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Inheriting Tenants in Default?
If you currently own or are looking to acquire a shopping center, office building or other commercial property, these transactions may bring with them some time consuming surprises and costly legal fees if existing tenants owe unpaid rent. An Illinois Appellate Court recently addressed this issue in 1002 E. 87th St. LLC v. Midway Broadcasting Corp., 2018 IL App (1st) 171691 (June 5, 2018), and ruled in favor of a commercial tenant after a new owner acquired a commercial building and attempted to collect accrued unpaid rent owed to the previous landlord. In affirming the lower court's ruling, the court held that a subsequent landlord did not have standing to sue for unpaid rent that had accrued prior to the conveyance and explained that such standing is a right remaining with the original landlord to whom the unpaid rent is owed. Additionally, unlike other debt obligations, the court differentiated rent accrual as a chose in action that is not assignable. The decision raises questions about the strength of assignment and non-waiver lease provisions and also rights of succeeding landlords. Further, it raises concerns about the applicability of certain non-waiver lease provisions, in particular, the assignability of lease rights and obligations. Landlords, tenants, and lenders alike are now questioning whether this decision may facilitate tenants' evasion of contractual duties upon acquisition or disposition of real estate.
Background
The court's decision stems from a dispute between 1002 E. 87th Street LLC (87th Street), the commercial landlord, and Midway Broadcasting Corporation (Midway), the commercial tenant, along with Midway's guarantors. 87th Street had recently purchased the property that Midway was leasing and demanded full payment for past due rent Midway owed to the previous landlord. 87th Street claimed a right to that unpaid rent by virtue of an assignment of the lease from 87th Street's predecessor. When Midway did not comply with the request, 87th Street began eviction proceedings.
87th Street first argued that the original lease gave 87th Street standing to sue. Its second argument was that the assignment provisions transferred to it the right to receive accrued rent from the previous owner. In response, Midway argued that 87th Street did not have standing to bring suit for the unpaid rent because 87th Street was not the owner of the property at the time when the past due rent accrued. Midway also argued that the assignment provision should be held invalid because the previous landlord could not have intended to assign its rights to collect unpaid rent to the succeeding landlord.
Standing
In order to have standing in a case, the plaintiff must have an interest in the action and the potential outcome. Unifund CCR Partners v. Shah, 407 Ill. App. 3d 737 (2011). Generally, a landlord has standing to sue for unpaid rent. Dasenbrock v. Interstate Restaurant Corp., 7 Ill. App. 3d at 302 (Sept. 1, 1972). It also remains undisputed that the conveyance of property includes the conveyance of a lease along with the rights to receive rent. However, the new landlord does not obtain rights to pursue past rent that was due prior to the landlord's owning the property. 87th Street pointed to a provision in the lease which stated that “[n]o failure of landlord to exercise any power *** or to insist upon strict compliance *** and no custom or practice of the parties *** shall constitute a waiver of Landlord's right to demand exact compliance with the terms ***.” 87th Street made the point that, as landlord, it should be able to enforce the lease through this non-waiver clause regardless of the previous landlord's inaction to collect the unpaid rent.
Despite this clause in the lease, the lower court, in a decision affirmed by the appellate court, ruled in Midway's (tenant's) favor, stating that 87th Street only has standing to sue for delinquent rent owed to it that has accrued after acquisition of the property by 87th Street. The court emphasized that a demand for compliance with the lease does not create a new right to collect rent due before the landlord seeking the back rent was the owner of the property. The court further noted there are presently no cases which state that a new owner can use a non-waiver clause to enforce a tenant's obligations to a previous owner. In short, the ruling in the case meant that 87th Street has no standing to sue for unpaid rent under the non-waiver provision in the lease.
Assignment
87th Street next pointed for its argument to an assignment of lease provision, which stated that the“[t]enant agrees to attorn to such new owner.” Additionally, the lease provided that all liability and obligations “shall be binding upon the new owner.”
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