When A Tenant Violates The Law

The Real Estate Espresso Podcast

When A Tenant Violates The Law

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When A Tenant Violates The Law

Welcome to the Real Estate Espresso podcast, your morning shot of what’s new in the world of merit investing. I’m your host, Victor Menasce.

Today we’re talking about an uncomfortable situation that every commercial property owner faces sooner or later. Your tenant is operating their business. They might be renting some space from you, and then they violate city bylaws or environmental regulations. It might be improper waste disposal, could be illegal dumping, might be a grease trap violation, could be noise, odors, all kinds of different things, hazardous materials, you name it.

And the question is, what is the owner responsible for, and what are you supposed to do when your tenant is not in compliance?

Let’s start with the principle that’s hard to hear, but important. If you own the property, you’re in the chain of responsibility.

Now I’m not bringing this up as a hypothetical situation. It happened to us recently on a property. City inspector showed up and wrote up a long laundry list of violations that, in my view, went well outside what was a fairly confined offense by our tenant.

Even when the tenant caused the problem, the municipality’s environmental regulators often have the power to pursue the property owner, because you’re the party they can reliably find. You have a deeper pocket than a struggling tenant, and you have control over the real estate. Regulators are not in the business of sorting out your lease language. They’re in the business of stopping the harm and enforcing compliance, so your job as an owner is to treat this like risk management, not a customer service issue.

You really need two tracks running in parallel. One is your relationship with the regulator, the environmental authority, the fire department, whoever is issuing the order. The other is the enforcement process with the tenant, and you need both to run with discipline, documentation, and urgency, because the worst thing you can do is ignore it, assume the tenant will handle it until you’re standing in front of an inspector with an order, a deadline, or penalties that, who knows, they might even accrue daily.

So what is the owner to do? Well, first you got to get clear on the facts. You need to know exactly what the violation is, which authority is citing it, and what the required remedy is, and the timeline to get it solved. You need copies of the notice, the order. Is it an inspection report? Any correspondence. If the tenant tells you it’s nothing, that’s not a fact, that’s an opinion.

In a well-written commercial lease the tenant is obligated to comply with the laws, maintain permits, avoid hazardous materials except as permitted, and operate in a way that doesn’t create nuisance or violations. There should be indemnities, insurance requirements, and often an obligation to notify the landlord of any notices from authorities. There might also be rights for the landlord to enter the premises, inspect, and require corrective action, in some cases perform the work and bill the tenant if they fail to do so. That’s called self-help, and it needs to be handled properly. You have to issue formal notice.

This is where many owners make mistakes. They might have a phone call, send an email, and think that they’ve put the tenant on notice. When it comes to enforcement you have to follow the lease provisions to the letter, exactly, with delivery methods, addresses, cure periods, everything. If the lease says notice must be delivered to the tenant’s registered address, then you do that.

Your notice should be factual and specific. Here’s the violation, here’s the authority, here’s the remedy, here’s the deadline, and here’s what the lease requires the tenant to do. You’ve got to demand a written corrective action plan with dates, responsible parties, and proof of completion.

And then next you’ve got to communicate with the regulator. You don’t want to hide. You don’t want to posture. You don’t want to blame the tenant; it sounds like you’re refusing responsibility. You want to show that you’re a responsible property owner, acknowledge receipt of their issue, and if needed present your plan for achieving compliance. If the tenant is responsible for execution, say so, but also state what your backup plan is going to be if the tenant doesn’t comply.

Regulators don’t care about who said, she said. They only care about the outcomes. If they believe that you’re serious and organized, you often get more flexibility, and I can tell you from firsthand experience that’s exactly the way it works.

If there’s risk of environmental harm, if there’s safety issues or escalating penalties, you might not have the luxury of waiting for the tenant to act. This is where the owner has to make some hard decisions. If the tenant is slow-walking, you may need to exercise your right to enter, stop the offending activity, bring in a contractor, perform remediation, and then recover the cost later.

In some jurisdictions you may need to involve the insurer. If you have legal liability coverage for pollution, or if your policy indicates environmental endorsements, you want to notify them early because late notification could jeopardize coverage.

Most important, you want to document everything. Create a file with inspection reports, photographs, emails, notices, invoices, your own site visit notes. If this ends up in court, if you need to pursue the tenant or the guarantor for costs, documentation is going to be your leverage.

You want to decide if this is a tenant that you want to keep on your property. Sometimes violations are one-time mistakes. In other cases, you want to terminate the lease. This is not just a compliance problem, it’s a credit problem and a reputation problem. It could affect your financing, your insurance, and your ability to sell. So you should be thinking about the endgame from day one. If they cure quickly and permanently, then great. If not, you need a path to terminate, regain control, and restore the asset.

And here’s the part that matters most: as a property owner you are a steward of community, not just an investor. Your responsibility is to protect the long-term value of the asset, the safety of the occupants, the neighbors, and the integrity of your own operation. That means acting early, transparently, quickly, acting with the seriousness that the regulators expect. You might delegate some of the operations to the tenant, but you cannot outsource accountability.

As you think about that, have an awesome rest of your day. Go make some great things happen, and we’ll talk to you again tomorrow.

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