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Tenant Defaults and Evictions for Commercial Leases

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July 12, 2018
Author: Michelle M. McGeogh, Esquire
Organization: Ballard Spahr LLP


The Maryland Code and common law provide several options to a commercial landlord seeking remedies for a lease default, depending on the nature of the default. These options include:

A. An action for repossession of the rented premises when the tenant fails to pay rent;

B. An action for repossession of the premises when the tenant holds over beyond the lease term;

C. An action for repossession of the premises when the tenant has substantially breached the lease;

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D. An action for damages due to a lease default; and

E. An action for distraint when the tenant has past-due rent.

F. In this outline, we explain these options, and provide a practical perspective on the ways that courts handle these types of proceedings. In addition, we explore other common scenarios in commercial landlord tenant relationships, including abandonments, the availability of self-help, the landlord's right to inspect the premises, and the landlord’s ability to sue for beach of lease guaranty.

A. Action for Repossession Due to Failure to Pay Rent Under Real Property § 8- 401

1. Summary ejectment is intended to be a quick and efficient judicial proceeding at which the landlord recovers possession of the premises from the tenant when the tenant has failed to pay rent. A copy of the statute is included in the appendix.

Generally, the statute contains the following key requirements:

  • The tenant must have failed to pay rent.
  • The tenant must be in possession of the rented premises.
  • The landlord must file a form complaint, a copy of which is included in the appendix, including:

(a) A description of the rented premises, sufficient to enable the Sheriff to post the complaint on the premises;

(b) The name of each person to whom the property is rented, subleased, or assigned;

(c) The months for which rent is due;

(d) The amount of the rent and late fees due;

(e) The future rent requested (after filing the complaint but before the date of trial);

 (f) Whether the property is required to be inspected for the presence of lead (commercial properties generally are not); and

(g) Whether the tenant is in active military service. An action under 8-401 is predicated on unpaid rent. Rent is generally defined by the terms of the Lease. What falls into the classification of “rent” depends in large part upon the language of the Lease between the parties. Typically, in commercial leases other charges are defined as “additional rent” which is then further defined as “rent.” Some courts require that charges touch and concern the use and possession of the premises in order to be considered "rent" for purposes of § 8-401. University Plaza Shopping Center, Inc. v. Garcia, 279 Md. 61 (1977); Law Offices of Taiwo Agabaje, P.C v. JLH Properties, II, LLC, 169 Md. App. 355 (2006). Depending on the Court's interpretation, rental charges may include:

  • percentage of gross receipts.
  • common area maintenance expenses;
  • percentage of real estate taxes;
  • utility payments;
  • merchants dues;
  • advertising expenses.

In general, the obligation to pay rent is an independent covenant in Maryland. Eberhart v. Mayor and City Council of Baltimore, 291 Md. 92, 433 A.2d 1118 (1981); Arthur Treacher’s Fish and Chips of Fairfax, Inc. v. Chillum Terrace Limited Partnership, 272 Md. 720, 327 A.2d 282 (1984); Hall v. City of Baltimore, 252 Md. 416, 250 A.2d 233 (1969); Brady v. Brady, 140 Md. 403, 117 A. 882 (1922). The Tenant’s duty to pay rent and the Landlord’s duties under the lease are independent. Even if a Landlord has failed to live up to its side of the bargain, such as failing to make promised repairs, the Tenant is still liable for the rent. Accordingly, the typical remedy for a tenant when a landlord has defaulted on the lease is to file an action for breach of contract.

