Commercial Property Herald

Can An Attorney Actually Collect Past Due Rents from Commercial Tenants?

You bet they can, or, at least I can and do. OK, so this may be a little bit of shameless self-promotion, but I get tired of hearing from landlords:

“Why bother trying to collect if we are not going to get paid.”

Drum roll please:

In the last three months, I have settled three separate cases in which my client’s have sued both existing and former tenants for an aggregate amount of $335,000.00; that’s no mere chump change. One stipulation was for $80,000.00; the other for $110,000 and the first was for $145,000.00, plus continuing rents on the lease. The best part of these settlements was that the actual rents owed on all three leases was around $265,000 and we obtained all of our client’s attorney’s fees.

Now, I am not suggesting that we will always be successful, but these three collection suits are perfect examples of what can be accomplished if you carefully evaluate, before filing suit, the tenant’s obligations and their likely ability to pay on a judgment, if pushed to the brink. Choosing the right cases and tenant’s to pursue is half the work. But if you take the attitude, before you start that why bother, you will never collect what is owed to the landlord. Part of the interesting thing about two of these cases is the fact that we were looking to and did obtain settlements for rents owing prior to a foreclosure. It is a common misconception that tenant’s who move out or owe rents, to a foreclosed upon, landlord, no longer have any lease obligations since the property was foreclosed upon. In fact, pre-foreclosure lease obligations may very will continue to accrue and be due to a secured lender and/or buyer after a foreclosure sale.

The economy goes in cycles and what goes up, usually goes down and back up again and so forth and so on. Just because the economy may be down, doesn’t mean that you can’t get your rent. If you are not prepared to go after your rent from tenants, I suspect that you shouldn’t be a landlord. Landlord’s need to, at the very least, look at what is owed, who owes it so that they can make a reasonable determination of what they can collect, when they will collect and how much it will cost to collect. This is very important information, even if you don’t want to evict a tenant and want to keep them in place.

US Attorney and Cities are Going After Landlord's Who Lease to Marijuana Collectives

A few months back a shopping center property manager doing work for a client of mine called me to advise me that they received a letter from the city attorney informing them that a lawsuit was filed by the city against a marijuana collective.  The collective was a tenant in one of my client's shopping centers.  The letter went on to state that unless the "property manager" evicted the tenant “immediately”, the city would add the property manager as a defendant in the suit.  Obviously, this letter caused both my client and the property manager considerable distress, particularly since my client inherited this client and was not the original landlord to the lease.

In California and a number of other states, it is not contrary to state law to sell marijuana for medicinal purposes.  This past sentence was very carefully worded. So there is no confusion, it is illegal, per federal law, to sell marijuana anywhere in the United States, including, if there be any doubt, the state of California. 

This discrepancy and conflict between state and federal law has caused quite a bit of confusion among the purveyors of marijuana and landlords who choose to lease space to these medical marijuana dispensaries.

An interesting twist to this story and one that landlords and property managers should pay close attention to is that a few weeks after hearing from the city attorneys office, my client received another letter, this time from the US Attorney. In this letter, the US Attorney threatened to file criminal charges against the landlord and the property manager and confiscate the shopping center since they considered the center an asset that was being used in the commission of a crime in violation of federal drug laws.

Looking out for the best interests of the client, I daftly avoided action by the US Attorney by figuring out a legal way to evict the tenant per California law. Notwithstanding the city and US attorney’s demand that I remove the tenant, seemingly without process of law, I had to research the law to figure out an adequate legal basis per both California and federal law to evict the tenant.  Upon deciding upon the legal basis to proceed commence an unlawful detainer action, and immediately upon the filing of the eviction suit, I contacted the city attorney and the US Attorney for their evidence of violations so that if the suit progressed to trial, I would have adequate evidence to prove my case.

Now, you have got to know where I am going with this, right?  You guessed it; the US Attorney refused to provide any evidence, claiming a privilege and that there was an ongoing investigation.  The city attorney could only provide meager evidence from about 1 - 1 1/2 years earlier.

My following post will fill in the blanks to this story, such as, the legal basis I used to evict the medical marijuana collective and how I planned to get my evidence.

