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

 

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

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