Landlord-Tenant – Creditors Rights 101

Will Landlords’ Casualty Paragraphs be a hot issue for Second Avenue businesses? (It looks like they already are.)

The real estate market has been so hot in Nashville over the past 6-7 years that, any time an old building in an in-demand area burns down, I’ve wondered if the culprit was a crafty real estate developer looking to build a high-rise condo. (Kidding, of course.)

But, as matter of law, a disaster can provide a landlord a way out of a long-term lease (whether they’re happy to be out or not), where the premises are fully destroyed.

I thought of this today, when reading the Nashville Post article Old Spaghetti Factory loses lease after 40-year run. Per local news, after total destruction of the building on Second Avenue, the landlord “will be terminating the lease agreement, although the restaurant reportedly has 16 years remaining on that lease.” The article notes that the restaurant is offering to spend more than $1 million of its own money to help rehab the space.

Seems unfair, right? It may be, but it’s probably allowed under the Lease.

Most commercial leases have a “Casualty” section, which dictates what happens when rental premises are totally destroyed, whether by fire, earthquake, or some other huge event.

Those provisions generally require the Landlord to restore the premises to substantially the condition that existed prior to the disaster. If the Landlord does that, then the Tenant is most likely stuck in the Lease. (Yes, even if losing the use its rented space during the repair period kills the Tenant’s business.)

Having said that, the provisions also generally give the Landlord an “out,” if the destruction is so total that the premises can’t easily be restored. In making this determination, a number of factors are considered, including if the cost to restore the building exceeds the ultimate value (and/or insurance money), if the Landlord’s lenders scoop up all the insurance money, the lease is near the end of the term, or if would take too long to restore (180 days from the event is a common measure).

In most cases, the landlord is motivated to repair or rebuild quickly, hoping to get the tenant back in the space–and back paying rent–as soon as possible.

There is no indication in the story whether the landlord here is relying on a similar provision or what types of other issues exist.

It may be that the cost to restore this historic building is so high that the landlord can’t (or isn’t financially ready to) quickly go into rebuilding mode. If the lease uses a typical 180 day requirement, the owner may know that there’s no way to do it in that time with all the special challenges presented by this terrorist event and during a global pandemic.

A skeptic would wonder if this owner wants to renovate a building to a newer, better use (like condos, offices, etc.) or may want to get rid of a long term–possibly below market–lease.

Leases are just like any other contracts. The plain text of their terms control. But, casualty provisions are a rarely negotiated point. When I prepare leases for commercial real estate, it’s often a few paragraphs at the end that I review quickly and move on.

But, when they do apply, it’s a big deal. Just like COVID got every Nashville commercial real estate attorney talking about force majeure, maybe this situation will get us negotiating casualty paragraphs.

In the end, though, yes, this is probably allowed under the lease.

New Court of Appeals opinion affirms landlord’s duty to mitigate damages on Tennessee leases

In a post from last month, I mentioned that, when a commercial tenant defaults and leaves a leased property, the landlord is faced with a hard decision: File the lawsuit for unpaid rent now, or do you wait 6-9 months until a replacement tenant can be found?

One thing we know for sure: A landlord can’t just file a lawsuit for all the rent due for the remainder of the term. Instead, the landlord has a duty to mitigate its losses, which means–in this situation–to try to find a replacement tenant.

Last week, the Tennessee Court of Appeals reaffirmed this duty in Loans YES v. Kroger Limited Partnership I, et. al. No. M201901506-COAR3CV, 2020 WL 6386884 (Tenn. Ct. App. Oct. 30, 2020).

As a quick summary, the Court makes the following points:

After a judgment for possession, does res judicata prevent a landlord from taking a money judgment?

I represent a lot of commercial landlords, and, when there’s a payment default and they want to evict a tenant, there’s an early strategy question that they all face: (1) Do we sue for possession only; or (2) Do we sue for money and unpaid rent (through the date of the court hearing)?

