Q&A on Enforcement of Commercial Leases in Arizona

This year has been complicated for commercial real estate on many fronts. While Arizona has allowed most businesses to stay open, there have been plenty that could not survive the challenges of the pandemic and many others struggling to make ends meet with capacity restrictions among other things. We wanted to put together an article on some of the most common questions about enforcement of commercial leases in Arizona from landlords and tenants.

Does the CDC moratorium on evictions impact commercial leases in Arizona?

The short answer is the CDC moratorium was only for residential leases and does not restrict commercial leases. This means a commercial landlord can still terminate a lease with a commercial tenant if they have materially breached the lease agreement. While you can terminate the lease, the current circumstances in the real estate market mean that it would be wise to communicate with your tenant to find out the current status of their business and whether they are simply experiencing a short-term cash flow challenge.

What is a material breach of a commercial lease agreement in Arizona?

Arizona courts have long held that a commercial lease cannot be terminated for a trivial or immaterial breach of the lease agreement. In Foundation Dev. Corp. v. Loehmann’s Inc, the Arizona Court of Appeals found that Loehmann’s had not committed a material breach with a delay in payment for common area maintenance fees. That case also adopted the Restatement (Second) of Contracts, Section 241 as the statewide standard for determining material breaches of commercial lease agreements.

A material breach requires the injured party to be deprived of a benefit that was reasonably expected and that appropriate damages can be determined for the injured party by being deprived of that benefit. The likelihood that the party failing to perform will be able to cure those failures in a timely manner must also be considered, as well as if their failure to perform goes against reasonable standards of good faith and fair dealings.

Could a fair compromise be the best long-term solution?

While a commercial landlord might have the right to terminate a lease, it might not be the best long-term option for either party. Under the current circumstances of the pandemic, it would be wise to approach any tenants struggling to pay their full lease payment with options to help them get back on track. If your building is designed for a restaurant or bar, you are unlikely to find another tenant that will take that lease in the short term. This might be enough reason to come up with a creative solution for a current tenant, especially if they have been paying on time up until their current challenges.

The unprecedented nature of having to close a business or operate while below capacity is likely to mean that any tenant would have short term challenges in that space. This doesn’t mean that you have to simply forgive past due rent payments. You could structure any past due balance as a structured loan if they pay on time going forward or you could offer them a reduced rate for a short period of time if they get caught up before a certain point. You should work with an experienced real estate attorney to structure this offer but keeping a solid long-term tenant through a short-term cash flow challenge is typically preferable to looking for a replacement with the same type of business model.

When is a tenant lockout the best option?

If a Landlord has provided clear written notification of any breaches of the lease agreement and the tenant has not responded with necessary and adequate steps to cure those breaches in a timely manner, then a lockout can be the only option to remedy the situation and recover a past due balance. It is important that a Landlord does not approach this step without making sure they’ve provided appropriate written notifications to all necessary parties and they do not attempt to use force or disturb the peace of that business or its employees.

Unless your tenant has committed to simply handing over the business and personal property in the business, a landlord must handle this process with care, and it is advisable to wait until the business is completely empty. Wrongful lockout can put significant liability on the landlord and complicate the process substantially. If you are considering a lock out of your tenant, it is advisable to work with an experienced commercial real estate attorney to make sure the process is handled by the letter of the law in Arizona.

How can a tenant’s past due balance be cured by a landlord’s lien?

If a landlord has locked out a tenant, they can recover any past due balance owed by the tenant with a sale of the tenant’s personal property. The process begins by enforcing the Landlord’s lien on the personal property that is not exempt.

In Arizona, the landlord must make a demand for full repayment from the tenant ten days before a proposed sale of the personal property. If full payment is not made, then the landlord can proceed with the sale of the tenant’s personal property. The proceeds of the sale go towards any declared past due balance with the landlord and any additional funds go to other creditors and finally the tenant if all creditor claims are satisfied.

Contact an Experienced Arizona Real Estate Attorney

Whether you are a commercial tenant or landlord, it is important to make sure you understand your rights under Arizona law and you handle the process of enforcing a lease agreement with professionalism and care. The attorneys at MacQueen & Gottlieb have significant experience with commercial lease enforcement. Our firm can assist you in finding the best possible resolution. Contact us today at 602-533-2840 to schedule an initial consultation or make an appointment online.