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Commercial Landlords: Four Important Questions to Ask When a Tenant Files for Bankruptcy

With the recent downturn in the market, a number of commercial tenants are experiencing financial difficulties. In turn, this can lead to problems for commercial landlords, most importantly, the tenant staying current with lease payments. This may then lead to the tenant filing for bankruptcy protection. If your commercial tenant files for bankruptcy, it is wise to have a strategy in place to not only minimize the time of non-payment, but also maximize the ability to receive rents and damages allowed under the Bankruptcy Code. 

Following are four (4) questions for commercial landlords to review with an attorney  whenever a commercial tenant files for bankruptcy protection:

1.    Have You Filed a Proof of Claim(s)?  As soon as the tenant/debtor files for bankruptcy protection, commercial landlords should ensure their rights to payment(s) by filing appropriate proofs of claim.  It is advisable to review with your attorney the current account history and lease to ensure all fees are being accounted. Landlords may be able to file upto three (3) different types of claims:

    a.    Pre-petition Claim. Section 502 of the Bankruptcy Code provides that creditors are permitted to file a proof of claim for all pre-petition charges and assessments owed.  If a tenant files for bankruptcy, the landlord is permitted to file a proof of claim for all fees and charges incurred prior to the filing date;

    b.    Post-Petition Administrative Claim.  Section 503(b)(1) of the Bankruptcy Code provides a creditor a priority claim for all “actual, necessary costs and expenses of preserving the estate”.  If the tenant remains in the premises after the bankruptcy and does not reject the lease, the commercial landlord may be allowed payment  ahead of other creditors for amounts incurred during this period; and

     c.    Post-Rejection Damage Claim. Section 503(b)(7) of the Bankruptcy Code provides a commercial landlord the right to be paid for “post bankruptcy rejection” damages. If the tenant rejects the lease, certain damages incurred and the remainder of the lease may be permitted priority before payment of certain claims.

 2.    Is the Debtor/Tenant Assuming or Rejecting the Lease?  Landlords should inquire whether the debtor/tenant intends to assume or reject the lease.  Bankruptcy Code Section 365 provides that tenants are permitted to assume a commercial lease, as long as they cure all post-petition defaults. If they reject the lease, then the landlord may be able to proceed with an eviction action to remove the tenant. However, landlords should know that the Bankruptcy Code permits the debtor 120 days to decide whether to assume or reject the lease, with an additional 90 day extension.  All told, this can leave the landlord sitting around for more than 7 months without payment.  If your not being paid, it may be advisable to have the Bankruptcy Court allow you to proceed with an eviction action. 

 3.    Should you File a Motion for Stay Relief to Proceed with an Eviction?   The debtor/tenant may not advise their intent to assume or reject the lease.  As noted, during this time, the debtor/tenant can use the premises without paying anything.  The landlord is permitted to file a motion for “Relief from the Automatic Stay”.  This Motion, if granted,  permits the landlord to resume or commence with a state court eviction action.

4.    What to Do with Items Left by a Tenant?  If the debtor/tenant leaves equipment, inventory or equipment at the premises, can you just throw it away? Does anyone have an interest in the left over items, like the debtor/tenants’ bank?   Can you recover storage fees? When a tenant/debtor files for bankruptcy, these left over items may be part of the bankruptcy estate. Gaining proper approval from the Bankruptcy Court, before disposing of the left over “junk” is essential to limiting liability.  For instance, the left over property may be secured by a bank, financial institution or creditor. You may want to have a UCC Search conducted to ascertain whether any security interest exists.  If security interests are discovered, it is advisable to give notice to those entities, possibly through a motion with the Bankruptcy Court.
These are just a few of the questions a landlord should ask when a debtor files for bankruptcy.  By asking these questions at the start of the bankruptcy, landlords can limit the loss or liability, as well ensure their right to payment through the Bankruptcy Code.

When a landlord is seeking to terminate a residential tenancy, it is important to select the proper statutory grounds under which to proceed. Under no circumstances may a tenant be legally “evicted” without meeting a statutory prerequisite. Note that the statute may require that one or more notices be served upon the tenant prior to proceeding with court action. With the exception of a tenant’s non-payment of rent, or failure to pay rent after a reasonable increase (which requires a separate notice unto itself), a landlord is required to serve notice upon a tenant prior to the institution of court action. N.J.S.A. 2A:18-61.2 provides the notice requirements. I have set forth below the text of the statute that describes the notice requirements for each section of the Anti-Eviction Act.

