Posts Tagged "Slow-Paying Tenants"

Brain Fielding Discusses Landlord’s Rights with Slow-Paying Tenants

Posted by on Sep 12, 2014 in Commercial Property Investment, Property Investment Advisor, Question and Answer | Comments Off on Brain Fielding Discusses Landlord’s Rights with Slow-Paying Tenants

Dear Mr. F.,

A broker who specializes in investment properties showed us a three store mini shopping center which he suggests is an outstanding investment. We tend to like the location and feel the price is right, but one of our partners, Grady, has cautioned us the tenant paying the highest rent looks to be getting into financial trouble. How difficult is it to get rid of a slow paying tenant and is it true that the bankruptcy courts often show little interest in protecting the Landlord’s rights?

Corey A

 

Dear Corey,

 

Your questions are good ones … you are wise to be concerned about dealing with financially troubled tenants. While the laws tend to be favorable to the landowner in a commercial transaction, you need to carefully review the existing lease to insure that you are able to avail yourself of the relief specified in your lease. Generally that lease will provide with the appropriate notice provisions you must follow, but the Courts are likely to see your matter as fairly straightforward and cooperate in the eviction.

Having said that, do not expect the same sort of easy road in tenant bankruptcy which is handled at the federal level. Legal costs are generally much greater and the judge will be responsible for protecting the various creditors of your tenant, prioritizing retention of monies owed to those that are “secured” over those that are not secured, [a lease can be seen as both an obligation [liability] as well as an asset. Indeed, there have been decisions that a favorable lease is an asset of the bankrupt and the Court may offer that “asset” to another party to maximize the return for the creditors. If your current lease is below market and if there are unilateral options for the tenant to renew, you might find your lease being sold or transferred to another party that you would not have preferred for your property.

Companies that seek relief through a Chapter 11 filing are ones that hope to reorganize and resume their business, and within relatively short order they will have to affirm or reject your lease and if they do the latter, you will gain relief and have the property returned to you in due course. And if they do affirm, they will be under the supervision of the Court and the Trustees and as such will have to meet the company obligations within the terms of those obligations, including, of course, contained in your lease.

When we suspect a tenant is having difficulties we immediately begin a two-step evaluation process. The first part is to think and act like a customer … visiting the store regularly, watching levels of inventory, tracking store traffic, seeing the amount of new and fresh stock on the shelves … trying to get a more general sense of the business operations. Then we expect the partner who best understands the business and may have recommended signing up the tenant and have them seek a friendly, open meeting to see if insight can be gained from the store managers. [Often if the property owner approaches the tenant demonstrating an interest in finding solutions, the store management will be less reluctant to share important insights].

Tread carefully and good luck,

 

Brian F.

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