Lockout of a Commercial Tenant: The Pitfalls
April 17, 2014
If a commercial property tenant neglects or refuses to pay rent and is in arrears for more than five days, or if a tenant violates another provision of the lease, under certain conditions and circumstances Arizona law allows the landlord the option to reenter and retake possession of the premises, seize personal property belonging to the tenant, and, after a statutory allotted time period and proper notice, publicly auction the tenant’s property. Entering and retaking possession, however, may not be the best course of action and, in fact, may expose the landlord to liability if not done properly. The following is a list of questions and comments intended to give landlords a glimpse of just a few potential issues, and why it is imperative they consult with a knowledgeable attorney to discuss whether reentering and retaking possession is legal without a court order, or, is the best option for their situation.
Read the lease first. Does the lease contain language that would prohibit a lock-out?
If so, a lockout is not an option.
Does the lease require the landlord provide written notice to the tenant before there can be a default or breach of the lease?
If so, a lockout remains a potential option only if the written notice has been properly delivered to the tenant, and the time to respond to the notice and cure a potential default has expired.
Is the tenant five days in arrears on the payment of rent or has there been a material default under the lease by the tenant aside from late rent?
Arizona statutory law provides that the right of a commercial landlord to reenter the premises arises when the rent has been unpaid for five days past the date it was due or when the tenant has violated another provision of the lease. Thus, before contemplating a lockout, questions the landlord should consider include whether the rent is at least five days in arrears and/or whether there has been some other material violation of the lease. The landlord should also assess whether the tenant has a valid argument that the failure to pay rent or alleged material default of the lease was prompted by the landlord’s own failure to comply with a term of the lease. A breach by the landlord may excuse a tenant from having to comply with certain performance obligations.
Has the landlord given the tenant a period of time in which to pay rent as part of an effort to resolve the issue?
If the landlord has given the tenant an additional period of time to pay rent as part of an effort to resolve the issue, the landlord should avoid retaking possession of the premises until the allotted period of time expires.
Has the landlord routinely accepted late rent payments or led the tenant to believe timely payments would not be required?
If the landlord has regularly accepted late rent payments from tenants, it should bring this fact to the attention of its counsel. This history of such conduct can potentially impact whether reentry is a prudent option and/or whether additional steps should first be taken.
Can the lockout be performed without any of the tenants, employees, or representatives present?
A landlord cannot retake possession while someone is inside the building.
Can a lockout be accomplished without breaching the peace?
If entering the property will result in a breach of the peace, the lockout cannot be performed. If a breach of the peace occurs during a lockout, then the lockout needs to be terminated. [The phrase “breach of the peace” has been said to include, but not be limited to, conduct or words which interfere with public order. Thus, violent acts and words likely to produce violence in others, among other things, would likely fall within a “breach of the peace.”]
Is the personal property on the premises owned by the tenant and, if so, is it of sufficient value to cover past due rent and other costs associated with the lockout?
If the personal property is not owned by the tenant, it cannot be sold by the landlord. Further, a landlord’s possessory lien will not take priority over another creditor who perfected a lien on the personal property before it was brought into the leased space. Thus, a UCC lien search should be conducted before deciding whether repossession is prudent. Also, consider what the personal property is likely worth in used condition. If the property is not worth enough to cover the rent owed, the lockout process may not be the best option. Additionally, a landlord could create liability exposure for itself if it retakes and disposes of personal property (such as computers) that contains protected personal information of the tenant’s customers. This is clearly an issue that should be discussed with counsel before initiating the repossession of personal property.
Will a lockout put the tenant out of business and, if so, is that in the landlord’s best interest?
Locking out a tenant and taking possession of its equipment may prevent it from satisfying obligations to its clients, forcing it to close it doors permanently. If the tenant is under a long-term lease and has simply fallen behind on one month’s rent due to a cash flow issue, a lockout is probably not going to be in the landlord’s best interest.
Is there a personal guaranty and do the guarantors have money?
If the tenant is a corporation or LLC, the owners of the company signed a personal guaranty, and there is reason to believe the guarantors would not be able to pay a judgment if one was obtained, filing suit on the personal guaranty and getting a money judgment against the guarantors may prove to be a better course of action than going through the time-consuming and uncertain process of seizing and selling the tenant’s assets. The suit can also include a request for a court order requiring the tenant to turn over the premises to the landlord. In summary, lockouts are ripe with hidden dangers and potential problems if not executed in accordance with the law. It is highly recommended that landlords consult an attorney familiar with commercial lockouts before moving forward with such a process.
ABOUT THE AUTHOR
Garrett J. Olexa | Read Bio
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