SCENE 1: Whether the Tenant has defaulted or is holding over, Landlord is in the process of taking possession of the premises. Even assuming an amicable termination of the leasehold interest, Landlord and Tenant have to deal with the issues created by a move-out.
In the best of all worlds, Landlord would employ its trusty pre-Lease checklist and go through the premises with Tenant and check off all items and review any personal property that remains as well as wear and tear, damage to structure, systems and so on and so on. The happy Tenant contractors are standing by as well, ready to counter check all items and remove all personal property, repair any damage and be out of the space in a jiffy. Landlord then returns the next day to a broom swept premises free of all blemishes and a final rent check in certified funds from the Tenant who is waving good-bye and giving well wishes to the owner and all neighboring tenants.
Hopefully you have experienced this series of events, but we must now leave Oz to examine what most folks encounter in real life.
CUT to SCENE 2 (MOST REALITIES): The Tenant is nowhere to be found and the Landlord’s Property Manager (“PM”) is forced to have a locksmith create access to the premises. As the door creaks open, the vermin scatter and garbage, debris and water on the floor are the first thing that greet this brave soul. As the PM has been advised, the broker for the property has already signed a lease with a new tenant who needs the space in five days in vanilla shell condition and ready for custom upfits. As the PM walks slowly into the space, and it becomes apparent there is a large amount of remaining personal property, alterations and improvements (most of which are malfunctioning) still in the premises. What to do?
1. Review and analyze the situation.
The best tool for this situation is a camera/phone/video record of the space and a witness to corroborate the conditions that are encountered. Despite any pre-Lease list, the current condition of the premises is paramount to analyzing what to do regarding Tenant’s personal property, fixtures and third party property that may be located in the space. Your witness is important, especially if there is substantial personal property left behind or major damage to the premises, or BOTH. Make sure to check for all evidence of property that may be owned, leased or liened by third parties (see below for a further discussion this issue!). Secure the premises. Return to your office and check for any UCC-1s that have been filed against the tenant and its specific list of collateral. Also note any obvious third party property (and hopefully) an address and phone number for a leasing or financing company.
2. Take A Deep Breath and Review.
If there is any property owned or leased or liened by third parties, contact them ASAP and tell them what is there and that you need it removed quickly. Once that is done you are hopefully dealing with only tenant owned personal property. If the third parties do not respond to you, your state law may require you to give certain notice to the owners before selling it, giving it to the new tenant or tossing it in the trash. If these folks fail to respond to you, give them an ultimatum; i.e. “take it soon or we will throw it away or sell it.” Careful though: a perfected secured interest in personal property may restrict your rights in this regard. Those rights (as well as the fee ownership rights of third parties) are protected by law even if the collateral is located beyond the boundaries of the premises. Here is your best weapon: let them know you have their property and give them a deadline to retrieve it. If they don’t respond, state clearly you will charge them for storage fees. Depending upon state law this may equal a “reasonable” storage fee or an amount close to the rent owed by the Tenant.
Special Note: If your Tenant is a franchisee, consult your lease and any related documents. Most franchisors will have protections built into the lease or associated agreements which not only prevent the Landlord from disposing of the personal property, but also give the franchisor the right (after appropriate notice) to step into the shoes of the franchisee, put a substitute franchisee in place in the premises, or otherwise have rights to retrieve the personal property. There are also likely procedures built into a default scenario that allow the franchisor the ability to analyze the situation before making a decision.
3. Come Up With A Plan.
Once the personal property has been inventoried, identified, scrutinized and related third parties given any required notice, the PM and the Landlord will need to decide what rights and remedies they wish to invoke to deal with the items left behind. These usually fall into a number of categories:
A. Lien Rights
State law and the Lease Agreement may provide for a security interest in the personal property that the Landlord can enforce by means of public or private sale or both. Certainly when the Landlord holds a first priority UCC this will be a north star to guide your decision making. Time to call the broker who so quickly promised the leftovers to the new tenant he has signed up to take possession of the premises! Most states recognize both statutory and common law lien rights for Landlords in the collateral. In NC, Landlords have the ability under many cases of enforcing a mechanic’s lien (see N.C. Gen. Stat. Section 44A) or even a post eviction lien (see N.C. Gen. Stat. 42-36.1 et. seq.). Wherever you may be located though, this should be your first avenue of inquiry !
B. What Can You Use Or Sell Or Trade Out
Assuming the there are no third party rights in the personal property, the PM and his or her Owner should evaluate what is a fixture (as a result of alterations or improvements) and what is not. Fixtures under most state laws and the terms of most commercial leases become the “property” of the landlord upon installation and/or abandonment. Some are obvious (new walls, brick oven, plumbing systems), some are on the border (hoods, shelving, cabling, lighting) and some are obviously not (carts, furniture, pallets, TVs, rugs, inventory and movable equipment) – For more on this topic See REAL ESTATE DRILL DOWN Post entitled “Fixtures – A Group Arrangement Or Entanglement.”
C. What Should You Just Throw Away
Garbage, useless inventory, broken equipment and debris. The biggest issue here is the cost of removal and cleaning. Demand should be made upon the Tenant to pay for this cost. However, many times the tenant is absent or not willing to cooperate or insolvent. Result then = cost of doing business. Just don’t try to pass it along in your CAM expenses !
D. What Should You Require Others To Retrieve
Third Party Property, Government Records and Hazardous Waste (“HW”). The first item is discussed above. The second is something the Tenant should be notified of and required to retrieve. The latter is a situation one hopes to never be involved with. However, if a PM encounters HW at the premises, due care should be given to determine the contractual and legal requirements that the Landlord and the Tenant have with regard to remediation. Depending on the type of HW, this can be a nuisance (oil cans, ink buckets) or a very serious problem (PCB s, toxic chemicals, sludge). A whole article could be written about how to deal with the problem items/waste, but the key point is always, document, analyze (with experts) and act expeditiously to resolve the situation. A final note: take care to observe the rules and regulations regarding tax and medical documents. Even a Landlord may have independent responsibilities to take steps to get these items into the hands of the appropriate agency(s).
At the end of the day whether you lease retail, industrial or office space, you will encounter these issues again and again. The hope is that you work your way through them more like Scene 1, than Scene 2. However, keep these words in mind:
“You Just Can’t Lose What You Never Had….”
– Muddy Waters