Lease Enforcement and Remedies: Structuring Key Provisions for Eviction, Self-Help, Injunction, Action for Damages

Transcription

1 Presenting a live 90-minute webinar with interactive Q&A Lease Enforcement and Remedies: Structuring Key Provisions for Eviction, Self-Help, Injunction, Action for Damages THURSDAY, MAY 25, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Douglas M. Bregman, Principal, Bregman Berbert Schwartz & Gilday, Bethesda, Md. Greg K. Hecht, Principal, Hecht Walker, Atlanta Jon Jordan, Principal, Hecht Walker, Atlanta The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

2 Tips for Optimal Quality FOR LIVE EVENT ONLY Sound Quality If you are listening via your computer speakers, please note that the quality of your sound will vary depending on the speed and quality of your internet connection. If the sound quality is not satisfactory, you may listen via the phone: dial and enter your PIN when prompted. Otherwise, please send us a chat or sound@straffordpub.com immediately so we can address the problem. If you dialed in and have any difficulties during the call, press *0 for assistance. Viewing Quality To maximize your screen, press the F11 key on your keyboard. To exit full screen, press the F11 key again.

3 Continuing Education Credits FOR LIVE EVENT ONLY In order for us to process your continuing education credit, you must confirm your participation in this webinar by completing and submitting the Attendance Affirmation/Evaluation after the webinar. A link to the Attendance Affirmation/Evaluation will be in the thank you that you will receive immediately following the program. For additional information about continuing education, call us at ext. 35.

4 Program Materials FOR LIVE EVENT ONLY If you have not printed the conference materials for this program, please complete the following steps: Click on the ^ symbol next to Conference Materials in the middle of the lefthand column on your screen. Click on the tab labeled Handouts that appears, and there you will see a PDF of the slides for today's program. Double click on the PDF and a separate page will open. Print the slides by clicking on the printer icon.

5 Lease Enforcement and Remedies: Structuring Key Provisions for Eviction, Self- Help, Injunction, Action for Damages Douglas M. Bregman, Principal Bregman, Berbert, Schwartz & Gilday, LLC 7315 Wisconsin Avenue, Suite 800 West Bethesda, Maryland

6 Default Provisions Default provisions are a critical aspect of any commercial lease They generally control the rights of the parties in the event that either fails to live up to its obligations Events of Default provisions explicitly enumerate the situations that will constitute default under the lease In the event of a tenant default, most commercial leases provide the landlord with a number of remedies in addition to those provided by law These remedies are set forth in default provisions Default provisions typically fall into two categories: monetary and non-monetary 6

7 Events of Default Sample Events of Default Provision- In addition to those events or circumstances described in this Lease as an Event of Default, each of the following shall constitute an "Event of Default": (a) Tenant's failure to make when due any payment of the Base Rent, additional rent or other sum; provided, however, that with respect to the first such failure in any twelve (12) month period only, no Event of Default shall be deemed to have occurred unless such failure continues for a period of five (5) days after Landlord delivers written notice thereof to Tenant; (b) Tenant's failure to perform or observe any covenant or condition of this Lease not otherwise specifically described in this Section; provided, however, that with respect to the first such failure as to any particular Article of this Lease in any twelve (12) month period only, no event of default shall be deemed to have occurred unless such failure continues for ten (1O) days after Landlord delivers written notice thereof to Tenant, or such shorter period as is appropriate if such failure can be cured in a shorter period; provided, however, that such cure period shall not be applicable if, in Landlord's sole and absolute discretion, such failure raises a life/safety issue with respect to the Building or its occupants or visitors, including but not limited to, a threat of personal injury or continuing physical injury to the Building, or if such failure is affecting another tenant's use or occupancy of the Building or its premises; (c) Tenant's failure timely to vacate and surrender the Premises in the condition required under this Lease at the expiration or earlier termination of the Lease Term; (d) Tenant's abandonment of or failure to occupy continuously the Premises, if Tenant also fails to pay Rent; (e) an Event of Bankruptcy as specified in Article XX; (f) Tenant's dissolution or liquidation; (g) any Environmental Default as specified in Section XX; or (h) any subletting, assignment, transfer, mortgage or other encumbrance of the Premises or this Lease not permitted by Article XX. 7

8 Events of Default (cont.) Landlord s Perspective: In general, a landlord wants to streamline the default process by not selfimposing too many requirements before the tenant is deemed to be in default For instance, an events of default provision requiring the landlord to provide written notice before the tenant is considered in default should be avoided from the landlord s point of view Tenant s Perspective: On the other hand, the tenant will always seek language that requires prior written notice with an opportunity to cure before the landlord may exercise its remedies Such a provision will allow the tenant to avoid forfeiture of its leasehold rights based upon an inadvertent mistake 8

