Click here to Print: Commercial Landlord's Options when Tenant Fails to Pay Rent
By Brian J. Holleran
As a result of the difficult financial times, many businesses are generating less income making it more difficult for landlords to collect rent from commercial tenants.
Landlords in existing non-performing leases have limited options. They can enter into an agreement voluntarily terminating the lease, enter into a modification of the lease, file an action solely for eviction, or file an action for eviction and damages. Because of declining real property values, the rent payable under an existing lease may be above market conditions. Both landlord and tenant may be better served to modify the lease to reflect market conditions and provide for payment of any delinquent rent. In exchange for reducing the rent, the landlord may ask for additional security or guaranties. Before entering into a lease modification, landlords should require updated financial statements and business plans. If insolvency and/or bankruptcy appear imminent, a lease modification will likely prove futile.
Unfortunately, many landlords are finding that their tenants are insolvent or about to become insolvent, leaving landlords with no other choice than eviction. In Idaho, a landlord can evict and have the county sheriff remove the tenant when the tenant has been found guilty of “unlawful detainer” of the leased premises. There are two statutory methods for holding tenants liable for unlawful detainer. The first is an action solely for possession. The second is an action for possession and damages.
An action solely for possession has the advantage of an expedited trial – within 12 days of filing the lawsuit – however, a separate action for the past-due rent and other damages must be commenced after the action for possession is completed. The second type of action has the advantage of one consolidated proceeding for both possession and damages, but without the benefit of an expedited trial.
Prior to filing either action, consult the lease for required notices. Typically, leases require the landlord to provide the tenant with notice of, and opportunity to cure, any default. If the tenant does not cure its default within the time allowed under the lease, the tenant is then in default of the lease.
Provided that the tenant is in default under the lease for failure to pay rent, and provided the landlord desires to file an action solely for possession, the landlord’s first step is to personally serve upon the tenant what is commonly called a three-day notice. The three-day notice informs the tenant that it is in jeopardy of being guilty for unlawful detainer unless, within three days from the date of service, it either (a) pays the past-due rent; or (b) removes its possessions and vacates the premises.
If the past due rent is not paid or the tenant has not vacated the premises within three days, then the landlord can file a lawsuit for unlawful detainer against the tenant. The court will set a trial on the matter within 12 days of filing the lawsuit. The landlord is thus able to regain possession of the leased premises much more quickly than the case where the landlord seeks possession and damages, as trial on an action for possession and damages may not be held for a year or more.
There are four caveats to an action solely for possession, all having to do with “rent.” First, the default upon which the action for possession is premised must be for the tenant’s failure to pay rent. The default cannot be for breach of some other promise, such as the tenant’s promise not to sublease the premises. Second, the past-due rent calculation in the three day notice cannot contain any amounts beyond actual “rent.” This law firm has seen Courts narrowly construe the term “rent,” such that ancillary fees such as common area maintenance fees, late fees, and even interest on past-due rent have been construed by the Court as something other than “rent.” In cases where landlords include these ancillary fees in the past-due rent calculation in the three-day notice, the Court has at times declined to award judgment in the landlord’s favor, reasoning that including these ancillary fees is an attempt to collect damages. The third caveat is obvious: the landlord can only seek possession of the premises, it cannot seek damages. Finally, rent that has been past-due for more than one year cannot be included in the past-due rent calculation of the three-day notice.
Once the landlord obtains judgment against the tenant for unlawful detainer, it must then serve a writ of eviction on the sheriff of the county where the leased premises are located, which writ of eviction requires the sheriff to enter and regain possession of the premises on behalf of the landlord. If the tenant’s possessions are still located in or on the premises, then the sheriff is entitled to place such possessions in storage at the tenant’s expense. Finally, once landlords have regained possession, they can file a separate, non-expedited action for damages.
As mentioned above, the second type of action is an action for both possession and for damages. Here, landlords must still give notice of default required by the lease. Provided the cure period expires under the lease, then landlords can immediately file a complaint with the Court, setting forth facts showing that the landlord is entitled to both possession of the premises and damages resulting from the tenant’s failure to pay rent or other breach. Here, however, the landlord does not get the benefit of an expedited trial, so it is possible that the tenant may remain in possession of the premises for an extended period of time, despite its failure to pay rent.
In summary, landlords are wise to check the creditworthiness, net worth, and business expertise of their tenants prior entering into a lease or a lease modification. If a lease modification is not desired, then landlords should strongly consider an unlawful detainer action wherein the landlord solely seeks to regain possession of the leased premises. An action solely for possession has the advantage of an expedited trial, enabling the landlord to regain possession and re-lease the premises in an accelerated amount of time. As a final option, the landlord can file a complaint for possession and damages concurrently, but the landlord will not get the advantage of an expedited trial with this option. In any event, landlords should seek competent legal advice when entering a lease, modifying a lease, or evicting a tenant.