A commercial tenant in our co-op building has stopped paying. What can we do about it?
“Non-payment from a commercial tenant can be hugely troubling for the financial health of a co-op and it is, sadly, not uncommon as a result of the coronavirus pandemic,” says Steven Wagner, a co-op and condo attorney at Wagner, Berkow & Brandt who has decades of experience litigating these types of issues.
He points out that the remedies available to a co-op board will depend on a close examination of the wording in the lease. “Any case against the tenant will also be restricted by executive orders that continue to change with the status of the pandemic,” Wagner says.
There are typically two routes forward for a co-op to seek payment or eviction: “Assuming the tenant is still legally in possession of the premises, you can make a demand for payment of rent and then start a non-payment proceeding or you may be able to commence a holdover proceeding where the lease is terminated because of a violation,” Wagner says.
Another alternative, if the tenant has given up legal possession, is a Supreme Court action. And of course, you can always consider seeking some kind of settlement that takes into account some of the difficulties presented by the pandemic.
With the right legal representation you can begin a non-payment proceeding by sending a demand for the rent payment and follow up with a non-payment proceeding. This would typically result in a money judgment and a judgment or possession in Housing Court. This is currently hampered, however, by restrictions on bringing court cases as a result of the coronavirus. “This is preventing judgments being entered and enforced regarding possession and eviction,” Wagner says.
You can bring a non-payment proceeding but you have to make sure you don’t do anything in violation of the specific coronavirus rules which are currently in effect. Wagner points out, this depends largely on executive orders, which are subject to change.
Many commercial leases allow you to bring a holdover proceeding for non-payment of rent. This is where you terminate the lease because of a violation—in this case non-payment of rent—and after you terminate the lease, you can sue the tenant in Housing Court for holding over after the expiration of the term of the lease. Instead of sending a demand for payment of the rent, you send a notice to cure, stating that the cure is payment of the arrears and if there’s no cure, (i.e. payment isn’t made) you follow it up with a notice to terminate.
It’s important to have a real estate attorney review the commercial lease to determine which of these proceedings would be more appropriate. In some commercial leases, the landlord is not allowed to bring a holdover proceeding for non-payment of rent, Wagner says. In other cases, they are.
In a non-payment case, the court will give a tenant time to pay, but in a holdover proceeding a tenant can lose their right to cure the problem if payment isn’t made within the cure period. This can result in a tenant losing the lease. “The language of the lease will tell you what type of proceeding is allowed. A lawyer familiar with this area of the law will know right away,” Wagner says.
If you decide to bring a holdover proceeding, there are also ways a tenant can slow down the eviction process—by bringing what’s called a Yellowstone Injunction—but whether or not they are allowed to do this will be detailed in the lease and be best identified by your co-op’s attorney.
Supreme Court actions
Another possible collection route is to sue in the Supreme Court if the amount is in excess of $25,000. These suits are often drawn out and costly because of discovery procedures. Discovery can be expensive and time consuming. In Housing Court, where non-payment and holdover proceedings are brought, discovery is not permitted except with permission of the court or agreement of the parties. The court rarely agrees to allow discovery in Housing Court when only rent is being collected.
Most leases have a guarantor. Under pre-pandemic circumstances, the guarantor would have a separate guarantee and if the tenant stops paying rent, there is an expedited procedure for extracting payment from those who owe money under guarantees.
However, the pandemic has changed this. A new rule relieves the guarantor of the obligation to pay rent that becomes due during the pandemic and although this is being challenged in federal and state courts, until a decision is made on the validity of this rule, there are currently restrictions on pursuing a guarantor for rent that’s missing since the coronavirus hit back in March.
Negotiating a settlement
Some co-op buildings have retail leases that date back many years.
“In older co-ops, there used to be a rule that, for tax purposes, limited the commercial rent to less than 20 percent of a building's gross income. Co-ops would offer bargain leases to make sure they kept within these income requirements. A change in the law modified those rules more than a decade ago, but if a commercial tenant has one of these valuable leases they will likely want to do all they can to avoid its termination and their eviction,” Wagner says.
He points out a tenant who is paying well under market will very often try to negotiate with the landlord to pay something less or defer the rent in order to keep the lease.
Depending on the circumstances and with the right legal representation, you may be able to negotiate an agreement with the tenant to either pay or leave the premises.
“It’s better to be practical and businesslike about it rather than get into court these days because of all of the restrictions resulting from the pandemic,” Wagner says.
He also points out any legal remedy will likely be very drawn out. “There’s going to be a backlog of cases as they begin to be heard and delays equal expenses. You’d be well advised to work something out with your tenants and get something from them or the space back if they are out of business,” Wagner says.
New York City real estate attorney Steven Wagner is a founding partner of Wagner Berkow & Brandt, with more than 30 years of experience representing numerous co-ops, condos, and individual owners and shareholders. To submit a question for this column, click here. To arrange a free 15-minute telephone consultation send Steve an email or call 646-780-7272.