Since commercial tenant defaults will remain on the upswing for a while, I post here the schematic for Arizona landlord action when a tenant defaults and, it appears, cannot cure in an acceptable time frame. This is a compendium of what the landlord can do; in the next post I’ll ruminate on what the landlord should be doing, in these devastating economic times. In the meantime, here are the dance steps.
One: Check for bankruptcy/insolvency status. Always check to make sure that neither the tenant nor its principals are in bankruptcy before taking action. (That’s not easy for the lay person to do competently—you should hire a law firm to help you do this.) If your tenant was a bank, check to make sure that the FDIC has not become your replacement tenant. Most of steps 2-5 below won’t apply if this step discloses that the tenant is under the protection of federal law. On the FDIC front, review www.nylj.com for the Special Section dated Monday, January 12, 2009; the Debevoise & Plimpton attorneys do a nice job of summarizing how to prepare for battle with the FDIC.
Two: Lock ‘em out. Sometimes the only way to find out if there’s a chance you’ll get any rent going forward is to ensure the tenant’s attention is devoted to its most important creditor—you. However, use your noodle, landlord—realize that there are repercussions if you lock out someone with perishable or time-sensitive merchandise or work in progress, and that you may force a tenant to choose the bankruptcy alternative if you close its business through a lockout earlier than would be optimal. Videotape your lockout, with sound narrative, as you inventory the premises. Such tactics increase the odds the landlord will not be defending a conversion claim by either the tenant or an equipment lessor, lender or vendor under an installment contract. Post a notice of the lockout on the door of the premises; and be prepared for the bitter and confused contacts that will follow. See your attorney for further advice on this aspect. If your lease is ambiguous about whether a lockout constitutes a termination, send the tenant written notice contemporaneously with the lockout making clear that the lease is not terminated, and that it remains liable for rent through the date a replacement tenant is found.
Three: Toss ‘em out. The convenient way, financially, is through a forcible detainer action, although there are other, less friendly or summary ways to do that, such as via an action in ejectment. You need counsel to do this; if you try this on your own, remember the adage about having an “idiot for a lawyer.” Forcible detainer actions can lead to an award of attorneys’ fees as part of the judgment of tenant’s “guilt.” Ask your attorney to explain the reach of A.R.S. §12-1178; and realize that you’ll have to file a separate suit to recover “going forward” rent (accruing after the date the defendant is found guilty of forcible detainer).
Four: Cut your losses. Landlords have a common law duty in Arizona to minimize their damages. You have the obligation as landlord to use commercially reasonable, not “heroic,” efforts to relet the vacated premises. There are a rash of Arizona appellate cases that explain, inferentially, what is commercially reasonable. The oldest is Wingate v. Gin (1985); and the most recent is Sakthiveil v. Casler (Filed December 16, 2008). If you have questions after your review of the law, call your attorney. If you don’t act in a commercially reasonable manner, your damages will be reduced by a judge reviewing the circumstances. It also may be a sensible cutting of losses to terminate the lease if the tenant makes clear that it has retained bankruptcy counsel and is preparing a petition in bankruptcy. If a landlord properly terminates the lease according to the notice provision in the writing that announces the termination date prior to the date the petition in bankruptcy is filed, then the leaseshold doesn’t become part of the bankruptcy estate—which means the automatic stay doesn’t “freeze” the landlord from taking action until the lapse of the period when the debtor tenant must assume (with or without assigning it) or reject the lease.
Five: Sell or toss your tenant’s property. This is a way to recoup some of your lost rent and prepare for re-letting, if a landlord handles it properly. But before you start down that lane, think about three things. Thing one, check for federal and state tax liens that may attach to personal property of the tenant, and that will trump your statutory landlord’s lien rights. Second, review Bates and Springer of Arizona, Inc. v. Frierwood (1973) with your counsel. Since there may well be competition for control of the personal property with equipment lessors, lenders or vendors of personal property retaining security interests, you must perform a search in the records of the Arizona Secretary of State and the County Recorder’s Office where the property lies. Don’t travel either a path of selling what you think is your tenant’s property without knowing whether someone else has a claim on it. Third, resist the temptation to dispose of property that you think is worthless—without input from legal counsel. (For one thing, a tax-liening jurisdiction will be real steamed that you didn’t get the government’s advance consent to the disposal of property as to which it had a lien.) The landlord’s opinions on valuation and resale potential don’t count for much here, especially if the landlord signed a subordination or waiver in favor of an equipment lessor or lender. The text of the lease you signed, on the other hand, does count. Review the text on abandoned property (post-lien termination) with your attorney, along with all other lease-pertinent documents like estoppel certificates, subordinations or landlord waivers.
Last thoughts: I get asked if the landlord can accept partial payments of rent from a tenant in default without waiving rights to proceed against that tenant. The answer is, “what does your lease say?” Often leases recite that landlord may accept any sum of rent without taking that marking a circumstance of waiver, release, accord and satisfaction, and so on. Sometimes, there’s just a generic statement that no covenant or term of the lease can be waived without a written landlord waiver—but understand that occasionally, waiver may be implied from the conduct of the parties. An Arizona case shedding light on the waiver issue is DVM Co. v. Bricker (1983), which says that accepting rent after knowledge of a breach results in landlord’s claim for breach and affirmation that the lease still is in force. Once again, see your attorney for guidance.
Also, I am asked if the landlord can keep the security deposit in payment of delinquent rent. Helloooo—that’s more complicated than first meets the eye. First, review what the parties have agreed to in the lease about the application of the security deposit to delinquent rent. Second, if there’s no discussion in the lease about how to treat the security deposit in a rent default circumstance, review Thompson v. Harris (1969) with your counsel before informing tenant that you are retaining the security deposit to satisfy back rent.
[Note: Saint Vitus’s Dance was the name given to a autonomic nervous system symptoms first described in the 1500s, which presented in the form of “hysterical” physical manifestations like dancing uncontrollably. This became confused with choreomania, a social phenomenon of medieval times, primarily seen in mainland Europe between the 14th and 18th centuries; this involved groups of people, sometimes thousands at a time, who danced uncontrollably and bizarrely, seemingly possessed by the devil. In that day, people of faith supplicated Saint Vitus for succor from the disease. I take the disease seriously; it’s the outward behavior that needs examination.]