Are Commercial Real Estate Landlords Warranted In Seeking Confessions From Defaulting Tenants?
Written by: Alan Nochumson
With the economy in the tank, commercial retailers are struggling to keep their cash registers ringing. Awash in red ink, some are even failing to make their lease payments. This puts many commercial landlords in the unenviable position of dealing with defaulting tenants. However, Pennsylvania landlords may be envied by their colleagues across the country for one particular ace in the hole that gives them the upper hand in dealing with defaulting tenants: a contractual provision contained in leases commonly known as a warrant of attorney.
Generally, a warrant of attorney allows the landlord to obtain a money judgment or a judgment for possession against the defaulting tenant without giving that tenant the opportunity to object prior to the entry of judgment. This contractual provision is thus a quicker, easier and less costly way of obtaining judgment against the defaulting tenant than pursing claims through full-blown litigation.
On its face, it would seem that the whole process of obtaining judgments by confession would violate the tenant’s due process rights. In the landmark case of D.H. Overmyer Co. v. Frick Co., the U.S. Supreme Court held that such provisions are not per se unconstitutional.
Pennsylvania courts have consistently concluded that the entry of judgment does not violate a debtor’s due process rights so long as there are procedural safeguards protecting the debtor from a potentially overreaching creditor. These procedural safeguards are set forth in the Pennsylvania Rules of Civil Procedure. Pa. R.C.P. 2950 et seq.
THE WARRANT OF ATTORNEY
Because the tenant’s due process rights are significantly affected by this powerful contractual provision, courts strictly construe the language of the warrant and the landlord’s obligations under the lease. Generally, most warrants require the landlord, as a condition precedent to obtaining judgment, to provide written notice to the tenant of any default committed by the tenant under the lease. The landlord should provide sufficient detail in the notice so that the tenant can understand and cure the default. As a precautionary matter, the landlord should also follow the notice requirements of the Landlord and Tenant Act of 1951, 68 P.S. Section 250.101 et seq. By satisfying all of the contractual and statutory requirements, the landlord eliminates certain technical defenses the tenant could raise in attacking the validity of the judgment.
Most warrants also contain language allowing the landlord to collect an attorney’s commission from the tenant. Courts are unwilling to award an attorney’s commission unless it can be clearly derived from the warrant itself. For example, a landlord may not recover “reasonable” attorneys fees. Instead, a recoverable commission would be of a specific amount (i.e., $1,000) or of a specific percentage of the amount of money sought under the lease (i.e., 10 percent). The landlord, however, does not have carte blanche to collect an “unreasonable” amount of attorneys fees.
The Pennsylvania rules of Civil Procedure set forth the requirements in filing a complaint in confession of judgment for money. The complaint must contain the following allegations:
- The name and last known addresses of the tenant;
- An averment that judgment is not being entered by confession against a natural person in connection with a consumer credit transaction;
- A statement of any assignment of the lease;
- Either that judgment has not been on the lease in any jurisdiction or, if it has been entered, an identification of the proceeding;
- If the judgment may be entered only after a default or the occurrence of a condition precedent, an averment of the default or of the occurrence of the condition precedent;
- An itemized computation of the amount due, based on matters outside the lease, if necessary, which may include interest and attorney fees authorized by the lease;
- A demand for judgment authorized by the warrant; and
- If the lease is more than 20 years old, an application for a court order granting leave to enter judgment after notice.
Additionally, the landlord must file the following documents along with the complaint:
- A copy of the lease showing the tenant’s signature;
- An affidavit that the judgment is not being entered by confession against a natural person in connection with a consumer credit transaction;
- A certificate of residence of the tenant and of the landlord;
- An affidavit certifying that the yearly income of the tenant is in excess of $10,000 a year;
- An averment of default;
- An affidavit verifying the facts of the complaint;
- An affidavit that the transaction upon which judgment is being entered is a business transaction;
- An affidavit that the tenant is not in the military service of the United States, nor in any state or territory thereof, or its allies as defined in the Soldiers’ and Sailors’ Civil Relief Act of 1940 and amendments thereto;
- An affidavit that the transaction upon which judgment is being entered does not arise from a retail installment sale, contract or account; and
- A praecipe for confession of judgment in the same form prescribed by the Pennsylvania Rules of Civil Procedure.
To obtain a judgment in confession for possession, the landlord must file a complaint in substantially the same form as prescribed by the Pennsylvania Rules of Civil Procedure concerning confession of judgments for money. The complaint must also contain:
- An averment that the judgment is not being entered against a natural person in connection with a residential lease;
- A description of the property; and
- A demand for judgment in ejectment.
