When a Retail Tenant Goes Dark – Part Two

shutterstock_448419196This post follows up on a prior article addressing the myriad issues that can occur when a retail tenant abandons the premises before the expiration of the lease term: When A Retail Tenant Goes Dark – Part One. This is a growing concern for shopping mall owners and their property managers who are seeing brick and mortar tenants default at a higher rate this year than during the depths of the Great Recession in 2009. See Sorry, We’re Closed, The Economist, May 13, 2017.  The following addresses a few additional issues that can arise in this situation.

Other Secured Parties

A defaulting tenant might leave behind a secured lender’s collateral, typically equipment or inventory. Because landlords often agree to subordinate their lien to these secured lenders, landlords allow these secured parties access to remove collateral from the premises.  However, if a secured creditor does not remove its collateral from the premises within a commercially reasonable amount of time, courts have been willing to award damages to the landlord.  Damages are typically measured by the obligations that the tenant owed to the landlord—i.e., rent—for the period of time the secured creditor exercised control of the premises.  Landlords can avoid potential disputes by entering into carefully drafted subordination agreements with the tenant’s secured creditors that define how long the secured creditor has to remove collateral, address whether an on-site sale of collateral is permissible, and provide express remedies if the secured lender fails to remove the collateral.

Landlord’s Lien

The Washington landlord lien statute, RCW 60.72.010, can also be of assistance when a defaulting tenant is threatening to go dark and remove its personal property from the premises. This statutory lien is limited to two months’ unpaid rent, but is granted higher priority over other liens (with a few important exceptions) and attaches to all of the tenant’s personal property on the premises. While not required under the statute, posting or serving a formal written notice at the premises can be helpful to remind the tenant and unwitting third parties of the landlord’s lien rights, and dissuade a tenant from wrongfully interfering with those rights.

Collection

Once legal possession of the premises is restored, the landlord should consider whether to commence a collection lawsuit against the former tenant for rent (past and future) and other damages arising from the tenant’s breach of lease.  Among the considerations are:

  1. The amount due and owing under the lease through expiration;
  2. Whether the landlord has been able to relet the premises;
  3. Solvency of the former tenant;
  4. Whether the lease was secured by any personal guarantees; and,
  5. Whether the tenant leases space in any of the landlord’s other properties.

When Tenants Go Dark

Landlords should have an experienced adviser who can help navigate and resolve the many time-sensitive issues that can arise. If you have any questions regarding retail and commercial leasing, please contact Nate Somers or another attorney in MPBA’s business or real estate group.

 

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