At times, the easiest part of litigation can be getting a judgment, while collecting on the judgment can be time consuming and expensive. Unfortunately, it is difficult to determine whether you will able to collect on a judgment before filing a lawsuit.
In the landlord/tenant context, before pursuing a tenant for damages, a landlord must decide whether there is value in pursuing a defaulting tenant for money damages. This frequently requires the landlord to balance the expense of getting a judgment with the likelihood of being able to collect from a tenant.
So how does a landlord decide? There is no 100% effective way to evaluate the ability to collect on a judgment since the existence of many assets and liabilities is not a matter of public record. Public record searches can reveal real estate and vehicles, but there is no reliable way to determine ownership of bank accounts, securities, and other intangible assets.
Some practical rules of thumb may indicate whether or not it is worth pursuing a tenant that failed to pay its rent.
- Multiple vs. Single Location Tenant. If the tenant is a one location business, its business failed, it abandoned the premises, and did not reopen at another location, then a tenant might not be as collectible as a tenant that has multiple locations and closed only the location subject to landlord’s lease.
- Tenant Continues Operating Under the Same Name. A tenant that relocates from its current premises to another location and continues to operate its business under the same name or related entity then it may be collectible.
- Personal Guaranties. If there is a personal guaranty of the lease, or better yet a guaranty that includes both a husband and wife, it may be worth pursuing the guarantor(s).
- Knowledge of the Tenant(s)’s/Guarantor(s)’s Finances. The more information a landlord learns about a prospective tenant/guarantor(s) up front, the easier it is to evaluate their potential collectability. Personal guaranties, security deposits, and letters of credit (whenever possible) are recommended.
- Failure to Defend a Lawsuit. If a tenant doesn't respond to a default notice and knowingly permits the landlord to push forward with a money judgment, then a tenant may not be collectible. While not always the case, a tenant that hires an attorney to defend the litigation may be collectible if they’re able to afford counsel.
- Multiple Judgments Exist Against Same Tenant(s)/Guarantor(s). If there are multiple judgments against a tenant and/or guarantor(s) then a landlord’s judgment may have to get in line behind the other outstanding judgments in order to collect. Pay particular attention to foreclosure judgments against guarantors, which may indicate that the guarantors are not collectible.
- Multiple UCCs. If there are multiple UCC-1 financing statements recorded against a tenant’s equipment that have priority over a landlord’s lien (see my post on how to prevent a tenant from removing valuable equipment before they flee) then it may be difficult to collect on a judgment or levy on a tenant’s property. Your counsel can run a search for UCCs before initiating any action against a tenant.
- Location of Guarantor(s). If a tenant’s representative(s) and/or guarantor(s) are no longer living in the country, while you may be able to obtain a judgment (see my prior post regarding substitute service on parties who intentionally evade service), there may not be any assets or bank accounts to collect from.
- Tenant/Guarantor(s) May Eventually Have Money. In Florida, a judgment typically provides a landlord with a right to obtain a judgment lien certificate, which operates as a lien on all non-exempt personal property of the tenant/guarantor(s) within the state of Florida. If a landlord thinks that there is a likelihood that its former tenant/guarantor(s) may later “come into money” it may be worth obtaining a judgment and hope that sometime in the future landlord may be able to collect against its former tenant.
- Non-Monetary. A landlord may want to send a message to its tenants that it will equally pursue damages claims against all tenants in order to keep other tenants from defaulting.
- Partner
Matthew Sackel is a partner in the West Palm Beach office of Shutts & Bowen LLP, where he is a member of the Business Litigation Practice Group.
A Martindale-Hubbell AV® Preeminent™ Rated attorney, Matthew has extensive trial and ...
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