My first experience with commercial abandonment was a double default. At a building in a tech corridor was a software developer who was developing a product for a major manufacturer. The company was apparently on a development funding venture capital dole. I received a call from a frantic customer who stated that I needed to meet him at the building. When asked why, I was told that there was an envelope on the door addressed to the client’s attorney. That would have been me.
Arriving, the envelope merely had keys to the door. We entered and what was a vibrant business of 7200 square feet was bereft of everything including the work cubes and what was left was trash and the carpeting. Actually, they left the front desk which had another two boxes, one again addressed to the client and another to the manufacturer.
In essence, in the boxes were keys and a note that is summarized as “sorry, couldn’t finish the software, we are out of here.” The manufacturer’s box had DVDs of software code and instructions on how to continue to build the product.
My client dealt with a variety of emotions. Mostly shock as this was a 5 year lease deal and only one year had expired. The feeling that he was expressing was much like someone coming home to a note from their significant saying, “I can’t live here with you anymore, and yeah I took the hamster and the Xbox… by the way the Chinese food has spoiled in the fridge”. Treachery. Sheer Treachery. Especially if this tenant was treated fairly and with care.
Remedy Clauses for Commercial Abandonments
The majority of commercial leases have extensive remedy clauses for abandonment. What is abandonment under Texas law or a lease? It is where a tenant has either taken or attempted to take all of its business fixtures and equipment to the extent that a reasonable person would conclude that the tenant has left. And not just for the weekend. It should be obvious that they have left and are not coming back. In some cases, particularly a food service, they may leave the foodstuffs rotting in the unplugged cooling units or just left on the counters leaving the landlord to attack this smelly mess as their first order of the day. Treachery….
The reasons for a client abandoning are as varied as there are businesses. Some had supply chain issues, others a death in the family they couldn’t get over. And it continues. Drugs, mental breakdowns, out of cash, finding a new lease on life with meditation guru Baba Rum Raisin in Madras. Mostly they were out of money. The real reason does not help the landlord.
Ok back to the law. So, in most commercial leases generally appear these four varieties (if not more) Landlord remedies which are summarized:
- Landlord enters and assumes the business of the tenant taking the revenue as a collection towards the rent and CAM;
- Demand a final judgement by accelerating all the months of rent and cam due into a single payment and then discounting to what is called the Net Present Value (complicated formula) less any current market value rent that a new tenant may pay;
- Terminate the lease, sue for damages and find a new tenant;
- Not terminating the lease and try to relet the premises, and when you find the new tenant, charge in a lawsuit to the abandoning tenant the difference between the new and old tenant. Plus, the costs of retrofitting the leasehold and any collection and attorney’s fees.
Your Legal Options
It would take a book to explain all of these. Let’s just offer them as a blueprint, and the kind reader is directed to find a Real Estate litigation attorney, such as the very fine ones at Sprigg-Novak Law to discuss how these options are implemented.
Here are some things to consider: 1.) even if you wish to sue the old tenant, sometimes they up and disappear. Sometimes, even if you get a judgment for all the monies they owe you, they are non-collectable. Meaning that their assets are protected by the Texas Constitution. For example, you can’t get their bedding, pets or personal firearm. It is the equivalent of squeezing a Tennis ball to get sangria. Not likely. Some declare liquidation in bankruptcy, and you are informed that even though you are creditor, there is not enough to pay you (or anyone else).
This view, of course, is at the end game where you, the Landlord, find the tenant uncommunicative and missing. Yet, there are some methods of making sure you are not as surprised, and these can be placed in your lease.
First, make sure that the commercial tenant provides profit/loss and cash flow projections on an annual or semi-annual basis. Have these in GCAA or accounting standards and have your accountant review them for warning signs. This gives you better heads-up that something may be happening with the tenant’s business.
Second, visit your tenant. Make it a point to communicate and see them on a regular basis if only just to maintain the relationship. It is harder for people to take off when they believe they will be personally hurting someone, instead of a distant landlord.
Third, if you find situations where your tenant is undergoing financial stress be open to concessions for the short term. It is far less expensive for you to forgo some lease payments while your tenant gets their bearing then facing an abandonment. And you may be building a long-term leasing situation.
Let Sprigg-Novak Law Firm Protect Your Interests
None of these things discussed here can guard against every situation. As the economy fluctuates, we will see an increase in abandonment. Most landlords maybe will see a commercial abandonment once in their career. Others may face a spate in one year. But know that you have a sympathetic ear with Jeff and Craig. We have seen how devastating it is to have a tenant take off. Come and talk with us.
