Pennsylvania Landlord Rights and Remedies for Tenant Defaults During COVID-19May 4, 2020 – Alerts
With social distancing and mandatory closures, COVID-19 has caused a tremendous impact on businesses. Many commercial tenants have failed to pay April or May rent and some tenants are looking for rent abatements, rent deferrals and the ability to terminate their leases. In these unprecedented times, it is important for commercial landlords to understand their rights and remedies under their leases and Pennsylvania law.
Know Your Remedies
Most commercial leases provide a landlord with a variety of remedies if a tenant does not pay rent. Such remedies may include:
- A lawsuit for past-due rent
- The ability to terminate the tenant’s right of possession
- The right to accelerate future rent due under the lease.
The lease may also include confession of judgments provisions and/or a guaranty allowing a landlord to recover from a tenant’s principal or another entity. While courts have generally stayed eviction and other lease enforcement remedies in response to COVID-19, landlords should be prepared for when the stays are lifted. Landlords should be sure to properly deliver any required default notices giving the tenant a cure period so the landlord can take prompt action when the courts reopen.
Although many leases state that a landlord’s rights are cumulative, Pennsylvania law limits which remedies a landlord can elect and recover. Most notably, a landlord cannot obtain a “double recovery” of both court-ordered possession and accelerated rent. The bar on double recovery prevents a landlord from declaring the lease terminated by the tenant’s default, recovering possession on the basis of that termination and thereafter obtaining judgment for accelerated rent through the balance of the lease term. The bar on double recovery may not apply when a tenant abandons the premises. Under such circumstances, a landlord may be able to take back physical possession of the property and relet the property, without letting the original tenant off the hook. If the landlord relets the property without terminating the original lease, the landlord must credit the rent from the new tenant against the rent due from the old tenant.
Avoid a Claim of Surrender
In communicating with a defaulting tenant, a landlord should be careful to avoid a claim of surrender that cuts off a landlord’s right to future rent and damages. A legally effective surrender requires both tenant abandonment and landlord assent to such abandonment. Assent by a landlord requires an unequivocal act that leaves no doubt that a tenant’s surrender has been intentionally accepted by the landlord. To avoid assent, a landlord should make clear in writing that it does not accept a tenant’s surrender of the property and it continues to view the tenant as bound under the lease.
Attempt to Negotiate a Resolution
Practically speaking, a landlord should always attempt to first negotiate an amicable resolution with a tenant before resorting to legal remedies. In negotiating a resolution during COVID-19, a landlord should consider the parties’ respective positions when the closures are lifted and business activities resume. A landlord can work with a tenant who is requesting a rent deferral or abatement by proposing a rent payback period or extension of the lease term. Such measures may allow a landlord to retain a tenant, which in turn may avoid triggering termination rights for other tenants.
If a resolution cannot be reached, the landlord should consider filing a simple complaint outlining the defaults and demanding damages generally. There is no need for the landlord to set forth all of its damages upfront because they will not be fully known until the landlord obtains a replacement tenant. A landlord should authorize its real estate broker to attempt to relet the space after the defaulting tenant vacates the space. The broker and the landlord should keep detailed records of all work performed to relet the property. After the landlord identifies a new tenant, it can calculate its damages incurred in connection with the default. Such damages may include:
- Lost rent from when the old tenant stopped paying rent until the new tenant started paying rent
- Any difference in rent paid by the new tenant through the current term of the old lease
- Brokerage fees and fit-up costs prorated through the term of the old lease
- Late fees, interest and/or other charges owed by the old tenant.
After the action is filed, the landlord can continue settlement negotiations with the old tenant while it works to obtain a new tenant. Any resolution must be properly drafted in a settlement agreement and should take into account a possible future bankruptcy filing by the tenant.
As this is an evolving area of law, specifically with respect to tenant defaults caused by COVID-19, it is recommended that commercial landlords speak with counsel to discuss their rights and remedies against tenants who fail to pay rent. At Fox Rothschild, our real estate attorneys are prepared to help landlords take action when tenants fail to honor their obligations or attempt to claim force majeure, due to COVID-19, as a basis for such defaults.