"Effective Methods for Property Managers to Avoid Summary Proceedings"
      by Richard Yaffe, R.A. - Vice President-Asset Management

A colleague of mine was sitting in Landlord-Tenant court earlier this week, thinking about what could have done to avoid being in a situation where he had to evict a Tenant. Evictions, or as we like to refer to them, Summary Proceedings, are the bane of property managers everywhere. Bringing an action against a Tenant is tedious, procedural, costly and time-consuming. The threat of eviction is usually given when all other methods fail to get a tenant to pay rent. And even then, it does not guarantee getting paid anything. In fact, the landlord pays Court fees and its attorney to bring the action and appear in Court. And either the landlord or the property manager must appear in Court, costing money and precious time. So, how can we, as property managers, avoid a summary proceeding?

A property manager is the landlord's agent, and as such has a fiduciary responsibility to protect the landlord's interests. In fact, since the property manager is contracted and paid for its services, the property manager takes on an added responsibility. After all, we are the professionals; we're entrusted to properly manage the property. When a good tenant goes bad, that's one thing. And perhaps, this situation is difficult to detect, for the reason could be economic, medical emergency, loss of key employees, etc. But when a tenant is bad from the get-go, as in not paying rent, or creating a hazardous situation for the property or other tenants, then that is an entirely different matter. We need to look at ourselves, and wonder how and why we didn't see this coming. Whether it was desperation to get the premises leased in a timely manner to maintain cash flow, or just plain laziness by not investigating the tenant prior to executing a lease, there are ways to avoid such a scenario.

It is incumbent upon the property manager to meet with brokers and their customers. While this sounds obvious, often times, managers leave the key with a neighbor, or have the broker pick up the key. Sometimes this is unavoidable, as a manager cannot be in two or three different places simultaneously. Short of that, however, the manager can save a great deal of headaches by meeting with a potential tenant. By posing simple questions to the customer, and listening to the answers, the manager can learn a great deal about the customer's business, how the customer makes a living, whether the business is well-suited for the space, and how the space will be used. This "interrogation", when handled correctly, will serve the manager well in determining whether to proceed with the customer. If the customer is downsizing from 25,000 sq.ft. to 5,000 sq.ft., is it due to attrition, outsourcing, or just plain poor business development? A property manager should find the answers to this question. If the customer was only in its current facility for seven months, what is the reason for relocating? Perhaps, he is being evicted. Or perhaps he just obtained a multi-million account, and needs to double its size. The manager has every right to ask such questions.

Assuming the initial meeting went well, and the customer is interested in the space, a Tenant Application should be completed. In addition to basic information such as address and phone numbers, the application should include business and personal references, business and personal banking information, current landlord name and number, home address, and emergency contact. This information can be quite crucial should the need arise to commence a summary proceeding. Yet, even at the early stage of making a deal, this information proves useful. Some managers insist on obtaining credit reports, at the customer's expense. Financial statements may also be required for certain types of leases.

It's common practice for a tenant to form a limited liability corporation, even if the tenant has been in business for a number of years. The LLC protects the tenant personally from obligations, and, as such, offers little protection for a landlord. A tenant can sign a lease under the LLC, but maintain its business accounts under another name, whether it's a doing-business-as, or a partnership, or even another corporation. The property manager should inquire as to whether the LLC will have a regular active banking account or whether it will act as a "dummy corporation". Various types of personal guarantees can be included in the lease agreement to protect the landlord's interest. A fairly common guarantee is known as the "good guy clause". The good guy clause states that the individual personally is responsible for the terms of the lease while the tenant is in occupancy of the premises.

Once the tenant vacates, the personal guarantee ends, provided rent is paid up to that time, the premises are returned in similar condition as to the commencement of the lease, and possession is restored to the landlord (i.e. keys returned). A straight personal guarantee provides that the individual will be responsible for the terms of the lease, until the natural termination date. Some leases combine the good guy clause with the personal guarantee, so that the individual would be personally responsible during the initial part of the term, with the good guy kicking in at a later date. This is popular when the landlord makes a substantial capital expenditure for the tenant, and wants to insure that if the tenant skips out, the landlord can go after the individual for rent.

Beyond regular rent payments, there are usually other payments that the tenant is responsible for, including common area maintenance, tax increases, insurance premiums, utilities, fire sprinkler maintenance, and others. There may also be guarantees or assignment fees that the tenant is responsible for. It's a good practice for a property manager to detail these items prior to preparing the lease. This can be done in a letter format, outlining the basic terms. Once the business terms are agreed to, then a lease can be prepared. It's also a good practice to have the prospective tenant pay a deposit prior to drafting the lease. The deposit binds the tenant to the business terms, so that if he simply changes his mind, the deposit is forfeited. Should the deal proceed, the deposit goes towards the initial rent payment and/or security deposit. Be wary of a tenant who chooses not to engage an attorney to review the lease. A lease binds both parties to a series of obligations for a period of time. Not having legal representation may signal that the tenant has no intention of abiding by the terms of the lease.

When the lease is executed by the tenant, and the checks are delivered to the property manager, it's a good idea to deposit the checks before giving possession. Possession is a legal term, and once keys are given, regardless if a lease is counter-signed, the tenant is entitled to use and enjoy the space. Many leases include a clause stating that if the initial checks are returned for insufficient funds, the lease is cancelable by the landlord. However, in practice, once keys are given, and the tenant has possession, the landlord must go through a summary proceeding to evict the tenant. So, it's important to make sure the checks clear prior to giving possession. If the tenant requires immediate occupancy, he can deliver certified or bank checks, insuring proper payment.

The property manager who is thorough and meticulous in screening potential tenants will save a lot of headaches down the road. Otherwise, he may find himself in Landlord-Tenant court wondering "What could I have done to have avoided being here today."