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

Falling behind on rent or otherwise defaulting on lease obligations can lead to serious consequences for commercial tenants, including the landlord instituting legal proceedings for eviction and monetary damages. However, tenants have rights and defenses that can help mitigate or prevent adverse consequences. Understanding these options is key to a tenant's navigation of a lease default situation: By being proactive, informed and prepared, tenants can better protect their rights and avoid unnecessary legal battles when facing commercial lease defaults.

Review the Lease for Termination Rights

Some leases provide tenants lease termination rights, of which a tenant may avail itself if it is in financial trouble rather than waiting for the landlord to take action. Some examples of lease termination rights for the tenant's benefit include:

• landlord's failure to timely deliver possession of the space
• failure to complete necessary buildouts or construction by agreed-upon deadlines
• failure to obtain required permits or approvals for the tenant's use
• eminent domain, if the government takes the property for public use

Damage to Premises or Constructive Eviction

If the tenant suffers damage to the premises due to a casualty event (e.g., fire or flood), it may be entitled to rent abatement or even the ability to terminate the lease. Similarly, if the landlord's actions (or inactions) make some or all of the leased space uninhabitable or impossible to use, the tenant may claim constructive eviction and terminate the lease without penalty.

Defending Against Eviction

If the landlord seeks to terminate the lease due to nonpayment or other breaches, an array of defenses and remedies may be available, including:

• Procedural Defenses. The landlord may not have followed the proper procedures for issuing default notices or initiating eviction.
• Waiver. A landlord that accepted rent payments after becoming aware of a default may have waived its right to terminate the lease for that specific default. In some jurisdictions (such as Florida), accepting full payment of past-due rent can be considered a waiver of the landlord's right to evict for those amounts.
• Prior Breach by the Landlord. A landlord's simultaneous breach of the lease (e.g., by failing to maintain the property) may serve as a defense against eviction, although tenants are typically still required to continue paying rent unless the breach is substantial enough to justify withholding payments.
• Yellowstone Injunction (in New York). Commercial tenants in New York may seek a Yellowstone injunction, a unique legal remedy that tolls the running of the default notice's cure period and allows them to remain in possession while they resolve the default or negotiate a settlement.

Default Caused by Events Outside of Tenant's Control

Tenants may also seek to avail themselves of an array of defenses based on outside events causing the tenant's default.

For instance, most commercial leases contain force majeure clauses, which excuse the tenant's nonperformance in the event of unforeseen events such as natural disasters, wars or other "acts of God." However, courts construe these clauses narrowly, and unless they specifically cover an event, tenants generally cannot use force majeure to avoid paying rent for economic disruptions. In a similar vein, tenants may seek to excuse a default based on the doctrine of impossibility of performance, which posits that the tenant cannot fulfill its obligations due to circumstances outside its control, such as the destruction of the leased premises by fire, flood or other casualty. And under the doctrine of frustration of purpose, a tenant may assert that a default should be excused should the primary reason for entering into the lease no longer exist. For example, if a tenant leases a space for a seasonal business and that business cannot operate due to unforeseen events, it may claim frustration of purpose. As with force majeure clauses, however, courts construe these legal doctrines narrowly. For example, commercial tenants were generally unsuccessful in arguing that the impossibility of performance and frustration of purpose doctrines acted to excuse their rent obligations during the COVID-19 pandemic.

Negotiate with the Landlord

In many cases, and especially if the landlord is facing a weak rental market, tenants may be able to negotiate with the landlord to avoid eviction. This could involve:

• working out a payment plan for overdue rent
• negotiating a reduction in rent or extending the payment period
• agreeing to a lease modification to reflect the tenant's current situation

Key Takeaways for Tenants

• Review the lease to understand your rights to terminate or defend against eviction.
• Explore legal defenses such as impossibility of performance or frustration of purpose.
• Consider seeking rent abatement or claiming constructive eviction if the premises are damaged.
• Raise procedural or waiver defenses if the landlord has not followed the proper procedures.
• Seek to negotiate with the landlord to reach a mutually acceptable resolution.