Enforcement of Commercial Leases in Arizona

2999 N. 44th Street
Suite 500
Phoenix, AZ 85018

Phone: 602.840.1400
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Enforcement of Commercial Leases in Arizona

ENFORCEMENT OF
COMMERCIAL LEASES
IN ARIZONA

Jeffrey Messing, Esq.
Ball, Santin & McLeran, PLC
2999 North 44th Street, Suite 500
Phoenix, Arizona 85018
(602) 840-1400
FAX: (602) 840-4411

February 20, 2015

INDEX OF TOPICS
ENFORCEMENT OF COMMERCIAL LEASES

 

ENFORCEMENT OF COMMERCIAL LEASES

INTRODUCTION

This article will include a discussion of legal and equitable remedies available to enforce a commercial lease. Remedies and enforcement mechanisms are authorized, in the first instance, by the terms of the lease. If the lease is silent or ambiguous on the issue, additional authority can be found in the Arizona Revised Statutes (“A.R.S.”) §§ 3301, et seq., Arizona case law, and general common law. See Valley National Bank of Arizona v. AVCO Development Co., 14 Ariz. App. 56, 480 P.2d 671 (1971).

Nature of the Lease.

The landlord and tenant relationship is a combination of property and contract law. Foundation Development Corp. v. Loehmann’s. Inc., 163 Ariz. 438, 788 P.2d 1189 (1990). Historically, rent was regarded as a real property interest arising out of the land, while the lease was considered a mixture of conveyance and contract. 49 Am.Jur.2d LANDLORD & Tenant, § 176 (1970). Thus, the real property remedy was generally for rent and the contract remedy damages subject to the requirement of mitigation. Roosen v. Schaffer, 127 Ariz. 346, 621 P.2d 33 (App. 1980).

Breach Issues.

In the landlord/tenant arena, breach issues generally include (i) monetary defaults, including the failure to pay rent and other collectible charges; (ii) non-monetary defaults, including breach of lease covenants; and (iii) abandonment of the premises prior to the expiration of the lease. This article will present a general discussion of the remedies available for these types of defaults, assuming that such remedies are not restricted or barred by the lease in question. Wilson v. Pate, 17 Ariz. App. 461, 498 P.2d 535 (1972); Camelback Land & Investment v. Phoenix Entertainment Corp., 2 Ariz. App. 250, 407 P.2d 791 (1965).

DEFAULT & LIMITATIONS THEREON

Material Breach Requirement.

A.R.S. § 33-361(A) gives the landlord the right to terminate the lease and/or retake possession of the leased premises if the tenant fails to pay rent or violates any other provision of the lease. The statute does not limit this right to a material breach of the lease. However, in Foundation Development Corp. v. Loehmann’s, Inc., 163 Ariz. 438, 788 P.2d 1189 (1990), the Arizona Supreme Court limited the landlord’s right to declare a breach in order to avoid what the court viewed as a forfeiture. In Loehmann’s, the Court held that a commercial lease could not be terminated based on what is viewed a “trivial or immaterial breach” of the lease by the tenant; even if the lease expressly grants the landlord this remedy. Id. Rather, it held, forfeiture is appropriate only for breaches that are “material” “serious,” or “substantial.” Id.

The Loehmann’s Court adopted the factors identified in the Restatement (Second) of Contracts, Section 241, as the standard for determining materiality:

  • The extent to which the injured party will be deprived of the benefit which it reasonably expected;
  • The extent to which the injured party can be adequately compensated [by damages] for the part of that benefit of which it will be deprived;
  • The extent to which the party failing to perform or to offer to perform will suffer the forfeiture;
  • The likelihood that the party failing to perform or to offer to perform will cure its failure, taking account of all the circumstances including any reasonable assurances; and
  • The extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing.

Loehmann (citing Restatement (Second) of Contracts § 241).

