Posted on

Legal Case: When a Tenant Terminates a Lease Early

I was recently hired as an expert witness to help defend a tenant that terminated their lease early. The landlord sued for millions of dollars and ended up with much less. By California law, landlords are generally required to mitigate a tenant’s lease damages by re-leasing the space using reasonable efforts. “Reasonable efforts” is kind of vague but not to me because I know practically what is needed to re-lease a space.

This type of case was already somewhat common, but COVID-19 really increased the number of these cases, as many tenants were forced to go out of business during this time. As an example, I have been involved in more than 50 of these types of cases since COVID-19 began, from about 2021 to 2023, but had only handled about 20 of these types of cases over the past 10 years before COVID-19 began.

This case was particularly complicated because of COVID-19. The State of California passed an executive order that basically allowed a tenant to remain in their leased premises for 18 months without having to pay rent. But, unless an applicable city or county ordinance also applied, this rent was still due immediately after this 18-month period in full, and most tenants couldn’t afford to pay it all at once while also keeping the rent current moving forward.

Some of the issues that were interesting to deal with were as follows:

a. Is the landlord entitled to late fees and interest during the 18 months rent was paused? The California executive orders didn’t address this.

b. The landlord marketed the property on their own for about 4 months after the tenant vacated before hiring a broker. Would the court accept this even though the landlord was not as experienced or connected as a local qualified broker would be?

c. There was a clause in the lease that basically stated that if the tenant defaulted on the lease in any way, the tenant would have to pay back in full, without proration, all tenant concessions such as abated rent, tenant improvements, and broker fees. Would the court allow this?

d. The landlord could have re-leased the premises immediately to a new replacement tenant but failed to communicate to the exiting tenant (my client) that this replacement tenant required the trade fixtures for the deal to happen. These trade fixtures were permitted to be taken out by the existing tenant (my client) and were worth hundreds of thousands of dollars. Was the landlord at fault for not communicating with the outgoing tenant (my client) about the trade fixtures, which my client would have left in the premises if all parties had agreed upon a deal for the new tenant? If this deal had been finalized with this new replacement tenant, the landlord and my client would not have had to waste time, money, and energy on an expensive lawsuit.

e. When a new lease was eventually signed in 2023, the new tenant received 12 months of free rent for the first year of the term in lieu of any improvement allowance or other tenant concession. Was the outgoing tenant (my client) responsible for reimbursing this 12-month rent amount to the landlord?

The above were just some of the complicating factors of this case. I also conducted a full lease audit and found the landlord was overcharging the tenant for their share of expenses and identified some errors in the lease that favored my client.

Once I wrote my expert report and was deposed by opposing counsel, the case settled about a week before the trial was to begin. I could tell that I knew much more about this type of case than both attorneys involved. My expert report and deposition caused the case to settle, and I’m pretty sure it wouldn’t have settled otherwise, as the parties didn’t like each other much.

If you are an attorney, a tenant, or a landlord with this type of issue, contact David Massie at 805-217-0791 or david@djmcre.com to find out the best strategy to minimize your costs.

Posted on

DJM Commercial Real Estate, Hired as an Expert Witness by Local Real Estate Attorney

David Massie, President of DJM Commercial Real Estate, recently was hired as an expert witness by a local real estate attorney in southern CA. The case revolved around the landlord charging the client too much in Triple Net (NNN) and/or Common Area Maintenance (CAM) fees.

David was able to convince the mediator that the landlord had indeed charged fees that are not industry standard and not per the contract between the parties. David’s client prevailed and the case settled in the client’s favor.

David specializes in commercial (office, retail, industrial, flex, medical, etc.) lease disputes of every kind including NNN/CAM audits and reviews like the above matter. If you are a tenant or an attorney or even a landlord that needs an expert witness with over 35 years of experience on both the landlord and tenant side, please contact David at david@djmcre.com or call him at 805-217-0791.

Posted on

DJM Commercial Real Estate Represented Firm to Buy an Office Building in Agoura Hills Below Comps

David Massie, President of DJM Commercial Real Estate, recently represented a CPA firm to buy an office/medical building in Agoura Hills, CA for a price below the latest comps.

