Remedies for commercial landlords when tenants go dark

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All too frequently, commercial landlords face the question of how to deal with a tenant that falls behind on its rent payments and,

eventually, “goes dark,” walking away from its lease. Often such tenants leave furniture, fixtures and equipment (not to mention a lot of other junk) cluttering up the landlord’s space. What’s a landlord to do?  Can it throw away the tenant’s personal property?  Can it sell these things at auction?  And what about the landlord’s obligations to other creditors who might have a right to this personal property?

In many circumstances, a commercial landlord is empowered to sell a tenant’s abandoned property to recoup back rent; however, the procedures for this remedy vary significantly depending on a number of factors.  Importantly, a landlord’s rights depend heavily on whether the leased premises are in North or South Carolina. Because so many landlords and developers in Charlotte maintain premises in both states, a brief discussion of the laws applicable to both states is provided below.

South Carolina

By statute, commercial landlords in South Carolina can avail themselves of a little known remedy under South Carolina law called “distress and distraint.”  This remedy, which is also sometimes referred to as a “landlord’s lien,” is a centuries-old remedy, but it remains a viable tool in the commercial landlord’s toolbox.

By following appropriate procedures, distress and distraint allows the landlord to sell the tenant’s property remaining in the premises, to offset any back rent obligations. This process can be initiated before a South Carolina magistrate in connection with an ordinary eviction. Although the procedure involves several more steps than a routine eviction, the same basic principles apply: the tenant is given notice and an opportunity to contest the landlord’s right to the back rent claimed, and if the tenant fails to appear, the landlord prevails.

In the case of abandoned premises, the tenant rarely mounts a defense to a distress and distraint action, and a constable is dispatched to seek to collect the amounts owed by the tenant.  If the tenant refuses payment (or, as is more likely the case, cannot be located), then the constable will inventory the property that remains in the premises. This inventory is publicized for sale, and after a brief notice period, the constable will hold an auction. Any proceeds from this sale are paid to the landlord.

Of course, the abandoned premises often contain property that is subject to the security interests and lien rights of third party creditors. Occasionally, the premises will even contain property owned by third parties.  Fortunately for commercial landlords in South Carolina, the applicable procedures provide a way to address the rights of these third parties (by providing adequate notice), which does not prevent the property being auctioned off by the constable (although the property would remain subject to any senior security interests).

Thus, the South Carolina statutes governing the commercial landlord-tenant relationship provide an often overlooked means to dispose of abandoned property that is left inside abandoned premises, while simultaneously allowing the landlord to recover back rent.

North Carolina

Similar to South Carolina, the North Carolina statutes provide a limited landlord’s lien, but it is less user-friendly and substantially weaker than its South Carolina counterpart.

In North Carolina, the statutory lien applies only to commercial leases and covers all personal property remaining in the premises. This lien arises only after the tenant vacates (either voluntarily or after summary ejectment proceedings) and at least 21 days have passed since the expiration of the last paid rental period.  The lien amount is equal to the amount of the landlord’s claim for damages (such as unpaid rent) against the tenant.  The statutory lien may be enforced by public sale, but like South Carolina, the property sold remains subject to any senior security interests.  Notice of the public sale must be sent to the tenant and any secured creditor whose identity can be reasonably ascertained.  The sale must be advertised and conducted in strict compliance with the statutory requirements to avoid giving rise to claims by the tenant.

If a North Carolina landlord does not go through the summary ejectment process, it must file a separate lawsuit to enforce its lien and do the work of moving and storing the property and arranging for the sale itself.  If, on the other hand, the landlord does elect to use the summary ejectment process, the sheriff will move and store the property and charge the landlord moving and storage fees. In addition, under this approach, the tenant can recover his property from the sheriff by simply requesting it within seven days from the date the sheriff executes on the writ of possession.  Practically speaking, the expected payoff simply may not be worth the North Carolina landlord’s time and expense in enforcing the statutory lien.

Thus, a major difference between the North Carolina and South Carolina statutory landlord’s lien is the degree of assistance a landlord can expect from the courts in enforcing its lien and conducting a public sale.  In South Carolina, a distress and distraint action allows a landlord to invoke the assistance of the magistrate and constable, but North Carolina is largely do-it-yourself.  That difference aside, both states’ procedures allow a landlord to limit its potential liability to the tenant’s creditors and other third parties when selling property found in the premises.

Accordingly, North Carolina’s statutory remedies for commercial landlords are less helpful than South Carolina’s.  Because of this, North Carolina landlords should seek to include adequate protections in their commercial lease agreements, allowing for seizure, storage and sale of the property of any defaulting tenant.  Of course, South Carolina landlords should also seek to include such provisions in their commercial leases, but the South Carolina statutes provide a better “backstop” if a tenant balks at such terms.