When the Tenant Stops Paying Rent - What Do I Consider First

When a commercial landlord or property manager first contacts me and advises me that a tenant is no longer paying rent, I first determine if the lease was terminated or not. Lease termination could occur: 

1. By mutual agreement; 
2. By the terms of the lease; 
3. By the foreclosure; 
4. By the landlord by service of a Notice to Quit, Pay or Quit, Perform Covenant to Quit, or Notice of Belief of Abandonment.

If the lease was terminated before the filing of the suit, the landlord's  claims to rental damages in California, are usually limited to Civil Code 1951.2 damages, if the lease so provides, which include: 

• Rents owing up to the date of termination; 
• Rents owing from the date of termination of the lease until the date of trial, less what the tenant can prove we could have reasonably avoided, (mitigation); and 
• Future rents, which are calculated by determining the present value of future rents owing from the date of trial through the end of the term of the lease, less what the tenant proves we can reasonably avoid, (mitigation).

Notice that of the three measures of damages above, only the second two involve issues of mitigation.

While in this post, I am referencing California law, many other states have similar statutes that allow a landlord to collect rents through the end of the term of a lease although the lease was terminated as a result of some act or failure to act by the tenant.  You should consult your own attorney who is qualified to give legal advice in the state that the premises are located.

If the lease was not terminated prior to the filing of the lawsuit, we have the option of terminating the lease and suing for Civil Code 1951.2 damages or, if the lease so provides, suing for rents as they accrue, in which case we are only entitled to collect rents and other charges owing up through the date of trial. Note, we do not waive rents owing after trial through the end of the term. As to those future rents, we would have to file a new lawsuit to collect those rents. While the requirement of filing a new lawsuit to collect those future rents seems daunting at first glance, based upon my experience litigating these matters, I have often found that the advantages of suing for rents up through the date of the trial far outweigh the disadvantages of getting a partial judgment.  I will explain.

For one thing, when you terminate the lease and seek rents accruing at any time after the date of termination, mitigation is always an issue and proving and disproving this fact is usually the most expensive part of the litigation. I have also found that in the face of a competent lawyer defending the tenant, the landlord's proof and brokers documentation is often very deficient. Some brokers document their files well and follow legal instructions well and some don't. For the most part, brokers participate in the litigation only to the extent that they continue to do work for the landlord but otherwise see little payoff by cooperating and doing a good job in litigation. Even when the landlord can expect cooperation from the broker, brokers, as a whole are not well known for the type of detailed record-keeping that is necessary to be convincing in court. As a consequence, I try to avoid dealing with mitigation issues. A suit for rents as they accrue is far easier and quicker to win, in most cases. There are very few, if any defenses.

When the lease is not terminated, in essence, the tenant is treated as if they continue to have control of the premises and thus, the landlord's efforts to mitigate are unnecessary. This is so, even when the tenant voluntarily abandons the premises and turns over the keys. The tenant usually cannot unilaterally terminate the lease, unless the lease allows for it, so the landlord can refuse to terminate the lease, in which case the lease continues to run and rents continue to accrue. When the tenant abandons the premises and turns over the keys unilaterally, most leases allow for the landlord to take possession only for the purpose of releasing the premises for and on behalf of the tenant, clean up the premises for re-leasing, secure the premises and for the purpose of safety. This usually puts the landlord in a perfect position of mitigating its damages since it is usually the most common sense and practical approach, without giving up any rights.

Other reasons why I tend to favor avoiding terminating a lease and just suing for rents as they accrue, include: 

1. Because there are so few defenses to a suit for rents as they accrue, the landlord has a much better chance of winning a Motion for Summary Judgment (avoiding a trial and just getting judgment by a motion), avoiding the longer process; 
2. Even if you get to trial, the damages are often very substantial, forcing a quicker resolution. For example, if the tenant owes $20,000.00 per month and it takes you 12 months to get your judgment, you will get a judgment for at least $240,000, plus interest, late fees and attorneys fees in addition to any other damages that you can prove. This is nothing to sneeze at in a breach of lease action. That judgment can get entered and you can file a UCC Judgment lien which, if properly perfected and seasoned, can be a secured lien if the tenant files for bankruptcy protection. 
3. In many instances, the landlord can immediately, upon filing of the complaint, obtain a pre-judgment Writ of Attachment whereby the court, if it is convinced that the Landlord will probably win the suit, can allow the landlord to attach any or all of the tenant's assets in an amount equal to what the court anticipates the tenant will owe up to the anticipated date of trial, plus anticipated attorneys fees and costs of suit. This is a very effective way to force a quick settlement; and
4. After you get your first judgment, it is relatively simple to get a judgment for rents accruing after the date of the first judgment and even another pre-judgment Writ of Attachment. That's because in the second suit, you do not have to re-prove anything that you had already proven in the second suit. We lawyers use the latin term for this as "Res Judicata." All of the facts proven and issues resolved in the first suit are taken as admitted and proven in the second suit and a pre-judgment Writ of Attachment is almost guaranteed.

