Landlord Fails To Properly Terminate Lease, Violating Automatic Stay
Written by: Alan Nochumson
When a landlord enters into a lease with a tenant, the lease will generally grant the landlord the power to terminate the lease and evict the tenant from the leased premises if the rent due under the lease is not paid within the specified time period provided in the lease. In order to exercise this power, however, the landlord must comply with the terms of the lease and any relevant law specifying the required procedure for termination and eviction.
A recent decision by the U.S. Bankruptcy Court for the Eastern District of Pennsylvania, In re Ice Treats One Inc., illustrates why a landlord must strictly adhere to the terms of a lease, and to the laws of the governing jurisdiction, prior to initiating eviction proceedings.
In Ice Treats, related entities entered into separate leases to rent properties from the landlord for the purpose of operating Rita’s Water Ice stores located in Philadelphia.
Under each of the leases, the tenant is responsible for paying rent on the first day of each month, and, if the tenant fails to pay rent within five days after receiving written notice from the landlord, the landlord may terminate the lease but only upon 10 days’ written notice to the tenant.
After the tenant failed to make timely payment for rent under each of the leases, the landlord sent letters of default to the tenant, stating that the tenant would be in default under the terms of the leases unless the landlord received payment, in full, of the rent within 10 days from the date of the letters, the opinion said.
According to the opinion, two days later, after the letters of default were mailed to the tenant, the landlord filed in the Philadelphia Municipal Court separate landlord-tenant complaints against the tenant in order to evict the tenant from each of the leased premises. In the complaints, the landlord represented to the court that, on the day of the court filing, the landlord had provided the tenant with a “Notice to Quit,” or, in other words, the landlord advised the tenant, in writing, to vacate from each of the leased premises in accordance with the Landlord and Tenant Act of 1951, the opinion said.
After the 10-day period in the letters of default had expired, the landlord sent letters of termination to the tenant, explaining the landlord’s decision to terminate each of the leases because the tenant was in default of the terms of the leases by failing to make the payment of rent as demanded by the landlord in the previous letters of default, the opinion said.
The letters of termination also included a “Notice to Quit,” whereby the landlord demanded that the tenant vacate from each of the leased premises 15 days after the date of the letters of termination, the opinion said.
When the tenant failed to appear at the municipal court hearing on the complaints, the court entered a default judgment in favor of the landlord and against the tenant, the opinion said.
After the landlord filed a praecipe for a writ of possession, an alias writ of possession was issued and served.
The landlord ultimately took physical possession of each of the leased premises pursuant to the writs. After the tenant was evicted, its water ice stores were taken over by businesses that began operating the water ice stores under another name.
Shortly thereafter, the tenant filed a petition requesting that the municipal court open the default judgment entered in favor of the landlord and against the tenant.
The municipal court subsequently vacated the default judgment and issued an order for a new monetary judgment and a new judgment for possession in favor of the landlord and against the tenant. The tenant then appealed these newly entered judgments to the Philadelphia County Court of Common Pleas. During the pleading stage of litigation, the tenant filed a suggestion of bankruptcy with the trial court, the opinion said.
A suggestion of bankruptcy is filed to place a court on notice that the defendant in a pending lawsuit has filed a bankruptcy petition. The filing of such a petition operates as an automatic stay of any act to exercise control over property of the estate. When, prior to the bankruptcy filing, a lease has not been terminated, “the lease is property of the estate subject to the automatic stay.”
In Ice Treats, in determining whether the tenant was entitled to the protections of the automatic stay, it was necessary for the bankruptcy court to decide whether the lease was terminated pre-petition. In deciding whether the lease was properly terminated pre-petition, the bankruptcy court examined whether the landlord’s termination of the leases complied with Pennsylvania law.
The bankruptcy court began its analysis by noting that the 3rd U.S. Circuit Court of Appeals has previously held, based upon the Landlord and Tenant Act of 1951, that “a landlord must give a tenant notice in writing before commencing eviction proceedings.”
According to the bankruptcy court, this notice, which the act titles, “Notice to Quit,” allows a tenant time to prepare for eviction once the tenant has failed to respond to the demand for payment. The act requires a landlord seeking eviction to provide the tenant with written notice to vacate from the leased premises due to a failure to pay rent upon demand.
Because the landlord’s notices to vacate here, the letters of termination were not sent to the tenant until after the landlord filed the complaints seeking eviction, the bankruptcy court noted that the landlord failed to comply with the prerequisites for eviction actions under the act.
In doing so, the bankruptcy court found that, because the landlord failed to properly obtain judgment upon the complaints, the writs of possession should never have been issued, and, therefore, the landlord was not entitled to have the tenant evicted from each of the leased premises.
Because the writs of possession should never have been issued, the bankruptcy court concluded that the tenant retained its interest in each of the leased premises and that the landlord’s and the successor tenant’s failure to return each of the leased premises to the tenant after notice of the bankruptcy filings was a violation of the automatic stay.
In a warning shot to both the landlord and the successor tenant, the bankruptcy court also pointed out that the issue of whether the violation was willful and, consequently, what damages the landlord should be liable for was to be determined at a later hearing.
LESSON LEARNED
The bankruptcy court’s ruling in Ice Treats clearly demonstrates the importance of complying with the express terms of a lease. The “Notice to Quit” requirement, in addition to providing the desired notice to tenants, also allows landlords to overcome a major legal hurdle should they bring action to recover possession of leased premises.
In Ice Treats, the landlord failed to comply with the notice requirements of the lease and, therefore, was prevented from recovering possession, despite the fact that the tenant did, in fact, default on its rental obligations. Even worse, the landlord may now be liable for damages if its violation of the automatic stay is deemed willful by the bankruptcy court.
Reprinted with permission from the November 22, 2011 edition of The Legal Intelligencer © 2011 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382, reprints@alm.com or visit www.almreprints.com.
