The lock-out of a commercial tenant is one of the most powerful remedies available to any party in a real estate transaction. On the other hand, it is a remedy which can lead to catastrophic liability if it is misused by a landlord. The lock-out remedy is available to most commercial landlords under Arizona law. Most lease forms expressly allow the landlord to re-enter and seize possession of the premises. Even absent such language in a lease, as a general rule, the landlord can still lock-out a tenant unless the lease expressly prohibits such action. Also as a general rule, the landlord is allowed to seize personal property belonging to the tenant to hold (and sell) for payment of the rent. This article will discuss concerns of using a lock-out from the landlord’s perspective. Obviously, this article is limited to commercial property because under Arizona law, a landlord may never lawfully perform a lock-out against property covered by the Arizona Residential Landlord & Tenant Act.
When Can the Landlord Lock-Out a Tenant?
Assuming that the lease does not prohibit a lock-out, the landlord may re-take the premises upon any material breach of the lease by the tenant or if the tenant is in arrears on rent for five days. It is absolutely crucial that the landlord not attempt to lock-out the tenant for a breach which may be deemed by a court to be “trivial” (such as a dispute over a CAM charge which is small in comparison to the tenant’s other rental obligations). If the landlord desires to use a lock-out for any reason other than the tenant’s failure to timely pay its monthly rental payments, then the landlord should seek the advice of legal counsel before proceeding with a lock-out. When in doubt, file a forcible detainer action and do not lock the tenant out of the premises.
What Is a Landlord’s Lien?
Under Arizona law, a commercial landlord has the right to enforce a statutory “landlord’s lien” against the personal property of the tenant, subtenant or assignee which is located on the premises to the extent necessary to secure payment of the rent. The landlord has no right to seize property belonging to persons other than the tenant, a subtenant, or an assignee of the tenant. A landlord who performs a lock-out may find it difficult to accurately determine which personal property actually belongs to the tenant.
A lock-out is usually the only practical method for the landlord to seize the tenant’s personal property. Arizona law permits the landlord to sell the tenant’s property and apply the proceeds toward the rent. If the tenant does not pay the rent within 60 days after seizure of the property, the landlord may sell the personal property at a public auction in the manner provided by statute, which requires notice to the tenant, and sometimes, publication. Because the statutory procedure for the sale process is quite ambiguous, the landlord should consider bringing a judicial action to foreclose on the landlord’s lien, or better yet, if the landlord has already obtained a judgment for rent, the landlord could require the sheriff to execute against the tenant’s personal property to satisfy the judgment.
Priority of the Landlord’s Lien
Generally, a landlord’s lien against the tenant’s personal property relates back to the later of (i) the commencement of the tenancy, or (ii) when the tenant first brings the property onto the premises. Therefore, a landlord’s lien will not have priority against another creditor’s security interest in the tenant’s personal property if that other creditor perfected its lien prior to the time the tenant brought that property onto the premises.
To further complicate matters, the tenant may be able to void the landlord’s lien by filing bankruptcy, unless such lien is based upon some contractual agreement rather than merely the landlord’s statutory right under Arizona law. For these reasons, among others, a landlord is well-advised to require the tenant to execute a separate U.C.C. financing statement granting the landlord a lien for non-payment of rent (and other charges due under the lease) against the tenant’s personal property, including the tenant’s equipment, inventory and accounts receivable. The landlord should then record the financing statement with the Arizona Secretary of State. By obtaining such an agreement in connection with the lease, the landlord should be able to later foreclose on the personal property easier and quicker, and will not lose the priority of its security interest if the tenant files bankruptcy or physically removes the property from the premises before the lock-out.
How to Perform a Lock-out
A landlord cannot exercise its right of lock-out while the tenant is physically inside the premises, or if the landlord has to “breach the peace” to perform the lock-out. Thus, a tenant may avoid a lock-out simply by keeping a person in the premises at all times. In such case, the landlord must file a forcible detainer lawsuit to regain possession. Of course, this may give the tenant an opportunity to remove personal property or to file bankruptcy (which will certainly cause more delays in regaining possession), however, the landlord really has no other choice in that situation.
If appropriate, the landlord should contact the local police prior to the lock-out. A landlord should never perform a lock-out without an adequate number of witnesses in addition to the locksmith, to observe the condition of the premises at the time of the lock-out (and especially to observe the contents inside the premises).
Also, as quickly as possible, the landlord should make a complete itemization of all of the property located in the premises. The landlord should also take photographs and/or make a videotape of each room (it is best to do this at the same time of the lock-out). It is not unusual for a tenant or its employees to claim that property is missing or stolen. It would also be wise for the landlord to make sure that it is covered by insurance against any loss or claim relating to such personal property.
A landlord should post a notice on all of the outside doors, notifying the tenant and others of the lock-out. The notice should not slander or belittle the tenant (as it may be read by persons doing business with the tenant). The language of the notice will vary depending upon the circumstances.
If the landlord desires to hold the tenant liable for future rent, the landlord should be careful to avoid using language in this notice or any other notice that could be interpreted as “terminating” the lease.
Things to Consider Before Using a Lock-Out
A lock-out is an effective but drastic remedy and should be used cautiously, and usually only as a last resort. A lock-out could destroy the tenant’s business, therefore, the landlord’s potential liability for a wrongful lock-out is enormous. The landlord should never perform a lock-out where the tenant may have a valid defense to its breach of the lease. Also, the landlord should be absolutely sure that (i) any default notices required under the lease (or otherwise) have been properly delivered, (ii) all grace periods under the lease have expired, (iii) the landlord has not somehow waived its right to strictly enforce its remedies (e.g., by the landlord previously accepting late payments without reinstating “time is of the essence”), and (iv) that the lock-out can be accomplished without breaching the peace.
Ultimately, the landlord should consider whether or not the lock-out will help achieve the landlord’s goals (whether that goal is obtaining past due rent or simply getting rid of the tenant). For example, in many cases the lock-out will make it more difficult (or impossible) for the tenant to earn income to pay the rent. But on the other hand, by performing a lock-out, the landlord would seem to have made the payment of rent the highest priority of the tenant. Finally, the landlord must also consider whether or not it is really prepared to assume the responsibility of taking control of all of the personal property in the premises, and to possibly litigate issues concerning the tenant’s default as well as the priority of the landlord’s lien against other creditors.