WHAT HAPPENS WHEN A TENANT CAN’T PAY THE RENT?
In the present economic climate, many once-thriving businesses are having trouble paying their rent. An obligation that once seemed both reasonable and manageable may become difficult for a tenant whose business falls off and customers hold back. Leases entered into during boom times, when there was competition among tenants for premises and landlords had the upper hand, may come to seem to tenants unfair and unaffordable. In such circumstances, a tenant may seek the landlord’s agreement to a “work-out,” a reformation of the lease adjusting the rent, the size of the demised premises, the use of the premises, or other lease terms to help the tenant continue in business in the premises. Sometimes, the parties can agree to a new arrangement which benefits both landlord and tenant.
It is important for tenants to understand that although a work-out may make sense for both landlord and tenant, a landlord is under no obligation to agree to any adjustments, whether based on economic circumstances, tenant hardship or anything similar. The landlord’s decision about this is a business decision which requires weighing several factors, the primary one being the landlord’s expectation of the ease or difficulty of finding a desirable substitute tenant. The landlord must factor in the costs of removing a non-paying tenant, locating another suitable tenant at an acceptable rent, fixing up the premises for the new tenant, and all the other expenses which are necessary to establish a new tenancy. In a depressed economy, the landlord may well decide that an otherwise good but lower-paying tenant is better than none, and be willing to make a deal. In an upward-trending market, however, the landlord may decide to cut its losses, evict the tenant, and start over with a new, presumably high-paying tenant.
Another important factor is whether a tenant which is a business entity is backed up by a personal guaranty of its obligations by its principal(s). Eviction gives the landlord back its premises, but does not extinguish the tenant’s obligation to pay rent until the end of the lease term. However, if the tenant had sufficient income or assets to meet such obligations, it would not have defaulted on the rent, or be about to do so, in the first place. But, if there is a personal guaranty involved, the landlord is more likely to stick to its guns because the tenant’s principals’ personal assets are on the line. Either the principals will make the tenant come up with the money somehow, or the landlord will have access to their personal assets.
If the landlord wants to evict a tenant for non-payment of rent, the landlord must bring a summary proceeding for possession of the premises in landlord/tenant court. In New Jersey, there is no such thing as a self-help eviction, residential or commercial. A landlord cannot lock a tenant out, take the tenant’s property to satisfy unpaid rent, render the premises uninhabitable (“constructive eviction”) or do anything to get rid of the tenant other than go to court.
Landlord/tenant court is a division of the Special Civil Part which deals only with possession of premises. A landlord can get a judgment for possession of the premises only – that is, the judge can order the tenant to vacate. If the reason for the eviction is non-payment of rent, a tenant has the right to reinstate by paying all the rent due on or before the court date. If the tenant is late again with the rent, the landlord will have to start another proceeding. To recover any damages, including the rent owed, the landlord must start a separate action in civil court. The landlord also has to try to reduce its damages by re-renting to another tenant, if possible – it cannot just sit by and hope to collect the rest of the rent under the lease.
Landlords and tenants which are entities rather than individuals may not represent themselves in court, including landlord/tenant court. They must be represented by an attorney licensed to practice law in New Jersey. (The exceptions are sole proprietors and partners in a general partnership.) Non-attorney representatives, no matter how much they know about landlord/tenant, are not allowed.
Sometimes tenants who are unable to pay the rent disappear under cover of darkness, leaving a mess, or perhaps valuable property, behind. Under these circumstances, a landlord may want to keep the tenant’s property, or sell it to defray some of the expenses incurred because of the breach of the lease. A landlord can sell or otherwise dispose of a tenant’s property left in the premises only pursuant to a legal regime which requires the landlord to notify the tenant that unless the property is claimed by the tenant, the landlord will dispose of it after 30 days. During that time, the landlord must safeguard the property either on the premises or in off-site storage. If the tenant does not collect it, the Landlord may sell the property and apply the proceeds to its expenses, including unpaid rent and moving and storage costs. Any balance must be remitted to the tenant.
DISCLAIMER – This article is for general information only and is not intended to provide legal advice or to address specific legal problems. This article does not create an attorney-client relationship. For legal advice concerning real estate transactions and all other legal matters, consult an attorney.