Applying those factors, the Court held that where a longstanding tenant paid common area maintenance charges two days late because of a clerical error, the breach was trivial and would not justify termination of the lease. The court reached this conclusion despite the fact that the lease contained a “time is of the essence” clause, reasoning that such a clause cannot, in and of itself, convert a “trivial” or “immaterial” breach into a “material” breach; such a clause is but one factor to consider in determining the materiality of a breach.” Loehmann’s involved a landlord’s attempt to exploit a one-time late payment due to a clerical error. A court may reach a different result if there was a history of late payments or a late payment in conjunction with other breaches.

Equitable Relief Against Statutory Forfeiture

The holding in Loehmann's was not new law. Arizona courts have long asserted the ability to grant a tenant equitable relief from a “forfeiture” based on fraud, accident, or mistake. In Thomas v. Given, 75 Ariz. 68, 251 P.2d 887 (1952), the tenant’s bookkeeper inadvertently failed to issue a check to the landlord and did not catch the error until eleven days after the rent was due. The court looked beyond the lease contract itself and exercised its equitable power to relieve the tenant from what it termed a statutory forfeiture. Id.

A landlord may be deemed to have waived its right to terminate the lease based on late rent payments or other nonmonetary breaches where it accepts rent with notice of the tenant’s breach. Butterfield v. Duquesne Mining Co., 66 Ariz. 29, 182 P.2d 102 (1947). Acceptance of rent does not necessarily waive the lease provision. Rather, the landlord must give notice and an opportunity to cure what will usually be a continuing breach. Id. But see DVM Co. v. Bricker, 137 Ariz. 589, 672 P.2d 993 (1983); T. H. Properties v. Sunshine Auto Rental, Inc., 151 Ariz. 444, 728 P.2d 663 (App. 1986) (setting forth limited exceptions to the general waiver rule).

Notice of Default

Arizona law does not require notice of default, but many standard commercial leases do. If the lease requires notice, it must be provided in accordance with the terms of the lease. University Realty & Dev. Co. v. Omid-GAF, Inc., 19 Ariz. App. 488, 508 P.2d 747 (1973). An alternative method of giving notice may be adequate, however, provided it is a superior or more reliable method than that provided by the lease. Id. And as always, the best possible notice is required. If the landlord knows the notice address on record is inaccurate, sending notice to that address alone will probably not suffice. Additionally, notice of default given to the tenant’s agent may be imputed to the tenant regardless of whether the agent actually relayed the notice to the tenant. Bates & Springer, 109 Ariz. 203, 507 P.2d 668 (1973). However, the tenant’s agent must be acting within the scope of his agency. Id. As in any contract case, the parties’ course of conduct is relevant. If the lease has no notice provision, but the landlord has provided notice of past breaches, it would be prudent to do so before exercising self-help remedies.

REMEDIES

Lock-out by the Landlord

If the default and the landlord’s right to declare a breach are clear, self-help is usually the preferred remedy. It is fast, inexpensive, and perfects the landlord’s lien on all of the tenant’s property located on the premises. Pursuant to A.R.S. § 33-361(A), the landlord may re-take possession of the premises by locking out the defaulting tenant. The landlord’s right to possession and hence right to lock-out the tenant arises as soon as rent is in arrears for five days. A.R.S. § 33-361(A). In retaking possession, the landlord may not exercise force or otherwise breach the peace. See Miller v. Condon, 66 Ariz. 34, 182 P.2d 105 (1947); A.R.S. § 12-1171(2) (person guilty of forcible entry and detainer if makes entry onto real property by use of force). The landlord’s retaking of possession does not necessarily preclude the landlord from bringing an action for recovery of unpaid rent, property damages, or breach of covenants in the lease. Roosen v. Schaffer, 127 Ariz. 346, 621 P.2d 33 (1980).