 

How Much Notice Should a Landlord Give When a Commercial Lease Requires More Than 3 Days Notice

While this issue rarely arises in residential leases, it is not uncommon for a commercial tenant to negotiate into a lease the requirement that the landlord provide more than 3-days notice, statutorily required by law to evict a tenant.  Typically, language that I see is:

"Any failure by Tenant to pay any Rent or any Additional Rent and any other amounts due Landlord under this Lease, where such failure continues for a period of five (5) business days after Tenant's receipt of written notice thereof from Landlord"

To begin with and as an example, the California eviction laws are statutory in nature.  California and most other states provide for a shortened legal process to remove a tenant from real property.  This quicker or faster process is provided by statute only and is often referred to as an unlawful detainer process. What I mean by statutory in nature is that there is no a "common law" or "natural" legal right to remove a tenant from property other than as provided by statutory law and usually, as in California, the statutory requirements must be strictly complied with.  For a landlord, there is very little margin of error allowed.  Nearly all reasonable inferences will be drawn in favor of the tenant so the landlord better have its "i"'s dotted and "t"'s crossed.

California, as in most other states require the landlord to serve a "3-Day" notice to the tenant, to pay rent or quit in the event of a rent default in order to remove the tenant from the property.  Only a 3-day notice is statutorily required.

The question is, based upon the typical language provided above:

"If the lease requires a 5 day notice and statute only requires a 3-day notice, how long should the notice be when serving the tenant after a default?"

 The California cases are split on the answer, but there is a safe way to proceed.

Some California cases insist that a landlord need only follow the statutory 3-day procedure to obtain the benefit of the eviction statutes and allow you to evict a tenant.  These cases distinguish the statutory rights to evict from the contractual rights set forth in the lease, but do not resolve the issue of landlord liability for failure to follow the lease terms.

Other cases allow the landlord to serve a notice entitled a "3-Day" notice but wait the necessary 5 days.  In this case, the courts usually will consider the notice satisfactory to comply with both the lease and statutory obligations of the landlord.

Unless time is extremely of the essence, my office usually would serve a notice entitled "5-Days" and wait the 5 days required by the lease, thus satisfying both the statutory and lease obligations.  No point in tempting fate or the court.

There is something special or not typical about the example rent default language that I provided earlier in this post, which, if you haven't noticed, is highlighted in bold; the phrase, "business days." There is another lesson here, which is:

Just when you thought that it was safe to go into the water......... no, just when you thought you knew what every lease says, a tenant throws you a curve ball.  

If I were to serve a rent default notice based upon the above language, I would, at the very least, wait 5 business days and I start counting those business days from the day after service, before I would file an unlawful detainer complaint.

 

California Courts Take Another Budget Blow - Time for Collaborative Arbitration, Finally?

I know that this post relates to California courts, but it probably is equally applicable to courts in other states throughout the United States. If you live anywhere else other than California, think twice about how lucky you are not to be here.

Governor Brown has just proposed an additional $544,000,000 in budgetary cuts from the California Judiciary and Court System.  These cuts are on top of the cuts to our court budgets that have gone into effect over the last few years. 

We have already seen the effect of the existing budget cuts to our court system.  Long delays when filing documents, sometimes weeks before you can get conformed copies back, where just 5 years ago and as long as I have been practicing law, you could file your documents and get file stamped copies on the spot.  Issuance of Writs and other court orders take weeks, including those for evictions and that is after you have obtained your judgment.  I can remember the days, not to long ago, when I could go to court, get the judge to sign the judgment, walk it to the clerks office along with my writ documents and Sheriff instructions and the clerk would have all of my documents to the Sheriff the same or next day.  Back then, my landlords still complained that the process took to long.

Some courts are so backed up that getting a hearing date some times takes longer than a trial date, making the motion and my arguments moot.  True, this happened to me once, down in San Diego.

Los Angeles County Superior Court will no longer automatically supply a court reporter for a hearing although you can make arrangement to have one on your own dime.  I am not sure how bad this is since I think the state courts should have gone to recorded hearings a long time ago like the federal courts did.  Nevertheless, unprepared lawyers and clients may find themselves unprepared when they need a court reporter.

My concern is that our civil court system is going to take such a hit to its operations that we will have trouble handling civil disputes in a timely fashion and efficient fashion. Ok, so it hasn't been so timely or efficient, but it is sure to get worse.