NJSA 2A:18-61.2. Removal of residential tenants; required notice; contents; service

No judgment of possession shall be entered for any premises covered by section 2 of this act, (2A:18-61.1) except in the nonpayment of rent under subsection a. or f. of section 2, unless the landlord has made written demand and given written notice for delivery of possession of the premises. The following notice shall be required:

a. For an action alleging disorderly conduct under subsection b. of section 2, or injury to the premises under subsection c. of section 2, or any grounds under subsection m., n., o. or p. of section 2, three days’ notice prior to the institution of the action for possession;

b. For an action alleging continued violation of rules and regulations under subsection d. of section 2, or substantial breach of covenant under subsection e. of section 2, or habitual failure to pay rent, one month’s notice prior to the institution of the action for possession;

c. For an action alleging any grounds under subsection g. of section 2, three months’ notice prior to the institution of the action;

d. For an action alleging permanent retirement under subsection h. of section 2, 18 months’ notice prior to the institution of the action and, provided that, where there is a lease in effect, no action may be instituted until the lease expires;

e. For an action alleging refusal of acceptance of reasonable lease changes under subsection i. of section 2, one month’s notice prior to institution of action;

f. For an action alleging any grounds under subsection l. of section 2, two months’ notice prior to the institution of the action and, provided that where there is a written lease in effect no action shall be instituted until the lease expires;

g. For an action alleging any grounds under subsection k. of section 2, three years’ notice prior to the institution of action, and provided that where there is a written lease in effect, no action shall be instituted until the lease expires.

h. In public housing under the control of a public housing authority or redevelopment agency, for an action alleging substantial breach of contract under paragraph (2) of subsection e. of section 2, the period of notice required prior to the institution of an action for possession shall be in accordance with federal regulations pertaining to public housing leases.

The notice in each of the foregoing instances shall specify in detail the cause of the termination of the tenancy and shall be served either personally upon the tenant or lessee or such person in possession by giving him a copy thereof, or by leaving a copy thereof at his usual place of abode with some member of his family above the age of 14 years, or by certified mail; if the certified letter is not claimed, notice shall be sent by regular mail.

NOTICE TO CEASE

Where a Notice to Cease is required, it should include as much detail as possible. This serves the dual purpose of putting the tenant on notice of a statutory (or lease) violation, and allows the tenant an opportunity to “cure” the alleged violation. If the tenant ceases the described wrongful conduct, a landlord may not proceed to terminate the tenancy. It is, in effect, a warning notice. By statute, the notice must be served upon the tenant or person in possession either personally at the demised premises, or by leaving it at “his usual place of abode with some member of his family above the age of 14 years or by certified mail; if the certified letter is not claimed, notice shall be sent by regular mail.” (See N.J.S.A. 2A:18-61.2 above.)

It is advisable to cover all 3 bases. The worst thing that can happen to a landlord’s case on the day of trial is to get “shot down” for defective service of a notice. If the notices are not correct (legally sufficient) or not properly served, the court must dismiss the landlord’s case. A defective notice or defective service is a jurisdictional defect. If a jurisdictional defect exists, the court must dismiss a plaintiff’s case.  Once dismissed, you must start all over.  Starting all over means months of additional lost rent.  It is important to stress that the acts complained of must be enunciated clearly and in detail. Remember N.J.S.A. 2A:18-61.2 says, “The notice in each of the foregoing instances shall specify in detail the cause of the termination of the tenancy…” The notice may not contain conflicting information. For instance, a Notice to Cease that contains a warning to a tenant not to pay rent late may not contain an additional notice that the tenant is obligated to pay late fees.

