Residential & Commercial Tenants: Do Not Treat Them the Same

All leases are not created equal. Commercial leases are generally governed by the specific terms of the lease agreement between landlord and tenant. Residential leases, on the other hand, are governed by the specific terms of the lease agreement and by certain statutory terms that are automatically merged into every residential lease/occupancy. Generally speaking, residential tenants have considerably more rights than commercial tenants.  Some of the important distinctions that landlords should be aware of are identified below:

Evictions 

Commercial landlords have rights of self-help; they can, under proper circumstances, simply lockout non-paying tenants. Residential landlords, however, have no such remedy. The Virginia Code provides that landlords may not recover or take possession of residential dwelling units unless by judicial process.  In addition, while a commercial landlord can immediately file for eviction if a tenant does not pay rent (subject to the terms of the lease), a residential tenant must first be served with a 5 day "pay or quit" notice.  We generally recommend that commercial landlords provide a similar notice, even if not required by the lease.

The Landlord's Lien: The Right to Seize Tenant's Property

Your tenant owes you three months rent. You want to collect, but you know that the moment you file a lawsuit your tenant is going to load everything he owns onto a truck bound for Upper-Slobbovia. What can you do? Virginia law may have the solution to your problem: the "landlord's lien." This under-utilized remedy offers landlords an opportunity to protect their interests and recover amounts owed without giving the tenant a chance to secret away assets located at the premises.

The Virginia Code gives landlords a lien on all of the tenant's property located on the leased premises. Furthermore, the landlord's claim takes precedence over almost all other claims against the tenant's property.

How good is it?

The landlord's lien is not just a right to assert a claim but is a lien which exists from the moment the tenancy begins and continues until thirty (30) days after the tenant's property is removed. The landlord's lien is superior to any other liens created after the tenancy has begun. This makes the landlord's lien a very powerful tool.  The landlord's lien is even superior to secured liens, including recorded UCC "purchase-money" security interests, so long as the competing liens arose after the tenancy began. Even if the tenant enters bankruptcy, the landlord's lien is superior to that of other secured creditors.

Accelerated Rent: Dead or Alive

Can businesses negotiate uncertain damages?

In tenBraak v. Waffle Shops, the Fourth Circuit Court of Appeals upheld the proposition that commercial leases could provide for the recovery of future rents even though such recovery was not available under the common law. It seemed the attitude of the court was to permit businesses to negotiate their respective default rights. After all, the actual losses to the landlord when the default takes place are very difficult to determine, and the landlord should not have to spend a lot of money litigating damages when the parties have agreed to a formula. When the Virginia Supreme Court addressed several cases involving acceleration provisions in commercial leases, they upheld by implication the principle that these clauses were enforceable. Unfortunately, no case on appeal has clearly and unequivocally found that these clauses can be enforced, even if the amount required to be paid would exceed the actual damages suffered by the Landlord.

Are acceleration damages a penalty?

In the Fairfax County Circuit Court case of Teachers Retirement System of the State of Illinois. v. American Title Guaranty Corp., Judge Thomas S. Kenny struck down an acceleration clause as unenforceable because "it calls for damages in excess of Plaintiff's actual damages." Judge Kenny under the facts of the case deemed the acceleration sums sought to be a "potential windfall" and an "unenforceable penalty." Judge Kenny indicated that the landlord's actual damages were equal to the difference between the amount that should have been paid by the tenant and the amount of rent actually collected if the premises is re-let, plus cost associated with re-letting. However, the lease was so poorly drafted that Judge Kenny declined to rewrite the lease in order to provide some amount for future losses caused by the default. Thus, the landlord received no award for future damages.

Abandoned Property

Commercial landlords must often deal with property that is seemingly “abandoned” by a former tenant.  Some of the landlord’s options include keeping the property, selling or leasing the property to third parties, transferring the property to a new tenant or trashing the property.  Before any decision can be made, the Landlord must determine whether the property is truly abandoned by the former tenant, and if it is, whether any third parties have legal claims to the property.

In residential cases, landlords are required by law to send a letter to the former tenant giving a 10 day notice that unless the property is retrieved it will be considered abandoned and disposed of by the landlord.   Commercial landlords are not subject to the same requirement.  However, we recommend that commercial landlords provide a similar notice to their former tenants when property is left at the premises. 

In cases where the tenant does not retrieve the property within the 10 day notice period, we generally advise the landlord to do the following: (1) complete a full inventory of the abandoned property in front of an independent witness; (2) take pictures of the abandoned property; (3) examine the property for evidence of ownership; and (4) complete a UCC search to see if the property is subject to any recorded liens or leases.  If the property is subject to any liens or leases, we recommend that landlord provide an abandonment notice to the secured party.  If the property is not retrieved by the secured party, then we generally advise the landlord that the property is abandoned and can be disposed of at the landlord’s discretion.

Each case of abandonment is different, and a landlord should not dispose of a former tenant’s property without consulting an attorney.  Non-legal factors may impact how the landlord should dispose of the property.  

Credit Applications: The Smart Way to Extend Credit

Merchants, landlords and anyone who extends credit via note, contract or lease should follow the lead taken by banks when making credit decisions. Make sure your applicant fills out a credit application. The credit application is a fact sheet about the debtor; often, it also includes credit terms. Part of the credit application should be a request for specific documents, such as tax returns, deeds and automobile titles.  There are important reasons why you should obtain detailed information before you extend credit.

First, if there is a default, background information and a listing of assets will be invaluable during the collection process. It is imperative to have facts about the person's employment, bank accounts, assets, address and social security number. This information may be difficult to obtain if the account goes into default.  Second, considered decisions regarding extension of credit can only be made based upon complete data (see tips below on how to investigate credit-worthiness).  Third, if the debtor was untruthful or misleading on the credit application, it may be possible to sue for fraud or oppose the debtor's discharge in bankruptcy.  Finally, the terms and conditions regarding the extension of credit should be included in the application. In the absence of a written and signed agreement, the court will not award pre-judgment interest or attorney's fees.

Make certain the applicant actually signs the credit application. An otherwise completed application is virtually useless against the debtor without this signature. Also, if you want a personal guarantee, prepare separate signature lines for the guarantors. The guarantee should be made clear by the terms of the credit application and the form of the signature.

Tips for Investigating Credit Worthiness

• Call other creditors of applicant 
• Call industry contacts 
• Check with landlords and credit references 
• Obtain a Credit Bureau Report 
• Review Dun & Bradstreet Reports 
• Study court records for information about: Judgments, pending litigation, title to real estate, liens on realty, and UCC financing statements
• Hire an investigator or attorney Have your CPA review financial records