Wrongful Lock-0ut – The Landlord’s Liability

If the landlord’s lock-out is wrongful, the landlord may be liable for any damages the tenant sustains as a result of the wrongful lockout. As noted, if the landlord’s lockout involves a breach of the peace, the landlord may be guilty of forcible entry and detainer. A.R.S. § 12-1171. The landlord may also be held guilty of forcible entry and detainer where the tenant was legally entitled to possession. Gangadean v. Erickson, 17 Ariz. App. 131, 495 P.2d 1338, (1972). Emotional distress and/or punitive damages may also be recovered where excessive force or other outrageous conduct is used to reacquire possession. Country Escrow Serv. v. Janes, 121 Ariz. 511, 591 P.2d 999 (App.1979). A tenant can also sue for lost future profits on the theory that the wrongful closure of its business resulted in a loss of good will.

Mechanics of a Lockout

The key to a successful lockout is avoiding a breach of the peace. Absent a stipulated turnover, the only effective way to achieve this result is to wait until the premises are empty. Often this means conducting lockouts in the early morning hours, on weekends, and holidays. In extreme cases it may be necessary to hire security guards. Law enforcement will usually refuse to get involved, but may do so if the tenant has an established history of violence. Locksmiths are generally willing to change the locks if provided with a copy of the lease, a statement of breach, and a lawyer’s letter stating the landlord’s authority. If the premises are alarmed, the alarm company must also be contacted. Given the same documentation, they are usually willing to deactivate the alarm. Once inside, a complete inventory of personal property and fixtures should be taken to avoid later claims of lost, stolen, or damaged property. A detailed written inventory will be needed for sale purposes (see below), but the initial inventory can be completed quickly by video recording the entire premises. After the premises are secured, notice should be posted giving third parties someone to contact if they claim ownership of or a superior lien to any of the personal property inside.

Landlord’s Liens

Once .the landlord has re-entered the premises, it may seize and sell the tenant’s property located on the leased premises. Two types of landlord’s liens may attach: (1) statutory liens pursuant to A.R.S. §§ 33-361 and 33-362; and (2) contractual liens governed by the Uniform Commercial Code as enacted in Arizona. See United States v. Globe Corp., 113 Ariz. 44, 546 P.2d 11 (1976).

Statutory Landlord’s Lien

A.R.S. § 33-361(D) grants the landlord a lien upon the tenant’s personal property if the tenant fails to pay rent. See A.R.S. § 1-215 for definition of “personal property.” Additionally, A.R.S. § 33-362(A) provides that the landlord may assert a lien upon “all property” of the tenant not exempt by law. The lien granted by A.R.S. § 33-362(A) is broad enough to encompass all kinds of property, including fixtures, intangibles, notes, receivables, etc., which are located or used on the leased premises.

Priority between Landlord’s Lien and Article Nine Security Interests

Often the tenant’s property will be subject to a security interest of a third party. The UCC specifically excludes landlord’s liens from its coverage, so the issue of which lien takes priority is governed by case law governs the priority issue. A.R.S. § 47-9104(2); Bates & Springer v. Friermood, 109 Ariz. 203, 507 P.2d 668 (1973).

As a theoretical matter, a landlord’s lien attaches at the commencement of the lease or at the time the personal property is brought onto the leased premises. Id. However, a landlord’s lien is inferior in priority to an Article 9 creditor’s interest that is perfected before the goods are brought onto the leased premises. Ex-Cell-o Corporation v. Lincor Properties, 158 Ariz. 307, 762 P.2d 594 (App. 1978). “To hold otherwise would mean that a party holding a security interest in goods subsequently brought onto premises leased by the debtor could never take priority over the landlord’s lien, even though his interest was perfected before the goods were placed on the premises.” Id.

Sale of Property

Under A.R.S. § 33-361(D), if the rent is not paid within sixty days after seizure, the landlord may sell the seized property in the manner provided by A.R.S. § 33-1023. (Note: A.R.S. § 33-1023(A) provides that where rent remains unpaid for twenty days after the lien has been asserted, the landlord may notify the tenant that all charges set forth in the lease are due. The apparent inconsistency could arguably shorten the time required for a sale. The general practice is to wait the full sixty days after seizure before conducting a sale. Roosen v. Schaffer, 127 Ariz. 346, 621 P.2d 33 (all remedies provided in A.R.S. §§ 33-361 and 33-1023 are available to landlord)).

