Damage Control in Commercial Lease Defaults

By Pat Hughes

Once a defaulting tenant is gone and the landlord has the property back, whether through a voluntary surrender or an eviction, the landlord has a chance to prevent some loss and restore cash flow by finding a new tenant.  However, sometimes landlords find their efforts delayed because of the condition of the property when it is returned.  In industrial buildings, tenants might cause significant damage to a building in the course of the tenant’s business through careless operation of forklifts or other equipment.  A tenant struggling financially may have stopped repairs or maintenance to avoid those expenses.  In retail spaces, the tenant may have left behind furniture, equipment and fixtures that belong to the tenant under the lease.

Whose Fault Is It? Reading the Lease

When the property is returned in poor condition, the first question is whether or to what extent the tenant is responsible.  The lease is likely to have the answer.  Leases typically specify who, between landlord and tenant, is responsible for what types of maintenance and repairs.  In addition to addressing ongoing maintenance and repair duties, some leases will specify the condition the property must be in at the end of the lease.  Some require that the premises be in the same condition as when leased, or in the same condition with “reasonable wear and tear excepted.”  A wise landlord with such a lease will have taken photographs of the premises at the beginning of the lease term to minimize disputes over what damage is new and what was pre-existing (we had a client who did this and it aided our claim against the tenant for damage to the property). Lease terms that deal with each party’s responsibilities in the event of a casualty may also come into play in determining the degree to which the tenant is liable for repairs the property may require at the lease’s end.  Finally, although the lease typically answers the question of who bears responsibility for the condition of the property, common law concepts of negligence and trespass may also be involved in some situations.

Avoiding or Minimizing Delay

Some issues concerning the property’s condition upon its return arise only after the tenant is in default.  Others, though, are at least partially avoidable. Where the lease requires the tenant to keep a building in good repair or in the same condition it was at the beginning of the lease, the landlord’s ongoing monitoring of the tenant’s performance may keep the tenant from allowing the building to deteriorate too far or from leaving damaged items unrepaired.
 
If the property is returned in a damaged condition, it may be tempting to simply demand the tenant fix it.  However, at that point it is often better for the landlord to make arrangements to get the repairs made and then try to recover the costs from the former tenant. That gives the landlord more control over the quality and scheduling of the repairs, and avoids the risk that the property will remain vacant because the tenant cannot or will not pay for the repairs.  Some agreement with the tenant about what repairs are necessary before the landlord begins the repairs can avoid conflicts later.  If the landlord has made some accommodation for a financially-struggling tenant, the landlord may be able to obtain such an agreement in exchange for the accommodation.

What To Do With the Tenant’s Property

One of the more vexing problems a commercial landlord faces is what to do with a tenant’s personal property that has not been removed when the landlord regains possession. Unless the lease specifically provides for it, in Kansas a landlord does not have a security interest in or lien on property of the tenant for unpaid rent.  Therefore the landlord does not have the right to hold the tenant’s property until the outstanding rent is paid.

In the long run, a landlord will be far less frustrated by working with the tenant to get the property removal completed.  If the landlord has the tenant’s property hauled to the landfill, the landlord will likely find out from the former tenant the equipment contained precious metals.  If the landlord puts the property in storage, it will not only incur storage costs, but may also face a claim that the property was damaged by the landlord in the move.

Worse, the landlord may hear from some third party who has a lien on the items the landlord disposed of and the landlord is now liable for their value.  Therefore, when the tenant does not remove its property, the landlord should be sure to check with the Kansas Secretary of State to determine if anyone has filed a UCC financing statement covering the property.  If someone has, the landlord should contact the secured party. But judicial remedies are available to remove the property if these efforts fail to resolve the problem. 

Minimizing delays and costs may take planning and, despite some general observation, always begins with reviewing the terms of the specific lease involved.

(Article appeared in Adams Jones August 2008 Newsletter)