It’s a nuanced question. Most landlords choose # 2, especially since detainer lawsuits are filed in General Sessions Court and, due to a little-known exception, you can take a huge money judgment in “small” claims court.

But, they’ll generally say, what about the unpaid rent for time periods after we get a judgment and evict them from the property? That’s a second lawsuit. Isn’t there a rule against two lawsuits on the same issues?

Yes, it’s called res judicata, which we talked about last year.

So, can you sue a tenant two times on the same lease agreement?

Davidson County General Sessions Caps Dockets at 25 Cases: This is a Big Problem

Last week, the Davidson County General Sessions Court entered an Administrative Order that limited the number of cases that can be set on the civil dockets in Courtrooms 1A & 1B, with a cap of 25 cases per day (effective October 5, 2020).

That sounds like a lot of cases. It is not.

A typical General Sessions civil docket might have 50 to 100 cases on the docket. Davidson County has civil dockets every day of the week.

By my math, this represents a minimum 75% cut in capacity.

Granted, when I first heard about the 25 case limit, it didn’t sound like too much of a problem, since I don’t have a high volume consumer or residential eviction practice. The high volume lawyers who routinely have 25 of their own cases on each docket would be the ones with the problem, right?

Then, I got a call from a commercial landlord whose tenant hasn’t paid rent since March and has “gone dark.” The landlord asked me to get a judgment for possession as soon as possible.

Spoiler-alert: The 25 case limit is a problem.

How your registered agent’s address could get you sued in their county.

Earlier this week, a lawsuit was filed in Davidson County Chancery Court by a landlord to collect $130,697.44 in unpaid rent from a Romano’s Macaroni Grill located in Rutherford County. There was no allegation that any of the facts of the case occurred in Davidson County or that the parties contractually agreed that the venue for any disputes would be in Nashville.

Should this lawsuit be dismissed for improper venue, where the business, all operations, and the leased premises were all in Rutherford County?

Not necessarily. Here’s why: All of the Defendants use corporate registered agents whose offices are based in Davidson County, and that subjects them to venue in Davidson County.

When analyzing venue for causes of action under Tenn. Code Ann. § 20-4-101(a), a defendant can be “found” in “any county wherein it has an office for the furtherance of its business activities.”

Tennessee courts have said that a registered agent’s address is an office for the furtherance of the defendant’s business activities, and it doesn’t matter that the defendant doesn’t actually operate a business out of that address or doesn’t otherwise have any other connection to that county. See Fed. Exp. v. The Am. Bicycle Grp., LLC, No. E200701483COAR9CV, 2008 WL 565687, at *3 (Tenn. Ct. App. Mar. 4, 2008).

Maybe this isn’t a big deal–most of these corporate agents are located in Davidson County, and Nashville uniformly has very strong courts and judges.

But, Tennessee is a very, very long state. It’s definitely something to keep in mind when you’re a company in Greenville or Memphis, and you’re selecting a registered agent.

The Palm and the Nashville Hilton’s litigation over unpaid COVID rent has touched almost every trial court in Davidson County.

As you all know, The Palm restaurant in Nashville sued the Nashville Hilton in July. At the time, The Palm was four months in arrears in its payment of rent.

But, despite being in payment default, The Palm went on the offensive and premptively filed the first lawsuit, arguing that the landlord’s (i.e. the Nashville Hilton) own shut-down in response to COVID was a breach that excused The Palm’s payment of its rent.

At the time, I marveled at the audacity of the tenant in making the first move. Today, however, I’ve discovered that this dispute has gone absolutely bonkers, and it’s has been (or is being) litigated in nearly every trial court in Davidson County.

First, there was the Chancery Court lawsuit filed by The Palm on July 9, 2020.

Then, after the Hilton declared The Palm to be in breach on July 13, 2020, the Hilton filed a Davidson County General Sessions evictions lawsuit on July 14, 2020.