2. Process/Timeline of an eviction:

(a) File a complaint under Real Property § 8-401.
(b) Sheriff posts notice of the complaint with hearing date and time at property.
(c) Tenant is served by private process, if appropriate. If the landlord obtains service of process sufficient to justify a judgment in contract or tort, then it is entitled to a money judgment in addition to a judgment for repossession. Md. Code Ann., Real Prop. § 8-401 (c) (2) (v) (2012).
(d) Trial (5th day after filing) The trial date will be stamped on the filed complaint. Although § 8-401 states that the trial shall be five days after filing the complaint, most District Courts do not comply with this  requirement. If the tenant pays the rent and court costs prior to the trial date, or appears at the hearing and tenders payment of the rent due and court costs, the court dismisses the complaint. If payment in full is not tendered there is a trial on the merits.
(e) Judgment (for possession and/or an amount) entered at trial, if it is shown that the tenant has failed to meet its rent obligations, the court enters a judgment for possession and/or a money judgment depending on the type of service and the relief requested (e) 4-day Stay of Execution/Appeal Period
(f) Warrant of Restitution. If the tenant fails to vacate the premises within the time required, the court may, on petition of the landlord, issue a Warrant of Restitution directing the sheriff to place the landlord in possession of the property by putting the tenant and the tenant’s belonging out of the premises. A sample Petition for Warrant of Restitution is included in the appendix. The landlord must petition for the Warrant of Restitution within 60 days of the date of judgment or the expiration of any stay of execution. The failure of the landlord to so petition will cause the judgment for possession to be stricken.
(g) Eviction scheduled with Sheriff’s office A tenant may redeem the premises at any time before the execution of the eviction by paying all past due rent, fees and all court costs. The eviction may be conducted within 60 days of the issuance of the warrant of restitution, or the judgment for possession will be stricken.

The timing of the process under § 8-401 can vary by county. Notice of default is not an express requirement of the statute. Arguably, notice is not required. However, the safest course of action is to notify the tenant of default as required by the lease.

3. Summary ejectment proceedings are within the exclusive original jurisdiction of the District Court. Md. Code, Courts and Judicial Proceedings § 4-401(4). The only issue before the Court is if the rent was or was not paid and if it was not paid, how much rent is owed.

4. Attorneys' Fees
Whether attorneys' fees may be awarded to the landlord in an action under § 8-401 has been a contested issue. Historically, some counts did not allow it – notwithstanding express language in the lease authorizing an award of attorneys' fees – under the theory that attorneys' fees do not constitute rent because they don't relate to the use or possession of the property. Law Offices of Taiwo Agabaje, P.C. v. JLH Properties, II, LLC, 169 Md. App. 355 (2006). In 2007, the Maryland Legislature amended § 8-401 to explicitly authorize an award of attorneys' fees in commercial cases when the lease explicitly states that the fees are due as additional rent. Note, though, that the language of the statute is permissive, not mandatory. Some judges are reluctant to award attorneys' fees. Others limit the fees to an amount they consider reasonable. Many judges require the submission of an affidavit attesting to the fairness and reasonableness of the fees.

5. After the entry of a judgment for repossession due to a failure to pay rent, the tenant maintains a right of redemption. If the tenant pays the amount determined to be due as of the date of trial, at any time prior to the eviction, then the tenant may stay in possession of the premises. The right of redemption may be foreclosed – and the landlord may evict the tenant even if the tenant has paid the rent determined to be due at trial – in two circumstances. First, § 8-401 expressly provides that the right of redemption may be foreclosed on the fourth judgment for repossession obtained by the landlord within a 12-month period. Second, some judges – but not all – will foreclose the right of redemption if the lease contains a waiver of the right.

6. Conducting the Eviction

At the eviction, the landlord should have a locksmith to change the locks. The landlord should also have a team of workers capable of moving the tenant's property out of the premises. Generally Tenant property is placed on the closest public road to the leased premises, at the direction of the Sheriff. However, if the lease has a provision for tenant property to be considered abandoned within a certain number of days of Landlord's repossession, a Sheriff may instruct the Landlord to keep the personal property in the premises after the eviction, and hold it for the tenant until it is considered abandoned per the terms of the lease. Generally, the landlord should simply follow the Sheriff’s directions during the eviction.

