Landlord Liens and Evictions
By Dan Kloberdanz
In today’s economy, more commercial landlords are facing tough choices in dealing with tenants who are not able to pay their rent. When a tenant defaults on the rent, the landlord usually has a number of options, not all of them mutually exclusive. The best course of action will depend on whether or not the landlord believes the tenant can stay in business and, hopefully, continue to pay rent. If there is little hope for the tenant’s ability to stay in business, the landlord needs to focus on cutting its losses and regaining possession as quickly as possible, and the collection of the back rent should be a secondary issue.
Landlord’s Remedies. When a tenant defaults on the rent, obviously many factors come into play, including the probability that the tenant can pay past and future rent, the strength of any personal guarantees, the possibility the tenant will file bankruptcy if the landlord sues or locks the doors, and the prospect of reletting the premises to a new tenant.
Upon a default, the landlord can bring a forcible detainer lawsuit to legally regain possession of the premises. The downside to filing an eviction action is that this process takes at least a few weeks, and gives the tenant the opportunity to move out of the property, and possibly take with them most or all of the personal property inside the premises.
On the other hand, the self-help remedy of lock-out is available to most commercial landlords under Arizona law. In fact, most commercial lease forms expressly allow the landlord to re-enter and seize possession of the premises, without the necessity of filing a court action. As a general rule, a commercial landlord has the right to lock out a tenant, unless the lease expressly prohibits such action, which would be very rare.
As for the payment of rent, the landlord can sue the tenant, and any guarantors, at any time after a default for breach of the lease. In most cases, the landlord can file a lawsuit regardless whether the landlord has retaken possession of the premises.
When Can the Landlord Lock-Out a Tenant? Assuming that the lease does not prohibit a lock-out, the landlord may re-take the premises after any material breach of the lease by the tenant, or if the tenant is in arrears on rent for five days. A landlord should not attempt to lock out the tenant for a breach which may be deemed by a court to be “trivial” (such as a legitimate dispute over a CAM charge which is small in comparison to the tenant’s other rental obligations). It is risky for the landlord to use a lock-out for any reason other than the tenant’s failure to timely pay its monthly rental payments. When in doubt, the landlord should not lock out the tenant, but should file a forcible detainer action (and let the court decide the possession issues).
The Landlord’s Lien. Under Arizona law, a commercial landlord has the right to enforce a statutory "landlord's lien" against the personal property of the tenant, subtenant or assignee which is located on the premises to the extent necessary to secure payment of the rent. The landlord has no right to seize property belonging to persons other than the tenant, a subtenant, or an assignee of the tenant.
A lock-out is usually the only practical method for the landlord to seize the tenant's personal property. Even so, typically the landlord who performs a lock-out may find it difficult to accurately determine which personal property actually belongs to the tenant. Arizona law permits the landlord to sell the tenant’s property and apply the proceeds toward the rent. If the tenant does not pay the rent within 60 days after seizure of the property, the landlord may sell the personal property at a public auction in the manner provided by statute, which requires notice to the tenant, and sometimes, publication. Because the statutory procedure for the sale process is quite ambiguous, the landlord should consider bringing a judicial action to foreclose on the landlord's lien, or better yet, if the landlord has already obtained a judgment for rent, the landlord could require the sheriff to execute against the tenant's personal property to satisfy the judgment.
Priority of the Landlord’s Lien. Generally, a landlord's lien against the tenant’s personal property relates back to the later of (i) the commencement of the tenancy, or (ii) when the tenant first brings the property onto the premises. Therefore, a landlord's lien will not have priority against another creditor's security interest in the tenant’s personal property if that other creditor perfected its lien prior to the time the tenant brought that property onto the premises.
How to Perform a Lock-out. A landlord cannot exercise its right of lock-out while the tenant is physically inside the premises, or if the landlord has to "breach the peace" to perform the lock-out. Thus a tenant may avoid a lock-out simply by keeping a person in the premises at all times. In such case, the landlord must file a forcible detainer lawsuit to regain possession. Of course, this may give the tenant an opportunity to remove personal property or to file bankruptcy (which will certainly cause more delays in regaining possession), however, the landlord really has no other choice in that situation.
If appropriate, the landlord should contact the local police prior to the lock-out. A landlord should never perform a lock-out without an adequate number of witnesses in addition to the locksmith, to observe the condition of the premises at the time of the lock-out (and especially to observe the contents inside the premises).
Also, as quickly as possible, the landlord should make a complete itemization of all of the property located in the premises. The landlord should also take photographs and/or make a videotape of each room (it is best to do this at the same time of the lock-out). It is not unusual for a tenant or its employees to claim that property is missing or stolen. It would also be wise for the landlord to make sure it is covered by insurance against any loss or claim relating to such personal property.
A landlord should post a notice on all of the outside doors, notifying the tenant and others of the lock-out. The notice should not slander or belittle the tenant (as it may be read by persons doing business with the tenant). If the landlord desires to hold the tenant liable for future rent, the landlord should be careful to avoid using language in this notice or any other notice that could be interpreted as "terminating" the lease (as opposed to terminating the tenant’s right of possession).
Things to Consider Before Using a Lock-Out. A lock-out is an effective but drastic remedy and should be used cautiously, and usually only as a last resort. A lock-out could destroy the tenant's business, therefore, the landlord’s potential liability for a wrongful lock-out is enormous. A landlord should be absolutely sure that (i) any default notices required under the lease (or otherwise) have been properly delivered, (ii) all grace periods under the lease have expired, (iii) the landlord has not somehow waived its right to strictly enforce its remedies (e.g., by the landlord previously accepting late payments without reinstating “time is of the essence”), and (iv) that the lock-out can be accomplished without breaching the peace.
Ultimately, the landlord should consider whether or not the lock-out will help achieve the landlord’s goals - whether that goal is forcing the tenant to pay past due rent, or simply getting rid of a problem tenant.
Dan Kloberdanz is a partner at the Scottsdale law firm of Berens, Kozub, Kloberdanz & Blonstein, PLC, and is a State Bar Certified Real Estate Specialist. Mr. Kloberdanz may be reached at firstname.lastname@example.org or (480) 624-2777. The firm focuses on real estate transactions and litigation, and corporate and business law.