Tag: rent differential

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).

 

 

 

 

 

Landlord’s Termination of Lease Precludes Future Damages

image

“A landlord left without an adequate remedy following breach of the lease by a tenant has only itself to blame for entering into a lease that fails to provide such a remedy.”  275 West Washington Street Corp. v. Hudson River Intern., LLC, 987 N.E.2d 194 (2013).

 

The case: 275 Washington Street Corp. v. Hudson River International, 987 N.E.2d 194 (Mass. 2013). 

Issues: lessor’s attempt to recover accelerated damages after a tenant default and after termination of the lease pursuant to a lease indemnity clause.

Facts:

– 12 year lease for operation for a Boston dental office (term 2006-2018);

– tenant abandons premises in 2007 and stops paying rent in 2008 – less than 2 years into term;

– lease contains indemnification provision which allows landlord to recover all damages resulting from tenant’s lease breach;

– 2008: landlord terminates the lease and files breach of contract suit seeking money damages for lost rents through 2018;

– 2010: landlord relets to new tenant for term that goes beyond 2018 (the original lease expiration year);

– current tenant is paying much less than defendant was under the breached lease;

– Trial court and Appeals Court rulings: Trial court grants landlord’s summary judgment motion and enters judgment in landlord’s favor for over $1,000,000 (damage elements: (i) pretermination rent, (ii) lost rents through 2010 reletting, (iii) rent differential through lease conclusion)).  Appeals court reverses and requests further appellate review from the Mass. Superior Court.

Supreme Judicial Court holding: Trial court reversed. Landlord can’t recover post-termination damages pursuant to indemnity clause until end of lease term (2018).

Why?:  Landlord made the mistake of terminating the lease (as opposed to terminating possession).  This foreclosed landlord’s ability to recover any post-termination damages.  Where a landlord terminates a lease following a tenant default, the tenant has no further rental obligations after termination unless the lease says otherwise.  Hudson River, 987 N.E.2d at 198 citing Restatement (Second) of Property, Landlord and Tenant, s. 12.1, comment g, at 389 (1977).  The Court also held that under common law principles, the lease’s indemnification clause only allowed the landlord to recover damages at the lease’s conclusion “because the precise amount of those losses cannot be ascertained until the end of the [term].”  Hudson River, at 199-200.

The Court further held that commercial lease parties are free to specify what damages are due and when in the event of a premature lease breach.  However, since the Hudson River lease was silent on damage specifics, the Court followed the common law rule that indemnification damages don’t “come due” until the end of the lease term.  Id. at 200.

Take-aways: The landlord’s nearly $1.1M judgment is now reduced to less than $40K (the pre-termination amount owed by the tenant).  Ouch.  The termination of lease vs. termination of possession dichotomy is a bit cryptic but clearly important as almost all commercial leases reference both options.  

Hudson River illustrates in stark relief that if a landlord terminates a lease (as opposed to terminating the tenant’s right to possession), it runs the risk of having its future damages barred.  The lesson for landlords is clear: the lease should contain clear acceleration or liquidated damages language permitting the landlord to recover future rents if the tenant prematurely breaches the lease.  Otherwise, the landlord could have its damages cut off at the date of lease termination, or, like the Hudson River plaintiff, have to wait several years to recover damages. 

My guess is that in 2018 when the lease is set to expire, the corporate tenant/defendant will be dissolved, non-existent and judgment-proof.

 

The Ubiquitous “Excess Rent” Provision

The boilerplate “excess rent” or “rent differential” clause appears in many commercial leases.  Usually buried in a voluminous lease, no one pays much attention to it until the tenant vacates and the landlord sues for damages.  All of a sudden, the excess rent clause assumes critical importance as the landlord tries to prove up its damages.  The rent differential/excess rent section generally provides that when a tenant prematurely vacates commercial property, the landlord can recover the difference between (A) the present value of lease rent owed through the unexpired lease term and (B) the fair market rent for the unexpired term (rent through the balance of lease at lease rate minus market value of rent through lease expiration).  St. George Chicago, Inc. v. George J. Murges & Associates, Ltd., 296 Ill.App.3d 285 (1st Dist. 1998).  In Illinois, these rent differential terms are enforceable and will satisfy the lessor’s statutory duty to mitigate set forth in Section 9-213.1 of the eviction statute.

So if the breaching tenant was paying $1,000 a month under its lease, and the landlord can only find a replacement tenant who pays $600/month – the landlord can recover $400/month ($1,000 minus $600) times the numer of months left on the defaulting tenant’s lease.  Of course, if the market value is now $1,500/month – $500 more than the lease amount – the landlord cannot recover anything.  Instead, the landlord’s recovery will be limited to its damages incurred through the date the replacement tenant begins paying rent.