Commercial Leasing: Options for Landlords on Default
A landlord entering into a commercial lease should consider the rights it wishes to have if the tenant is not performing its obligations. The following is a list of the options most landlords have to choose from when dealing with a tenant who is not performing its obligations:
(a) Keep the lease alive: This option is related to the common law of breach of contract and is used where there is a reasonable prospect of payment by the tenant or a guarantor/indemnitor/co-covenantor on the lease. The lease remains in place and is binding on the parties, and the tenant still has the right to exclusive possession and to enjoy the property without interference from the landlord. The rent continues to become due each month, and the landlord can sue for rent overdue (not future rent).
Advantage: If there is a reasonable prospect of payment, this option will result in the tenant being liable to pay all rents under the lease as they become due.
Disadvantage: This is really slow.
(b) Accept tenant’s repudiation and terminate the lease: This option, by terminating the lease, ends the tenant’s obligations to pay any rent which is not yet due. The tenant’s right to occupy the premises is at an end, and the landlord may retake possession and manage the premises as it sees fit.
Advantage: Landlord gets possession of the premises quickly. May be a preferred option where the rents have gone up since the lease was entered into and the landlord expects to be able to re-lease at higher rents.
Disadvantage: No right to sue for future rents.
(c) Affirm lease, re-let on tenant’s account: This option is only available if drafted into the lease. In this option, the lease continues and the tenant is liable for the rents as they become due each month. The landlord exercises its right to arrange for a new tenant to take over the premises and the rents received are applied against the rent owed by the tenant. If there is a shortfall, the tenant makes up the difference.
Advantage: The tenant continues to be liable for the rent to the end of the term.
Disadvantage: Only available if drafted into the lease, and then only in accordance with the words of the lease.
(d) Accept repudiation, terminate lease, give notice of a claim for recovery of damages: This option allows the landlord to take possession of the premises right away, and sue the tenant for the loss of present value of unpaid future rent. This loss must be mitigated by the landlord by re-leasing the premises to a new tenant. The amount that the landlord receives as a judgment is the difference between the rent under the terminated lease and the rent under the replacement lease for the balance of the term. There is a precise form of notice which must be provided to rely on this option.
Advantage: Allows the landlord to claim damages for the future unpaid rent.
Disadvantage: Requires a particular form of notice. This only provides recovery for future rents where the landlord is only able to re-lease at a lower rate. If the rents are better, then there is no loss for future rent.
Landlords should review their commercial leases to ensure that they have the language in their leases to allow them the flexibility to react to a situation with a tenant. If you would like a review of your standard commercial lease for these and other issues, please contact Andrea East.
Andrea East is a business lawyer at Pushor Mitchell LLP practicing in the areas of Business Law and Commercial Leasing. You can reach Andrea at 250-869-1245 if you would like assistance.