In response, The Palm filed a Notice of Removal of the detainer action to the District Court for the Middle District of Tennessee on August 7, 2020. This prompted the Hilton to file a notice of voluntary dismissal on August 10, 2020.

Then, the Hilton filed a second detainer action in General Sessions Court on August 13, 2020. On August 26, 2020, The Palm filed an Application for Removal of the matter to Davidson County Circuit Court, which was granted.

So, what courts did they miss? Criminal Court? Bankruptcy? Environmental Court?

This dispute involves two mega-law firms, so it’s fun to see big-time lawyers fighting over eviction issues in small claims court.

Still, though, I have to wonder if the Hilton could have opposed The Palm’s request to remove the matter to Circuit Court, which was–possibly–an attempt to get the matter moved to the slower-paced Circuit Court, but without having to post the detainer possessory bond pursuant to Tenn. Code Ann. § 29-18-130(b)(2), which requires a tenant that loses in sessions court to post one year’s worth of rent in order to remain in possession of the property.

Sessions Judges don’t like to waste valuable docket time on complex commercial matters, so they are generally happy to allow complicated, discovery-heavy trials to be removed to Circuit Court pursuant to Tenn. Code Ann. § 16-15-732.

But, at the same time, it’s a move that Sessions judges see all the time, and the Judges will sometimes ask tenant’s counsel “Is the rent paid current?” and, depending on the answer, grant a judgment for possession, and tell the tenant’s counsel to appeal and sort it out in Circuit Court.

I don’t want to ruin the developing story, so I will remain quiet about the Landlord’s options in Circuit Court to force payment of rent. But they have a few.

Whatever direction this goes, in the age of COVID, this qualifies as entertainment (for law nerds).

The Palm sues the Nashville Hilton over losses related to COVID

Late Thursday, the Palm Restaurant sued the Nashville Hilton, arguing it should not have to pay full rent during the pandemic and especially not for time periods when the Hilton hotel itself wasn’t open.

It’s an interesting argument, about issues that will be litigated throughout the country over the next few years.

Generally, in Nashville (and everywhere else), closures related to COVID-19 haven’t given tenants much factual or legal basis for avoid rent payments. That’s because most commercial leases–more than anything–make payment of rent such a supreme duty under the lease that anything short of total physical destruction of the premises doesn’t excuse payment.

The Palm’s Lease at the Hilton is no different.

The Complaint alleges that “[t]he Lease provides for a rent abatement in the event that the Premises is damaged as a result of casualty,” citing Section 23.1 of the Lease. Specifically, that provision requires that the Property “be damaged by fire or other casualty” and has the typical murky text that you’d expect in a landlord-drafted lease that assumes the premises were physically damaged.

(Side note: The Lease also has a “Force Majeure” provision that is so iron-clad that The Palm doesn’t even cite it in the Complaint.)

As in so many of these cases, the million dollar question is: Does the COVID-19 virus cause “physical damage”?

The Palm takes a novel approach, in part, arguing that the Hilton’s voluntary shut-down caused the losses at the restaurant, since The Palms’ decision to initially lease the space was so heavily dependent on the existence of a thriving Hilton hotel.

“Pursuant to the Lease, the Hilton was and is required to operate a first-class business hotel…[and] provide the Palm with access to Common Areas…” As part of the Lease, the Palm’s dependence on the Hilton is evidenced by the facts that: Palm allowed Hilton guests to charge meals to their rooms; the Hilton heavily advertised the Palm in the hotel and in the rooms; and the Palm agreed to identify the Hilton in its own marketing.

Then, COVID hit. On March 12, the SEC tournament was shut down. On March 20, Metro shut down in-person dining. On March 22, the State of Tennessee took similar action. In response, on March 22, the Palm closed to in-house dining.

