Commercial Tenants May Be Required to Pay Rent to Bank when Landlord in Default

Section 2938 of the California Civil Code requires commercial tenants to pay their rent to the creditor of their landlord when a landlord defaults on its obligations to its creditor under certain circumstances.  The general principle is that if a landlord defaults under an obligation to the creditor, the creditor can compel the tenant to make rental payments directly to it.


This assumes the creditor has followed all requirements under Section 2938 and the creditor-landlord relationship includes a conditional assignment of the right to receive such rental payments.  The creditor can then provide notice to the tenant (in the form prescribed in the statute), and subsequently, the tenant is required by law to make rental payments directly to the creditor.

There are a few exceptions to Section 2938 as a safeguard mechanism for the tenant.  For example, if a tenant made a good faith payment to the landlord with 10 days following the receipt of the notice from the creditor, the tenant is not in violation of the statute.  Of importance, the statute makes it clear that the tenant’s rental obligations are satisfied to the extent paid to a creditor.


As more and more commercial property owners struggle to keep up with their obligations in this economy, Section 2938 is being exercised by creditors (banks) more frequently.  As a commercial tenant, you need to be aware of this potential scenario arising.


For more information regarding Section 2938 or other real estate legal issues, please contact Richardson “Red” Griswold of Griswold Law.

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