At least ten days prior to the sale of the property, the landlord must make demand upon a tenant who resides in the county where the property is located. A.R.S. § 33-1023(A). If the tenant fails to pay the past due rent within the ten days, the landlord may proceed with the sale. Id. A tenant who does not reside in the county where the property is located does not receive the ten day cure period. Thereafter, the tenant must receive at least five days’ notice of the date, time, and place of the sale, which must be by public auction. A.R.S. § 33-1023(B). If the tenant cannot be located, the landlord must publish notice of the sale in a county newspaper on two separate occasions. The lease may, of course, require longer notice periods.

The proceeds of the sale are applied to the accrued charges. A.R.S. § 33-1023(A). Any remaining proceeds go to other creditors and the tenant. Id.; A.R.S. § 33-1023(C).

Contractual Liens

Unlike statutory landlord’s liens, liens actually created in connection with a lease are covered by Article 9 of the UCC. Among other things, Article 9 governs priority issues. United States v. Globe Corp., 113 Ariz. 44, 546 P.2d 11 (1976).

Forceful Entry and Detainer (FED) Action

An FED action affords the landlord a speedy, summary civil remedy to retake the possession of the premises. Byrd v. Peterson, 66 Ariz. 253, 186 P.2d 955 (1947). FED actions are strictly limited to the issue of possession and back rent; future rent and other damages are not recoverable. See A.R.S. §§ 12-1171, et seq.; c.f. Moreno v. Garcia, 169 Ariz. 586, 821 P.2d 247 (App. 1991) (issue of title may be decided for purposes of collateral estoppel when title is in dispute). An FED action is the remedy customarily used when self-help remedies are unavailable.

Statutory Requirements.

The statutory requirements of an FED action must be strictly followed. The tenant must have violated one or more lease provisions and the breach must remain uncured for five days. A.R.S. § 33-361(A). This five day grace period may not end on a Saturday, Sunday, or legal holiday. Fridena v. Maricopa County, 18 Ariz. App. 527, 504 P.2d 58 (1972). Prior to commencing the action, the landlord should demand possession of the premises from the tenant. See A.R.S. § 12-1173(A). While A.R.S. § 33-361(A) provides that the landlord may begin an FED proceeding without formal demand, Arizona case law suggests that notice is required prior to filing an action. See Alton v. Tower Capital Co., Inc., 123 Ariz. 602, 601 P.2d 602 (1979). However, the landlord may provide such notice immediately upon the tenant’s failure to pay rent, and then use the five day waiting period as the tenant’s grace period. See Rapp v. Olivo, 149 Ariz. 325, 718 P.2d 489 (Ariz. Ct. App. 1986).

As plaintiff, the landlord or filing party must be the entity to whom rent is due or the agent of such entity. A.R.S. § 33-36l (A). Further, the complaint must describe the property, the facts entitling plaintiff to possession, and name as defendant the person in possession of the premises at the time the complaint is filed. A.R.S. § 12-1175(B); Byrd v. Peterson, 66 Ariz. 253, 186 P.2d 955. However, possession under these circumstances is expanded to include the situation in which the tenant’s employees or personal property remain on the premises, or where the tenant retains dominion and control over the premises. Standage v. Planned Investment Corp., 160 Ariz. 287, 772 P.2d 1140 (Ct. App. 1988).

A summons must be served at least two days prior to the day the tenant must appear for trial. A.R.S. § 12-1175(C). The defendant must appear personally or by counsel at the date and time stated on the summons, and must enter a plea of guilty or not guilty at that time.

Trial Issues.