Originally, David’s client only wanted to lease until David showed him the property which had just been listed that same day.  The CPA client agreed it was too good of a value to pass up and was a better value than leasing.

The sales market in southern CA where David’s primary market is very hot with many more buyers than sellers right now and it is a good time to sell because of this so it’s harder to find a good buy like David did for his client here.  Getting to properties fast for David’s clients is very important and he is usually able to show them the properties the same day they were listed and many times even before they are listed.

If you want creative ideas on how to buy or sell your next office, medical, retail, industrial or other commercial building for more, please contact David at david@djmcre.com or call him at 805-217-0791.

Posted on

DJM Commercial Real Estate Sold an Office / Medical Building for 20% Over Comps

David Massie, President of DJM Commercial Real Estate, recently sold an office / medical building in Newbury Park, CA for about 20% over the latest comps representing the seller.
David was able to convince the City of Thousand Oaks to change the zoning to allow medical use in addition to the existing office use because the demand for medical space in this area is strong and supply is limited.
David then targeted a medical buyer to achieve a higher price and was able to get the property to appraise for the buyer’s loan.
The sales market in southern CA, David’s primary market, is very hot with many more buyers than sellers and it is a good time to sell because of this.
If you want creative ideas on how to sell your office, medical, retail, industrial or other commercial building for more, please contact David at david@djmcre.com or call him at 805-217-0791.
Posted on

Why Covid Has Made Commercial Leasing Better for a Tenant

If you are an existing tenant or a potential tenant considering leasing commercial (office and retail primarily) space, COVID has created some good leasing benefits in your favor. Many tenants are missing out on these benefits because they aren’t aware of them or don’t know how to get them. They won’t last forever, so the sooner you make a deal the better.

One of the main benefits for commercial tenant leasing space is a lower rent and/or more tenant concessions (free rent, improvement allowance, moving allowance, etc.). Landlords vary quite a bit on how they will give a tenant a credit here and it really many times depends on whether the landlords want quick cash flow or want a higher resale value. You have to find out what the landlord’s goal is before you start negotiating to get your best deal. A landlord that wants quick cash flow will usually give you a lower rent. A landlord that wants a higher property value will usually not lower the asking rent much, but will instead give you free rent and more tenant improvements and other similar types of concessions.

Another COVID lease benefit that favors a tenant is the lease language itself. Landlords are more open to clauses that favor tenants like not having to pay rent if COVID continues to shut down a tenant’s business or even cause less income for a tenant’s business.

I have found that if a lease is carefully and artfully negotiated, a tenant at this time will pay less than before COVID started by a quite a bit. This is especially true in the first year of the lease since the landlord knows the space he has might sit vacant for another year or more without a tenant.

Each situation is unique and needs to be figured out carefully. A tenant will do best if they hire an experienced broker to help them; a tenant should not negotiate on their own. I have negotiated many leases since COVID occurred and in my 35 plus years of negotiating commercial leases, I have not seen such favorable tenant terms. If you would like to find out how you can save money on your next lease, please contact me as follows:

David Massie

DJM Commercial Real Estate

david@djmcre.com

805-217-0791

Posted on

Round Four: Commercial Tenant Lease Options During COVID – Landlord Sues Me; Now What?

Are you currently a tenant leasing space in a commercial (retail, office, industrial usually) property with your business suffering significant losses?  If so, want to know what your options are and what you should be doing about it now and in the future?  

This is the fourth and final part of a series of articles written on this subject.  The first article covered the pros and cons of subleasing and assignment.  The second had to do with not paying rent.  The third article in this series dealt with how to terminate your lease early.  This one deals with what to do if your landlord has filed a lawsuit against you.

I mentioned in my last blog that if a tenant terminates a lease early, most times the landlord doesn’t even sue the tenant and the tenant might only lose their security deposit.  This usually happens when the landlord doesn’t think that pursuing a judgment will be worth it for many reasons.  One of these reasons would be a tenant not having any assets to pay or not having assets that are legally attachable via a judgment (such as retirement accounts and your personally owned residence that you occupy). Another would be because of how much time, energy, and cost it takes.