B. Petition for Repossession of Holdover Tenant, Pursuant to § 8-402

1. The Maryland Code also provides a remedy in § 8-402 of the Real Property Article, a copy of which is included in the appendix, for a Landlord seeking to repossess the property from a month-to-month Tenant or at the expiration or termination of a lease. Like an action for repossession due to the failure to pay rent under § 8-401, a holdover action is primarily designed to provide the Landlord with a judgment for repossession, but may also include a money judgment against the tenant when there is service of process that would be sufficient to support a judgment in contract or tort.

Generally, the statute contains the following key requirements:

  • The Landlord must have given the Tenant notice to quit in writing at least one full month before the expiration of the term.
  • The Tenant must have failed to vacate the premises at the end of the term.
  • The Landlord must complete a form complaint, a copy of which is included in the appendix. The complaint must include a description of the premises sufficient to allow the Sheriff to post it on the property, the amount of rent, the date of the notice to quit provided to the Tenant, and a statement as to whether the Tenant is in active military service.
  • The Tenant may file an appeal within ten (10) days after the entry of a judgment. If the Tenant appeals, files an affidavit that the appeal is not taken for delay, and also obtains sufficient bond, then the Tenant may remain in possession of the premises during the pendency of the appeal.
  • After judgment, a Landlord must obtain a warrant of restitution in order to conduct an eviction at the direction of the Sheriff. See appendix.

C. Action for Repossession Due to Substantial Breach of Lease, Under § 8-402.1

1. A Landlord may also terminate a Tenant’s lease and evict the Tenant under Real Property § 8-402.1, a copy of which is in the appendix. Generally the court must find: (i) a “substantial” (or “material”) violation of the lease (ii) which warrants eviction. Brown v. Housing Opportunities Commissioner, 350 Md. 570, 584 (1998). These are two separate requirements. It is possible for a court to find that a Tenant substantially breached the lease but that the breach does not warrant an eviction. See id.

 
2. A tenant substantially breaches the lease when “the breach is such that further performance of the contract would be ‘different in substance than that which was contracted for . . . .’” Dialist Co. v. Pulford, 42 Md. App. 173, 178 (1979).

3. A court decides whether a substantial breach “warrants an eviction” by looking at several factors, “including the actual loss or damage caused by the violation at issue, the likelihood of future violations, and the existence of effective alternative remedies for past or existing violations.” Brown v. Housing Opportunities Commissioner, 350 Md. 584 (1998).

4. Substantial lease violations that could warrant eviction may include: (i) grossly neglecting the maintenance of the property (when maintenance was the Tenant’s responsibility);

(ii) allowing a store to go dark when the lease required continuous operation;

(iii) assigning or subleasing the premises in violation of an antiassignment clause;

(iv) failing to pay property taxes or to follow applicable federal, state, and local laws;

(v) using the premises for a purpose other than those permitted by the lease, particularly an illegal or corrupt purpose; and

(vi) in the case of a lease in which rent is based on a percentage of the Tenant’s sales, failing to provide the Landlord with correct information for an audit of the Tenant’s books.

D. An Action for Damages Due to a Lease Default

1. In addition to the statutory remedies addressed herein, both a landlord and a tenant are entitled to file an action for breach of the contractual provisions in the lease. Due to the availability of expedited statutory repossession remedies, a breach of contract action almost always focuses primarily on damages suffered by either the tenant or the landlord.

2. The Landlord has up to three years after the cause of action has accrued to bring a civil suit to recover rent. Md. Code, Courts and Judicial Proceedings § 5-101.

E. An Action for Distraint When the Tenant's Rent is Past-Due

Real Property § 8-301 et seq. provides a mechanism for a landlord to obtain a court order to enter the premises and seize the tenant’s property (with several limitations) in order to hold an auction to satisfy past-due rent. In light of the accelerated remedy of repossession available under § 8-401, as well as the opportunity to obtain a money judgment under that statute, actions for distraint are rarely filed.