Counterclaims, cross-complaints, offsets, or any other matters beyond the right to possession and liability for back rent may not be litigated in an FED action. Andreola v. Arizona Bank, 26 Ariz. App. 556, 550 P.2d 110 (1976); but c.f., Moreno, 169 Ariz. 586, 821 P.2d 247. The tenant may present only those defenses which disprove the landlord’s right to possession. For instance, unreasonably withholding consent to an assignment is a permissible affirmative defense. See Esplendido Apts. v. Metro. Condo. Association, 158 Ariz. 487, 763 P.2d 983 (App. 1988). Courts will also hear the affirmative defenses of waiver of the alleged default or nonmateriality of the breach. Cottonwood Plaza Associates v. Nordale, 132 Ariz. 228, 644 P.2d 1314 (App. 1982). The landlord’s acceptance of rent with notice of a nonmonetary default will act as a waiver of that default for purposes of an FED action. However, the landlord’s breach of the lease may not establish an affirmative defense unless the tenant’s performance was contingent upon the landlord’s actions. Bolon v. Penninton, 6 Ariz. App. 308, 432 P.2d 274 (App. 1967).

Either party has the right to request a jury trial, although this right is rarely exercised. A.R.S. § 12-1176(A) requires a trial setting within five days after the complaint is filed. A.R.S. § 12- 1177 provides for one continuance, based on good cause supported by affidavit, of three calendar days in justice court or ten calendar days in superior court. As a practical matter, many FED trials are continued beyond the statutory time limits because the court does not have room on its docket to hear them.

Judgments.

Upon a verdict of guilty, the landlord is entitled to all rent due and owing as of the date of judgment, delinquency charges, and court costs, as well as “writ of restitution.” A.R.S. § 12-1178(A). Supplemental payments, such as property taxes and common area maintenance charges, are not recoverable unless such amounts are characterized as rent in the lease. T .H. Properties v. Sunshine Auto Rental, Inc., 151 Ariz. 444, 728 P.2d 663 (App. 1986). Attorneys’ fees may now also be recovered in an FED action. A.R.S. § 12-1178.

The clerk issues a writ of restitution five judicial days after the date of judgment. A.R.S. § 12-1178(C). A sheriff executing the writ of restitution will then seize the premises and deliver them to the landlord. The statute requires the writ to be enforced “as promptly and expeditiously as possible.” Depending on the sheriff’s workload at the time, it can take an additional three to four weeks to obtain possession. Thereafter, the tenant may be punished by contempt if he or she attempts to re­ enter the premises. Canon v. Arizona Fish and Game Commission, 85 Ariz. 1, 330 P.2d 501 (1958). A writ of restitution does not give the landlord a lien on the tenant’s personal property. Any property remaining on the property should be removed at that time for storage and safekeeping by the sheriff. Fridena v. Maricopa County, 18 Ariz. App. 527, 504 P.2d 58. The property may then be sold in accordance with the judgment at a sheriff’s sale.

An important point to remember is that the Bankruptcy Court has held that a lease is terminated upon recovery of the premises pursuant to A.R.S. § 33-361. See In Re Bricker, 43 B.R. 344 (D. Ariz. 1984). Consequently, any corresponding right to rental proceeds would also be terminated. However, Bricker does not invalidate provisions in the lease which may provide otherwise. Thus, if the subject lease provides that an FED action will not operate to terminate the lease, the landlord may file a separate action to obtain future rent or other charges based upon a contractual cause of action. Tempe Corp. Office Bldg. v. Ariz. Funding Serv., 167 Ariz. 394, 807 P.2d 1130 (App. 1991).

Ejectment

In accordance with A.R.S. § 12-1251 et. seq., a landlord may also pursue an action in ejectment. While this civil action is not as speedy as an FED action, it does permit the litigation of title issues and may accomplish the remedy of quieting title to the premises if title is uncertain. A.R.S. § 12-1251.

