Litigating Commercial Lease Terminations, Part 1 of 2: Landlord's Perspective

Commercial leases are a critical source of income and financial stability for property owners, but the current evolving economic environment presents many risks. One of the primary concerns is when a tenant falls behind on rent. This scenario triggers a cascade of legal, financial and operational challenges for the landlord. Crucial to managing rent defaults are an understanding of the lease's terms, the parties' rights and obligations, and the available legal remedies.

Review the Lease's Terms

The first step for a landlord when a tenant fails to pay rent is to consult the lease agreement. Most commercial leases include a default provision outlining the procedures the landlord must follow. Typically, the lease requires the landlord to issue a default notice to the tenant, which details the overdue rent and provides a cure period within which the tenant must remedy the default by paying the outstanding amount or otherwise correcting the breach.

If the tenant does not cure within the time frame required by the lease, the landlord may serve a termination notice, which will end the lease's term and serve as the necessary predicate to commence an eviction proceeding.

Recovering Damages

In addition to recovery of possession, landlords may seek to recover the unpaid rent and related monetary damages from the tenant, including:

• past-due rent
• future rent for the remainder of the lease term, which in some instances may be accelerated to present value
• expenses attendant to reletting the property, including (among other things) broker's fees and renovation costs

However, landlords should be aware that courts may prevent them from realizing a double recovery. In many jurisdictions, landlords cannot collect both accelerated rent and rent from a new tenant who takes over the space for what would have been the balance of the terminated lease's term. For example, New York courts generally prohibit double recovery, and widely used New York lease forms provide that a future rent award will be set off against either the fair market rental value or the proceeds of reletting. Meanwhile, California landlords can demand accelerated rent but must demonstrate that they made reasonable efforts to re-lease the property.

Attorneys' Fees and Litigation

If litigation ensues, the lease's attorneys' fees clause often provides that the prevailing party is entitled to recover its legal costs from the losing party. In many cases, the clause is one-sided, allowing the landlord (but not the tenant) to recover attorneys' fees if it prevails. In New York and certain other states, such a provision is enforceable as written. However, states such as California and Florida imply reciprocity to one-way attorneys' fees clauses, meaning the tenant may also recover legal costs if it wins the case – even if the lease purports to give that right only to the landlord.

Is the Landlord Required to Mitigate Damages?

Where the tenant is evicted prior to the expiration of the lease term, landlords must also consider whether their right to future rent is conditioned on attempting to mitigate damages – i.e., by attempting to procure a new tenant for what would have been the lease's remaining term.

For example, in states such as New York, landlords are not required to actively search for a new tenant unless the lease specifically so mandates. Thus, in these states, landlords are free to seek rent from the tenant for the entirety of what would have been the lease's remaining term, with no obligation to try to rent the space to another tenant.

However, in Florida and other states, landlords are obligated to make commercially reasonable efforts to relet the space upon regaining possession, and landlords who do not seek to relet the space in the normal course of business will see their future rent awards reduced and potentially forfeited. In these states (as well as in states without a statutory mitigation requirement but where the lease requires mitigation), landlords should maintain thorough documentation of their efforts to find a new tenant, as such evidence is crucial to their right to recover future rent.

Lease Guaranties

Many commercial leases include guaranties (either by a corporate parent or the individual principal) that provide additional financial protection in case of the tenant's default. A guaranty may provide assurance of all sums owed under the lease, or it may be limited in some respect. For example, a "good guy" guaranty may allow a tenant to walk away from the lease without further liability, leaving the guarantor responsible for the outstanding debt.

Though guaranties provide landlords assurance that tenants' monetary obligations will be satisfied, in each case the landlord must assess whether the guarantor has sufficient assets to cover the debt before executing the guaranty and, later, pursuing them for payment.

Key Takeaways for Landlords

• Understand the lease's default provisions.
• Consider whether to accelerate rent or mitigate damages by re-leasing the property.
• Keep in mind the potential legal limits on recovering both accelerated rent and rent from a new tenant.
• Assess the enforceability of any lease guaranty.
• Pay attention to the lease's attorney's fees clause in case of litigation.