Our firm frequently represents landlords regarding leases that are in default. Usually the landlord’s object is clear, recover the property as soon as possible and make it productive again. Sometimes however the goal is more complicated and the landlord’s options other than pursuing a straight-forward repossession should be examined. The course of action a landlord takes after a breach of the lease may depend on a variety of factors, for example, the time left on the lease, the rental market, the financial condition of the tenant (or the tenant’s guarantor(s)), and the desirability of the premises. The landlord’s course of action will often be a business decision arrived at after reviewing these and other factors. However, there is another ingredient to making a well-informed decision – what options, other than eviction, does the law allow?
A commercial lease normally claims to provide the landlord with a variety of remedies that include (i) a lawsuit for past due rent and other monies due; (ii) the ability to re-take possession and relet the premises without terminating the lease; (iii) the ability to accelerate future rent; and (iv) the ability to bring a summary action for the repossession of the premises. Additionally, a landlord-friendly commercial lease will also contain a confession of judgment for possession and, often, although less frequently, a confession of judgment for past due and accelerated rent.
A commercial lease will almost always include language to the effect that the landlord’s remedies are cumulative and that he may pursue them in any combination or sequence he wishes. Despite this language, there are limitations regarding what remedies the landlord is ultimately allowed to recover: for example, it is well-settled in Pennsylvania law that any party (with a few exceptions) that brings a lawsuit, cannot gain a “double recovery.” Landlords are no exception in this regard, and as a result, courts universally hold that a landlord cannot recover both accelerated rent and possession.
For most landlords the inability to obtain possession and accelerate rent is not a big consideration—the landlord is relatively content to have a court give him back possession of the property (although sometimes, unfortunately, this requires the aid of the sheriff) and award the landlord the back rent due. Moreover, the judicial bar to recovering accelerated rent occurs only when the landlord judicially obtains possession of the property. The bar does not apply when a tenant simply walks away or mails in his keys and claims that the landlord has re-gained possession. In fact, the landlord may have other options when the tenant does unilaterally abandon the premises—and under the right conditions these options can pay off. For example, under Pennsylvania law a commercial landlord can take back the physical possession of the property for security reasons, and he can even take back the property and re-let it to a new tenant, for the account of the original tenant, without terminating the lease of the original tenant and without letting him off the hook for the balance of the rentals. In the event that the landlord does take the step of re-letting the property without terminating the lease of the original tenant, the landlord must credit the rental from the new tenant against the rental due from the old tenant. The requirement that the landlord credit such rents does not conflict with the well-known “rule” that a commercial landlord does not need to mitigate damages – that rule means, among other things, that a landlord is not obligated to find a replacement tenant (no matter how suitable); it does not mean that the landlord is not required to apply the rents of the new tenant against that of the original tenant.
Another option open to a landlord in the event of a tenant removing from the property is to simply not re-let the property at all and collect the rental for the remainder of the lease term either by accelerating the rent or by waiting and claiming the rent as it comes due. Obviously, this approach will only be profitable when the tenant and/or the tenant’s guarantor(s) have the resources to pay or when the property will be difficult to re-let. However, in those circumstances, this approach should be considered. For example, we have seen a case where a shopping mall owner had several tenants vacate their premises in mid-term as a result of construction work being done to the mall. The marketability of the vacated space was low (the result of construction to the mall and to the adjacent parking), and one of the tenants was a large operation with multiple sites and a guarantor who could be thought of as a “deep pocket.” Under those conditions the landlord did not take possession of the space but rather pursued the tenant and guarantor for the accelerated rental balance. Given the relative unmarketability of the space, this was the best option.
If a landlord chooses to re-let the premises on account of the original tenant or chooses to let the property stand and seek rent from the tenant, the landlord does need to be wary of tenant claims that the lease has been officially “surrendered” to the landlord. Fortunately, a legally effective surrender is a two-step process that consists of more than simply abandonment by the tenant. In fact, a legally effective surrender requires abandonment by the tenant and the “assent” of the landlord. Assent by landlord to the surrender of a lease requires an unequivocal act that leaves no doubt that a surrender of the lease has been intentionally accepted by the landlord. The high burden of showing whether such an assent occurred is borne by the tenant. For example, landlords have done the following and not been found to have assented to a surrender of the lease:
- re-letting the premises;
- entering the property to secure it and for safety and insurance reasons;
- sending a letter to tenant stating that tenant is to “surrender” the property provided that the letter otherwise indicates that the landlord continues to view the tenant as bound to the lease; and
- passively receiving the keys along with a statement by tenant that he has “surrendered” the lease.
Finally, there is a relatively new development in commercial leases that allows a landlord both to have the comfort of getting a judgment for possession and to recover more from the tenant than just the back rent. Some commercial leases now feature a liquidated damage clause in lieu of a straight acceleration clause. Such provisions generally provide for future rent reduced to present value using a specified discount rate and further reduced by the fair rental value of the leased premises for the balance of the lease term. Thus, these provisions are aimed at (1) avoiding the double recovery problem and (2) more generally avoiding the perception that accelerated rent is a windfall to the landlord and a penalty to the tenant.
Provided that such a liquidated damages clause does actually credit the tenant for the “fair rental value” of the balance of the lease term, it seems evident that a judgment for liquidated damages could be obtained in conjunction with a judgment for possession. As a practical matter, such clauses work best in the case of long term lease, and they work best of all when the “fair rental value” of the balance of the lease term is low (for example, the above-described situation, where construction has made the space undesirable for the short or intermediate term).
The scenarios described above generally involve the unusual situation where a tenant cannot pay its rent but has a viable guarantor or can pay its rent but refuses to do so. In fact, we should point out that in some instances a tenant has a good reason to not pay rent. Occasionally a defaulting tenant is successful in claiming that the landlord breached the lease’s “covenant of quiet enjoyment” or that the landlord took actions that “constructively evicted” the tenant; both of these defenses, if proven, do relieve a tenant of liability. However, these cases are the exceptions and from a tenant’s standpoint, they are hard to win (for example, the mall tenant described above was in a quite sympathetic position; however, the on-going construction’s impact to his business was not complete enough to be viewed as a breach of the covenant of quiet enjoyment).
Notwithstanding these few “landlord fault” cases, it will be apparent to most landlords that most defaulting tenants are simply in miserable financial condition. In such cases, a landlord might be stuck with simply obtaining possession and holding a worthless “paper” judgment for back rent. Moreover, the situation can become even worse – tenants can and do file for bankruptcy. The good news is that a bankrupt tenant cannot simply file and stay on the property without paying rent. The bad news is that this scenario, more than any other, might require hiring an attorney to move the process along and regain the property as a source of income.