But, the lawsuit alleges, “[a]t no point in time since March 1, 2020 has the Hilton been forced to cease operations due to a state or local governmental order. … Despite the fact that it was under no obligation to do so, the Hilton shut down on March 24, 2020. …Upon information and belief, despite its management company having cash on hand necessary to support ongoing operations, the Hilton remained closed during April, May, and part of June.”

The Palm re-opened to 50% capacity on May 11 (as allowed by local and state law), but the Hilton didn’t re-open until June 8, 2020. The Palm argues that it was denied the benefit of foot traffic from the Hilton, marketing and promotional benefits, and access to Common Areas.

When the lawsuit was filed, the Palm had not paid rent for April, May, June, or July 2020 (including CAM charges for space at the Hilton). The Hilton has refused to discount any of that rent, despite the Palm’s requests for a discount.

This lawsuit asks the Davidson Chancery County Chancery Court to provide “declaratory relief” and declare that The Palm is not in default and is not required to pay April, May, June, and July 2020 rent (as well as get back some of the rent paid in March).

This case raises nearly all of the issues the commercial landlord-tenant bar will be fighting in the near future. Plus, this one has the added awkwardness of two inter-dependent, adjacent businesses being involved in direct litigation.

This may be the first notable COVID-related landlord tenant lawsuit filed in Nashville, and it’ll be one to watch over the next few weeks, months, and, gulp, year.

TL;DR: The lawsuit asks whether the Hilton’s decision to shut its own operations down creates a factual or legal defense to some or all of the amounts due from The Palm under the Lease.

New Chancery lawsuit spotlights struggles for Airbnb companies in Nashville

As you’d expect, COVID-19 and the related travel restrictions have had a catastrophic impact on the travel and hospitality industry. In Nashville, rental income for once wildly-lucrative Airbnb properties evaporated in an instant.

Consider Stay Alfred, a hospitality start-up based in Spokane, Washington that had 2,500 units in 33 cities, which closed its doors in April and is now subject to a receivership action.

In Nashville (and in Memphis), Stay Alfred had a number of buildings where it controlled nearly all the units, such as the shiny 505 Tower in downtown Nashville, as well as other prime locations in both cities. By April, Stay Alfred had left those buildings entirely.

Now, it appears that Sonder USA, Inc. may be headed toward a similar fate. Sonder manages over 12,000 rental units in 28 cities, generally for short and medium term rentals. In its most recent efforts to obtain private equity, Sonder provided a valuation of $1.3 billion.

Yesterday, in Davidson County Chancery Court, a Georgia developer filed a breach of contract lawsuit against Sonder over its failure to take possession of 101 units in a residential building in Nashville’s Hillsboro Village, located at 1620 21st Avenue South.

In this deal, the Plaintiff-developer agreed to purchase the 101 units in December 2019, many of which were already rented out to long term tenants. As those existing tenants either left or were forced out, the developer would then lease those units to Sonder, which Sonder would then manage as short term rentals. Under the Lease, Sonder would pay the developer annual rent of “$2,641,387.32.”

What could go wrong in Nashville real estate in 2020, right?

Per the Complaint, in April 2020, when Sonder was scheduled to take possession of the first batch of units, Sonder immediately went into default. Sonder claimed defenses of force majeure and impossibility of performance and frustration of purpose.

When Sonder failed to take possession or pay, Plaintiff filed this action, seeking $2 million in current and future rents. This is going to be an interesting case, since the parties seemed to go into this venture, jointly, in December. If so, then why does all of the risk shift to the lessor-defendant? Does the nature of the business relationship mean that Plaintiff and Defendant both should bear the risks?

I live in Hillsboro Village, so this one is a bit personal for me. This is my neighborhood, which is a bustling area of families, Vanderbilt workers (school and hospital), and college kids. It’s a residential community, not a vacation or party destination.

Housing is scarce. And getting more and more expensive.

As somebody who has lived in this neighborhood for over ten years, it’s irritating that these out-of-town companies created a business model to convert limited, scarce housing assets into STR properties by forcing residents out of their leases and out of the building.

