Commercial Lease Acceleration: Termination of Possession vs. Termination of Lease

accelerator Form commercial lease language usually gives the landlord the option of terminating the lease OR terminating the tenant’s right to possession after a tenant default. Generally, if a landlord terminates the lease, this cuts off his damages at the date of termination. So, if landlord terminates the lease on January 1, 2013 and the lease expires on January 1, 2015 – the landlord cannot recover damages beyond January 1, 2013.

By contrast, if a landlord terminates only the tenant’s right to possession, the landlord can still periodically sue for rents as they come due or, using the above example, wait until January 1, 2015 (the expiration date) and sue for all accrued damages on that date.

Stillwell Real Estate Limited Partnership v. Deluxe Auto, Inc., 2011 IL App (2d) 100966-U examines the lease termination-vs.-lease possession  distinction. 

The landlord filed two separate actions: (1) an eviction (forcible) case; followed by (2) a breach of contract case for money damages.  The parties’ lease was three years (2007-2010) for the operation of a car dealership.  The tenant defaulted about two years into the term and the landlord sued to evict about a year before the lease ended.  The tenant moved out a month later and the court awarded the landlord damages owed through the trial date. (¶ 5). 

Six months later, when there was still some time left on the lease, landlord filed a separate breach of contract action against the lease guarantors to recover rental damages that accrued after the eviction trial date. 

One of the guarantors moved to dismiss on the basis of res judicata – that the landlord’s breach of contract claim was barred by failing to seek accelerated damages in the prior eviction suit.  The guarantor based this argument on lease language that said if the landlord terminated the lease, it could recover all rental damages through the 2010 lease end date.   But since the  landlord chose not to sue for all rents in the prior eviction suit, it was now too late.  The trial court agreed and dismissed the landlord’s suit.  Landlord appealed.

Disposition: Reversed.  

Reasoning: The lease required the landlord to provide written notice of its intent to terminate the lease.  Upon termination, the lease allowed the landlord to recover “all damages incurred by reason of the breach.” 

The lease also had an “excess rent” clause (landlord can recover excess rental stream for remainder of lease minus fair market value through the lease term). 

The Court found that the landlord’s statutory five-day notice didn’t equal a lease termination.  It merely signaled the landlord’s intent to terminate possession only.  Also, the landlord’s eviction suit didn’t terminate the lease since the purpose of a forcible/eviction suit is limited to the right  to possession. (¶¶ 18-19).   

Shifting to res judicata, the Court cited the doctrine’s three elements: (1) final judgment on the merits; (2) identity of parties; and (3) identity of cause of action.  (¶ 11).  Applying these rules, the Court found element (3) missing: there was no identity of cause of action between the earlier eviction suit and the later damages action. (¶ 12). 

The  the first eviction/forcible suit – was limited to the issue of possession and rents that were owed on the date of that trial.  The later filed breach of contract suit sought money damages accruing after the eviction trial date. 

Since the landlord never terminated the lease (it only terminated possession) it could sue separately to recover damages as they became due. (¶¶ 12-16).

Take-aways: Service of a 5-day notice and the filing of a forcible suit doesn’t equal a lease termination.  

This case vividly captures the importance of lease drafting precision and that leases contain clear acceleration language.  The case also describes what constitutes a lease termination (as opposed to possession termination only).