What happens if your landlord does sue you?  What should you do?  Most of the time its tenants that have legally attachable assets that are concerned about this, such as those with substantial net worth not legally protected in any way.  This would include rental houses, boats, cars, cash, etc.  Sometimes tenants simply don’t understand the legal process and are afraid that it could be very costly, possibly ruin them, hurt their credit, etc. if they lose in court.  However, once again even legal cases that are filed usually get settled before they go to court because of how costly and time consuming the court process is, not only monetarily but also in terms of time.

Let’s say you are headed to court.  There are so many cases currently filed in California that the courts are backlogged close to 3 years right now,  and many of these cases also deal with a tenant not paying rent.  The courts haven’t decided on how they are going to rule over the government shutting down businesses and COVID causing more of the same.  If the court rules in the tenant’s favor in some of the early cases, then I think many of these cases will be dismissed or settled quickly.

Why might a court rule in a tenant’s favor when the lease clearly states the tenant needs to pay rent no matter what?  I think the best defense right now is “frustration of purpose.”  It’s a legal phrase that basically means if you are supposed to do something but can’t because the government says you can’t, or for another good reason, (like COVID) then you are excused from having to do that something.  In this case, that something is paying rent if you are a tenant.  There are other defenses but I think “frustration of purpose” is the best one for a tenant right now in this situation. Check out this article for more on “frustration of purpose” during this pandemic. 

I am not an attorney, but I have been an expert witness and have been involved in resolving many legal cases for many types of commercial real estate matters including why a tenant should pay rent.  In my 35 plus years of being in the commercial real estate business, I have never seen a more appropriate fit for the “frustration of purpose” argument.  It doesn’t get more frustrating for a tenant than a lease stating that the tenant has to pay rent when the government says they can’t be open for business.  I am watching closely what the courts will do here and really hope they rule in the tenant’s favor on this matter.

What bothers me about landlord leases is that they are usually heavily slanted in the landlord’s favor and landlord’s usually have leverage over a tenant so the lease is rarely fair to the tenant.  And never more so in the “force majeure” clause area.  “Force majeure” simply means “acts of God” or things that happen that aren’t in your reasonable control.  This clause is in many landlord drafted leases and when it exists it’s usually written such that a landlord doesn’t have to do what the lease says the landlord must do if it’s out of the landlord’s reasonable control.  But guess what?  This right isn’t usually reciprocal to a tenant and even if it is, it almost always excludes the payment of rent by a tenant.  How fair is that?  Many times, courts will realize the leverage the landlord has over the tenant and will not allow a lease clause to only favor one party unequally.  For instance, in California, courts don’t allow a lease to award legal costs to the landlord only and not also the tenant no matter if the lease states otherwise and by law,  it makes this right reciprocal.  I hope that after COVID the courts will realize that a “force majeure” clause needs to be not only made reciprocal if it’s in a lease but even if the clause itself is absent from the lease that it becomes mandatory anyways.

Each situation is unique and needs to be figured out carefully if you want help making the right decision on how to handle what you should do regarding your commercial lease.   I have settled these types of matters both as a landlord and tenant hundreds of times so I can assist you for a reasonable cost if you need help so please contact me if so as follows:  

David Massie

DJM Commercial Real Estate

david@djmcre.com

805-217-0791

 

Posted on

Round Three: Commercial Tenant Lease Options During COVID – Save Money By Terminating Your Lease Early

Are you currently a tenant leasing space in a commercial (retail, office, industrial usually) property with your business suffering significant losses?  If so, do you want to know what your options are and what you should be doing about it now and in the future?  

This is the third part of a series of articles I will be writing on this subject so make sure to tune in for the rest in the future.  The first article covered the pros and cons of subleasing and assignment.  The second had to do with not paying rent.  The next article will cover what to do if you are in a lawsuit with your landlord and in particular, the “frustration of purpose” defense.  This third article in the series deals with how to terminate your lease early and save a lot of money doing so.

I have written on the subject of terminating your lease early but would like to point out some notable updates. Click here to view this original, relevant blog. 