NOTICE TO QUIT

A Notice to Quit terminates the tenancy. If the tenant fails to cease the acts complained of in the Notice to Cease, after a reasonable period of time to cure has elapsed, or the statute does not require a cease notice, a landlord may serve a Notice to Quit for the statutory violation. Many landlords are under the mistaken impression that they must wait 30 days after serving a Notice to Cease before serving a Notice to Quit. This is just plain wrong. All that must elapse is a “reasonable” period of time and what is reasonable has to be determined on a case by case basis. The Notice to Quit also must contain a paragraph called “Demand for Possession.” A written demand for possession is required in all cases except for nonpayment of rent. If this language is lacking, the court will lack jurisdiction to hear the case. A Notice to Quit is generally served in the same manner as the Notice to Cease. (See above.) However, it is interesting to note that the statutes are silent as to how a Notice to Quit should be served.

NON-PAYMENT OF RENT

If a tenant fails to pay “rent” when due, a landlord may immediately proceed to commence a summary proceeding to regain possession of the premises. A landlord is under no obligation to wait for its rent, accept payments late, or accept rent in installments. However, if on the “return day” (day of court) the tenant appears and is prepared to pay all “rent” which is due, the landlord must accept the tender and dismiss the case.

N.J.S.A. 2A:18-55. Discontinuance upon payment into court of rent in arrears; receipt

If, in actions instituted under paragraph “b” of section 2A:18-53 of this title, the tenant or person in possession of the demised premises shall at any time on or before entry of final judgment, pay to the clerk of the court the rent claimed to be in default, together with the accrued costs of the proceedings, all proceedings shall be stopped. The receipt of the clerk shall be evidence of such payment. The clerk shall forthwith pay all moneys so received to the landlord, his agent or assigns.

(Case Law has held this statute is applicable to proceedings under the Anti-Eviction Act as well. (N.J.S.A. 2A:18-61.1.))

If a tenant agrees that certain charges constitute “additional” rent (i.e. utilities, damages, late fees) a court will likely enforce the agreement if it does not conflict with any statute, rule, regulation or ordinance such as rent control or U.S. Dept. of Housing & Urban Development regulations (”H.U.D.”).

Like almost any rule, there is an exception to the “no notice rule” for non-payment of rent cases. When filing a non-payment of rent case against tenants receiving (1) social security old age pensions, (2) railroad retirement pensions and (3) other government pensions, these tenants are afforded a 5 day grace period to pay their rent, presumably because their checks are sent to them on or about the first day of each month. (copy of the statute appears supra.) Likewise, tenants who participate in a H.U.D. subsidy program are entitled to the additional protection of federal laws that require a written notice be served upon the tenant prior to the filing of any action for eviction.

THE LANDLORD REGISTRATION ACT

By law, every landlord of a dwelling, except owner-occupied premises with not more than two rental units, must file with the clerk of the municipality in which the residential property is situated, or with the Bureau of Housing Inspection in the Department of Community Affairs, a certificate of registration. In court, a judgment for possession cannot be entered if the landlord has not complied with this registration requirement. Non-receipt of the statement is almost a standard defense by tenants who are represented by competent counsel to avoid an immediate judgment of possession. The court has the authority to stay the proceedings for 90 days to allow the landlord to come into compliance.

A landlord is well advised to consult competent counsel when seeking to properly terminate a tenancy.

At Hanlon Niemann we have experienced, qualified attorneys and para professional staff representing Landlords statewide who appear in the Landlord Tenant section of the New Jersey Superior Court every week.  Let our experience protect you.  Contact Christopher J. Hanlon at chanlon@hnlawfirm.com, Phone (732) 863-9900 Ext. 109, or Fredrick P. Niemann, fniemann@hnlawfirm.com, Phone (732) 863-9900 Ext. 105.

With the recent downturn in the market, a number of commercial tenants are experiencing financial difficulties. In turn, this can lead to problems for commercial landlords, most importantly, the tenant staying current with lease payments. This may then lead to the tenant filing for bankruptcy protection. If your commercial tenant files for bankruptcy, it is wise to have a strategy in place to not only minimize the time of non-payment, but also maximize the ability to receive rents and damages allowed under the Bankruptcy Code. 

