In the purchase and sale of real property which is leased to tenants, sellers and purchasers must pay particular attention to the allocation of rent collected both before and after the closing. A typical purchase and sale agreement will include, among other things, language addressing the allocation of rent by the parties for the current period as well as the collection of delinquent rent after closing which is attributable to the seller’s period of ownership prior to closing. In negotiating a contract, the parties will need to determine whether the purchaser is responsible for attempting to collect pre-closing delinquent rents and the rights of the seller to pursue tenants after closing for any such pre-closing delinquent rents.
Collection of pre-closing delinquent rent can be a complicated issue for purchasers and sellers to resolve. On the one hand, the purchaser may be reluctant to allow the seller to undermine the financial condition of a tenant by pursuing lawsuits against a tenant that may be paying current rent to the new landlord. On the other hand, a former owner does not have a full range of typical landlord remedies at its disposal to effectively induce tenants to pay delinquent rent as the former owner cannot assert an eviction action against a tenant and terminate the tenant’s right of occupancy.
The tension between purchasers and sellers with respect to pre-closing, delinquent rent is further complicated by a recently decided opinion issued by the Illinois Appellate Court in 1002 E. 87th Street LLC v. Midway Broadcasting Corporation (2018 IL.) App. 1st 171691, June 5, 2018). In that case, the Court upheld a lower court ruling that Illinois law does not permit the purchaser of real estate to pursue claims against a tenant for pre-closing, unpaid rent under a lease assigned to the purchaser at closing. The purchase and sale agreement between the purchaser and seller in that case contained standard provisions confirming that the “landlord” under the lease included any successors and assigns. It also provided that all obligations and liabilities of the original landlord were binding on the purchaser, as successor landlord. That would include any pre-closing landlord defaults that remained uncured. Notwithstanding the successor landlord’s assumption of the lease, including, potential liability for pre-closing defaults of its predecessor, the Court ruled that the successor landlord did not have the right to recover pre-closing rent. The Court specifically stated that the rule in Illinois is that rent in arrears is not assignable.
The lesson to be learned from the 1002 E. 87th Street case is that it is important to negotiate and set the expectations of the parties with respect to pre-closing delinquent rents at the time of contract. Since a predecessor landlord may have little power other than initiating litigation (which is not desired by the successor landlord) against a tenant for delinquent rent and the successor landlord is unable to maintain an action for that delinquent rent, parties must give careful thought to the method of addressing the collection of pre-closing delinquent rent. Fortunately, there are a number of different approaches that the parties may employ to coordinate and enhance the collection of pre-closing, delinquent rent.
For further information regarding the purchase and sale of commercial real estate as well as matters involving the rights of sellers, purchasers and tenants, please contact:
firstname.lastname@example.org or 312-368-0100.
Under the City of Chicago Residential Landlord Tenant Ordinance (“RLTO”), owners and landlords of residential property located in the City of Chicago must notify their tenants of a foreclosure action within seven (7) days of being served with the foreclosure complaint. If the foreclosure action is pending at the time the lease is executed, the owner or landlord must disclose in writing to the tenant that the foreclosure complaint is pending.
The notice must comply with the following requirements:
- Be in writing;
- Be sent to all tenants of the premises and to any other third party who has a consistent pattern and practice of paying rent on behalf of the tenant;
- Identify the court in which the foreclosure action is pending, the case name, and the case number; and
- Include the following language: “This is not a notice to vacate the premises. This notice does not mean ownership of the building has changed. All tenants are still responsible for payment of rent and other obligations under the rental agreement. The owner or landlord is still responsible for their obligations under the rental agreement. You shall receive additional notice if there is a change in owner.”
If an owner or landlord fails to provide the required notice, the tenant may terminate the rental agreement upon thirty days (30) written notice to the owner or landlord. Additionally, in a civil lawsuit, the tenant can recover $200 in statutory damages, plus any other actual damages incurred as a result of the owner or landlord’s failure to provide the requisite notice.
If you have any questions about your obligations under the RLTO, or would like assistance in issuing a foreclosure notice to your tenants, please contact:
(312) 368-0100 or email@example.com.