Landlords: Beware When Terminating and Evicting Commercial Tenants

January 2012Articles In the Zone

When a tenant under a commercial lease defaults and the landlord wishes to exercise a right to terminate the lease and evict the tenant, the landlord must comply with the terms of the lease and the applicable law regarding termination and eviction. This issue was addressed in a September 8, 2011, decision by the U.S. Bankruptcy Court for the Eastern District of Pennsylvania, which held the landlord failed to comply with the prerequisites for evicting a tenant under the Landlord-Tenant Act of 1951, and as a result, the lease was not terminated and the landlord was not entitled to have the debtors evicted from the premises (See In re Ice Treats One, Inc.)

In the case in question, the tenant, operating as a Rita’s Water Ice, failed to timely pay its rent to the landlord. The landlord sent a letter to the tenant indicating the tenant would be in default if it failed to make the required payment within 10 days of the date of the letter. Two days after sending the default letter, the landlord, without notifying the tenant, filed a landlord-tenant complaint in the Philadelphia Municipal Court against the tenant. Upon expiration of the 10-day cure period, the landlord sent the tenant a letter terminating the lease and demanding the tenant vacate the premises within 15 days. The Municipal Court granted judgment against the tenant and the landlord ultimately took possession of the leased premises and installed a new operator. The tenant filed a petition to open the default judgment, and the Municipal Court vacated the judgment but issued a new judgment for possession and a monetary judgment in favor of the landlord. In the tenant’s appeal to the Court of Common Pleas, it filed a suggestion of bankruptcy, the intent of which is to notify a court that the defendant has filed a bankruptcy petition. The filing of a bankruptcy petition operates as an automatic stay of any act to exercise control over property of the estate.

The issue at hand for the Bankruptcy Court was whether the tenant, as the debtor, was entitled to the protection of the automatic stay. To make such a determination, the court first had to determine if the lease had been terminated by the landlord prior to the date on which the tenant filed its bankruptcy petition. If the lease was not terminated prior to the bankruptcy filing, then the filing would operate as an automatic stay of the landlord’s right to evict the tenant and take back possession of the leased premises. In its analysis of the Landlord-Tenant Act of 1951, the court found that 68 P.S. §250.501 required that a landlord must give a tenant a notice to quit before commencing eviction proceedings in order to effectively terminate the lease and evict the tenant. In the case before the court, the notice sent by the landlord to the tenant before the landlord commenced eviction proceedings was a default notice, not a termination notice (or notice to quit). The landlord’s termination notice was sent after the landlord commenced eviction proceedings. As a result, the landlord failed to comply with the prerequisites for commencing its eviction proceedings and thus the judgments against the tenant should not have been granted by the Municipal Court and the landlord was not entitled to have the tenant evicted from the premises. As the landlord did not effectively terminate the lease, the tenant’s bankruptcy petition entitled the tenant to retain its interest in the lease and the protection of the automatic stay. Based upon the court’s findings, the tenant, as the debtor, could assume the lease (if it so chooses), provided it complies with the requirements of Section 365 of the Bankruptcy Code.

This decision points out the importance of reviewing and understanding the requirements, both in the applicable lease and the law, to affect a proper termination of a commercial lease. Had the landlord proceeded properly and in compliance with the lease and the Landlord-Tenant Act, the lease could have been terminated and would not have been subject to the protection of the automatic stay.

For more information, please contact Brian J. Levin.