What happens when a business needs to shut down or break its lease?
When a tenant leaves a lease and stops paying rent before the end of the lease contract without an authorized exit by the contract, it is a breach of the lease agreement. Often commercial lease agreements may be 3 years, 5 years or even 10 years long. Sometimes a tenant cannot continue their business for reasons such as the business is failing, or the health of the business owner, or the property is not working well enough for the business.
When a tenant must stop using the space, the tenant has a choice to keep paying the rent, or to stop paying the rent. Often a landlord may excuse the non-use of the premises if the rent is paid. However, nearly all landlords will consider the non-payment of the rent to be a breach of the lease.
Before the tenant makes any drastic options, they should reach out to the landlord to see if the landlord has any potential tenants who might take over the space. Also, the tenant could decide to even go so far as to find a replacement tenant for the landlord. Sometimes a tenant could also hire a commercial real estate broker to help find a tenant for the space.
The decision to pay rent or not if leaving early is not an easy one to make. Paying the rent costs the expense of the rent and may delay a potential lawsuit by the landlord. Not paying rent saves the expense of paying rent, but may trigger a lawsuit from the landlord.
The length of the remaining term of the lease (how many months or years left) will often guide a tenant as to whether to keep paying rent. After all, most tenants will not want to keep paying rent for years. If the remaining term is only a few months (like 3 to 4 months), then it may make sense for the tenant to pay the last few months of rent.
The landlord will often start off by taking the position that the tenant must pay the entire remaining term of the lease contract to the landlord if the tenant does not want a lawsuit.
Is there a law that says what a landlord is entitled to when a tenant breaches a lease?
Yes, in California there is a relevant law. The relevant law that is California Civil Code § 1951.2, which states the lessor’s (landlord) remedies upon breach by lessee (tenant).
It states the following, CA Civil Code Section 1951.2:
“(a) Except as otherwise provided in Section 1951.4, if a lessee of real property breaches the lease and abandons the property before the end of the term or if his right to possession is terminated by the lessor because of a breach of the lease, the lease terminates. Upon such termination, the lessor may recover from the lessee:
(1) The worth at the time of award of the unpaid rent which had been earned at time of termination;
(2) The worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the lessee proves could have been reasonably avoided;
(3) Subject to subdivision (c), the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the lessee proves could be reasonably avoided; and
(4) Any other amount necessary to compensate the lessor for all the detriment proximately caused by the lessee’s failure to perform his obligations under the lease or which in the ordinary course of things would be likely to result therefrom.
(b) The “worth at the time of award” of the amounts referred to in paragraphs (1) and (2) of subdivision (a) is computed by allowing interest at such lawful rate as may be specified in the lease or, if no such rate is specified in the lease, at the legal rate. The worth at the time of award of the amount referred to in paragraph (3) of subdivision (a) is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus 1 per cent.
(c) The lessor may recover damages under paragraph (3) of subdivision (a) only if:
(1) The lease provides that the damages he may recover include the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award, or for any shorter period of time specified in the lease, exceeds the amount of such rental loss for the same period that the lessee proves could be reasonably avoided; or
(2) The lessor relet the property prior to the time of award and proves that in reletting the property he acted reasonably and in a good-faith effort to mitigate the damages, but the recovery of damages under this paragraph is subject to any limitations specified in the lease.
(d) Efforts by the lessor to mitigate the damages caused by the lessee’s breach of the lease do not waive the lessor’s right to recover damages under this section.
(e) Nothing in this section affects the right of the lessor under a lease of real property to indemnification for liability arising prior to the termination of the lease for personal injuries or property damage where the lease provides for such indemnification.”
Now, you are probably wondering what Section 1951.4 involves, since it is the exception.
Under that section, a landlord might be entitled to continuing rent for the remainder of the term if the tenant under the lease is allowed to and can sublease the property subject to reasonable limitations. If there is a clause in a lease agreement that allows a tenant to sublease the property, then a tenant might want to help find a replacement tenant. A tenant may be able to use a commercial real estate broker to help locate a potential tenant. By finding a replacement tenant, the tenant may limit their financial responsibility under the lease to the landlord.
Going back to the Remedies of a Landlord, a Landlord has a duty to mitigate their damages and to attempt to re-let (re-rent) the location to a new tenant.
This is evidence in CA Civil Code Section 1951.2 (2), which lessens the amount the tenant would owe if the landlord could have avoided the lost rent for example. A tenant might prove this in a lawsuit with an experienced commercial real estate broker who is familiar with the type of property and the location and standard rental terms for that area. Such a broker might be an expert witness for the tenant to say that a new tenant should be able to be found within 6 months. This will vary depending on the market, the type of space, the popularity of the space and the economic cycle.
Help, I’ve been sued by my commercial landlord? Can you help?
Nick Heimlich has experience representing commercial tenants. So, if you are a commercial tenant who has been sued by your landlord, Nick Heimlich has experience handling tenant matters for commercial real estate leases. Mr. Heimlich has represented tenants of various types of commercial properties, such as restaurants, office spaces, professional office spaces, or retail stores. A commercial lease agreement is a common feature of many small businesses. As an attorney, Nick Heimlich, has advised many small businesses who have leases for their businesses. The first step is contacting an attorney like Nick Heimlich to review the relevant lease. A proper lease review will take some time as some leases are 40 pages or more. After the review of the lease, Nick Heimlich will discuss options for the tenant.