F. Landlord Lockouts and Illegal Evictions

At common law, a Landlord could not be civilly liable to a Tenant for using self-help – removing a Tenant's possessions and changing the locks on the premises – so long as the lease provides for the Landlord’s right of entry and the Landlord was entitled to possession of the premises and did not use unreasonable force to get it back. Maryland retains the common law rule for commercial leases. Accordingly, the landlord may exercise self-help if it is correct in taking possession and the repossession is peaceful, using no more force than is necessary to regain possession. See K & K Management, Inc. v. Lee, 316 Md. 137, 175 (1989); Nicholson Air Services, Inc. v. Board of County Commissioners, 120 Md. App. 47 (1998). However due to the numerous statutory options for repossession that are now available (and were not available when the common law rule was created), courts tend to disfavor self-help. Accordingly, a commercial Landlord who uses unreasonable force or who is not justified in taking possession of the premises from the Tenant can face a wrongful eviction lawsuit with hefty damages.

G. Tenant Abandonment

1. When a Tenant abandons the rented property, the landlord typically retakes possession. In this case, because the Tenant normally also stops paying rent, a Landlord may also seek to regain possession by filing an action pursuant to 8-401. Retaking possession is typically advisable so that the landlord can secure the premises. After the landlord has retaken possession, whether the tenant remains liable to the landlord for future rent depends on whether the landlord accepts the tenant’s surrender.

2. A landlord accepts the tenant’s surrender if the landlord retakes possession of the premises for himself, using it for his own purposes. If the landlord accepts the tenant’s surrender of the premises, then the tenant can walk away without paying rent for any of the time after the acceptance of surrender.

3. It is not an acceptance of surrender to: (a) enter the premises to make repairs; or (b) attempt to re-lease the premises to a replacement tenant. If the landlord does not accept the tenant’s surrender of the premises, then the tenant remains liable to the landlord for lost rent damages.

4. When a Tenant abandons the premises, the Landlord may sue for past monies due, and also for the rent for the remainder of the lease term based on the rules of anticipatory breach and surrender. Further, the Lease may contain an acceleration clause.

5. After a Tenant abandons the premises, a Landlord has a duty to mitigate damages if it repossesses the property or has terminated the lease. Circuit City Stores v. Rockville Pike Joint Venture Limited Partnership, 376 Md. 331 (2003). If the Landlord has not terminated or repossessed the premises, its obligation to mitigate is unclear. Id. An obligation to mitigate may be satisfied by listing the property for rent. Wilson v. Ruhl, 277 Md. 607 (1976). The Landlord is held to a reasonable diligence standard, and the failure to actually find a replacement tenant is not necessarily proof of a breach of the duty to mitigate. Millison v. Clarke, 287 Md. 420 (1980); Wilson v. Ruhl, 277 Md. 607 (1976).

6. When a Tenant abandons the premises, the Landlord may sue for past monies due, and also for the rent for the remainder of the lease term based on the rules of anticipatory breach and surrender. Further, the Lease may contain an acceleration clause.

H. Landlord’s Right to Inspect Premises

By contracting for a leasehold estate, a tenant has the right to “quiet enjoyment,” or a right to enjoy possession of the premises without the interference of the landlord. Landlords may, pursuant to the terms of a lease, enter the premises for periodic inspections or to make repairs.

I. Enforcement of Lease Guaranty

If a guaranty was executed, the Landlord can file an action for breach of lease guaranty in the appropriate Circuit Court.

Historically, if the Landlord modified the primary obligation (lease) in any fashion, a guarantor would be released from liability. However, a Landlord can provide in the guaranty that a modification of the primary obligation does not release the guarantor, even if modification are made to the primary obligation. Even with this language in the guaranty, it is a good idea to have the guarantor sign off on any modifications to the lease (including any forbearance agreements).


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