Lease Defaults and Landlord Remedies: Monetary DamagesJune 2012 – Articles
* * *
This will be the first in a three-part series discussing landlord remedies for tenant lease defaults. This installment will address the landlord’s right to collect monetary damages.
* * *
As a business transaction, a lease is a fairly simple arrangement — the landlord leases space to the tenant in exchange for rent. When the tenant defaults, the rent usually stops. In that scenario, the question for the landlord is equally simple — how does the landlord get paid? This article will explore the provisions a lease should contain in order to ensure that the landlord gets the damages to he/she is entitled when the tenant defaults.
The most basic damages are fairly obvious. The landlord is entitled to be paid the amounts that have accrued. This means that base rent, as well as any payments to be made on account of taxes, operating expenses or similar charges that are due and payable but unpaid, may be collected by the landlord.
What the lease should say about rent and other charges for the balance of the term is a more complex question. Absent any provision to the contrary, a landlord would be entitled to collect rent and any additional charges that accrue under the lease as those amounts become due. This can be unwieldy as a remedy, and most landlords would prefer to be able to collect the balance of the rent and other charges owed under the lease for the remainder of the term all at once. As a result, most landlords attempt to negotiate a “rent acceleration” clause in their leases. This permits the landlord to declare that all amounts due under the lease for the balance of the term are due and payable immediately upon the occurrence of a default under the lease.
Tenants often try to eliminate rent acceleration clauses or at least mitigate their effects. Rent acceleration clauses can take a number of forms, giving the tenants “credit” for the fact that the landlord will likely have possession of the premises and for the fact that the landlord will be paid the rent all at once as opposed to over time. For example, rent acceleration clauses often provide that the amount to be accelerated is not the full amount of the rent and other charges coming due under the lease, but rather that full amount less the “fair rental value” of the premises for the balance of the term. While this may be objectively more fair (insofar as the landlord does not gain a windfall by re-letting the premises while still getting the full rental from the defaulting tenant for the balance of the term), determining what the “fair rental value” of the premises is can be difficult. In addition, rent acceleration clauses will often provide that the accelerated rent (whether reduced by the fair rental value of the premises or not) will be reduced to “present value” by discounting the aggregate amount by a percentage (since dollars paid now are worth more than dollars paid in the future).
Leases often provide for alternate remedies. In lieu of accelerating the rent for the balance of the term, leases will often provide that the landlord can elect to keep collecting the rent and other charges as they become due, while giving the landlord possession of the premises and allowing it to re-let the premises to another tenant. These clauses will often provide that the defaulted tenant will then only be liable for the difference between the rent and other amounts it owes under his/her lease, and the rent and other charges actually collected by the landlord from any new tenant to whom it rents the property. Essentially, it is as if the landlord is leasing the premises on behalf of the tenant (however, if the landlord were to rent the property for more than the rent that the defaulted tenant was to pay, the tenant would obviously not get the benefit of that additional rent).
In addition to the accrued and unaccrued rent and other charges owed to the landlord under the lease, the landlord can also suffer additional damages as a result of the tenant default. Accordingly, leases should provide that the landlord is entitled to collect from the defaulted tenant the costs incurred by the landlord in obtaining possession of the premises and re-letting the premises to a third party. These can include attorneys’ fees, brokerage commissions, tenant improvement costs and similar charges that the landlord would not have incurred but for the tenant’s default.
From a business perspective, it is important that the landlord make certain the tenant is credit-worthy. Obtaining a monetary judgment against an entity with no money is of little value. If the tenant itself is not credit-worthy, a landlord should get a guaranty of the lease obligations from an entity or person that has money or assets. A properly written guaranty will make the guarantor directly liable for the obligations of the tenant under the lease (not as a “backstop” in the event the money cannot be collected from the tenant, but as a co-obligor with the tenant). The landlord then has the right to collect its damages from the guarantor as well as from the tenant.
Finally, it should be noted that in some states, such as Pennsylvania, commercial leases can contain “confessions of judgment” for monetary damages. This permits the landlord, upon the occurrence of a default, to go to court and obtain an actual judgment against the tenant for the amount of damages the landlord is permitted to collect under the lease. This gives the landlord a judgment for monetary damages without having to go through a trial. This remedy is only available in certain states and must be properly drafted in order to be enforceable.
It is time well spent making certain that leases and guaranties are properly drafted. Properly written documents give a landlord the ability to collect the full amount of monetary damages to which they are entitled in the event of a tenant default.