Tenant Escapes Eviction Based On Pre-Sale Unpaid Rent (And Possibly Ever Paying That Delinquent Rent)

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Can a new landlord sue a tenant for unpaid rent from before closing? Can it evict the tenant based on that unpaid, pre-closing rent? An Illinois appellate court says “No” to each question. And, it awarded attorneys’ fees to the delinquent tenant.

[By the time you reach the end of today’s posting, you’ll want to read the court’s decision yourself. You can do so by clicking: HERE.]

The facts are simple. Readers could even write the following themselves, but we won’t let them. A radio station leased commercial space. It had a guarantor. At the time its original landlord sold the property, the tenant was delinquent in an amount of more than $72,000. Its lease had the usual “no waiver” and rent is due “come heck or high water” provisions. The new landlord filed a collection action and sued to evict the tenant. The tenant’s basic response was: “we don’t owe you the money; if we owe any money, it would be to the old landlord and the old landlord can’t assign its claim to you.”

We’ll describe the dispute a little differently. The new landlord asserted that a breach of the lease survives the sale of the leased property because the tenant has agreed to pay rent and the rent was unpaid. It also claimed that the old landlord’s claim was what is called a “chose in action” and that this “legal thing” is freely assignable. [One legal dictionary on the web defines a “chose in action” as “a comprehensive term used to describe a property right or the right to possession of something that can only be obtained or enforced through legal action.” That would encompass a money claim.] The tenant’s position was that the new landlord did not have standing (i.e., it didn’t have a sufficient legal interest – it didn’t have the right to sue) to assert the old landlord’s eviction right and also that, under Illinois law, a chose in action is not assignable.

Citing Illinois law, the appellate court, following generally accepted law in the United States, agreed that a warranty deed conveys not only the property but also all leases of that property. As the “new” landlord, the buyer now has the right to collect rents. But, under Illinois law, the collectible “rent” is only that first accruing after the sale. The “original landlord retains any right to recover past due rent.”

Curiously, to us not steeped in Illinois law, it appears (as the court tells us) that no Illinois court had ever ruled as to whether a chose in action could be assigned. Further, the court also tells us that a debt assignment (in Illinois) is only a “partial” assignment that allows the assignee to sue, but any money recovered belongs to the assignor. Ruminations keeps adding “Illinois” because this is contrary to what we have always thought.

As best we can tell from what the court wrote, there was no “assignment of lease,” just a deed. We would hope that had there been an assignment of lease, the outcome of the case would have been different. That’s because a lease has two characteristics. It is both a document of “conveyance” and a “contract.” A conveyance is related to real property ownership. That’s why the new owner of a property takes ownership subject to any existing leases and when a tenant agrees to “attorn” to any new owner, it agrees that the new owner will be its landlord. But, there are a lot of other things that a lease says. For example, a lease would allocate maintenance responsibilities. Absent a lease that does so, neither the landlord nor the tenant would have any. That’s an example of a contractual obligation. So, a lease is a hybrid creature – conveyance and contract. That’s why it is almost imperative that leases be assigned to the new owner – a deed alone only conveys the real property obligations (and burdens).

SO, AT THIS TIME, we beg that our erudite readers (and that means you) tell us what the law is in your own state. Readers knowledgeable about Illinois law, please chime in. You can privately email us at meislik@meislik.com or, even better, tell all other readers by use of the comment feature way down below).

Now, we are thinking about “workarounds.” Above and beyond the absolute wisdom of assigning a lease to the new owner, they would all begin with an actual assignment of past-due rent (and other things as well) as part of the closing documents. In that regard, we use core language like this:

(i) all assignable warranties and guaranties (expressed or implied) existing with respect to the Improvements or the Personal Property; (ii) all assignable trade names (including the name “Ruminations”), and any similar name (including domain name and any abbreviation of the foregoing), logos, licenses, permits, air rights, certificates of occupancy, signs, trademarks, telephone listings and numbers, and fax numbers; (iii) all accounts receivable; (iv) all choses in action against Tenants; (v) all accrued but unpaid rent; (vi) all accrued but previously unbilled monetary obligations of Tenants other than rent; (vii) all web sites and URL addresses used exclusively in connection with the Property; (viii) Books and Records for the Property; and (ix) all plans and specifications for the Improvements (collectively, the “Intangibles”).

We don’t know why the Illinois court characterized the past due rent as a “chose in action” instead of an account receivable, but if Illinois courts ever rule that a chose in action can be assigned but such an assignment would only be a “partial assignment” (as it is for a debt in Illinois), then the buyer should take a promissory note or notes from the seller. The note or notes should only be payable if and to the extent the assignee (now permitted to sue) successfully collects any part of the past due rent “on behalf” of the seller. It could also be characterized as a contingent future (or installment) purchase price installment.

Is Ruminations overthinking this? Can anyone familiar with Illinois practice shed some light of what is actually done there?

[Of course, the buyer doesn’t have to “buy” the past-due rent as part of the property. In fact, it isn’t common for the new owner to “purchase” past due rents; the seller usually gets whatever is paid after closing. There are a number of formulations for how “old” rent is handled post-closing. Basically, the purchase price doesn’t usually include this “bonus.” Absent any agreement to the contrary, the seller would be free to institute its own collection action. But, a successful suit by the “old” landlord could jeopardize the financial condition of the transferred tenant. That would be detrimental to the “new” owner. Further, the “new” owner, if it could evict the tenant, has more leverage than would have the “old” landlord. That’s why purchase agreements set out the rules for the handling of past-due rent.]

Now, how about evicting such a tenant? It appears that the court didn’t treat the failure of the tenant to pay the pre-sale rent as an evictable default. Perhaps the result would have been different if there had been an assignment of lease as well as the deed. From the way the court’s opinion was written, we just can’t tell.

We’ve “noodled” the issue of preserving a “right of eviction” and thus far, here’s what we think. The Lease should say two things. First, it should say that, at the old landlord’s option, evidenced by notice to the tenant at any time, all outstanding, accrued rent at the time of a transfer of the landlord’s interest to a new owner would be defined as “Old Rent” and the failure to pay the Old Rent to the new landlord (the transferee) would be an “event of default” for which the new landlord could avail itself of stated remedies, including the right to evict the tenant. That would be a contractual event of default and might be enforced in Illinois. Our thought would be that the new landlord would not then be seeking eviction based on the failure of the tenant to pay the back rent to the old landlord but by reason of the tenant’s failure to abide by the lease’s contractual requirement that new landlord is to be paid an amount equivalent to the back rent. [Of course, Illinois courts could characterize that as form over substance and refuse to evict the tenant.]

Second, it could say that failure to pay [what would also be defined as] “Old Rent” to the old landlord within 60 days after the sale of the property would be an event of default under the lease. That would be the same as making it an event of default under a lease or loan where the tenant or borrower is not paying its bills when due. It could be justified as a way to get rid of a tenant before it goes out of business.

With each variation, the old landlord and the new landlord would make their own agreement as to whether any money flows between them if and when the tenant pays.

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Comments

  1. RLGunn Associates LLC says:

    Bottom line. When there is a sale of property that has tenants, include an assignment of lease and an estoppel certificate. That should get around any idiosyncrasies in state and local laws.

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