Think about if you’re a grad student or doctor at Vandy, and you love your apartment. It’s right there next to your school/work, next to Luke Bryan’s steakhouse (which really is delightful), and next to Dragon Park. Sounds great, right? But, when you get to month 10-11 of your lease, you get a notice from the new owner that they want you out; the entire building is converting to vacation rentals.

I’m sure the developer would say that the “market dictates the highest and best use of property.” Let’s hope our new economy sends its own message to these opportunistic developers who want to convert our residential space into a hotel / vacation rentals. One that our local government is clearly afraid to send.

Maybe an empty building where all the long term tenants were forced out will send that message.

For what it’s worth, that message may have been received. As of the time of this posting, a great number of the units in Village 21 are now available for long term leases.

Detainer Warrants: When can I get them Out?

Tennessee’s General Sessions Courts provide the fastest justice in the state. There, a plaintiff can file a lawsuit and, potentially, have a judgment in as early as 2-3 weeks.

No plaintiffs, however, are as eager to get to court than landlords. A common question I get is: What is the quickest court date a landlord can get?

The answer is in Tenn. Code Ann. § 29-18-117, which provides: “The officer serving the warrant shall notify the defendant of the time and place of trial, the time not to be less than six (6) days from the date of service.”

So, in order to have a valid eviction lawsuit, you have to provide–at a minimum–six days notice from the date of service of process.

Note: This timeline is for commercial property evictions. Residential evictions are governed by the Uniform Residential Landlord and Tenant Act , and that is it’s own blog post.

Tennessee Detainer Actions: Not Just for Tenants and Landlords

What if you own real property, but someone else has possession of the property, and you want them gone? You evict them. But, as you’ll see under Tennessee statutes, they don’t call it an “eviction” lawsuit; they call it a “detainer” lawsuit.

The statute in Tennessee is Tenn. Code Ann. § 29-18-104, titled “Unlawful Detainer.” That statute provides:

“Unlawful detainer is where the defendant enters by contract, either as tenant or as assignee of a tenant, or as personal representative of a tenant, or as subtenant, or by collusion with a tenant, and, in either case, willfully and without force, holds over the possession from the landlord, or the assignee of the remainder or reversion.”

These detainer actions are generally brought in general sessions court, where, as I’ve noted before, you can exceed the $25,000 jurisdictional limit. Also, even though general sessions appeals are very easy on most matters, they are complicated and expensive in general sessions court.

So, if you’re a landlord, you’re probably reading that statute and thinking it’s exactly what you need, right? But, what about if you’ve purchased the property, either by a typical sale or a foreclosure? In that case, you’re not a landlord, and the defendant isn’t entering by contract (i.e. lease). Does a different statute apply?

No, said the Tennessee Court of Appeals in Federal National Mortgage Association v. Danny O. Daniels, W2015-00999-COA-R3-CV (Dec. 21, 2015). There, the Court noted that the Deed of Trust will create “a landlord/tenant relationship … between the foreclosure sale purchaser and the mortgagor in possession of the property,” and, as a result, “constructive possession is conferred on the foreclosure sale purchaser upon the passing of title; that constructive possession provides the basis for maintaining the unlawful detainer.”

In such a case, a plaintiff must prove: (1) its constructive possession of the property (i.e. ownership of the property); and (2) its loss of possession by the other party’s act of unlawful detainer.

In short, the detainer statutes in Tennessee aren’t well crafted. Sometimes they reference landlords and tenants; sometimes they don’t. Courts have a tendency to construe statutes as written and to assume that the legislature means what it says when it uses specific words. That’s bad news for the foreclosure sale purchaser, who isn’t a landlord and who isn’t dealing with a tenant.

Here, however, it’s clear that the legislature should have proofread the statutes a few more times. Fortunately, Tennessee courts have applied the statutes in a broader sense.