Collecting on Commercial Leases

By Mark J. Bainbridge

These days it is all too common for owners and managers of commercial buildings to have difficulty collecting rent. Whether the tenant is in an office space, retail space or any other commercial property, the economic turmoil has opened up a new chapter in the landlord-tenant relationship. Many of the leases currently in effect today were entered into during the boom times and without personal guarantees executed by the tenant or other credit-worthy signer. This can create a problem for the landlord. But there are several things the landlord can do to help maximize the rent rolls.

First, landlords should aggressively seek personal guarantees when appropriate. A personal guarantee allows the landlord to name the guarantor personally in a lawsuit to collect rent. The landlord may then go after the personal assets of the guarantor, which can provide valuable leverage for the landlord.

Second, A.R.S. §33-361 allows a landlord to reenter the leased space and change the locks on the tenant when the tenant is at least 5 days delinquent in paying rent. Technically, the law does not require the landlord to provide notice to the tenant before reentry, although some leases may require prior notice.

This goes hand-in-hand with A.R.S. §33-362, which provides the landlord with a lien on most of the tenant’s items found in the leased space. When the landlord reenters the premises and takes back possession, the landlord has the legal right to seize the tenant’s personal property to satisfy the outstanding rent. There are some exceptions to this rule and one should always consult with a licensed attorney before taking such action. But the rules do favor the landlord in this regard. Many tenants know this and will do a “midnight move-out” to avoid losing their property. Landlords should take appropriate steps to prevent this. A well drafted lease can be helpful in preventing such conduct.

After demand for rent and negotiations have failed, and there are insufficient assets to satisfy the rent, the landlord may need to consider litigation (or arbitration if the lease requires). If the tenant has assets and is not in bankruptcy, a rent collection lawsuit may be the way to go. Many of these cases are very simple and straight-forward. The landlord may be able to win the case early on through a default judgment, summary judgment or other motion to the court. Once the landlord obtains judgment against the tenant, the landlord may begin collection efforts, including garnishment of bank accounts, wages, etc. A recorded judgment from the superior court will also act as a lien on any real estate owned by the tenant in the county it is recorded in. This may provide a payoff to the landlord if/when the tenant tries to refinance or sell the property.

In short, landlords have several options available to them in collecting on commercial leases. Before deciding on a specific course of conduct, landlords should consult a licensed attorney to make sure they are employing the most effective strategy. Mark J. Bainbridge is the founder of The Bainbridge Law Firm, L.L.C., a real estate and business litigation firm in Scottsdale. Ph: 602-902-1930.