Following are four (4) questions for commercial landlords to review with an attorney  whenever a commercial tenant files for bankruptcy protection:

1.    Have You Filed a Proof of Claim(s)?  As soon as the tenant/debtor files for bankruptcy protection, commercial landlords should ensure their rights to payment(s) by filing appropriate proofs of claim.  It is advisable to review with your attorney the current account history and lease to ensure all fees are being accounted. Landlords may be able to file upto three (3) different types of claims:

    a.    Pre-petition Claim. Section 502 of the Bankruptcy Code provides that creditors are permitted to file a proof of claim for all pre-petition charges and assessments owed.  If a tenant files for bankruptcy, the landlord is permitted to file a proof of claim for all fees and charges incurred prior to the filing date;

    b.    Post-Petition Administrative Claim.  Section 503(b)(1) of the Bankruptcy Code provides a creditor a priority claim for all “actual, necessary costs and expenses of preserving the estate”.  If the tenant remains in the premises after the bankruptcy and does not reject the lease, the commercial landlord may be allowed payment  ahead of other creditors for amounts incurred during this period; and

     c.    Post-Rejection Damage Claim. Section 503(b)(7) of the Bankruptcy Code provides a commercial landlord the right to be paid for “post bankruptcy rejection” damages. If the tenant rejects the lease, certain damages incurred and the remainder of the lease may be permitted priority before payment of certain claims.

 2.    Is the Debtor/Tenant Assuming or Rejecting the Lease?  Landlords should inquire whether the debtor/tenant intends to assume or reject the lease.  Bankruptcy Code Section 365 provides that tenants are permitted to assume a commercial lease, as long as they cure all post-petition defaults. If they reject the lease, then the landlord may be able to proceed with an eviction action to remove the tenant. However, landlords should know that the Bankruptcy Code permits the debtor 120 days to decide whether to assume or reject the lease, with an additional 90 day extension.  All told, this can leave the landlord sitting around for more than 7 months without payment.  If your not being paid, it may be advisable to have the Bankruptcy Court allow you to proceed with an eviction action. 

 3.    Should you File a Motion for Stay Relief to Proceed with an Eviction?   The debtor/tenant may not advise their intent to assume or reject the lease.  As noted, during this time, the debtor/tenant can use the premises without paying anything.  The landlord is permitted to file a motion for “Relief from the Automatic Stay”.  This Motion, if granted,  permits the landlord to resume or commence with a state court eviction action.

4.    What to Do with Items Left by a Tenant?  If the debtor/tenant leaves equipment, inventory or equipment at the premises, can you just throw it away? Does anyone have an interest in the left over items, like the debtor/tenants’ bank?   Can you recover storage fees? When a tenant/debtor files for bankruptcy, these left over items may be part of the bankruptcy estate. Gaining proper approval from the Bankruptcy Court, before disposing of the left over “junk” is essential to limiting liability.  For instance, the left over property may be secured by a bank, financial institution or creditor. You may want to have a UCC Search conducted to ascertain whether any security interest exists.  If security interests are discovered, it is advisable to give notice to those entities, possibly through a motion with the Bankruptcy Court.

These are just a few of the questions a landlord should ask when a debtor files for bankruptcy.  By asking these questions at the start of the bankruptcy, landlords can limit the loss or liability, as well ensure their right to payment through the Bankruptcy Code.

New Jersey courts have long sought to protect the right and ability of a person “to pursue one’s own business, calling or occupation free from undue influence or molestation.”  In the latter part of the 19th century, the courts recognized that a “wrongful and malicious combination to ruin a man in his trade may be ground for [legal action].”  Similarly, in a line of cases spanning the middle of the 20th century, New Jersey courts protected the rights of real estate brokers whose clients surreptitiously cut them out of a transaction to avoid paying a brokerage commission.  The courts have continued their oversight of business dealings through the present, and now call this an action for tortuous interference.

Tortious Interference With Contract
There are two separate causes of action for tortuous interference:  tortious interference with contract and tortious interference with prospective economic advantage.  The primary distinction between the two torts is the existence of a contract.  Each tort results from the need, or society’s desire, to protect certain types of business relationships.

To establish a claim for tortious interference with contractual relations, a plaintiff must prove: (1) actual interference with a contract; (2) that the interference was inflicted intentionally by a defendant who is not a party to the contract; (3) that the interference was without justification; and (4) that the interference caused damage.