Normally when you terminate a lease early, you restore legal possession of the premises to your landlord, and thereafter, your landlord has an obligation to mitigate your damages.  In my experience and opinion, “mitigating your damages” usually equals 6-12 months of your then-current rent.  This is the amount of time normally awarded by a court to a prevailing legal party.  It doesn’t matter if you have a 10 year or longer lease, the award is the same.  So, usually, a tenant can simply reduce what they owe dramatically by restoring legal possession of the premises to their landlord.  Although it’s unclear how COVID is going to affect this 6-12 month rent period and if the courts are going to extend it because it’s probably going to take longer to find a new tenant to take your place.  However, most of the time these types of cases settle and never make it to court as that saves both landlord and tenant time and money.

Most of the time the landlord doesn’t even sue the tenant for terminating its lease early and the tenant walks away paying nothing.  Why?  There are many good reasons: If the tenant doesn’t have enough assets worth pursuing; even if the tenant has enough assets but they are legally protected (in a trust, retirement account, principal residence tenant owns, etc.); because the landlord doesn’t blame the tenant for the government shutdown and/or COVID; because the landlord thinks it might cost more in time, money and energy to sue you than it’s worth; because the landlord might not win in court (if the courts decide that a “frustration of purpose” or other types of legal argument favors the tenant); or because it will make the landlord look bad if other tenants and brokers find out and then don’t want to do business with this landlord (because this wasn’t the tenant’s fault and/or they like the tenant).

Each situation is unique and needs to be figured out carefully if you want help making the right decision on how to handle what you should do regarding your commercial lease.   I have settled these types of matters both as a landlord and tenant hundreds of times so I can assist you for a reasonable cost if you need help so please contact me if so as follows:  

David Massie

DJM Commercial Real Estate

david@djmcre.com

805-217-0791

Posted on

Round Two: Commercial Tenant Lease Options During COVID – Pros And Cons Of Not Paying Rent

Are you currently a tenant leasing space in a commercial (retail, office, industrial usually) property? Is  your business suffering significant losses?  If so, do you want to know what your options are and what you should be doing about it now and in the future?  

This is the second part of a series of articles I am covering on this subject, so make sure to tune in for all of them shortly.  The first article covered the pros and cons of subleasing and assignment.  Future articles will cover when/how to terminate your lease early, and other relevant options.  This particular article of the series will deal with when you should and shouldn’t pay rent, along with the pros and cons of each.

Not paying your rent is usually not a good idea if your landlord has offered you a reasonable alternative like not having to pay  your rent now and adding on the deferred rent to your lease. This can be done at the end of your term via a term extension (adding 3 months or whatever length of the deferred rent amounts to in months) or in some other fashion like raising your rent some time in the future to recoup the abated rent. There are also many other options such as paying a percentage of your rent based on the percentage of your gross/net income that you are currently making, compared to what it would have been before COVID began.  However, if these types of rent arrangements don’t work for you for some good reason, one being that your business simply isn’t going to make it and you are losing money, then you have to find a different solution.

What happens if you ask the landlord for some kind of help and he isn’t responding to you?  Then in my opinion, not paying your rent could be your best option.   Both landlords and lenders don’t want empty buildings as landlords might give a building back to a lender if too many tenants aren’t paying rent or vacating their building.  My experience is that by not paying rent, you will get your landlord’s attention and get a response with what the landlord is willing to do for you quickly.

Some of my clients I have spoken with fear litigation if they don’t pay their rent.  They ask whether the landlord can sue or evict them or if this will hurt their credit?  Assuming the courts are even open, it will probably take over two to three years because of the current legal case backlog for your case just to make it to court. Also, it has not traditionally gone well for the landlord or the lender if they have to spend a lot of money on legal fees chasing tenants and creating vacant spaces at their property.  And you can always change your mind and pay the rent once you get a notice of default as long as you pay within the allotted time, but, even then, most times I would probably recommend that you still don’t pay.  At the same time, it’s unclear how the courts are going to decide the legal matter of a tenant not paying rent if the government shut their business down or the tenant simply couldn’t reasonably open due to COVID related issues.  There is a legal term called “frustration of purpose” and it’s my opinion that this legal doctrine applies to the nonpayment of rent issues and that the courts should not require a tenant to pay rent during such times if they can’t reasonably operate their business.