9 Monetary Default Monetary default occurs when a tenant fails to meet a financial obligation due to the landlord under the lease (e.g., rent) In addition to rent, monetary default could involve a tenant s failure to pay common area maintenance fees, operating expense pass throughs, taxes, or repair/improvement costs Monetary default provisions specify a tenant s liability in curing such a default Sample Monetary Default Provision- If Tenant fails to make any payment of Base Rent, additional rent or any other sum on or before the date such payment is due and payable (with exception to any grace period specified in Section XX), then Tenant shall pay to Landlord a late charge of five percent (5%) of the amount of such payment. In addition, such payment and such late fee shall bear interest at the Default Rate from the date such payment or late fee, respectively, became due to the date of payment thereof by Tenant; provided, however, that nothing contained herein shall be construed as permitting Landlord to charge or receive interest in excess of the maximum rate then allowed by law. Such late charge and interest shall constitute additional rent due hereunder without any notice or demand. 9

10 Monetary Default (cont.) Landlord s perspective: When drafting monetary default provisions, landlords seek to 1) collect the unpaid payment in a timely manner and 2) discourage the tenant from defaulting again, and 3) charge a late fee and interest With respect to these provisions, landlords are often reluctant to provide anything beyond a minimal written notice requirement Tenant s perspective: Because landlords use these provisions to discourage monetary default, tenants should watch out for overly burdensome penalties such as excessive late payment fees and interest rates From a tenant s point of view, these provisions should impose a written notice requirement on the landlord, however short it may be; that way the tenant will have time to cure 10

11 Non-Monetary Default A non-monetary default means the tenant has failed to perform some duty which does not include the payment of money Examples of non-monetary default may include the lapse of a tenant s liability insurance required under the lease or the wrongful assignment or subletting of the premises Sample Non-Monetary Default Provision- An Event of Default shall occur if Tenant shall fail (other than a Monetary Default) to comply with any term, provision or covenant of this Lease, including, without limitation, the Rules and Regulations, which failure is not cured within thirty (30) days after delivery to Tenant of written notice of the occurrence of such failure, provided, however, that if the failure identified is not reasonably capable of being cured within such thirty (30) day period for reasons which are beyond the reasonable control of Tenant, then such thirty (30) day cure period shall be extended for an additional reasonable amount of time as may be necessary for Tenant to effect such cure, as long as Tenant proceeds diligently to effect such cure upon its receipt of Landlord s written notice. 11

12 Non-Monetary Default (cont.) Landlord s perspective: Written notice may be more justifiable from the landlord s perspective in the non-monetary default context For instance, the landlord may want to notify the tenant that it is underinsured or that the tenant is not conducting business properly in accordance with the lease requirements However, time-frames with respect to this type of notice should be specific and short; if the time-frame is open ended, requiring only that the tenant make reasonable efforts to resolve the default, the landlord can be left with an unresolved problem for a long time Tenant s perspective: It is likely that a tenant may need more time to cure a non-monetary default than a monetary one Therefore, tenants should advocate for a flexible cure-time when negotiating these provisions 12

13 Self-Help A self-help provision refers to the right of a commercial landlord to cure the tenant s default and be reimbursed later for reasonable expenditures related to the cure Sample self-help provision If Tenant fails to make any payment to any third party or to do any act herein required to be made or done by Tenant, then Landlord may, but shall not be required to, make such payment or do such act. The taking of such action by Landlord shall not be considered a cure of such default by Tenant or prevent Landlord from pursuing any remedy it is otherwise entitled to in connection with such default. If Landlord elects to make such payment or do such act, then all reasonable expenses incurred by Landlord, plus interest thereon at a rate (the "Default Rate") equal to the greater of eighteen percent (18%) per annum or the rate per annum which is five (5) whole percentage points higher than the prime rate published in the Money Rates section of the Wall Street Journal, from the date incurred by Landlord to the date of payment thereof by Tenant, shall constitute additional rent due hereunder; provided, however, that nothing contained herein shall be construed as permitting Landlord to charge or receive interest in excess of the maximum rate then allowed by law. 13

