Commercial Eviction Attorney in Florida

Commercial Landlord Protections

Commercial leases are almost always entered into with a corporation or other legal entity as the tenant. If the tenant's business is unsuccessful or the tenant breaches the lease, often times the landlord is left without adequate protections to recover some or all of the rent due. Commercial landlords should consider some of the ways to protect some or all of the rental obligation of the tenant.

These include:

  1. Security Deposits
  2. Letters of Credit
  3. Personal Guarantees
  4. Security interests in the assets of the tenant.

There are pros and cons to each of these options.

Security Deposit

The simplest way for a landlord to secure a tenant's obligations under a lease is to collect a cash security deposit. A security deposit is usually the amount of one or two months' rent and usually must be paid at the time that the landlord and tenant sign the lease. However, in evaluating the proper amount of a security deposit, Landlords should analyze the assets of the tenant against the obligations under the lease, the landlord's costs and the likely time to re-let the premises.

Florida does not have a statute governing the treatment of non-residential security deposits; therefore the Lease governs the treatment of security deposits.

Pros of a Security Deposit:

  • It is the easiest method of securing a portion of the obligation in case of a default.
  • No special accounts or paperwork is necessary to take and hold a security deposit.
  • The funds can be commingles and used by the landlord unless the lease provides otherwise

Cons of a Security Deposit:

  • When a tenant declares bankruptcy, the landlord immediately is barred by the automatic stay from invoking many rights under the lease. Even though the tenant may have breached the lease prior to bankruptcy, if the lease has not yet been formally terminated, the landlord is unable to seek recourse for damages for that breach during this period. This includes any resort to any cash security deposit that the landlord may have been holding.
  • Bankruptcy Courts view the security deposit as an asset of the tenant's bankruptcy estate, and the landlord's access to it will be governed by the court, whose mandate will be backed up by significant penalties for violation of the automatic stay or misapplication of assets of the estate.
  • If a tenant files bankruptcy and rejects the lease, the landlord's claim for damages is limited to the greater of one year's rent or 15% of the un-accelerated rent, not to exceed three years' rent (Bankruptcy Code Section 502(b)(6)). Thus, the fact that a landlord may have obtained a cash security deposit in excess of this cap does not mean that the landlord has a right to greater damage than bankruptcy allows.
  • The security deposit is typically far less than the amount of the potential damages that a landlord will experience in the event of a tenant default.

Letter of Credit

Letter of credit is a commitment from a bank or other financial institution (the "issuer") to pay a beneficiary, e.g., the landlord, for the account of the applicant (e.g. the tenant) to pay the amount of the letter of credit to the beneficiary upon the beneficiary's draw on the letter of credit.

Letters of credit are governed by Article 5 of the UCC. However, the parties to a letter of credit can adopt other rules or codes to apply to the rights of the parties (except for certain rights that under the UCC cannot be modified) to the extent that the issuing bank is willing.

Pros of Using a Letter of Credit:

  • Can be used instead of the more traditional security deposit.
  • May represent the only liquid asset available to a landlord to recover rent arrearages and other damages.
  • Letter of credit proceeds are an exclusive source of funds for a landlord since they are not subject to pro rata distribution to all creditors of a bankruptcy estate.
  • Ability to obtain letter of credit proceeds without leave of Bankruptcy Court allows for immediate access to funds.
  • Due to the "independence principle" letters of credit and the proceeds of letters of credit are not property of a bankruptcy estate. In re Air Conditioning, Inc. of Stuart, 845 F.2d 396 (11th Cir. 1988). The automatic stay would not impact a landlord's action in drawing upon the letter of credit. Therefore, Landlord can immediately use the proceeds from a letter of credit to cure both pre-petition and post-petition tenant defaults without first seeking the approval of the bankruptcy court.

Cons of Using a Letter of Credit:

  • More complex than a traditional security deposit, as Landlords must always be aware of not only the applicable state law governing leases and letters of credit, but also, the way in which the federal district in which a tenant may potentially commence a bankruptcy case applies key provisions of the Bankruptcy Code.
  • Requires additional paperwork and costs.
  • Must make sure that the letter of credit terms are easy to enforce if a default occurs.
  • Must ensure that the letter of credit does not expire during the term of the lease or extensions.

What To Keep in Mind When Drafting a Letter of Credit:

  • In order to receive full advantage of a letter of credit and not violate an automatic stay, letter of credit provisions must be incorporated in the Lease, the letter of credit provisions should be documented in both the Lease and the letter of credit.
  • The terms and conditions should specifically set forth the rights of the Landlord as to the letter of credit. The Lease and the letter of credit should define the circumstances that will trigger the Landlord's ability to draw down the letter of credit, the amount of any such draw, how the proceeds of the letter are to be applied and whether and under what circumstances a landlord must pay over any proceeds to the tenant.
  • The events that trigger a landlord's right to draw against a letter of credit should include both monetary and non-monetary defaults.

Security Agreement to Secure Payment of Rent

In Florida, absent a waiver in the lease, all landlords are granted a statutory lien on the tenant's property contained within the premises to secure the payment of rent. This statutory lien has limitations and enforcement of the lien is not as streamlined as a typical lien granted under the Uniform Commercial Code (UCC). A trustee in a bankruptcy filed by a commercial tenant has the right to avoid the statutory lien on any assets of the debtor as of the fling of the bankruptcy. However, a commercial landlord, like any other creditor, can require a tenant (like any other debtor) to grant to it a consensual lien on its assets under the UCC. A properly granted and perfected UCC lien on the tenant's property will survive a bankruptcy avoidance by the trustee and will afford better and easier rights to take action against the property to satisfy the rental obligation.

Pros of a Security Agreement

  • Easy to add to the Lease agreement and easy to perfect under Florida law.
  • Provides added and better protections for Landlords against the tenant's property
  • Provides leverage to prevent tenant's from disposing of their property when they vacate
  • Creates third parties against whom claims can be asserted if the property is transferred in violation of the lien rights.

Cons of a Security Agreement

  • Tenants often resist granting a lien to the landlord.
  • Tenant's lenders will not typically grant loans to tenant unless the Landlord subordinates its lien.

Guaranty

A guaranty is a pledge to agree to be responsible for another party's (typically, the tenant) debt or contractual performance if the other party fails to perform on the given contract. Guarantees provide a means for both commercial landlords and commercial tenants to obtain additional security for the performance of lease obligations of the other party.

A commercial landlord should evaluate the creditworthiness of the guarantor.

From a landlord's perspective, a lease guaranty should be prepared to allow the landlord to seek recovery from the guarantor without being required to assert remedies against the original tenant or the original tenant's property against which the landlord has a lien.

Another powerful tool is to draft a guaranty to provide that the guarantor waives all defenses to the claims which would be available to the tenant in a claim for breach of the lease.

Pros of Using a Guaranty

  • Provides a third party who is responsible for the financial obligations under the Lease.
  • Serves as a disincentive for a tenant to default if the guarantor is collectible and is in control of the tenant operations.
  • The guarantor does not have protections in bankruptcy if the tenant files bankruptcy.

Cons of Using a Guaranty

  • Requires a lawsuit to enforce it in the event of a default.
  • Only as good as the financial stability of the person signing it.

Commercial landlords should consider all of the foregoing protections to ensure that the rent is paid through the term of the lease. Careful attention should be given to the language used and agreements drafted when entering into a commercial lease. No two tenants are the same and there is a danger in considering all guaranty agreements, security agreements or letters of credit as being the same.

Questions?

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