If you can’t afford to pay all or part of the rent and don’t have any assets that are legally attachable via a legal judgment, then, in my opinion, it’s pretty easy to not pay rent as there isn’t much a landlord can do about it.  Many landlords would rather have the tenant in the space even if they aren’t paying, rather than a vacant space that might take years to release, as at least there is a chance the existing tenant might make it and even be able to pay some of the back rent due in the future.  But if you can afford to pay the rent, even though your business isn’t making much income and have legally attachable assets via a legal judgment, the decision is a little tougher, but not impossible, and not paying rent still might be your best option.

Note to Landlords:  It’s probably in your best option to work with your existing tenant rather than have their space go vacant and try to release it.  Legally pursuing your existing tenant for rent might backfire on you and cost you more in money and time than is worth the effort.  If your lender won’t help you, give them a strong warning about how you might have to default on your loan.  In my opinion, one of the best ways for the tenant, landlord, and lender to get through this is for all three to work together and share in the pain.  Example:  If each party agreed to pay 1/3 of the rent due for 3-12 months, then everyone might get through this as best as possible with no tenant going out of business or a lender having to foreclose on a property at great expense.

Each situation is unique and needs to be figured out carefully but you have to know and consider all of your options so you can pick the best one.   I have settled these types of matters both as a landlord and tenant hundreds of times so I can assist you if you need help so please contact me here:  

David Massie

DJM Commercial Real Estate

david@djmcre.com

805-217-0791

David Massie

Posted on

Round One: Commercial Tenant Lease Options During COVID – Subleasing Your Unused Space

Are you currently a tenant leasing space in a commercial (retail, office, industrial usually) property with your business suffering significant losses? If so, do you want to know what your options are and what you should be doing about it now and in the future? This is the first part of a series of articles I will be writing on this subject so make sure to tune in for all of them shortly. Upcoming articles will cover: when not to pay rent to your landlord, when/how to terminate your lease early, and other relevant options.

Let’s start with what a tenant would normally do if they didn’t pick a course of action with any risks of legal action by the landlord, such as terminating a lease or not paying rent. Subleasing part of your space or assigning all of it are two viable options.

Under a sublease, you would lease part of your space and you are still the tenant, but become your new subtenant’s landlord which is called a “sublandlord”. You could also sublease all of your space, but this isn’t as common. You still pay your rent to the landlord normally, and you collect rent from your “subtenant” based on the agreement you have made between you and your subtenant. You and the subtenant can agree to pretty much whatever you want to on lease terms as long as it doesn’t violate the main lease between you and your landlord.

Subleasing sounds simple enough but here are some issues to consider that make it more complicated: a) The subtenant’s business use should be compatible with yours because if it isn’t, it could be very disruptive to your business; b) You should have a very good written sublease agreement prepared by a real estate attorney or possibly your commercial real estate broker if he is qualified and should try not to create or change the form on your own. This is because if something were to go wrong with the relationship, and the subtenant creates a problem (not paying, disruptive, etc.) you want to make sure you are on solid legal ground to evict them and make them pay for any damages they cause you; c) You should check out your subtenant’s criminal and financial background thoroughly just like your prudent landlord did with you and make sure you get enough security deposit and/or personal guaranty but get professional help when making this determination from a CPA or your commercial broker if he is qualified to do so; d) You should market your sublease space to reach the widest audience you can. This will usually require costs (advertising, commission, time, and energy) so it’s best to hire a commercial broker to do so as you simply will not have the same audience reach or expertise that the broker does and this broker will bring you more quality options than you can find on your own and lease your space faster.

Switching to an assignment works somewhat like a sublease but an assignment is normally done when leasing the entire space to someone new rather than just part of it like through a sublease. Your new replacement tenant is called the “assignee” and you become the “assignor”. The assignee pays rent to the landlord directly as opposed to paying you like the sublease example above. However, this assignee pretty much takes your place and assumes your existing lease without making changes to it, although it is still possible to have changes made, your landlord has to agree, and there normally isn’t an incentive for your landlord to do so. You remain on the hook under the terms of your original lease like a guarantor would, so if your assignee defaults on the lease and doesn’t cure it then you will be responsible to do so. This will result in you having to pay any rent difference each month to your landlord that your new assignee doesn’t pay if this assignee is paying less than you were.

