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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

 

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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

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How Being An Expert Witness Helps My Commercial Real Estate Clients

I know, and have worked with, many commercial real estate (“CRE”) brokers.  Most of them aren’t expert witnesses for legal matters related to CRE.  Being an expert witness really gives me the ability to help my clients in ways brokers that aren’t expert witnesses can’t.

One primary way being an expert witness helps my clients is when I learn what the court judges will and will not allow even if a lease or other contract states something to the contrary.  Even if the parties to a contract agree on an issue but it’s now allowed by law or by a judge, my understanding on these issues can really help me negotiate better for my clients and help them get out of sticky legal situations.  

Don’t get me wrong; I am not an attorney.  Hiring an attorney at the right time is something I highly recommend.  But I am often able to use this type of experience, or clout, with a landlord (I bring the landlord tenants many times) as a broker to persuade the landlord. This includes the landlord’s property manager, and sometimes even their legal counsel, with me persuading them that they aren’t going to prevail on a certain matter. I can thereafter reach a reasonable settlement at great monetary, time and headache savings to my client.

And knowing what a court judge or applicable law will allow, no matter what is agreed to in a contract, really helps my clients when I negotiate their leases or purchase or sell contracts.   If the opposing party to us doesn’t agree to change a term that isn’t allowed by law, it gives our side the ability to let this landlord get what he wants in exchange for something we want. However, I always recommend my clients run any of these types of matters by a really good experienced  CRE attorney just to make sure before we say “yes” to the landlord on an issue like this. Many times the landlord doesn’t know the issue he is fighting for isn’t even legally enforceable and usually worthless to pursue for a landlord. 

Lately, I have been involved in landlord/tenant or buyer/seller or other types of disputes on average about four times per month.  Many of these disputes settle out of court, but the ones that don’t can go the legal way. With rare exception, most of the ones that head to court eventually settle, and many at the last minute before a court appearance.  A few examples of some of my recent expert witness assignments involve: terminating a lease early for a tenant and requiring the landlord to mitigate the tenant’s damages, commission dispute between a selling broker and their client seller, commission dispute between a seller and party promised a finder’s fee (paid to a nonlicensed broker), and representing a tenant in retail shopping center against a landlord for a NNN and square footage matter that ended up with me having to testify in court.  I would say the two biggest disputes that I am involved with as an expert witness include terminating a lease early (and requiring a landlord to reasonably mitigate a tenant’s lease damages as prescribed by applicable law) and NNN (tenant’s share of expenses usually for all retail and large industrial CRE) or operating expense increases over a base year (usually office and small industrial leases).

In summary, I learn quite a bit through being an expert witness by being involved in legal cases.  Both judges and very good CRE attorneys have taught me much that can help my clients prevail in difficult disputes related to just about any CRE matter.  And, if necessary and at the right time, I can refer my clients to a really good CRE attorney that has successfully handled their specific type of matter in the past.

If you have questions about any of the above topics or have any CRE needs, including hiring an expert witness, please contact David Massie at david@djmcre.com or 805-217-0791.