Contract Actions – Action for Future Rent

In Tempe Corp. Office Bldg. v. Ariz. Funding Serv., 167 Ariz. 394, 807 P.2d 1130, the Court upheld a lease clause providing for the recovery of future rentals. See also Wingate v. Gin, 148 Ariz. 289 714 P.2d 459 (App. 1985). Absent a termination of the lease, the landlord may sue for all unpaid rent and other sums due, provided that the landlord mitigates its damages by attempting to relet the premises. Id. While the landlord in Tempe did not request damages arising after the date of trial, the court did remark such damages would be limited to the “difference between the stipulated rental and the fair rental value of the premises.” Id.; see also The Lee Development Co., v. Papp, 166 Ariz. 471, 803 P.2d 4641 (App. 1990). Thus, the landlord will not receive any damages after the trial if the fair rental value of the premises surpasses the stipulated rent in the lease.

Alternatively, the landlord may wait until the end of the lease term to sue for all unpaid rentals, if the lease is terminated by filing suit. As before, the landlord must mitigate his damages by attempting to relet the premises at a fair rental. Id. The reasonableness of the landlord’s efforts to mitigate damages will be determined by a consideration of the totality of the circumstances. Dushoff v. Phoenix Co., 22 Ariz. App. 445, 528 P.2d 637 (App. 1974).

Remedies for Nonmonetary Defaults

Both Injunctive and declaratory relief are available to landlords under A.R.S. §§ 12-1801 et seq. and 12-1831, et. seq., respectively. These remedies are useful alternatives to enforce non-monetary obligations under the lease in the situation where the landlord does not want to terminate the lease. Injunctive relief is especially appropriate if an anchor tenant is attempting to close or abandon its store in violation of a continuous operation or percentage lease clause. See Dover Shopping Center, Inc. v. Cushman’s Sons, Inc., 164 A.2d 785 (New Jersey 1960); Lincoln Towel Corporation v. Richter’s Jewelry Co., 12 So.2d 452 (Fla. 1943). A landlord may pursue all the remedies for monetary defaults discussed above in Section A except, of course, an action for rent or a landlord’s lien.

Remedies for Abandonment

Abandonment occurs when the tenant vacates the leased premises with the intent to relinquish all his rights in the premises. Gangadean v. Erickson, 17 Ariz. App. 131, 495 P.2d 1338 (App. 1972). Where the tenant unjustifiably vacates the premises and ceases to pay rent, the landlord has the following two options under Arizona law: (1) To accept a surrender and terminate the lease or (2) refuse to accept surrender and enforce the tenant’s obligations. Roosen v. Schaffer, 127 Ariz. 346, 621 P.2d 333. The parties may also provide for other remedies in their lease. Id. If the parties expressly state, the remedies in the lease will not be the exclusive relief, but will be in addition to the remedies provided by law. Id.

Accepting Surrender of Premises

Accepting surrender terminates the lease and relieves the tenant of liability for future rent. Id. The lessor can recover only the accrued rent and expenses due prior to the termination of the lease. Id. Nevertheless, the courts will honor reasonable lease provisions varying the remedies provided by law. For example, if the lease so provides, and subject to the landlord’s obligation to mitigate damages by making reasonable efforts to rerent the premises, the landlord may terminate and recover reasonable rent for the remainder of the lease term in addition to past rent. Wingate v. Gin, 148 Ariz. 289, 714 P.2d 459 (App. 1985).

Refusing to Accept Surrender of Premises

The lease is not terminated where the landlord refuses to accept surrender. Roosen v. Schaffer, 127 Ariz. at 346, 621 P.2d at 333 (1980). The landlord may recover unpaid rent due prior to reletting the premises as well as future rent due under the lease, subject to the landlord’s duty to reasonably mitigate his damages by reletting the premises. Id.; Wingate v. Gin, 148 Ariz. 289, 714 P.2d 459 (App. 1985). Accordingly, the landlord should prepare a record establishing reasonable efforts to relet the premises.