Landlords Lose Remedies Or Do They? – The Lockbox


Most commercial landlords are familiar with the concept (or actually use) a bank “lockbox” for deposits of rent and other lease charges from tenants. The process is simple. Take for example a shopping center development. Instead of the landlord receiving checks by mail or other carrier, tenants deliver their payments directly (usually via via ACH) to a bank that holds all of the payments in a single account.

The advantages of this system are numerous:

  1. Landlords don’t have to spend the time or the $$ to collect and account for all of the monthly or periodic payments owed by the tenants;
  2. Although there is generally a fee charged by the bank for this service, it is usually far outweighed by the cost of employees or third party collectors doing the same job; and
  3. The bank provides a clear timely report of which tenants are making payments, short paying, or not paying at all.

So, assuming you are a landlord with multiple properties and/or numerous tenants, why would you not choose this method of gathering and accounting for rents, TICAM  and other payments?  Unfortunately in many states if a rent payment is deposited, it is considered to be accepted by the owner and constitutes a waiver of all defaults. In addition, most banks will not block individual tenant’s payments, short of closing the account entirely. Not a good solution for the landlord, especially when the anchor tenants are paying through the lockbox as well.

So what do you do if you don’t want to block your lockbox?

In many situations landlords and their attorneys have attempted to come up with creative solutions to this problem, including:

1. Attempting to reverse the payment through the bank;

2. Sending the tenant a replacement check in the same amount with a letter reiterating the default is not waived and landlord maintains its position that it can act on its remedies;

3. Changing the notice address for payments to a P.O. Box or even better, someone’s office; or

4. Reporting to the bank that any payments received by the defaulting tenant are potentially fraudulent.

Which of these have been successful?  Under the first scenario, most tenants have successfully argued that once the check is negotiated by virtue of deposit into the lockbox account, the receipt of the same and waiver cannot be undone.

In the second situation, tenants have either refused to accept the payment back from the landlord either by ignoring certified mail or hiding from the FedEx person!  Thus, the tenant can frustrate the attempt to avoid a waiver.

In the last scenario, even when there has been a history of bad checks issued by a tenant, most banks will not investigate checks sent by the offending tenant before they go directly into the lockbox deposit. This is also dangerous, as a savvy tenant could argue that the landlord is setting them up to default by creating a mechanism by which they can evict or collect additional monies per the remedies section of the lease.

For tenants who are concerned about getting their rent in on time and in full, the third situation may work. However, a canny tenant would continue to send the rent to the lockbox. Although that may be technically a default of the notice paragraph in the lease, courts have held that it does not undo the waiver of the default by the owner.

Is this the end of the story?

Maybe not.

Some courts have ruled that waiver must be a conscious choice regarding legal rights as to the tenant. In other words, the landlord must have actual knowledge that the payment is being made and intentionally not take action to allow the check to be accepted.  In the case of Manufacturing Co. v. Building Co., 97 S.E. 718, the North Carolina Supreme Court stated that “[w]aiver must be manifested in some unequivocal way, and to operate as such, it must in all cases be designed, must have so acted as to induce the other to believe that he intended to waive…”.  The case also cited Justice Holmes’ classic definition of the doctrine of “election” from Bierce v. Hutchins, 205 U.S.340, that “[e]lection is simply what its name imports; a choice shown by an overt act , between two inconsistent rights, either which may be asserted at the will of the chooser alone.”

In the lockbox situation, an affirmative election to not waive the tenant’s default (by returning the payment and stating in writing such election and intent not to waive the default), the landlord would arguably be able to maintain an action for eviction, collection and other damages despite the tenant’s position to the contrary.

Business Decision or Rely on the Courts?

One final point.  Aside from the legal outcome of accepting lockbox payments, landlords may want to consider shutting a lockbox account down temporarily in order to have rock solid grounds to oust a tenant. Consider the situation of a large tenant in a industrial park who has defaulted repeatedly and the presence of a more solid and attractive replacement tenant for the same space. Foregoing the rent payments for a month or two may make more long term business sense than accepting the rent from the defaulting tenant and potentially losing the replacement business in the process. Obviously this is not an easy decision to make in most cases and lender restrictions and other factors could easily complicate the decision.

Leases or Licenses – Careful What You Wish For!


Just as we have previously reviewed and analyzed the differences between certain aspects of  sharing property rights, landlords and owners are often met with the challenge of whether to enter into lease or a license agreements when allowing businesses or individuals to use their real property. Although these contractual arrangements resemble each other in many structural ways, they have important legal and practical differences that should be considered before choosing one path or the other. Read on for five important differences… Continue reading

Just Work With Me! – Best Intentions and “Waiver Creep”

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When is it a good idea to keep working with a defaulting tenant?

How many times (even during a robust market) have landlords considered and perhaps acted on a tenant’s request to grant them abatement, deferrals and other concessions in order to preserve the relationship, avoid vacancy, make their lender happy and keep the rent coming in? More often than you might imagine.

