Protect Interests When Dealing with Financially Troubled Tenant

While retail and office building owners field defaults of many kinds from tenants that fail to follow their lease terms, nonpayment of rent is the most common breach of a tenant’s lease. It signals bigger problems for you than just your bottom line being affected in the months that you don’t collect rent from a tenant. A tenant that isn’t paying its rent is probably struggling to such a degree that it might go under, leaving you with the difficult job of handling an eviction properly. Handling an eviction poorly could result in a wrongful eviction lawsuit. But in the meantime, while you determine what will ultimately happen to the tenant, you’ll still need to enforce the lease. Here’s how you can protect yourself when a tenant’s eviction seems imminent. 

Take Immediate Action After Partial or Missing Payment

It’s critical to take action—by enforcing the lease for a tenant experiencing financial difficulty—as soon as that tenant sends a partial rent payment or misses a rent payment altogether.

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. But if you can’t come to an agreement, closely monitor the eviction process so that it’s as efficient and painless as possible for everyone involved—and you don’t suffer financial or legal damage as a result.

When determining whether it’s feasible or in the best interest of your center or building to try to keep a tenant that’s 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. 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. Ask your attorney about adapting the language in our Model Notice: Keep Status Quo with Struggling Tenant’s Lease.

Make sure to tell the tenant that rent will continue to be due on the day of the month specified in the lease, but that you’re 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. It will help avoid turning this into a week-to-week tenancy.

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. It’s key to 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. 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.

Other tenants are likely to get wind of the struggling tenant’s situation and worry that their businesses will be affected. This can lead to questions from them. But always remember that you shouldn’t talk to tenants about an eviction that is or may be happening in your center or building. You and your property manager are under no obligation to talk about what’s happening with another tenant’s lease. Even if a tenant’s cotenancy clause may be affected by the eviction, it’s the tenant’s responsibility to enact the clause—not yours.

Follow Lease and Law to the Letter

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. You can adapt our Model Form: Document Adequate Notice of Eviction to Tenant. Hold a meeting with the tenant to discuss the following items.

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.

Related provisions in lease. 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 doesn’t change the terms in the lease governing chattels, fixtures, the condition of the space, security deposits, or other end-of-lease obligations.

You’ll also need to comply with the 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. 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’re 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.

If you want to keep a tenant, but also want it to start fulfilling its lease obligations, consider telling it when handing it a notice of breach that it can seek relief from forfeiture, if your attorney agrees that this is wise. Sometimes, using the court system to back you up 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.

Preserve Good Will Through Process

Remember that an evicted tenant loses its investment and its employees lose their jobs, so 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. Be effective and efficient when enforcing your troubled tenant’s lease throughout the eviction process.