Brian J. Holleran
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Commercial Landlord's Options when Tenant Fails to Pay Rent
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.
Understanding the Purpose of a Lien is Required to Ensure Payment
By Brian J. Holleran
Click here to print; Understanding the Purpose of a Lien is Required to Ensure Payment
It is generally understood that a supplier of labor, materials, or equipment on a private construction project can secure a mechanic’s or materialmen’s lien on the subject property. The purpose of such lien is to ensure payment to those supplying the labor, materials, or equipment.
Idaho’s materialmen’s and mechanic’s lien statute, however, does not allow a laborer, materialman, or equipment supplier to attach a lien to public, government-owned property. The laborer or materialman is therefore deprived of his or her typical security interest in the project. Recognizing this shortcoming, Idaho has adopted a series of laws designed to protect the rights of those providing labor, materials, or equipment to projects on public property.
This alternative remedy is the “payment bond.” Idaho law requires a general contractor on a state, county, city, or any other public works project to post a payment bond before the contract for construction is awarded. The public, contracting authority sets the amount of the payment bond, but it cannot be less than 85% of the entire contract amount. The general contractor will typically secure the payment bond via a licensed surety company. Pursuant to the statute, the payment bond is solely for the protection of persons supplying labor, materials, or equipment to such public works project.
A person seeking payment via the payment bond must meet various qualifications in order to sue for payment under the statute. First and foremost, the person seeking payment must qualify as a claimant under the statute. The statute limits claimants to first-tier and second-tier subcontractors. A “first-tier subcontractor” is a subcontractor that supplies labor or materials directly to the general contractor. A “second-tier subcontractor” (also known as a “sub-subcontractor”) is a subcontractor that supplies labor or materials to a first-tier subcontractor. Thus, a person that supplies labor or materials to a second-tier subcontractor cannot make a claim against the payment bond because his relationship to the general contractor is too remote.
The next requirement is of course that the claimant has provided labor, material, or equipment to the project. Quite obviously, a “laborer” performs some physical act at the project site. A person providing a professional service, such as a project manager, engineer, or architect may qualify as a “laborer” if such professional supplies 1) on-site; 2) physical toil; and 3) and the professional’s work is supervisory in nature. A claimant supplies “materials” to the project if, at the time of sale, he reasonably expects such materials to be used in the project. Finally, claimant provides “equipment” if he rents, leases, or otherwise supplies equipment to the project.
Next, the claimant must not have been paid in full within 90 days after last furnishing labor, materials, or equipment to the project. Here is where the distinction between first-tier and second-tier subcontractors is relevant. A first tier-subcontractor is not required to give notice to the general contractor of his claim within this 90 day period. A second-tier subcontractor, however, is required to give notice to the general contractor of his claim during the 90 day period. Specifically, the second-tier subcontractor must give notice directly to the general contractor via registered or certified mail, stating that such second-tier subcontractor has not been paid for the labor, materials, or equipment supplied. The notice must state with substantial accuracy: 1) the amount claimed; and 2) the name of the person to whom the labor, materials, or equipment was furnished. In addition, the notice must be sent to any place where the contractor maintains an office or conducts his business, or the notice may be sent to the contractor’s residence.
Finally, the claimant must institute a lawsuit against the payment bond within the appropriate amount of time. Here again, the first-tier/second-tier distinction is relevant. A first-tier subcontractor is entitled to file suit within one year from the date on which final payment under the subcontract became due. A second-tier subcontractor, however, has a shorter time period to bring suit. The second-tier subcontractor must bring suit within one year from the date on which he last supplied labor, materials, or equipment to the project.
It is also important to note that there are federal statutes providing a similar remedy for first-tier and second-tier subcontractors where the project is on federal land. However, because there are differences between the federal and state statutes, the subcontractor should consult such federal statutes before commencing a federal action.
Under Idaho state law, a prevailing subcontractor may be entitled to a reasonable attorney’s fee. On the flip side, a subcontractor who does not prevail may be required to pay the other party’s reasonable attorney’s fee. As such, it is highly recommended that a subcontractor contact a construction attorney before commencing an action against the general contractor's payment bond.
Brian J. Holleran is an attorney with the law firm Meuleman Mollerup LLP focusing in the areas of construction law and commercial litigation. Mr. Holleran earned his undergraduate degree in English from the University of Idaho, and he received his J.D. in 2010 from the Gonzaga University School of Law. Prior to law school, he served as Project Manager for an Idaho Commercial Development and Management firm. Mr. Holleran can be contacted at 208.342.6066 or by email at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .
Meuleman Mollerup LLP attorneys have served the construction, real estate, and business communities for over 29 years. More information is available at www.lawidaho.com
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