Landlord Remedies
WHAT HAPPENS WHEN A TENANT CAN’T PAY THE RENT?
In the present economic climate, many once-thriving businesses are having trouble paying their rent. An obligation that once seemed both reasonable and manageable may become difficult for a tenant whose business falls off and customers hold back. Leases entered into during boom times, when there was competition among tenants for premises and landlords had the upper hand, may come to seem to tenants unfair and unaffordable. In such circumstances, a tenant may seek the landlord’s agreement to a “work-out,” a reformation of the lease adjusting the rent, the size of the demised premises, the use of the premises, or other lease terms to help the tenant continue in business in the premises. Sometimes, the parties can agree to a new arrangement which benefits both landlord and tenant.
It is important for tenants to understand that although a work-out may make sense for both landlord and tenant, a landlord is under no obligation to agree to any adjustments, whether based on economic circumstances, tenant hardship or anything similar. The landlord’s decision about this is a business decision which requires weighing several factors, the primary one being the landlord’s expectation of the ease or difficulty of finding a desirable substitute tenant. The landlord must factor in the costs of removing a non-paying tenant, locating another suitable tenant at an acceptable rent, fixing up the premises for the new tenant, and all the other expenses which are necessary to establish a new tenancy. In a depressed economy, the landlord may well decide that an otherwise good but lower-paying tenant is better than none, and be willing to make a deal. In an upward-trending market, however, the landlord may decide to cut its losses, evict the tenant, and start over with a new, presumably high-paying tenant.
Another important factor is whether a tenant which is a business entity is backed up by a personal guaranty of its obligations by its principal(s). Eviction gives the landlord back its premises, but does not extinguish the tenant’s obligation to pay rent until the end of the lease term. However, if the tenant had sufficient income or assets to meet such obligations, it would not have defaulted on the rent, or be about to do so, in the first place. But, if there is a personal guaranty involved, the landlord is more likely to stick to its guns because the tenant’s principals’ personal assets are on the line. Either the principals will make the tenant come up with the money somehow, or the landlord will have access to their personal assets.
If the landlord wants to evict a tenant for non-payment of rent, the landlord must bring a summary proceeding for possession of the premises in landlord/tenant court. In New Jersey, there is no such thing as a self-help eviction, residential or commercial. A landlord cannot lock a tenant out, take the tenant’s property to satisfy unpaid rent, render the premises uninhabitable (“constructive eviction”) or do anything to get rid of the tenant other than go to court.
Landlord/tenant court is a division of the Special Civil Part which deals only with possession of premises. A landlord can get a judgment for possession of the premises only – that is, the judge can order the tenant to vacate. If the reason for the eviction is non-payment of rent, a tenant has the right to reinstate by paying all the rent due on or before the court date. If the tenant is late again with the rent, the landlord will have to start another proceeding. To recover any damages, including the rent owed, the landlord must start a separate action in civil court. The landlord also has to try to reduce its damages by re-renting to another tenant, if possible – it cannot just sit by and hope to collect the rest of the rent under the lease.
Landlords and tenants which are entities rather than individuals may not represent themselves in court, including landlord/tenant court. They must be represented by an attorney licensed to practice law in New Jersey. (The exceptions are sole proprietors and partners in a general partnership.) Non-attorney representatives, no matter how much they know about landlord/tenant, are not allowed.
Sometimes tenants who are unable to pay the rent disappear under cover of darkness, leaving a mess, or perhaps valuable property, behind. Under these circumstances, a landlord may want to keep the tenant’s property, or sell it to defray some of the expenses incurred because of the breach of the lease. A landlord can sell or otherwise dispose of a tenant’s property left in the premises only pursuant to a legal regime which requires the landlord to notify the tenant that unless the property is claimed by the tenant, the landlord will dispose of it after 30 days. During that time, the landlord must safeguard the property either on the premises or in off-site storage. If the tenant does not collect it, the Landlord may sell the property and apply the proceeds to its expenses, including unpaid rent and moving and storage costs. Any balance must be remitted to the tenant.
DISCLAIMER – This article is for general information only and is not intended to provide legal advice or to address specific legal problems. This article does not create an attorney-client relationship. For legal advice concerning real estate transactions and all other legal matters, consult an attorney.