I know that I have written about this before and I am going to write about it again.  The time has come for Collaborative Arbitration where the evidence, issues, documents and arguments accumulate online for all parties to access and the dispute is resolved before an arbitrator. The other unique feature of Collaborative Arbitration is that not only do the parties exchange information in an online database shared by the parties and the arbitrator, but the arbitrator gets access to all of the information, issues and evidence from the get-go and can be in constant communication with the parties rather than only dealing with everything at the time of the hearing.  This will tend to get the parties to resolve the dispute much sooner.

When the Tenant Stops Paying Rent - What Do I Consider First

When a commercial landlord or property manager first contacts me and advises me that a tenant is no longer paying rent, I first determine if the lease was terminated or not. Lease termination could occur: 

1. By mutual agreement; 
2. By the terms of the lease; 
3. By the foreclosure; 
4. By the landlord by service of a Notice to Quit, Pay or Quit, Perform Covenant to Quit, or Notice of Belief of Abandonment.

If the lease was terminated before the filing of the suit, the landlord's  claims to rental damages in California, are usually limited to Civil Code 1951.2 damages, if the lease so provides, which include: 

• Rents owing up to the date of termination; 
• Rents owing from the date of termination of the lease until the date of trial, less what the tenant can prove we could have reasonably avoided, (mitigation); and 
• Future rents, which are calculated by determining the present value of future rents owing from the date of trial through the end of the term of the lease, less what the tenant proves we can reasonably avoid, (mitigation).

Notice that of the three measures of damages above, only the second two involve issues of mitigation.

While in this post, I am referencing California law, many other states have similar statutes that allow a landlord to collect rents through the end of the term of a lease although the lease was terminated as a result of some act or failure to act by the tenant.  You should consult your own attorney who is qualified to give legal advice in the state that the premises are located.

If the lease was not terminated prior to the filing of the lawsuit, we have the option of terminating the lease and suing for Civil Code 1951.2 damages or, if the lease so provides, suing for rents as they accrue, in which case we are only entitled to collect rents and other charges owing up through the date of trial. Note, we do not waive rents owing after trial through the end of the term. As to those future rents, we would have to file a new lawsuit to collect those rents. While the requirement of filing a new lawsuit to collect those future rents seems daunting at first glance, based upon my experience litigating these matters, I have often found that the advantages of suing for rents up through the date of the trial far outweigh the disadvantages of getting a partial judgment.  I will explain.

For one thing, when you terminate the lease and seek rents accruing at any time after the date of termination, mitigation is always an issue and proving and disproving this fact is usually the most expensive part of the litigation. I have also found that in the face of a competent lawyer defending the tenant, the landlord's proof and brokers documentation is often very deficient. Some brokers document their files well and follow legal instructions well and some don't. For the most part, brokers participate in the litigation only to the extent that they continue to do work for the landlord but otherwise see little payoff by cooperating and doing a good job in litigation. Even when the landlord can expect cooperation from the broker, brokers, as a whole are not well known for the type of detailed record-keeping that is necessary to be convincing in court. As a consequence, I try to avoid dealing with mitigation issues. A suit for rents as they accrue is far easier and quicker to win, in most cases. There are very few, if any defenses.

When the lease is not terminated, in essence, the tenant is treated as if they continue to have control of the premises and thus, the landlord's efforts to mitigate are unnecessary. This is so, even when the tenant voluntarily abandons the premises and turns over the keys. The tenant usually cannot unilaterally terminate the lease, unless the lease allows for it, so the landlord can refuse to terminate the lease, in which case the lease continues to run and rents continue to accrue. When the tenant abandons the premises and turns over the keys unilaterally, most leases allow for the landlord to take possession only for the purpose of releasing the premises for and on behalf of the tenant, clean up the premises for re-leasing, secure the premises and for the purpose of safety. This usually puts the landlord in a perfect position of mitigating its damages since it is usually the most common sense and practical approach, without giving up any rights.

Other reasons why I tend to favor avoiding terminating a lease and just suing for rents as they accrue, include: 

