CLIENT ALERT: A Wake Up Call To Commercial Real Estate Landlords
By: Charles M Tatelbaum and Corey D. Cohen, Tripp Scott PA
The media has recently been replete with both stories and prognostications concerning the mushrooming number of commercial lease defaults as a result of the post-pandemic shift in the work and retail environment. Especially in urban areas, full and part-time virtual staffing has created much less of a demand for both office and retail space utilization, leading to an increasing number of defaults by commercial tenants.
A recent decision by a Judge of the United States District Court in Miami affirming a decision by the Chief Bankruptcy Judge for the United States Bankruptcy Court for the Southern District of Florida points out the need for vigilance and focus for commercial landlords when making decisions with their legal advisors as to what remedies to pursue in the event of such defaults.
Some commercial landlords, when faced with a tenant default situation, will seek only to obtain a writ of possession through the courts in order to take back the premises in an attempt to find a new tenant. The decision by U.S. District Judge Darrin Gayles, in affirming the Chief Bankruptcy Judge, held that obtaining a court-ordered writ of possession for the premises does not in and of itself constitute a termination of the lease. This is very important, as even after a writ of possession has been entered by a court, if the tenant were to seek bankruptcy relief under Chapter 11 of the Bankruptcy Code, the tenant could still assume the lease. While the assumption of the lease in a bankruptcy proceeding would require the tenant to cure all pre-bankruptcy defaults, during the time that the Chapter 11 proceeding was pending, it would restore the premises to the tenant, also giving the tenant up to 60 days in order to effect the cure. Furthermore, under the provisions of the Bankruptcy Code, in most instances, even with a lease that prohibits the assignment of the lease without the consent of the landlord, the bankruptcy court can authorize the tenant to assume and assign the lease to a third party, even over the objection of the landlord.
Judge Gayles went further in his opinion to remind landlords that if the lease is terminated, the landlord is not entitled to seek future rent from the defaulting tenant. The appellate opinion also stated that the landlord has three options when a tenant defaults: (1) take possession and terminate the lease; (2) take possession and hold the tenant liable for damages; or (3) do nothing and hold the tenant liable as rent comes due.
Too often, landlords who utilize agents to assist with defaulting tenant situations fail to confer with competent legal counsel in order to assess the short-term and long-term ramifications of the action to be taken as a result of the tenant’s default. The court decision referenced above should be a wake-up call to all commercial landlords to seek competent legal help in analyzing what action should be taken.
The bankruptcy and creditors rights practice group, along with the real estate practice group at Tripp Scott, has knowledge and experience in assisting clients in planning the strategy needed when a commercial tenant defaults on a lease.
