For landlords, a late or missed rent payment might be the first sign that one of its tenants’ businesses is struggling or even failing. In this economy, a landlord facing this kind of situation should keep certain things in mind in order to minimize potential lost revenue and expense.
Quick action is critical in this economy
It is important for landlords to ensure that they understand the struggling tenant’s situation, and be able to quickly react. If the tenant is in default for nonpayment of rent because its business is failing, a prompt eviction is typically appropriate. Especially now, quick action in these cases is critical, since the passage of time may make it much more difficult for the landlord to recover its damages. If the tenant’s business has failed, there will likely be little to recover from the tenant entity. Additionally, if the only guarantors are the tenant’s principals, they will very likely also be facing precarious personal financial situations, making it difficult to recover from them. Moreover, the longer the landlord waits to evict, the longer it will delay the landlord’s efforts to try to find a new, paying tenant.
Sometimes, eviction is not the best option
While it is appropriate in the case of a tenant with a failing (or failed) business for the landlord to quickly evict the tenant and attempt to re-let the premises, other situations may call for a more measured approach. In some circumstances, the tenant’s business may simply be suffering a temporary setback, which the parties can often address through communication. In other cases, the tenant’s business may be facing a permanent decrease in activity and resulting decrease in revenue. Sometimes, this leaves a tenant unable to afford its rent payments.
If the tenant’s business could remain viable if it were paying a lower rent, it may be in the landlord’s interest to consider restructuring the lease. This is especially true for tenants with leases that were entered into prior to the economic downturn, since these leases may provide for a rental rate that is significantly higher than current market rates. Considering that the tenant is “locked-in” at a high rent rate, some landlords may be inherently reluctant to even consider decreasing the tenant’s rent. However, there are at least two reasons why it might be appropriate to restructure a lease for a tenant who, in absence of a rent reduction, will default and vacate the premises. First, if the tenant is forced to vacate the premises, it may cause the tenant to fold completely, precluding it from generating any revenue. This carries with it the risk that the landlord’s collection of damages will be very difficult. Second, if a judgment based on the higher rate will be very difficult to collect, and if current market rates are significantly below what is provided for in the lease, the landlord may have little to lose by agreeing to decrease the lease rental rate to the current market rate. Any new tenant would only be willing to pay current market rates, and keeping the existing tenant in place after restructuring the lease may allow the landlord to keep a paying tenant in the premises without having to go through a potentially long vacancy period.
Obviously, the right approach will ultimately depend on the circumstances, and it is often helpful, even at the early stages, to involve an attorney with experience in landlord/tenant disputes and evictions to help the landlord best protect its interests. For example, lease amendments and concessions should be carefully documented to ensure that the landlord does not inadvertently waive any of its rights, and it may be appropriate to address a number of contingencies when dealing with these situations.
Regardless of the landlord’s chosen course of conduct, it is clear that, in the difficult leasing market we are currently experiencing, it is important for landlords to be very diligent at the first signs of problems with their tenants. If a landlord does nothing in the face of months of unpaid rent, it may already be too late for the tenant’s business to survive, and the landlord will have missed out on months of time during which it could have marketed the premises to potential new tenants.
This is the first part in a series in this blog on commercial/retail evictions. In the next part, I will discuss the basic procedures for evictions under Colorado’s unlawful detainer statute.
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