United States: IL Appellate Court Rules: New Landlord May Not Be Entitled To Unpaid Rent

Seyfarth Synopsis: The Illinois Appellate Court ruled in favor of a commercial tenant after the new landlord attempted to collect accrued unpaid rent owed to the previous landlord, who had assigned the lease to the new landlord. In affirming the lower court’s ruling, the court held that the new landlord did not have standing to sue for unpaid rent which accrued prior to the conveyance to the new landlord. Additionally, the court noted that, unlike debt obligations, rent accrual is a chose in action that is not assignable. The decision raises questions about the strength of assignment and non-waiver lease provisions as well as succeeding landlords’ rights.

Background

The Illinois Appellate Court issued a recent opinion holding that a new landlord does not have standing to sue a tenant for accrued unpaid rent prior to the new landlord’s acquisition of property (“Unpaid Rent”).1 In affirming the lower court’s decision, the appellate court explained that standing to sue is a right remaining with the original landlord to whom the Unpaid Rent is owed, rather than with the succeeding landlord. The holding in this case raises concerns about the applicability of certain non-waiver lease provisions, in particular, the assignability of lease rights and obligations. Landlords, tenants, and lenders alike question whether this decision may facilitate an evasion of contractual duties upon the acquisition or disposition of real estate. 

The court’s decision stems from a dispute that arose between 1002 E. 87th Street LLC (“87th Street”), a commercial landlord, and Midway Broadcasting Corporation (“Midway”), the tenant, and the tenant’s guarantors. 87th Street purchased the property that Midway was leasing and demanded payment for past due rent Midway owed to the previous landlord. When Midway did not comply with the request, 87th Street began eviction proceedings. 87th Street first argued that the original lease gave them standing to sue. Their second argument was that the assignment provisions transferred the right to receive the Unpaid Rent due from Midway under its lease. In response, Midway argued that 87th Street did not have standing to bring suit for the Unpaid Rent because they were not the owner of the property when the Unpaid Rent accrued. Midway also argued that the assignment provision should be held invalid because the previous landlord could not have intended to assign its rights to collect Unpaid Rent to the succeeding landlord. 

Standing

In order to have standing in a case, the plaintiff must have an interest in the action and the potential outcome.2 Generally, a landlord has standing to sue for unpaid rent.3 It also remains undisputed that the conveyance of property includes the conveyance of such property’s leases, together with the rights to receive rents due under such leases. However, the new landlord does not obtain rights to pursue rent due to the prior landlord for periods prior to owning the property. Accordingly, the lower court, affirmed by the appellate court, ruled in Midway’s (tenant’s) favor stating that 87th Street only has standing to sue for delinquent rent which first accrued after the assignment of the lease (which rent is owed to them as the new landlord), and does not have standing to sue for delinquent rent which accrued prior to the assignment of the lease.4

Assignment

87th Street pointed to an assignment of lease provision which stated that “[t]enant agrees to attorn to such new owner.”5 Additionally, the lease provided that all liability and obligations “shall be binding upon the new owner.”6 However, rent in arrears is not assignable to a new property owner. The court distinguished this case from A.M. Realty Western v. MSMC Realty, L.L.C.7 where the court allowed the previous landlord to sue for unpaid rent for the period up to the sale of the property writing, “Here, 87th Street is not suing for debt that accrued during its tenure as landlord…[but rather] claiming past due rent that accrued before it owned the property.”8 Further, the court determined that there was no evidence showing that the prior landlord intended to assign to 87th Street its right to collect rent due to the prior landlord. Consequently, the court ruled in favor of Midway and 87th Street, as the new landlord, was unable to recover the Unpaid Rent.  

Looking Ahead

This decision requires purchasers, sellers, landlords, tenants and lenders to scrutinize their rights and obligations with respect to the payment and collection of Unpaid Rent upon the purchase, sale, lease or finance of a property. The risk of insolvent tenants coupled with the additional expense of having to delay eviction proceedings for non-paying tenants can create greater landlord solvency issues and complications with the new landlord’s lender. Purchasers also need to factor these additional risks and corresponding implications into its purchase offer to avoid overbidding. Likewise, lenders do not escape the burden of this decision as assignment provisions related to Unpaid Rent may be held unenforceable, thereby increasing their risk of exposure to the extent its underwriting factored in either the collection of Unpaid Rent or the continued income stream from a defaulting tenant. On the other side, tenants need to be attentive to ensure they are paying rent and other amounts due to the correct landlord party during a process of transitioning ownership and management in order to avoid a risk of liability for nonpayment. 

While this case provided a bad result for 87th Street as purchaser and new landlord, it highlights the need for all parties to a purchase, sale, lease and finance transaction to address the issues in the case clearly to avoid ambiguous contract, lease, or assignment language, unintended results and additional risks not factored into deal pricing or underwriting. Each party to a transaction should make sure that its purchase and sale agreement, lease, mortgage, assignment of lease and rents, guaranty, estoppel certificates and subordination, non-disturbance and attornment agreements, as applicable, provide each party to a transaction with clear and unambiguous obligations and rights related to the payment and collection of Unpaid Rent, including all related enforcement rights, whether in connection with a new lease or with respect to a purchase, sale and finance transaction involving a property with existing leases. Despite this case exposing potential complications with the assignment of rights related to Unpaid Rent, proper drafting and advance planning may minimize the likelihood of exposure for the parties involved. 

Footnotes

1 N  1002 E. 87th St. LLC v. Midway Broadcasting Corp., 2018 IL App (1st) 171691 (Jun. 5, 2018). 

2 Unifund CCR Partners v. Shah, 407 Ill. App. 3d 737 (2011). 

3 Dasenbrock v. Interstate Restaurant Corp., 7 Ill. App. 3d at 302 (Sept. 1, 1972). 

4 See supra note 2.

5 1002 E. 87th St. LLC v. Midway Broadcasting Corp., 2018 IL App (1st) 171691 (Jun. 5, 2018). 

6 Id.

7 A.M. Realty Western v. MSMC Realty, L.L.C., 2012 IL App (1st) 121183.

8 Id. 

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