A commercial tenant’s default puts both landlord and tenant in a bind. The tenant has to decide whether to move out, stay and fight or sue, and the landlord has to decide whether to evict, renegotiate or sue.
Emotions run high for both sides. The tenant usually spends the early days of the dispute fuming that the landlord could have prevented the default (if only the building was in better condition). The landlord, on the other hand, is certain to take serious losses.
This analysis is not exhaustive. Rather, it sketches an overview of the remedies and rights of both parties for early self-evaluation.
An unguaranteed tenant who goes broke and defaults may simply wind up the company or file a corporate bankruptcy (unless its claims against the landlord look good). The landlord quickly gets the space back, but unpaid.
Nobody likes it, but at least both sides can get on with their lives.
Personal Guaranty
The typical commercial lease makes the owner sign a personal guaranty. The guarantor is a person or entity unlikely to end up with no assets, so the tenant can’t just walk away. Instead it has two basic options.
The tenant can either try to settle with the landlord quickly, or try to outlast the landlord.
I believe early dealing makes the most sense for everyone. The tenant gets to wind down the business in a controlled way, the landlord cuts its loss by getting the space back into productive use, and both sides avoid wasting scarce resources on lawyers.
Because lease terms almost always favor the landlord, early bargaining can keep losses down. Early settlement allows the tenant to avoid a large judgment. Sadly, early deals often don’t happen, and not just because of high emotion.
Most landlords list their losses, add them up and hand the tenant (or its guarantors) a large bill. These landlords believe they are entitled to whatever recovery the lease promises. And as a matter of law, they may be.
Landlords certainly can’t be faulted for doing everything they can to recover every dollar they lose, but their insistence on a full recovery almost always has one effect: it makes early deals nearly impossible. The result is often a long lawsuit that uses up scarce resources for everyone.
Fighting Is a Gamble
Once suit is filed, both sides have to hire lawyers, and the costs start to add up. Attorneys’ fees pile onto losses that have already been felt, and emotions are at their height.
At every point, the tenant must remember that fighting is a gamble. If it stays and fights, it must be willing to pay any judgment the court renders.
Once the landlord files suit, the situation becomes all or nothing. Most tenants know the landlord will get a judgment but don’t realize it will cover all the landlord’s costs of the lawsuit (attorney’s fees) on top of unpaid rent and other damages.
The tenant may believe the landlord has violated the lease in many ways, but with very few exceptions, the landlord will get a judgment. Every day the case drags on, the judgment grows. A tenant without an exit plan is trapped under a Sword of Damocles.
But landlords should never count their winnings until the hand is played out. Some tenants do have an exit plan.
Winning a Judgment Is One Thing, Collecting It Quite Another
Most landlords are all but certain to get a judgment on a genuine default. With a professionally drafted lease, costs, fees and damages will be covered. (If the lease was written by amateurs, all bets are off.) And the judgment will probably be large, as well.
That sounds good for landlords, but winning a judgment is one thing, collecting it quite another.
A tenant in default who chooses to fight is betting on a strategy. It knows that the landlord will get a judgment, so it would not waste money fighting unless it had a good reason to risk a bigger judgment.
Usually, the tenant wants to make collecting on the judgment costly or impossible. This takes more maneuvering with a guarantor in play.
Landlords need to watch for signs the tenant is moving assets beyond reach. If the tenant’s attorney keeps stalling or putting off the inevitable, watch for asset-protection efforts.
Done right, a good asset-protection strategy can work. The judgment holder may give up rather than spend more money trying to collect. The debtor can walk away, but calling that person a winner would be a mistake.
Keeping up asset protection costs money and attention. And the landlord can ask the court to pierce the tenant’s corporate veil, letting it enforce the judgment against entities set up to hide assets. Both sides need to take care to stay inside the law.
There is no single moral of the story; the ending depends on the choices the tenant and landlord make. After a default, it becomes a game of cat and mouse. The stakes get higher and higher, until one side decides the risks are just too high.
Each decision point in the process deserves careful thought, and a better understanding of what lies ahead. I hope this overview helps you reach better decisions when it is your turn to choose.
About Delancey Street
Delancey Street is a premier, and award winning, business debt settlement company that helps business owners nationwide. Our goal is simple: help you escape debt in a safe and legal manner. Based out of New York, we can help in 49 of 50 states. We tell you how it is; because your business and future is on the line.