Although there is clearly self-interests on both sides in the decision to allow the tenant to pay partial rent or defer overdue amounts under the lease, often landlords and tenants enter into such discussions with the best intentions for all involved.

Yet, even the most benevolent agreements can lead to negative consequences down the road. Continue reading

Growing Pains – Issues Surrounding the Construction or Re-Devolopment of Commercial Properties

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Let’s face it.  In the post recession market, Developers and Owners are ready to look for opportunities to build, expand, alter and modify their properties.  Although likely not as robustly as to pre-2008, there is retail, office and industrial re-development and expansion happening as we  read these words.  And with this change in the market comes an inevitable challenge between Landlords and Tenants as to their rights and obligations as new development moves forward and existing product is modified, altered and expanded.  The focus of this post is to delve into the issues relating to what these parties should discuss, plan for,  and work through during the growing pains.  One of the struggles is to determine the rights and responsibilities of the owner and the tenant when a dormant or unimproved property experiences growth and (yikes!) prosperity. As reflected below, change may not ultimately be a problem for either party.  Although there is a lot of advice for tenants, landlords can certainly benefit from this discussion. Continue reading

What’s Ahead For CRE in 2015? – Predictions, Predicaments and Predilections

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2015 is here and the real estate market is back! Or is it? The beginning of the year is always a good time for reflection and planning for what may lie ahead for retail, industrial, office and multifamily properties;  lending; the economy; construction; investment;  and development. Here are some thoughts on what 2015 could look like. My local lens is Charlotte N.C., but I would be interested in feedback from others areas of the country as well.

Certainly this list is not scientific or the result of past reflection on future time travel, so weigh in!  Continue reading

Best Wishes For The Holiday Season And Some Things To Think About….

For this part of the year, REDD is celebrating with some trepidation (mostly caused by attorneys and accountants) the end of  2014 and  a bit of food for thought. To begin with, my apologies for the strained rhyming  below and if I have may have left some folks out.  But now, without further ado…

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Twas’ the last days before the end of the year and all through every Landlord and Tenant house, people were tucked in their beds, not stirring and there was no mouse – or at least one that didn’t work without IT help:

1.  The budgets for 2015 were finished (we think) and put away with care,  for all of us to tussle over next year!

2.   The Tenants were flush with optimism over Black Friday and Cyber Week profits without dread; while Landlords dreamed of big Tenant gross sales like lollipops in their heads;

3.   The vendors were paid in full in hopes that all  begin fresh in the New Year, we think….Did we settle up with everyone and iron out all the kinks?

4.   TICAM estimates had been sent with care to every Tenant everywhere, for them to open and hopefully not despair.

5.    The accountants and tax folks have been presented with every necessary document and reporting (P.S. they work all week with keyboards a’ clicking!).

6.   Everyone was joyful for the year that had passed and 2015 to follow with great promises to last?   Landlord said : “I hope sales get you to the place you pledged you would be.”  Tenant replied: “how can I have a successful year with internet sales and no fee!”

7.   And as the Landlord lay a finger across his nose, the Tenants exclaimed  percentage rent ratios were too low!

8.   Franchisors sat in their command centers ready to react to their Franchisee’s reports on customer traffic and year end sales. By the way, do not forget your franchise fee and please, please no tall tales!

9.   Assignors sat back with good tidings to all,  hoping that their Assignees were kings of each mall.

10.  Brokers were huddled with their plans for next year; to make every transaction work perfectly clear.  Meanwhile as they looked at holiday meals, a fat man landed down the chimney with new deals!

11.    The Contractors opened presents with glee, hoping new construction or TI would be what they would see; or at least a major upfit.

12.  The Developers were also asleep in their beds, as new projects danced in their heads!

13.    The Investors were last ones to bed, no sense of magic stuck in their heads.  P&L statements were the main concern, so large profits could be earned!

And to all a good night, let none of you have a fright. May the New Year bring you good cheer and a prosperous year…..

Best Wishes and see you in 2015!

CO-TENANCY – What’s In Your Crystal Ball? (PART 2: Key Issues and Related Dilemmas)

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In the last post, we discussed the basic concepts and procedures involving  co-tenancy in commercial leases. We also threw out some questions about how all of this plays out in the current real estate environment.  This week, we will delve further into important issues for landlords, tenants and their lenders to consider when grappling with co-tenancy at the drafting stage and after the lease is signed. In addition, we will suggest some answers to the questions from last week…. Continue reading

CO-TENANCY – What’s In Your Crystal Ball? (PART 1: the basics)

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As the retail shopping experience has become more complicated and intertwined between Landlords, Tenants, Lenders and Consumers, so too has the use, scope and shape of “Co-Tenancy”. This is the first of two posts that will examine the ins and outs of the Co-Tenancy concept. We will examine: (1) the meaning of the term and its three generally recognized forms; and (2) key concerns Landlords and Tenants have with this animal. Continue reading