1. Because there are so few defenses to a suit for rents as they accrue, the landlord has a much better chance of winning a Motion for Summary Judgment (avoiding a trial and just getting judgment by a motion), avoiding the longer process; 
2. Even if you get to trial, the damages are often very substantial, forcing a quicker resolution. For example, if the tenant owes $20,000.00 per month and it takes you 12 months to get your judgment, you will get a judgment for at least $240,000, plus interest, late fees and attorneys fees in addition to any other damages that you can prove. This is nothing to sneeze at in a breach of lease action. That judgment can get entered and you can file a UCC Judgment lien which, if properly perfected and seasoned, can be a secured lien if the tenant files for bankruptcy protection. 
3. In many instances, the landlord can immediately, upon filing of the complaint, obtain a pre-judgment Writ of Attachment whereby the court, if it is convinced that the Landlord will probably win the suit, can allow the landlord to attach any or all of the tenant's assets in an amount equal to what the court anticipates the tenant will owe up to the anticipated date of trial, plus anticipated attorneys fees and costs of suit. This is a very effective way to force a quick settlement; and
4. After you get your first judgment, it is relatively simple to get a judgment for rents accruing after the date of the first judgment and even another pre-judgment Writ of Attachment. That's because in the second suit, you do not have to re-prove anything that you had already proven in the second suit. We lawyers use the latin term for this as "Res Judicata." All of the facts proven and issues resolved in the first suit are taken as admitted and proven in the second suit and a pre-judgment Writ of Attachment is almost guaranteed.

It is important to note that additional factors that I consider are the type of property, i.e. retail vs. office, industrial, warehouse, etc., the financial resources of the tenant, (to what extent we believe they can pay on a judgment) and the state of the economy, (the ease of re-leasing the premises at a rental rate equal to or greater than the rate owed by the tenant in accordance with their lease.

 

Serving Legal Documents by Mail or Overnight Carrier

I just finished a conversation with my paralegal reiterating how I wanted her to serve a Notice of Belief of Abandonment on a tenant.  For the uninitiated, A Notice of Belief of Abandonment is a document that a California landlord can send to the tenant, via mail, that might allow the landlord to regain legal possession of leased premises without the necessity of filing an eviction or unlawful detainer lawsuit. This possessory remedy is allowed by statute, the requirements of which must be strictly followed. It is important to note that the statute does allow this notice to be served by mail.

In my office, how we send something by mail is very important because, not only do we want to prove that we actually sent what we said we sent but also we want to prove that we actually intended for the recipient to receive the notice.  Therefore, it is our customary practice to send a notice that is allowed to be sent by mail, by certified mail, return receipt accepted, (“RRA”), priority mail AND duplicates to the same recipient by first class mail.

Now, you may ask, why do we send duplicates by first class mail, particularly when sending something by first class mail does not provide any written or verifiable proof that we actually sent the notice?  Well, the answer is borne from experience and in my case good and bad experience. 

When I send something by certified mail or priority mail, it may not actually get delivered.  As a matter of fact, when I send a notice to a tenant who I believe is no longer in the premises, I would gather to say that most of the time, the certified letter never actually gets to the tenant because they are not at the premises and the certified letter often gets returned to me.  Also, it is not uncommon for a tenant to ignore or avoid the delivery of a certified or priority letter. When I send a letter by first class mail, it can get forwarded to the tenant if they have left a forwarding address.

If I ever have to go to court and the tenant argues that they did not get the notice, I can then present to the court proof that the notice was sent by certified mail or priority mail, which may have been returned but yes, I also sent it by first class mail, which was not returned, increasing the likelihood that tenant did receive the notice and at the very least, elevating me in the eyes of the court and making it clear that I went beyond what was statutorily required and do everything reasonably necessary to make sure that the tenant received the notice and had an opportunity to respond.  It never fails to work.

In a later post, I will discuss more about a statutory Notice of Belief of Abandonment and why and when to use it.

Waiver of Jury Trial in a Commercial Lease

Every commercial landlord wants a waiver of jury trial provision in their lease and nearly every commercial lease in California contains such a provision.  Why do landlord's feel that this provision is so important?

The answer is relatively simple.  Most jurors have been tenants albeit, residential tenants at some point in their lives and few have been in the position of a landlord.  Far more jurors will be able to relate to and sympathize with the tenant's position.  Obviously, the landlords fear that a jury will stray from the strict dictates of the law and come to a verdict based more on emotion than the law. As a landlord attorney, I almost never want to be in front of a jury and will do what ever I can to avoid the situation.  On the other hand, when representing a tenant, I almost always want, or at the very least threaten to have the matter heard in front of  a jury.

The real question posed to me by Joel Hall in a Linkedin discussion is; "to what extent is the Waiver of Jury Trial provision often seen in leases, enforceable."

As a California attorney, I can answer that question as to California leases; NO!  A commercial tenant can waive its right to a jury trial, but not until the filing of a suit by one of the parties to the lease.  It is my understanding that the California courts will not enforce the Waiver of a Jury Trial provision in a commercial lease, based upon constitutional grounds.