14 Self-Help (cont.) Landlord s perspective: This is a pro-landlord clause because it allows the landlord to quickly correct any defaults by the tenant that may affect the rest of the building (i.e. necessary repairs, utility bills, ect.) Tenant s perspective: Allowing landlords to cure certain monetary defaults can be beneficial to commercial tenants, who may temporarily be unable to pay certain expenses required under the lease However, when negotiating these provisions, tenants should ensure that the landlord is not imposing excessive interest rates on reimbursement fees 14

15 Property Access Self-Help This type of self-help refers to a landlord s ability to lock out or constructively remove from the leased premises a tenant who stops paying rent or otherwise stops honoring his/her obligations under the lease. Sample self-help property access provision- Without further notice or demand except as elsewhere provided in this Lease, if a Default occurs, Landlord has the option, immediately, or at any time thereafter, to pursue any one or more of the following remedies together with any other remedies available to Landlord at law or in equity: Terminate Tenant s right to possession of the Premises, enter upon and take possession of the Premises and expel or remove Tenant and any other person who may be occupying any portion of the Premises [If Landlord exercises either of its remedies set forth in clause (a) above or this clause (b): (i) TENANT WILL NOT BE ENTITLED TO ANY NOTICE TO QUIT OR ANY OTHER STATUTORY NOTICE, IT BEING AGREED THAT THE PROVISIONS OF THIS ARTICLE XI SHALL OPERATE AS A NOTICE TO QUIT, ANY OTHER NOTICE TO QUIT OR ANY NOTICE OF LANDLORD S INTENTION TO RE-ENTER THE PREMISES BEING HEREBY EXPRESSLY WAIVED BY TENANT, and (ii) Tenant will immediately surrender the Premises to Landlord upon demand, and if Tenant fails to do so, Landlord may, without prejudice to any other remedy for possession or arrearages in Rent, enter upon and take possession and expel or remove Tenant and any other person who may be occupying any portion of the Premises, by force and using self-help if necessary, without being liable for prosecution or any claim of damages therefore]. 15

16 Property Access Self-Help (cont.) Landlord s perspective: In general, this type of self-help is very risky for a landlord If the repossession is in anyway not peaceful, or if the tenant resists in some way, it could lead to tort liability Alternatively, a landlord s repossession of a commercial tenant s property could disrupt the tenant s business operations, making the landlord susceptible to civil damages Tenant s perspective: Tenants should try to avoid having these types of provisions in their commercial leases Giving a landlord the power to repossess the premises could temporarily (or permanently) disrupt business operations and seriously diminish profitability 16

17 Relocation Relocation clauses allow the landlord under a commercial lease to relocate the tenant from the original premises to another premises, typically in the same building or development Sample Relocation Clause- Landlord shall have the right, at the sole cost and expense of Landlord, to change the location of the Premises provided that: (a) Landlord shall provide Tenant with substitute space of similar configuration and size, comparable visibility, and a storefront location, elsewhere in the Building (the "Substitute Premises"); (b) Landlord shall provide Tenant not less than ninety (90) days' advance written notice of the date Tenant must relocate to the Substitute Premises; and (e) Landlord shall at Landlord's expense (A) remove Tenant's equipment and furniture from the Premises and reinstall those items in the Substitute Premises, and (B) cause the Substitute Premises to be built out in a manner consistent with the then-existing condition of the Premises. Landlord shall reimburse Tenant for its reasonable out-of-pocket relocation expenses, including: moving expenses, a reasonable amount of new stationery and business cards, and the cost of installing comparable data connections in the Substitute Premises. On the date of the relocation, the Base Rent and Tenant's proportionate share shall be adjusted based on the size of the Substitute Premises, and all references in this Lease to "Premises" shall be taken to refer to the Substitute Premises. Within ten (1 O) business days after the date Landlord submits an amendment of this Lease indicating the location and size of the Substitute Premises, Tenant shall execute such amendment. 17

18 Relocation (cont.) Landlord s perspective: Landlords use relocation clauses to address various operational issues and to provide flexibility with regards to the following Future management of a property Prior granted rights (rights of first refusal, expansion rights) Larger tenants that might have future expansion needs Possible reconfiguration/construction of a property Tenant s perspective: Relocation clauses raise many concerns for tenants The loss of an established location could disrupt a tenant s business/profitability, diminish customer-base, and possibly alter certain attributes of a location unique to that business (view, architecture, etc.) Another concern is relocation expenses 18