To have acted “intentionally”, a client must have known of the contract,” but cannot have been a party to that contract.  Thus, this tort does not redress a breach of contract.  Rather, this tort addresses the separate injury caused by a third party inducing the breach.  Viewed from the perspective of plaintiff’s counsel, having a claim against party B for inducing that breach provides two potential pockets from which to recover.

The law governing this tort is relatively straightforward, inasmuch as the protected relationship between the parties is defined by contract.

Tortious Interference 
To prevail on a claim for tortious interference with prospective economic advantage, a plaintiff must prove: a reasonable expectation of advantage from a prospective contractual or economic relationship; that the defendant interfered with this advantage intentionally and with malice – that is, without justification or excuse; that the interference caused the loss of the expected advantage; and that the injury caused damage.

New Jersey’s emphasis on adequate proof of a reasonable probability of success is consistent with the national trend.  Summing up the standard for determining the existence of a reasonable expectation of economic advantage, one group of commentators has concluded:

[I]t is vital for the plaintiff – when pursuing a claim – to make certain that there is a bona fide and reasonable expectancy of a continuing and reasonable expectancy of a continuing and prosperous relationship, not just the mere desire or possibility for one.  In a prospective advantage case, the plaintiff must demonstrate that expected benefit with a reasonable degree of specificity.  More than a mere hope or optimism is needed; although the law does not require reasonable probability of economic benefit from a valid prospective relationship.

Malice
New Jersey courts describe malice in a variety of ways.  First, the courts make clear that malice does not mean ill will.  Rather, malice means that the conduct was engaged in without justification or excuse.  In the typical business case, competition between the parties may constitute justification.  The courts, however, require more than the assertion of competition:  A defendant must have a legitimate motive, such as success in the marketplace, and employ legitimate means to obtain that goal.

In Ideal Dairy, the Appellate Division specifically addressed proof of malice when competition is invoked as a justification.  The Ideal Dairy court held that there was nothing wrong with targeting a competitor, and that targeting a competitor by offering lower prices was, in fact, “the very essence of competition.”

New Jersey case law does not permit a competitor to use wrongful means.  New Jersey courts use the term “malice” to describe conduct that is “injurious and transgressive of generally accepted standards of common morality or of law.”

The New Jersey courts have reduced this inquiry to whether the conduct was sanctioned by the “rules of the game.”  The rules of the game standard first appeared in 1957 in DiCristofaro v. Laurel Grove Memorial Park, and has become the standard for determining malice in tortious interference cases.  The DiCristofaro court found that a cause of action might lie based on allegations that the defendant cemetery owners imposed excessive charges and costs upon patrons who obtained monuments and memorials from someone other than the cemetery when, as a result, the outside company was prevented from realizing its “normal business expectancies.”

The tort of tortious interference with prospective economic advantage requires that business competitors act within the moral and ethical framework required by society, as well as their own industry.  The rules of the game depend on the customs, practices or code of ethics of the industry, which have typically been vetted time and again by what is necessary to achieve efficiency in the marketplace.

New Jersey courts, harkening back to the advice dispensed by all mothers in our society that “just because someone else is doing it doesn’t make it right,” require that conduct during the course of competition must not only be consistent with the rules of the game, it also must not be “fraudulent, dishonest, or illegal.”

The New Jersey courts have enumerated several examples of what may constitute fraudulent, dishonest or illegal conduct, but the list is by no means exhaustive.  For example, liability will ensue where a competitor uses “violence, fraud, intimidation, misrepresentation, criminal or cruel threats, and/or violations of the law.”  Moreover, the conduct complained of must be independently actionable.  For example, one of the issues analyzed by the Appellate Division in Ideal Dairy was whether the defendant had violated the antitrust laws through the use of extremely low pricing.

The Ideal Dairy court held that, absent a violation of the antitrust laws, a claim of tortious interference could not be premised on “extremely low, or unprofitable prices” because that conduct was not independently actionable.”

Conclusion
The painful irony is that you may not have done anything wrong, and may have been engaging in intense, but legitimate, competition in the marketplace, but you may, nonetheless, have to endure months of expensive discovery to prove that this conduct does not subject him/her to liability so goes the capitalist way.