A few months ago, one of my clients had a tenant who skipped out on his lease, leaving the landlord with months of overdue rent — and an office full of high-end electronic equipment.
The landlord figured that the flat-screen TV and top-of-the-line stereo system were his due. After all, the tenant owed him thousands of dollars, and taking possession of the left-behind equipment would help offset his expenses, right?
Not necessarily. While lease provisions control what happens to the tenant’s abandoned property in these situations, it’s much more complicated than who left what where. In this brave new world of too much commercial space and not enough tenants, property managers and owners need to make sure they are safeguarding themselves and their investments by paying attention to some key areas.
Before you sell anything on eBay
In the example above, the first thing the landlord should do is regain possession of the premises and secure any items left behind. All potential claimants then need to be notified.
Provisions in the lease will determine who has the rights to the tenant’s abandoned property and how it should be handled. But even with a signed lease, the tenant’s property may not necessarily be the landlord’s to dispose of as he or she wishes. The property may have been used as collateral on a loan, which means a bank or financial institution would have first rights. Or the items may be leased, in which case they would go back to the owner.
If the lease provides and it’s clear that the property is yours, it’s still a safe idea to check with your attorney before putting abandoned items up for sale on eBay — or out at the curb.
Back to basics
What else should property owners and managers focus on as we move into the last quarter of 2009? Since it’s still a renter’s market out there — and likely to remain so as we move into 2010 — property owners can take some steps now to assure they are better positioned for the coming year. These steps include:
Lease payments: In our current economy, tenant defaults on lease payments top the headache list for property owners. Landlords often grapple with the issue of late rents and postpone taking action in the hope — often vain — that things will improve. While well-intentioned, this approach can delay getting your rent and possession of your premises. Typically, commercial rent is due on the first of every month. If a tenant misses a payment, your best bet is to issue a “demand for payment,” which is a seven-day notice putting the tenant on alert that he or she needs to pay the rent in the next seven days or the property owner can take the next step, which is filing an eviction proceeding. The property owner then has a business decision to make as to whether to pull the trigger on the tenant or “work with” him or her.
If you are going to work with the tenant, recognize that you are now acting like a bank, so you had better think like one. Is the tenant cooperating with you? Does this tenant have a business plan that looks likely to turn things around? Or is the hole just going to be dug deeper? If you conclude its “go time,” while this may sound heavy-handed, it ensures that the clock starts running to regain possession of your premises as quickly as possible. The next steps include a court appearance, which could result in either a default or consent possession judgment or a trial to regain possession. In either case, with a possession judgment, the tenant is given a 10-day redemption period during which it can make a payment of all amounts owed to wipe the slate clean. The circumstances vary, but it can take about six to eight weeks to get rid of a non-paying tenant — which is why it is so critical not to miss a beat and file the first notice when the first payment is late.
Lease review: Are you losing prospective tenants before they sign on the dotted line? It might be a great time to review the terms of your lease to see if they are too heavy-handed compared with others in the market. While no landlord can afford to loosen up payment provisions, there are areas landlords are taking a fresh look at to be more attractive to potential tenants, including:
Maintenance provisions: Tenants typically will pay a pro rata share of maintenance provisions for cleaning and maintaining common areas of the building, including parking lots, sidewalks, vestibules, entryways, elevators, etc. Landlords should revisit these provisions to make sure there are no “hidden” expenses. Go line item by line item and make sure you can identify how the tenant benefits — and then sell those benefits.
Pass-through expenses: This line item allows landlords to “pass through” certain payments for items that mutually benefit all tenants, can be another area where expenses get nebulous. Again, make sure that the bills you are passing along to your tenants are truly bills they should be sharing in, or are tied to just the tenant’s leased premises, and another user’s bills.
Management fees: Take a look at the fees you or your property manager are charging tenants to handle day-to-day facility operations. Do your tenants understand and value the service they receive for their management fees or is this an area that generates a lot of complaints? How do your fees compare with comparable buildings in the market?
Maintenance improvements: While you might be inclined to cut expenses to weather the down market, don’t skimp when it comes to maintenance. Be sure to make the necessary repairs, as well as the cosmetic improvements, to make the property safe and attractive. Some of the key areas to focus on — which often are the same areas that generate personal injury lawsuits — include: lighting, grounds maintenance, steps and stairwells, railings and guard rails, and reception areas.
MBT exposure: Property owners needs to be well versed in the far-ranging definition of “gross receipts” under the Michigan Business Tax and whether your lease properly delineates the landlord’s receipt of dollars from a tenant — even those that simply pass through the landlord’s hands. Property owners who have not done so should evaluate the tax consequences of the fees they collect yet don’t directly benefit from.
The overall moral of the story is: Be proactive. Landlords and property managers can’t afford to sit around and wait for problems with past-due rents or maintenance challenges. You need to be diligent in managing your property to ensure that you attract and retain quality tenants.
Robert J. Nolan is a partner at Warner Norcross & Judd LLP. He concentrates his practice in both real estate and corporate mergers and acquisitions and has worked extensively with commercial development projects, commercial lease negotiations, landlord/tenant law and related areas. He can be reached at email@example.com or (616) 752-2172.