19 Continuous Operation A continuous operation clause is commonly used in commercial leases for retail space within shopping centers It is a covenant requiring a tenant to operate its business in the leased premises continuously throughout the lease term Sample Continuous Operation Clause- Tenant shall open for business in the Premises on the Rent Commencement Date at which time the Premises shall be fully fixtured, fully staffed with adequately trained personnel, and Tenant shall thereafter continuously, actively and diligently operate its business in the whole of the Premises in a high-grade and reputable manner throughout the Lease Term unless prevented from doing so by fire, strikes, or other causes beyond Tenant's reasonable control. 19

20 Continuous Operation (cont.) Landlord s Perspective: Store closings, even temporary closings, could have many negative effects on a landlord s operation of a shopping center Ability to relet the space, vacancy rate, customer draw, and overall profitability could be impacted Through continuous operation clauses, landlords seek to protect the economic prosperity of their shopping centers by ensuring their tenants will not have vacant stores Tenant s Perspective: Continuous operation clauses present positives and negatives for a tenant On one hand, if a tenant-retailer is not doing well at a certain location, continuously paying rent and covering other occupancy costs (inventory, labor, etc.) while making low profit can be very expensive On the other hand, business attracts business retail stores benefit from their neighbors continuously operating and generating clientele 20

21 Lease Enforcement and Remedies Greg K. Hecht Hecht Walker 340 Peachtree Rd #1530 Atlanta, GA (404) Jon Jordan Hecht Walker 340 Peachtree Rd #1530 Atlanta, GA (404)

22 EARLY TERMINATION OF LEASE Requirements for Early Termination LEASE TERMS Open-Ended Termination Right Upon Notice Termination Right Upon Event of Default Notice and Cure Period 22

23 EARLY TERMINATION OF LEASE Notice of Termination Compliance with Lease Provisions Manner of Delivery Time for Delivery Notice and Cure Period 23

24 EARLY TERMINATION OF LEASE Notice of Termination Compliance with Statute Timing of Notice At-Will Tenancy* Landlord must provide at least 60 days notice to tenant for termination of the lease. Tenant must provide at least 30 days notice to landlord for termination of the lease. * Georgia Law Only 24

25 EARLY TERMINATION OF LEASE Surrender by Tenant Surrender of Property + Landlord Acceptance Landlord Acceptance Express Implied Re-Rental of Premises in manner enabling inference of acceptance Accepts Return of Keys in manner enabling inference of acceptance Repossesses Premises in manner enabling inference of acceptance 25

26 EARLY TERMINATION OF LEASE Surrender by Tenant Landlord Tips To Avoid Inference of Acceptance Written Notice of Rejection of Surrender Do not Accept Return of Keys Lease Provision rejecting any surrender unless accepted in writing by Landlord. 26

27 EARLY TERMINATION OF LEASE Ramifications Landlord Generally terminates rent obligation going forward. Liability exposure if wrongful termination Tenant Tenant becomes Tenant at Sufferance Tenant still be obligated for prior rent obligations Landlord may not be required to mitigate damages 27

28 Post Eviction Rent Back Rent Future Rent Must be Specifically Agreed to in Lease should specify in default notice and demand for possession that Landlord has elected to retake possession without terminating the Lease. Continuing Monthly Rent Obligations Rent Acceleration 28

29 Continuing Monthly Rent Each rent installment after eviction constitutes a new cause of action. Landlord may continue to file suits to collect monthly rent, less rent received from any subsequent tenant. 29

30 Accelerated Rent Parties may contract to provide for accelerated rent damages as liquidated damages in case of breach. Liquidated Damages Requirements Injury caused by breach must be difficult or impossible to estimate accurately Parties intended to provide for an estimate of damages and NOT a penalty Must be a reasonable pre-estimate of the Landlord s probable loss. 30

31 Accelerated Rent Specific Formula for Ascertaining Accelerated Rent Required in Lease Must account for future market conditions, future rental value, and probability of reletting. Accelerated Rent must be reduced to present value EXTREMELY DISFAVORED 31

32 CASE STUDY Landlord may use reasonably necessary force to enter and take possession of all or any part of the Premises, expel Tenant or any other occupant, and remove their personal property, and the entry will not constitute a trespass or terminate the Lease. After regaining possession of the Premises, Landlord may relet the Premises for Tenant s account, but Landlord will not be responsible or liable if Landlord fails to do so or is unable to collect rent due from any reletting. Tenant will continue to pay Rent due, less a credit for the proceeds that Landlord received in reletting the Premises, but only after Landlord is reimbursed from these proceeds for the expenses Landlord incurs to recover possession of the Premises and relet the premises. 32