Both of the above options normally require landlord approval so check your lease carefully in the applicable sections and make sure you do what it says. Your landlord can usually decline a request to sublease or assign your lease based on reasonable grounds. Reasonable grounds can be items like bad financials or a criminal record, too many employees, business use not compatible with other tenants in the building, etc.

Each situation is unique and needs to be figured out carefully but you have to know and consider all of your options so you can pick the best one.   I have settled these types of matters both as a landlord and tenant hundreds of times so I can assist you if you need help so please contact me here:  

David Massie

DJM Commercial Real Estate

david@djmcre.com

805-217-0791

David Massie

 

 

Posted on

COMMERCIAL TENANTS: SHOULD YOU PAY RENT DURING THIS CRISIS?

In my opinion, the answer is generally no; don’t pay your rent for now.

Why?  Because it’s probably the only leverage you have over your landlord right now, and it is good leverage which most tenants don’t typically have with a landlord. A relevant Costar News Article discusses how The Cheesecake Factory is one of many examples of a business that has found it impossible to pay rent.  If you pay your rent as usual, why would a landlord offer you any kind of help?

I have been receiving many calls from business owners from existing clients and those that are becoming new clients related to what they should do regarding their commercial real estate leases.  Negotiate to terminate the lease early, sublease or assign the leased space, apply for governmental aid, make an insurance claim, etc. are some of the potential options. There are pros and cons to each option but one of the best options for a tenant right now is to simply not pay your rent.

Not paying your rent might not be a good idea if your landlord has offered you a reasonable alternative such as not paying rent now and adding on the deferred rent to your lease. This could be done either at the end of your term, via a term extension for three months, or whatever length of the deferred rent amounts to in months, or in some other fashion like raising your rent in the future to recoup the abated rent.  However, if this doesn’t work for you for some reason, then you have to find a different solution like one of the ones mentioned in the paragraph above. Here is a link to another article on this subject that you might find of interest.

But what if you ask the landlord for some kind of help and he isn’t responding to you?  Then in my opinion, not paying your rent could be your best option. Landlords and lenders both don’t want empty buildings as landlords might give a building back to a lender if too many tenants aren’t paying rent or vacating.  My experience is that by not paying rent you will get your landlord’s attention and get a response with what the landlord is willing to do for you quickly.

Some of my clients I have spoken with are worried about litigation if they don’t pay their rent.  “Won’t the landlord evict me?” or “Won’t this hurt my credit?” The answer to these questions is that the courts aren’t open now and might not be for some time. And if the landlord has to spend a lot of money on legal fees chasing a lot of tenants and creating a lot of vacant space at their property that traditionally has not gone well for a landlord or a lender.  Also, you can always change your mind and pay the rent once you get a notice of default as long as you pay within the allotted time but even then most times I would probably recommend that you still don’t pay.

Doug Schneider of Alabama-based Bayer Properties knows what store and shop owners are struggling with amid this COVID-19 crisis. In a recent Costar News article, Tony Wilbert states: 

“To help, Schneider, the executive vice president of operations at Birmingham, Alabama-based Bayer Properties, is starting a program to help tenants access some of the money available to them as part of several federal programs, including the Coronavirus Aid, Relief, and Economic Security (CARES) Act and Small Business Administration Economic Injury Disaster Loans (EIDL). Tax credits are available under expanded provisions of the Family and Medical Leave Act as well, he said.”

Here is another great article from Bisnow: The Coronavirus Tenant-Landlord Playbook Revealed.

Each situation is unique and needs to be figured out carefully, so run it by your attorney, CPA or other counsel if you want help making the right decision on how to handle what you should do regarding your commercial lease.   I have settled these types of matters both as a landlord and tenant hundreds of times so I can assist you if you need help. Reach out at david@djmcre.com or 805-217-0791.

Here is a resourceful list of additional relevant articles: