Justice Delayed Is Justice Denied: Regaining Possession of Commercial Real Property in a Court System Impacted by the Great Recession and the COVID-19 Epidemic

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Justice Delayed Is Justice Denied: Regaining Possession of Commercial Real Property in a Court System Impacted by the Great Recession and the COVID-19 Epidemic

Kyle Yaege

Kyle Yaege is a partner with Hickman Robinson Yaege, LLP in San Diego, where he focuses his practice on real estate and business matters. He has represented clients ranging from individual homeowners and tenants to Fortune 500 companies, and from public agencies to non-profit organizations. Kyle’s work includes a broad spectrum of issues that relate to business and real property, including finance, acquisition, development, and management.

I. UNLAWFUL DETAINER PROCEEDINGS WERE SLOWED AS AUSTERITY MEASURES WERE TAKEN IN RESPONSE TO THE GREAT RECESSION AND WILL SLOW FURTHER AS COVID-19 EVICTION MORATORIA EXPIRE

Budget cuts after the "Great Recession" of 2007 to 2009 included a reduction in funding for the California judicial system totaling approximately 25% of its entire budget (approximately $1 billion).1 These cuts forced California’s courts to close fifty-two courthouses, reduce operating hours, reduce services (e.g., court reporters), and generally reduce the public’s access to justice.2

Among the services that were cut back in that "temporary" moment of fiscal hardship were "specialty" courts, "small claims" courts, and in many cases unlawful detainer (aka "eviction") courts. Since those cuts were first enacted, the budget priorities identified by the trial courts in their annual statements to the California Judicial Council have emphasized the need to return services and reestablish closed departments, including reopening closed unlawful detainer departments.3 As an example, in San Diego County with a total population of 3.1 million,4 the number of unlawful detainer court departments before 2008 was four, but that number was decreased to two departments in the initial austerity measures taken after the Great Recession, and now there is only one unlawful detainer department for the entire county.5 In March 2020, the State of California was forced to temporarily shut down all court operations in response to the COVID-19 epidemic, and despite courts "reopening" more than a year ago, various State and local moratoria6 have suspended eviction proceedings and generally courts have not been able to impanel juries during the epidemic.7 Many of the restrictions that have prevented landlords from pursuing eviction proceedings for more than a year are expected to expire in the near future, and the courts have started to conduct jury trials again on a limited basis.8 The expected influx of new eviction filings as COVID-19 moratoria expire has resulted in a number of articles predicting an imminent wave of evictions and bankruptcies.9 In short, while California Code of Civil Procedure section 1179 provides that unlawful detainer proceedings are entitled to "precedence" over all other civil proceedings, that "precedence" will not prevent the landlord from experiencing months of delay waiting for trial in many jurisdictions in California, especially in those cases where the tenant demands a jury. In light of the above, this article will review some of the tools available to commercial landlords to expedite recovery of possession of their property and increase the odds of collecting unpaid rent obligations from defaulting tenants.

A. Landlords Should Consider Non-Litigation Options First

As with all eviction proceedings based on tenant default for non-payment of rent, the landlord must consider the cost and delay of litigation against the probability that the tenant (and the tenant’s guarantors) will be able to pay the resulting judgment. This process begins with a request that the tenant share information about its financial condition. For those landlords with tenants who will volunteer information confirming that they do not have sufficient assets to pay, spending even more money to regain possession is often a poor choice. In circumstances where collection of money from the tenant after eviction is unlikely, but the tenant’s business appears likely to return to profitable operation once COVID restrictions are lifted, the landlord is often best served by trying to negotiate a lease amendment that allows the tenant to make up for the default over a longer period of time. Examples of potential arrangements include:

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  • allowing the tenant to pay some or all the past due rent obligation with a separate note that is personally guaranteed or secured against an asset with real value (e.g., a vehicle, the merchandise, or the furniture, fixtures, and equipment in the property);
  • agreeing to forbear eviction or collections efforts for a fixed period of time if tenant can obtain new guarantors for the rent obligation, or;
  • agreeing to restructure the delinquent rent obligation into a new lease that includes a longer lease term (brokers and property managers sometimes refer to this arrangement as a "blend and extend" lease amendment).

In disputes where collection from the tenant is unlikely and the tenant appears unlikely to return to profitable operation, the landlord’s next best option is often a "cash for keys" agreement. Under this option, the landlord agrees to forgive some of the unpaid rent debt or to pay the tenant a modest amount (often covering some portion of the costs of removing the tenant’s personal property from the leased premises), or both. To ensure that the agreement is more enforceable than the original lease, these "cash for keys" agreements should be documented in a writing that complies with California Code of Civil Procedure section 664.610 that is signed after11 the landlord has filed an unlawful detainer action. To avoid additional procedural delays, practitioners in unlawful detainer proceedings will also often insist on the tenant’s concurrent execution of a stipulation for entry of judgment12 that authorizes the immediate issuance of a writ of possession containing a specified lockout date. Finally, where practicable, any cash payment to the tenant should occur after the tenant has actually returned possession.

Where the tenant is unwilling to share its financial information with the landlord, is unwilling to modify the lease in a form acceptable to landlord, or is unwilling to agree to voluntarily return possession of the premises on acceptable terms, the landlord will likely be forced to try to recover possession by prosecuting an unlawful detainer claim.

B. Landlords Have Tools for Accelerating Resolution While Unlawful Detainer Litigation Is Pending

Landlords who are compelled to prosecute an unlawful detainer, in the current what is hopefully a post-COVID-19 environment, will be actively searching for tools to secure tenant assets for future collection so as to create an incentive for the tenant to either return possession before trial or to pursue bankruptcy protection, which protection would occur long before the landlord can reasonably expect to regain possession through an unlawful detainer proceeding. Three tools that can help a landlord achieve these goals are:

  • a motion to require the tenant to deposit landlord’s damages during the delay, or set trial within fifteen days under California Code of Civil Procedure ("CCP") section 1170.5;
  • a motion for pre-judgment writ of attachment against the tenant’s assets under CCP sections 483.010 through 483.020; or
  • parallel collections litigation against the tenant and tenant’s guarantors.

The first option, a CCP section 1170.5 motion, is likely the least effective tool in motivating a prompt return of possession. The court is required to set trial within twenty days of its receipt of plaintiff’s request for trial after the defendant has appeared. However, if the court is unable to try the case within twenty days, the landlord may be faced with filing expensive and time consuming motions to move the case forward. For example, the landlord could file a CCP section 1170.5 motion for a finding that the landlord has a probability of success on its claim. Upon making that finding, the court is required to determine the damages that will be caused to the landlord and is required to enter an order requiring the tenant to pay those damages pending trial.13 CCP section 1170.5 is somewhat useful in obtaining such a pre-trial determination on the probability of success. But, noticed motions requiring a probability of success finding are expensive, and hearing dates may not be available for months. Accordingly, landlords should balance these considerations against their other options, including negotiating a mutually agreeable lease extension. Most importantly the remedy provided in section 1170.5—an order requiring the tenant to deposit estimated damages in advance of trial or have trial conducted within fifteen days—is really a hollow remedy if the court is incapable of calendaring and conducting a jury trial within fifteen days. Moreover, despite the requirement under section 1170.5 that the court conduct the trial within fifteen days, the unlawful detainer court cannot compel the tenant waive its right to a jury and submit to a bench trial, even if that is the only way for the court to meet the section 1170.5 fifteen-day timeline.14

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The second option, a noticed motion for pre-judgment writ of attachment under CCP section 483.010 through 483.020, is more likely to be effective but it too involves delay and also requires the landlord show a similar "probable validity" of its claims before the court will grant the application.15 However, unlike CCP section 1170.5, the potential for issuance of an attachment order against the tenant has real consequences because a writ of attachment can freeze up the tenant’s assets and establish the landlord as a secured party in future bankruptcy proceedings. A struggling tenant who is borrowing money but not paying rent will often be forced into bankruptcy by a right to attach order. Moreover, there is some disagreement among the bankruptcy courts about perfecting an attachment lien before final judgment.16 A tenant considering a future bankruptcy petition that requires the landlord to be an "unsecured" creditor will try to accelerate the timing of its bankruptcy petition to a date that is before the hearing on the landlord’s application for pre-judgment writ of attachment, or to a date that at least places the attachment lien squarely within the bankruptcy preference period.

The third option to motivate a tenant to return possession without waiting for an unlawful detainer trial is to leverage third parties, such as guarantors, who have influence over the tenant. Many commercial tenants obtain possession from the landlord by providing personal guaranty agreements from principals, or affiliates, or lease co-signers. Often, the same person(s) who provided the guaranty or co-signature are critical to the tenant’s continued operation as a business and have the power to compel the tenant to return possession by withholding further assistance or by asserting their own claims against collateral pledged by the tenant, or against the tenant or its principals personally. For landlords holding these third-party obligations, assuming the guaranty agreement contains language waiving statutory surety protections17 and assuming that the landlord has complied with all contractual and statutory notice requirements, there is no need to delay pursuing a parallel action for breach of contract against the tenant18 and guarantors concurrently with the unlawful detainer proceeding.19 In many instances, pre-judgment attachment is also available against the guarantors under CCP section 483.010 through 483.020.

C. Despite Its Reputation for Adding Delay, A Tenant Bankruptcy May Actually Accelerate the Recovery of Possession in Some Circumstances

Landlords have historically sought to avoid bankruptcy proceedings where possible because a bankruptcy petition triggers an automatic stay of eviction proceedings and requires a noticed motion for relief from stay to resume unlawful detainer proceedings.20 In addition, landlords avoid bankruptcy because the tenant, acting as debtor-in-possession or as trustee, can tie up the property for sixty days or possibly more upon an affirmative showing by the debtor-in-possession or trustee as the tenant decides whether to assume or reject the lease.21 However, where the timeline to trial in the unlawful detainer court is expected to exceed the sixty-day deadline before the lease is presumed to have been rejected,22 a bankruptcy petition by the tenant may be the best news a landlord can get.

The landlord has the option to move the bankruptcy court for an order confirming both that the lease has been rejected and that the lessor is entitled to immediate possession of the leased premises and that the landlord holds an unsecured claim for the unpaid rent, when the tenant fails to:

  • confirm its intent to assume the lease; or
  • provide adequate assurance of compensation for actual losses incurred by lessor as a result of the pre-petition breach; or
  • where the tenant fails to provide adequate assurances of future performance if tenant assumes the lease.

Under these circumstances the lease is presumed to have been rejected by the trustee or debtor-in-possession, and the landlord has a good chance of obtaining the requested order.23

While the bankruptcy court has authority to order the immediate return of possession of leased property upon actual or presumed rejection by the debtor/tenant, there is no clear enforcement mechanism in statutory or case law if the tenant refuses to comply with the bankruptcy court’s order.24 The lack of clear enforcement mechanisms assumes that the debtor will comply and therefore leaves the landlord with traditional bankruptcy remedies such as civil contempt25 or a motion to dismiss,26 if the tenant does not comply.

II. CONCLUSION

Before COVID-19 forced more than a year’s worth of eviction litigation to pile up, the austerity measures taken in response to the Great Recession of 2007 to 2008 were already causing significant delays in California’s unlawful detainer courts. As state and local moratoria prohibiting unlawful detainer proceedings are allowed to expire, those delays will only become more severe. Attorneys representing commercial landlords in the present environment, where the statutory "precedence" of unlawful detainer proceedings may not guarantee a trial for months after filing, must think creatively to obtain the best outcome for their clients. This article describes some options for commercial landlords to consider to avoid unlawful detainer litigation entirely and to help achieve a prompt and cost-effective resolution.

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Notes:

1. https://www.courthousenews.com/revised-california-budget-slashes-millions-from-court-funding/.

2. 3/11/2013 Summary of Impacts From Instant Survey, https://www.courts.ca.gov/partners/documents/20130312-PJ-Instant-Survey-Impacts.pdf.

3. Judicial Branch Budget Impact Snapshots by County, https://www.courts.ca.gov/partners/804.htm.

4. https://www.sandiegocounty.gov/hhsa/statistics_demographics.html.

5. San Diego Superior Court – Department Assignment, http://www.sdcourt.ca.gov/portal/page?_pageid = 5 5,1056977&_dad = portal&_schema=PORTAL.

6. COVID-19 Tenant Relief Act, Assemb. B. 3088, Reg. Sess. (2020), Tenant Relief Act, S.B. 91, Reg. Sess. (2021), City of S.D., Cal. Mun. Ordinance O-21177 & O-21292.

7. http://www.sdcourt.ca.gov/pls/portal/docs/PAGE/SDCOURT/GENERALINFORMATION/COVID-19INFO/GUIDE%20TO%20SD%20SUPERIOR%20COURT%20SERVICES%20DURING%20COVID-19.PDF.

8. 1/27/2021 News Release – Super. Ct. of Cal., Cty. of S.D., https://files.constantcontact.com/cd9936e9001/039b1733-1707-40b8-a4c8-c7f0804f65a0.pdf.

9. Niv Elis & Edward Moreno, Wave of Evictions Could Be Coming for Nation’s Renters, The Hill (July 24, 2020), https://thehill.com/policy/finance/508802-wave-of-evictions-could-be-coming-for-nations-renters.

10. Mesa RHF Parthers, L.P. v. City of L.A., 33 Cal. App. 5th 913 (2019).

11. Kirby v. S. Cal. Edison Co., 78 Cal. App. 4th 840 (2000).

12. See Cal. Judicial Council Form UD-115, https://www.courts.ca.gov/documents/ud115.pdf.

13. Cal. Civ. Proc. Code § 1170.5(c).

14. Garcia v. Cruz, 221 Cal. App 4th Supp. 1, 6 (2013) (Overturning trial court order compelling bench trial over tenant’s jury demand after tenant failed to deposit funds as ordered by trial court).

15. Cal. Civ. Proc. Code § 484.090, Pech v. Morgan, 61 Cal. App. 5th 841 (2021).

16. Diamant v. Kasparian (In re S. Cal. Plastics, Inc.) 165 F.3d 1243 (9th Cir. 1999) (Addressing attachment lien as unperfected until final judgment); In re Aquarius Disk Servs. Inc., 254 B.R. 253, 260 (Bankr. N.D. Cal. 2000) (Addressing issue of granting holder of attachment lien relief from stay for the purposes of perfecting lien that was established prior to bankruptcy petition).

17. See Cal. Civ. Code §§ 2832 through 2856.

18. Walt v. Sup. Ct.(Clement), 8 Cal. App. 4th 1667, 1678 (1992).

19. Cal. Civ. Code §§ 2845, 2856, Gramercy Inv. Tr. v. Lakemont Homes Nev., Inc. 198 Cal. App. 4th 903, 911 (2011).

20. In re Goodman, 991 F.2d 613, 616 (9th Cir. 1993).

21. 11 USC § 365(d)(3)(A), (B).

22. In re Sonora Convalescent Hosp., Inc., 69 B.R. 134, 136-37 (Bankr. E.D. Cal. 1986).

23. In re Elm Inn, Inc., 942 F.2d 630, 633-34 (9th Cir. 1991); In re LCO Enters., 12 F.3d 938, 941 (9th Cir. 1993).

24. In re Elm Inn, Inc., 942 F.2d at 634 (Holding "The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title" in citing the court’s authority to order the immediate return of possession, and quoting 11 USC § 105(a)).

25. In re Walters, 868 F.2d 665 (4th Cir. 1989) (Discussing civil contempt powers generally).

26. 11 USC § 1112(b)(4)(E).