It is important to note that additional factors that I consider are the type of property, i.e. retail vs. office, industrial, warehouse, etc., the financial resources of the tenant, (to what extent we believe they can pay on a judgment) and the state of the economy, (the ease of re-leasing the premises at a rental rate equal to or greater than the rate owed by the tenant in accordance with their lease.

 

Comments

[Howard F. Kline]

Sorry for the delay in responding. In California, the tenant cannot unilaterally terminate the lease unless the lease allows for it. Most commercial leases state that a tenant abandonment is a "breach" but the landlord has to act on the breach in some way for their to be a termination. Usually, the landlord would terminate by serving notices to pay or quit or perform some covenant or quit or even serve a notice of belief of abandonment.

By serving any of these notices, the landlord acts to terminate the lease and then limits itself to CC 1951.2 damages. With that being said, most leases also provide specific language in the lease which allows the landlord, at the landlord's option, to keep the lease in full force and effect and sue for rents as they accrue, pursuant to CC 1951.4. In rare instances, I have seen the statutory language missing from leases, which makes pursuing the tenant for rents, much more complicated. I have recently seen language in a lease where there is no reference to the landlord's rights to CC 1951.4 and misstated the landlord's rights pursuant to CC 1951.2. In that case, the tenant may be able to abandon and not owe rents through the end of the term of the lease.

[TP]

Hi Howard, thanks for your article.
I have a question for you:
Ca Civil Code Section 1951.2 reads:
"if a lessee of real property breaches the lease and abandons the property before the end of the term [...] the lease terminates"
Doesn't this mean that the lesse can terminate the lease by abandoning the property before the end of the lease and, therefore, face the consequences described on 1951.2 a to e?
Reading your article above I take it that the lessee can't do anything to terminate the lease other than wait until the lessor sues him.
This means that, if the lessor doesn't do anything, he can sue the lessee after the term for the unpaid rent, plus interest, fees , etc. And in this case, he wouldn't even have to prove that he has made any effort for mitigating damages, because it would be under Section 1951.2-a that does not take into account mitigation of losses.

I would appreciate your comments, Thanks!

[Kw Commercial Sa]

Howard, when I first read the title of your post...I considered that thoughts involving a "tough guy" holding a firearm might be the first mental picture that many of my fellow Texan property owners and brokers might imagine when they hear this question (j/k) . In Texas since we still ride on horses and wear cowboy hats to go show space (lol), the mental picture might be Clint Eastwood holding a .44 (Pale Rider). In your part of the country maybe landlords might mentally picture Eastwood with his Model 29 .44 and a different "look" (Dirty Harry) telling the tenant to "make my day"? Maybe some east coast property owners might have a "Tony Montana" picture in their mind telling the tenant to "say hello to my little friend" (Scarface). It's obviously Friday...and even more obvious that I watch to many movies "for guys who like movies", lol.

In all seriousness, I truly enjoyed reading this incredibly well thought and written post. I fear that society (and the CRE industry) is often fearful of topics that they don't know or understand. Along the same lines, I see folks pass on seeking damages like the ones you suggested...or leave money on the table by not fully investigating topics like cost segregation or other tax incentives...because they are fearful of looking into a subjects that they aren't currently an expert at. We should all seek the wise counsel of folks that are experts in certain subject matter that we aren't, so that we limit the amount of time we spend banging our heads into the wall. To become an expert at anything, we have to start somewhere. We must remember that none of us know all the answers and remove pride from the equation if we want to increase our wisdom relating to our trade and life.

Specific CRE concepts like this one aren't spoken about enough. Education is the key to improving the service we provide our clients (and ourselves) and how we eliminate fear and replace it with the power of information. Thanks for sharpening me today. Although there are areas of the article that are obviously state specific in nature, I truly believe that it would be valuable for any CRE broker, property owner, or tenant to read.

Keep up the great work.

Have a great weekend my friend!

Link

Link LeGrand, CCIM

http://kwcommercialsa.com/blog/

[Bob Canter]

I'm glad you added the additional factors. With small business owners who often sign a personal guarantee, the LL is still going after an empty drum and it is probably not worth the time and expense to seek damages or restitution. In NYC they have what is referred to is the "Good Guy" Rule. This is where most LL's just tells the tenant to leave rather than go through the process. Now if they have a large tenant perhaps a different story. I have had 3 tenant bankruptcies for large spaces and large companies and the unfortunate outcome once they hit Bankruptcy Court has been it does not matter what the lease states, the Judge will do what is practical. The best we ever did was get administrative rent (lower than contract rent) and the environmental costs (assuming their was a problem) covered otherwise it was see ya later.