To pursue or not to pursue a default

The economy, the use of office space and the attendance of workers at a central location have evolved since 2020. In many cases, this has led to tenants falling behind on their rent. When this occurs, commercial landlords must balance the costs, advantages, and drawbacks associated with filing a lawsuit against a non-paying tenant.

The terms of the lease play a significant part in considering whether a commercial landlord should engage in real estate litigation against a non-paying tenant. But other factors also require evaluation.

Solvency

A lawsuit may be fruitless if the landlord cannot collect from an insolvent tenant. Corporations or other businesses having a cash flow problem may lack other assets that can be attached to satisfy a judgment.

Before filing a suit, the landlord should consider whether the tenant has assets that can pay a judgment. A private investigator may be able to locate this information, or it may be available by purchasing a license to online databases that evaluate the availability of publicly known assets that can be sought.

Guaranty

A guaranty may be decisive. Having solvent entities acting as a guarantee to the lease greatly increases the likelihood of recovering unpaid rent.

A landlord may require the principal operating the corporate tenant to personally guarantee the obligations of the lease. If there is a lease assignment, the previous tenant and its principal may have to stay liable as a condition for the landlord consenting to the lease assignment.

The language used in the guarantee is also important. There are usually limited or continuing guarantees.

A limited guarantee is usually restricted to the lease obligations under the terms existing at the time of execution. It may expire when a certain time period is over.

A continuing guaranty, however, may stay in place indefinitely subject to the waivable right of revocation. It can make the principal liable in future successive transactions.

In longer lease terms, continuing guaranties can be important if the lease was assigned more than once, the term of the lease expanded or rent obligations rose over time. In these situations, the continuing guarantor stays liable even if it was unaware of the expanded obligations.

Mitigation

Mitigation can be a difficult obstacle and tenants often challenge landlords’ efforts to mitigate. Landlords must take reasonable steps to re-let the property to reduce the damage from the tenant’s default. Landlords must act pragmatically and within reasonable commercial practices.

Landlords should consider:

  • Engaging a commercial broker who may also testify as a witness on releasing efforts.
  • Types of potential replacement tenants.
  • Reasons for seeking or rejecting specific tenants and whether these decisions are reasonable.
  • Need for tenant improvements and acquiring permits.
  • Other actions and considerations to expeditiously release the property.

Damages

Commercial leases usually contain the types of damages that a landlord can recover for default. These often include late fees and interest.

A net lease allows a landlord to recover property taxes, insurance, utilities, maintenance and repairs. It may give the landlord the ability to recover the costs of re-leasing the premises such as commissions and renovation and alteration costs in addition to recovery of rent.

Attorneys can provide options when a tenant defaults. They can also pursue actions in court proceedings.