should talk to the owner immediately upon any substantial change to the tenancy and then going forward as each step of the eviction process is contemplated or finished,” advises Peter D. Morris of Greenstead Group LLC. Make it clear to a third-party property manager that it should and can act only on your instructions—not unilaterally—and that your written approval is necessary to authorize issuing a default notice, which would change the cash flow and tenancy of the property.

Remember when setting reporting guidelines for both types of property managers that you can choose the issues that you want information about and the intervals for updates, and require them to formally document all reports.

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