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Your Legal Corner - Client Alert Blog

Some Commercial Tenants May Be Required to Pay The Bank, Not The Landlord

Written By: Melissa C. Marsh, Esq., California Attorney, July 2011 Add to Favorites
Like many residential property owners who have found themselves underwater and facing foreclosure, many owners of commercial buildings are also having trouble keeping up on their mortgage payments. Consequently, a commercial tenant may be asked to pay a bank/lender the rent. What should the tenant do?

California Civil Code Section 2938 provides that, under certain circumstances, a commercial tenant is required to pay the rent to the landlordís creditor rather than the landlord. The triggering procedures are set forth in California Civil Code Section 2938 and include: (1) the appointment of a receiver; (2) the lender obtaining possession of the rents; (3) delivery of a demand letter (the contents of which are statutorily defined and set forth in the code) to the tenants to pay the rent to the creditor; and (4) delivery of a demand to the borrower to pay over the rents collected.

If the notice for demand of rent is properly written on the statutorily prescribed form and signed under penalty of perjury, it is effective upon actual receipt by the tenant. If a commercial tenant receives multiple demands, the tenant is not required to determine which of the competing lenders has priority. However, a commercial tenant who fails to pay their rent to the lender in accordance with the lenderís demand (if properly written) may be subject to double exposure for payment of the rent.

Commercial tenants who receive a notice demanding that their rent be paid over to a third party creditor that is signed under penalty of perjury of law must take that notice seriously, and should consult with a real estate attorney if there is any uncertainty about what they should do next.

Tags: commercial rent, commercial tenants
Posted In: Real Estate Reporter 

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Located in Los Angeles, California, the Law Office of Melissa C. Marsh handles business law and corporation law matters as a lawyer for clients throughout Los Angeles including Burbank, Sherman Oaks, Studio City, Valley Village, North Hollywood, Woodland Hills, Hollywood, West LA as well as Riverside County, San Fernando, Ventura County, and Santa Clarita. Attorney Melissa C. Marsh has considerable experience handling business matters both nationally and internationally. We routinely assist our clients with incorporation, forming a California corporation, forming a California llc, partnership, annual minutes, shareholder meetings, director meetings, getting a taxpayer ID number (EIN), buying a business, selling a business, commercial lease review, employee disputes, independent contractors, construction, and personal matters such as preparing a will, living trust, power of attorney, health care directive, and more.