May 1, 2014

Commercial Evictions in Arizona

Under Arizona commercial landlord-tenant law there are two basic ways a landlord can recover possession of a commercial property.

"Locking Out" an Arizona Commercial Tenant

First, a landlord can do a “lockout”. Through a lockout the landlord eviction suit they literally just lock the tenant out.  If a tenant is more than five days late with a rent payment, the landlord may enter the premises and take possession without any prior notice or demand for payment. However, before you just lockout your tenant it is important to review the lease and see if it contains terms which will limit your ability to recover possession without notice or a demand for payment.

In spite of the very broad repossession power given to commercial landlords by Arizona law, a landlord should follow any specific procedures found in the lease relating to notice and termination of the tenancy.

What can a commercial landlord do with all the tenant’s property left in the premises if they lock out the tenant?  Arizona law gives a commercial landlord a lien on all the tenant’s property in the premises when the landlord recovers possession.  The landlord can hold the property and demand payment of rent in exchange for release of the property.  If the tenant has not paid rent due within sixty days, the landlord may sell the seized property and apply the proceeds to the amount of rent owed by the tenant.

Prior to selling the property, the landlord must provide the tenant with a ten-day notice of intent to sell the property if rent is not paid.  If the tenant still fails to pay past due rent and late fees, the landlord must sell the property at a public auction.  There are a number of commercial auction houses available in the Phoenix metropolitan area that can be used for the auction.

There are a several potential traps associated with seizing a tenant’s property and holding it for auction.  A landlord may not hold for auction any property exempt by law.  For example, personal financial records of the tenant, or personal education materials, or a personal library on the premises.  A much more significant trap is the seizure of property on the premises which belongs to some third-party.  It is quite common for commercial tenants to have equipment that is rented from another business.  For example, a restaurant tenant might rent the freezers on the premises form a restaurant supply company.  Often rented equipment can be easily identified by a sticker or label on the equipment.  But, a landlord should make a concentrated effort to determine whether or not the tenant owns the property seized at the business before that property is auctioned at a public sale.

Note that if a lease has been assigned or there is a sub-tenant of the original tenant occupying the property a landlord can still enter and seize the property of the sub-tenant if the rent is in arrears.  The landlord has a lien in the sub-tenant’s property on the premises.  If nobody pays past due rent and late fees, the landlord can proceed to auction as described above.  If the sub-tenant has been faithfully paying rent to the original tenant, who has not been forwarding that rent on to the landlord it makes no difference.  The sub-tenant would have a very good breach of contract claim against the original tenant, but the landlord can proceed to auction unless somebody pays the past due rent.

Filing a Lawsuit Against the Commercial Tenant

As an alternative to a tenant lock-out, an Arizona commercial landlord can file an eviction lawsuit.  One major reason to file an eviction lawsuit is that it is the quickest and easiest method to obtain a money judgment against the tenant. For this reason, it is always advisable to obtain personal guaranties from the principles of any closely held corporation or limited liability company tenant.  You will then have the ability to seek recovery of your damages from the guarantors.  To make sure you can collect on a personal guaranty if necessary, it is imperative to have both a husband and wife sign the personal guaranty.   This is necessary to make the guaranty an obligation of the marital community.  For example, if only the husband signs the guaranty at the end of the personal guaranty lawsuit you only get a judgment against the husband.  You can only satisfy that judgment from the sole and separate assets of the husband.

Since the bulk of most couples assets are held as community property, attempting to collect from a husband’s or wife’s sole and separate property may be a futile effort.  This highlights an important issues related to a personal guaranty.  If you are going to require a personal guaranty for a lease, get a financial statement from the prospective personal guarantors; not just a credit report.  Get a financial statement that shows you what the prospective personal guarantor owns.

Another reason a commercial landlord might consider an eviction lawsuit to recover possession is to limit any possible liability they might be exposed to by conducting a lock-out of their tenant.  A good commercial lease will have terms which limit a landlord’s liability for any consequential damages the tenant suffers as a result of a lock-out.  If you don’t have a lease which limits your liability for consequential damages, you should consider going to court and getting an eviction judgment, rather than simply locking your tenant out.