Cashing In

The small manhattan co-op’s commercial tenant is chronically late with the monthly rent. Although the lease states that the rent is due before the first of each month, the money typically comes in on the 20th or 21st. The lease between the cooperative and the subtenant does not provide for a late fee – it was a sweetheart deal negotiated with the sponsor – so how does the co-op put some teeth in its demands?

Good question. Want to hear a novel answer? Hit him for chronic late payments, which falls under the “objectionable conduct” portion of a proprietary lease.

“Court decisions have confirmed the right of landlords to demand prompt payment in accordance with the lease terms and have confirmed that chronic late payment is not a curable default,” says attorney James Samson, a partner at Samson Fink & Dubow.

The key to success is a paper trail. The first time the tenant is late, you must jump on him with a letter indicating that this behavior is unacceptable.

“Every time the tenant fails to pay by the fifth day in the month, a written notice documenting the default must be sent,” the attorney notes. “If payment is not received by the tenth day of the month, start an eviction. For rent-controlled or rent-stabilized residential tenants the process is slow but that should not deter the board. Eviction notices have a wonderful salutary effect on most rental tenants. For commercial tenants, the termination threat is enough to cause the tenants to pay on time to avoid losing a valuable retail space at below-market rents.”

If the lease provides for late payment penalties or legal fees, enforce these provisions. Do not accept the arrears until the additional fees are paid.

If the tenant does not change his conduct to the terms of the lease after repeated written letters and multiple default notices and legal proceedings, terminate the lease, start a separate action for “breach of the obligation to pay in a timely manner.”

“Once a default proceeding of this type is started, do not then accept a payment,” warns Samson. “Lock out your managing agent’s lock box account. Acceptance of payment can be fatal to your attempt to terminate the lease. Acceptance of payment may be deemed a waiver of the default.”

Some attorneys say the renter can then just get a so-called “Yellowstone injunction,” which is a court proceeding initiated by the tenant when the landlord seeks to end the lease because of a claimed default by the tenant. A Yellowstone injunction asks the court to maintain the status quo. Under a Yellowstone, the landlord is prevented from terminating and the tenant is given the right to cure the alleged default without the notice to cure expiring. If there were no injunction, the notice to cure would expire before the judge could determine whether the tenant was in default or not.

But Samson insists that “a Yellowstone injunction is not applicable here” – it is the timeliness not the payment that is the crux of the matter. Unlike arrears, simply paying the back rent does not cure a chronic late condition. “The obligation of paying in a timely fashion is different from the obligation of paying,” Samson explains. “He may have paid, but he is still guilty of paying late; and if it’s a chronic condition, you can get him.”

Does this strategy work? Samson cites a number of cases where a lease was terminated for chronic arrears and points to a recent Nassau County court decision against a store owner. He had been served 27 notices of default; each time he was served, he would immediately pay the arrears. But then he would again pay late the next month.

Samson himself has already used the strategy effectively as a club to get chronic residential late-payers to pay on time. His final word of advice: “Read the lease! Find out when the rent is actually due and what the default provisions are. Then, implement a plan-based upon the lease terms and any applicable law.”