So if a jury trial is so potentially dangerous to a landlord, what, if anything can a landlord put in a lease to avoid a jury trial?  That is a subject of another blog post and an article I wrote nearly 15 years and which was published in the National Law Journal and as part of the ICSC Annual Legal Review.  Now if I can only find that article.

By the way, although not an expert in residential leasing, I assume that a jury trial cannot be waived in a residential lease either.

Procrastination by a real estate attoreny

Last week  I created a post and copied a link to a video from KW commercial entitled "Can Being a Perfectionist harm your real estate business".  Admittedly, I did relate to the video and thought that as a perfectionist, I was sometimes frozen in time.

The reality is that for some other inexplicable reasons, and like other people, I sometimes procrastinate and wait until the last second to get something done.  What I don't understand is why do I do this?  I know better and I don't think that I always procrastinate because I am a perfectionist.

A perfect example was this past two weeks.  I had to draft a cross-complaint in a lawsuit that I was handling.  Now I knew about this for about 4 weeks.  About two weeks ago, I reviewed my paperwork, discussed the facts with my client and was prepared to write the document and move on with my life.  But, nooooooooooo.  That was too simple.  I got distracted and put off the writing of the cross-complaint for another week.  Then last week, every day, I kept telling my staff to leave me alone so I could draft the cross-complaint and get it filed last week.  

Did I do it last week? Noooooooooooooo.  And every day that went by, I could feel more and more stress because I wasn't getting this project done.  Now, I know better.  I know that pracrastinating and delay is just going to stress me out and all I have to do is to just get it done.  But noooooooo.  Come the weekend I still haven't drafted the document and now I have set an absolute deadline of filing the cross-complaint for Monday.  I even had my staff call the court on Friday to let them know that I would be filing the cross-complaint on Monday.  So what did I do on Saturday.  Noooooooooo, I didn't draft the cross-complaint and I did everything else I could do but that.

So what happened.  I filed the cross-complaint today and yesssssssss, I worked on it Sunday morning.  Was it difficult?  Nooooooooooo.  Actually it was pretty easy.  I just sat down and did it and relieved all that stress that was building up in me over the last two weeks.  Actually, it felt really good getting it done and I did it so quickly, that I actually had time to take the family bowling Sunday afternoon.  I just don't get it.

Now opposing counsel will have to procrastinate

 

California Appeals Court Rules Oral Promises Are Binding

A recent California appeals court ruling found that an oral promise by a lender to modify a loan is enforceable, by the borrower.
California Appeals Court Rules Oral Promises Are Binding.

To an experienced lawyer, a recent court ruling in California finding that an oral promise to modify a loan can be enforceable even when the loan documents require a writing to modify the loan, is not new or surprising law and is nothing more than what we learned in law school.  What us lawyers would refer to as "Hornbook Law." We know this defense as "Promissory Estoppe and can be raised as a defense in almost any contract dispute, not just loans. The defense arises when one party reasonably relies upon, to their own prejudice or harm, the person making the promise may be bound by their oral promise. 

There are some difficulties in the defense, not the least of which is proving that the promise was actually made, that the promisee reasonably relied upon the promise and that the promise relied upon the promise to their prejudice.

Court Filing Fees Go Up in California

Effective Immediately, filing fees in California courts have increased as follows:

• First appearance in an Unlimited Civil action (over $25,000), Family Law Petitions and Probate Petitions by plaintiff(s) and each defendant will increase to $395. This fee increase applies to all types of filings in which the previous fee was $355 (civil, probate, family, etc.);
• First appearance in a Limited action ($10,000 up to $25,000) by plaintiff(s) and each defendant will increase to $370;
• First appearance in a Limited action (under $10,000) by plaintiff(s) and each defendant will increase to $220.

Note: the above fees do not include the additional fees required for Unlawful Detainer filings (additional $15) or the surcharges imposed in Riverside County, San Bernardino County or the City and County of San Francisco.

• Motion for Summary Judgment/Adjudication will increase to $500.
• Application by counsel to appear Pro Hac Vice will increase to $500.
• Adds an additional $3 penalty to every parking violation.
• Additional increases in various criminal penalties and traffic fines.
• A fee for telephonic appearances (a fee payable to the court in addition to fees paid to vendors). This fee has not been determined yet.