33 Case Study Landlord sent several default notices to Tenant for Tenant s failure to pay rent stating that if default was not cured, Landlord would dispossess the Tenant pursuant to the Lease, without it constituting a termination of the Lease and that Tenant would be responsible for post-eviction rent. 33

34 Case Study Parties settled the dispossessory action with a Consent Order. Tenant agreed to vacate the Premises Tenant agreed to pay $90,000 in back rent Consent Order specified that the damages were only for amounts accruing through that date. Tenant attorney acknowledged he anticipated being back in Court every 4 months as future rent accrued. 34

35 Case Study Litigation Issues 1. Did the Lease unambiguously demonstrate the parties intent that Landlord could dispossess Tenant in Court without terminating the Lease? 2. Was the issue of future rent under the Lease barred by res judicata as a result of the dispossessory action? 35

36 THE EVICTION PROCESS SELF HELP Disfavored by law Must be provided for and permitted in Lease Commercial Lease ONLY Potential Liability Must NOT Cause Breach of Peace Wrongful Eviction, Trespass, Conversion Punitive Damages 36

37 The Dispossessory Action Pre-Requisites Landlord-Tenant Relationship Not available against a mere guest, intruder, trespasser or adverse possessor Compliance with Lease terms Notice and Cure Period Default Notice Properly Provided 37

38 The Dispossessory Action Pre-Requisites Demand for Possession Verbal Demand Sufficient NOT Advised No specific time frame 3 Days Held Sufficient No requirement to terminate lease before demand. Non-Compliance with Demand for Possession 38

39 The Dispossessory Action Grounds for Dispossession Failure to Pay Rent Rent failure must remain when suit filed. Cannot refuse tender of rent Not required to accept partial rental payment Tenant Holding Over Leases may provided for 150% or 200% holdover rent Tenant at Sufferance Upon lease termination Tenant becomes Tenant at Sufferance. Termination may arise from nonpayment of rent, or other breaches of the Lease. 39

40 The Dispossessory Action Where to File Magistrate Court Summary Proceeding No monetary limit for monetary damages Subject to de novo review by State or Superior Court State or Superior Court 40

41 The Dispossessory Action Initiating the Action Dispossessory Affidavit Very form driven. Res Judicata Concerns 41

42 42 The Dispossessory Action

43 The Dispossessory Action Service of Process Summons must state date the Answer is due Personal service Tack and mail In Rem v. In Personam 43

44 The Dispossessory Action The Answer Seven (7) days from service of process Default may not be opened Motion to Pay Rent Into Court Registry 44

45 The Dispossessory Action The Hearing and Judgment Magistrate Court No discovery Rules of Evidence may not be applicable Mandatory Informal Mediation De novo review (7 days to appeal) Relief Writ of Possession and Damages Hearing on damages even if Tenant vacates before. 45

46 Writ of Possession Writ of Possession Writ or Order commanding that the Sheriff place the Landlord in possession of the leased property. Generally must apply for Writ of Possession Often signed by Clerk of Court 46

47 The Eviction An eviction is complete when the Sheriff leaves the leased premises. Must schedule eviction date with Sheriff Must provide moving crew for Tenant property Tenant property moved to location designated by the Sheriff. Tenant property becomes abandoned property after eviction is complete. 47

48 Property Managers How Aggressive to be with Tenants The continuous late paying Tenant. Acceptance of partial rent. When to pursue eviction. Postponing the inevitable Possible Bankruptcy Magistrate Court Discretion 48

49 Property Managers Acceptance of Rent Generally Partial Payment not required to accept Waiver of Payment in Full failing to demand monthly rent payments in full could enable the Tenant to pay rent in partial payments until strict compliance is demanded. Accord and Satisfaction Tender After Event of Default Bars Dispossessory Action based on non-payment Acceptance required if tender within 7 days of dispossessory filing. Only once per 12 months. Potential to create a tenancy-at-will after lease terminated. 49

50 Property Managers Security Deposits Residential Leases Statutory scheme requires (1) deposit return and (2) written statement explaining deductions within 30 days. No deduction for normal wear and tear. Statute does not preclude deductions for: 1. Unpaid backrent 2. Late charges 3. Unpaid utility fees 4. Damages from Tenant abandonment Tip include provision for deductions from deposit. Potential for Treble Damages 50

51 Property Managers Discontinuance of Utilities O.C.G.A It shall be unlawful for any landlord knowingly and willfully to suspend the furnishing of utilities [heat, light and water] until after the final disposition of any dispossessory proceeding by the landlord against such tenant. 51