A warrant of attorney may authorize the landlord to obtain a money judgment and a judgment for possession concurrently, but the landlord is prohibited from obtaining a money judgment for the accelerated amount due under the lease and a judgment for possession. If the landlord was otherwise allowed to do so, the landlord would be receiving a windfall by collecting the accelerated amount due under the entire lease term and, at the same time, leasing the premises to another tenant and collect rents from that tenant as well.
ENTRY AND EXECUTION OF THE JUDGMENT
Upon filing the complaint, the prothonotary enters judgment in conformity with the praecipe for confession of judgment submitted by the landlord. After entry of judgment, the landlord is obligated to provide the tenant with written notice of the judgment. The notice requirements differ for the landlord depending on the time in which the landlord attempts to execute upon the judgment. If the landlord decides to immediately attempt to execute upon the judgment, it must personally serve the tenant with the following documents:
- Written notice that judgment had been entered against the tenant in a form prescribed by the Pennsylvania Rules of Civil Procedure; and
- A petition to strike the judgment and request for prompt hearing in a form prescribed by the Pennsylvania Rules of Civil Procedure.
This notice must be served along with the writ of execution. The tenant then may file with the sheriff a petition to strike the judgment. The petition is limited to whether the tenant voluntarily, intelligently and knowingly waived its right to notice and a hearing prior to the entry of judgment.
If the tenant files the petition, a court must hear the petition within three business days. At the hearing, the landlord has the burden of proving by a preponderance of the evidence that the tenant voluntarily, intelligently and knowingly waived its right to notice and a hearing prior to the entry of judgment. If the landlord fails to make this showing, the court must enter an order vacating the writ of execution and striking the judgment.
Clearly, there is an inherent risk in deciding to immediately attempt to execute upon the judgment. This risk, however may be outweighed if, for example, the landlord believes that the tenant intends to file for bankruptcy. If the landlord does not regain possession of the leased premises prior to the bankruptcy filing, the landlord’s ability to remove the tenant from the premises may be significantly diminished.
Most landlords choose the other method of executing upon the judgment; the risk of judgment being stricken is less likely to occur because the tenant, not the landlord, carries the burden to strike, or in this case, open the judgment. Under this option, the landlord must serve the tenant with written notice in a form prescribed by the Pennsylvania Rules of Civil Procedure at least 30 days prior to the filing of the praecipe for a writ of execution.
The caveat, under this option, however, is that the landlord is prohibited from commencing execution proceedings against the tenant for a minimum of 30 days. The tenant then has 30 days after service of the notice to file a petition to open or strike confessed judgment. A petition not timely filed will likely be denied.
A petition to strike and a petition to open judgment are the two forms of relief available to the tenant. Clearly, the easiest way of preventing a judgment from being open or stricken is to follow terms of the warrant and the lease. If the landlord dots all of its “i’s” and crosses all of its “t’s”, it should have no trouble withstanding any attempt by the tenant to affect the landlord’s ability to execute upon the judgment.
In order to strike the judgment, the tenant must show a fatal defect or irregularity appearing on the face of the record. Courts generally strike a judgment if the judgment was not entered in accordance with the warrant, judgment was entered for items that were not permitted under the lease, the warrant is not in writing, or the warrant is not signed directly by the tenant. The last two bases for striking the judgment are predicted upon due process principles. If there is no proof that the tenant signed the warrant or if none exists, the landlord clearly should not be able to obtain judgment pursuant to this potentially oppressive and powerful tool.
In order to open the judgment, the tenant must present sufficient evidence supporting a meritorious defense to require submission of the issue to a jury. In making this determination, courts employ the same standard as that of a directed verdict and examine the evidence in the light most favorable to the tenant. Courts routinely open judgments based upon contract principles (i.e., breach of contract, misrepresentation and fraud).
If the tenant establishes prima facie grounds for relief, the court issues a rule to show cause. If the rule is issued, the landlord must answer the petition to open or strike judgment. In addition to issuing the rule, the court may allow the parties to conduct discovery and present testimony and other evidence in support of either the petition or answer.
The landlord does not waive any of its substantive rights even if the judgment is ultimately opened or stricken by the court. Of course, this is hardly a consolation prize for a landlord who now must embark on the long and grueling road of full blown litigation while the tenant remains on the leased premises for years until the case is ultimately decided.
Reprinted with permission from the May 5, 2003 edition of The Legal Intelligencer © 2003 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382, firstname.lastname@example.org or visit www.almreprints.com.