Op-Ed: Read this before locking out a commercial tenant

Garrett Olexa, used with permission from Jennings Strauss. *Garrett Olexa is a member with the law firm of Jennings, Strouss & Salmon, PLC. He practices in the areas of real estate and commercial litigation.  Mr. Olexa can be contacted at golexa@jsslaw.com or 623.878.2222.

Garrett Olexa is a member with the law firm of Jennings, Strouss & Salmon, PLC. He practices in the areas of real estate and commercial litigation. Olexa can be contacted at golexa@jsslaw.com or 623.878.2222. Photo used with permission from Jennings, Strouss & Salmon, PLC

Most commercial landlords and property managers are aware that, in Arizona, if a commercial property tenant neglects or refuses to pay rent and is in arrears for more than five days, or if a tenant violates another provision of the lease, under certain conditions and circumstances, Arizona law allows the landlord the option to reenter and retake possession of the premises, seize personal property belonging to the tenant, and, after a statutory allotted time period and proper notice, publicly auction the tenant’s property to pay the unpaid rent. What they may not be aware of is the number of potential pitfalls associated with taking such actions.

The following are questions commercial landlords should consider and discuss with an attorney knowledgeable in the laws that govern lock-outs to determine whether it is a possibility and the best option for their situation.

1. What does the lease say?

If the lease contains language that would prohibit a lockout, then it is not an option. Also, if the lease requires the landlord to provide written notice to the tenant before there can be a default or breach of the lease, a lockout is only an option if the written notice has been properly delivered and the time to respond to the notice and cure a potential default has expired.

2. Is the tenant five days in arrears on the payment of rent, or has there been a material default under the lease by the tenant aside from late rent?

These questions are significant because a lockout cannot be performed until (i) the rent has been unpaid for five days past the date it was due or (ii) the tenant has violated another significant provision of the lease. The landlord should also consider whether the tenant has a valid argument that the failure to pay rent or alleged material default was prompted by the landlord’s own failure to comply with a term of the lease. Keep in mind, – a breach by the landlord may excuse a tenant from having to comply with certain lease obligations, and if the landlord has breached the lease and then taken the tenant’s property, the landlord could be exposed to a claim for conversion.

3. Have you allowed the tenant extra time to pay the rent?

If a landlord promises the tenant extra time to get caught up on the rent, the landlord should avoid retaking possession of the premises until the extension expires.

4.  Have you routinely accepted late rent payments or led the tenant to believe timely payments would not be required?

If a landlord has regularly accepted late rent payments from tenants, additional steps may need to be taken before a lockout can occur. Such conduct may also determine whether the lockout is a reasonable option.

5. Can the lockout be performed without any of the tenants, employees, or representatives present?

A landlord cannot retake possession while someone is inside the building.

6. Can a lockout be accomplished without breaching the peace?

If entering the property will result in a breach of the peace, the lockout cannot be performed. If a breach of the peace occurs during a lockout, then the lockout needs to be terminated.

7. Is the personal property on the premises owned by the tenant? Will selling such property bring sufficient proceeds to cover past due rent? Are there risks associated with selling or disposing of personal property on the premises?

If the personal property is not owned by the tenant, it cannot be sold by a landlord. Also, the landlord will want to consider whether the personal property is worth enough to cover the rent owed and auction costs. A landlord should also consult with an attorney concerning potential liabilities associated with disposing of certain personal property (e.g. computers that contain protected personal information of the tenant’s customers).

8. Have you conducted a UCC lien search?
A landlord’s possessory lien will not take priority over another creditor that perfected a lien on the personal property before it was brought into the leased space. Thus, a UCC lien search should be conducted before deciding whether repossession makes sense.

9. Will a lockout put the tenant out of business and, if so, is that in your best interest?
Locking out a tenant and taking possession of its equipment may cause a tenant to lose its customers and force it to close its doors permanently. If the tenant is under a long-term lease and has simply fallen behind on one month’s rent due to a cash flow issue, a lockout is probably not going to be in a landlord’s best interest.

10.  Is there a personal guaranty and do the guarantors have money?
If a personal guaranty on the lease was obtained, and the guarantors are believed to have sufficient assets, filing suit on the personal guaranty and getting a money judgment against the guarantors may prove to be a better course of action than going through the time-consuming and uncertain process of seizing and selling the tenant’s assets. The suit can also include a request for a court order requiring the tenant to turn over the premises.

In short, while lockouts can be a valuable tool to a commercial landlord, they are also ripe with potential problems if not executed properly. Therefore, it is recommended that landlords consult an attorney familiar with commercial lockouts before engaging in the process.

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