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The lease is among the biggest obligations for most small businesses, and the penalties for breaking one can be steep—as many companies may be on the brink of discovering. Here’s what to know if you can’t make your rent.
•Your landlord might give you a break. Many landlords are offering some sort of break to tenants who ask—often two or three months of deferred rent, with repayment at the end of the lease. The extent to which your property owner will offer forbearance depends in part on whether the landlord, in turn, has received a break from its lender. Banks and other institutional lenders seem to be more responsive to their borrowers’ plight, says George Pincus, a real estate attorney in Fort Lauderdale, Fla. But some real estate loans get converted into securities sold into the bond market, where it’s far harder for borrowers to plead their case. Those are often the landlords, says Pincus, who aren’t accommodating tenants.
•Normally, it takes at least a month for a landlord to force you out. Most commercial leases stipulate a five- or seven-day grace period after the rent is due before the landlord will send out a notice of default. This notice typically gives from 3 to 10 days (depending on state law) to “cure” the default with a payment. If the cure period passes without a payment, the landlord can sue to take back the property. If you don’t contest the lawsuit, the landlord can win a judgment against you—called a writ of possession or writ of termination—in as few as 20 days. When the county sheriff serves the writ, you will have to leave immediately.
•Covid-19 has put everything on hold. With the onset of the coronavirus pandemic, most states have put a halt to eviction proceedings or stopped non-essential court work generally, says Pincus. A landlord could try to initiate a court proceeding now—and, in some places, even win a judgment against you—but in terms of enforcement, Pincus says, “nothing’s going to happen for a while.”
•You may also owe the landlord more money. Many states allow landlords to write acceleration clauses into leases stipulating that when a tenant defaults under a lease, the landlord can seek, as part of the eviction lawsuit, the rent that would have been collected up to the end of the lease term. (A smart tenant, says Pincus, will insist that the lease calculate the claim based on the current value of that balance, rather than the face value.) In general, the landlord must attempt to find new tenants for a space as quickly as possible to reduce the damages sought–what the law calls mitigation of damages. The requirement varies from state to state. In Florida, for example, says Pincus, a landlord is required to mitigate damages only if it’s in the lease.
If you declare bankruptcy, the landlord’s claim for future rent is capped at either one year or 15% of the remaining term of the lease up to three years, whichever is greater. Many landlords now insist on a personal guarantee from the business owner, and may pursue a separate claim against you, often simultaneously with the bankruptcy case.
•Your personal property is at risk. In most states, the law gives the landlord a lien, or a right to possess the property inside the rented premises—including equipment and inventory—as security for the debt. The landlord ordinarily has to get a court order to act on the lien, which usually is granted at the same time as the eviction. Pincus says it’s unclear when the property has to be on site to be covered by the lien. Your best shot at keeping stuff out of the landlord’s hands, he says, is to remove it before the judge issues the order. In any event, you’ll want to get whatever’s worth keeping out before the sheriff comes knocking; often, officers will simply put it out on the curb or lock it inside as abandoned property for the landlord to deal with.
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