Guideposts on Commercial Lease Defaults
by Laura P. Sims
Many, if not most, attorneys with a commercial practice will field a lease default question at some point. Here are guideposts for evaluating and navigating the breach and default process.
The tenant’s goal is generally to avoid a breach or minimize damages. If anticipating a future breach, the tenant should consider asking the landlord to modify problematic terms before the breach occurs. Modifications to reduce or defer rent, alter burdensome operating requirements, or relocate to more affordable space may better serve both parties in the long-term and are worth exploring.
If the landlord will not consider modification or has delivered notice of breach, the tenant should promptly review its lease and correspondence to determine: (i) the nature of the claimed breach and required cure, (ii) applicable notices, cure periods and alternative dispute procedures, (iii) applicable late fees and default interest, (iv) rights and obligations to remove personal property and improvements, and (v) the scope of any liens, contractual or statutory, on a tenant’s personal property.
Strategic thinking before repossession can save the tenant money. For example, putting the premises in required surrender condition could prevent surcharges and interest on the landlord’s cost to do so. Removing important personal property before repossession will preserve a tenant’s access to those items, limit the practical reach of the statutory lien for delinquent rent under Texas Property Code (TPC) § 54.021, and eliminate storage charges, but may constitute a separate breach of the lease.
Scrutinize the notice posted and process used by the landlord for any lock-out for non-compliance with TPC § 93.002 and § 93.003 or with conflicting requirements under the lease, which will control if present. The tenant’s remedies for breach of TPC § 93.002 include re-instatement of possession or termination (at tenant’s election) and damages equal to the lesser of actual damages, one month’s rent or $500. If the landlord holds a contractual lien on the tenant’s property, and the landlord fails to store and sell the same in compliance with the applicable provisions of the Texas Uniform Commercial Code (UCC), the tenant may be able to reduce default damages by the amount a commercially reasonable sale would have garnered or even counter-claim for conversion of its property.
The landlord’s goal is to maximize recovery and minimize liability by strict compliance with the lease and applicable statute. Although pre-lease diligence, including credit and reference checks, and a substantial security deposit may minimize losses, defaults do happen. Once a rent default occurs, deliver written notice without unreasonable delay. Be sure to comply strictly with notice and cure provisions, including acceptable notice delivery methods, and to review all amendments, correspondence and third-party agreements to confirm current addresses and which third-parties, such as guarantors and lenders, are entitled to notice.
Texas common law does not authorize termination or repossession for breach, rather such rights exist only if set forth in the lease. That said, a tenant’s anticipatory breach (e.g., abandonment and failure to pay rent) may create the right to repossess. A rent default, however, entitles a landlord to lock-out per TPC § 93.002, subject to the tenant’s right of re-entry upon full cure. If a landlord exceeds its remedies, it risks claims for wrongful termination and conversion.
Texas courts have also disfavored termination or repossession for non-monetary or so-called “administrative” defaults (e.g., failure to provide proof of insurance), even if seemingly allowed under the lease. Exercising rights of repossession or termination for non-monetary breaches should be limited to material matters, such as a failure to operate or violation of another tenant’s exclusive use. If termination or repossession is the desired end, a tenant’s failure to reimburse the landlord for costs to cure non-critical breaches may create a monetary default that supports all remedies under the lease.
The landlord should document any lock-out with video or a neutral witness and prepare an inventory of the contents. Requests by the tenant, employees or equipment lessors to recover personal effects or other property not covered by the landlord’s lien should generally be honored, subject to escort and prior identification of the items being removed.
Finally, the landlord must mitigate damages arising after repossession and from default upon a tenant’s abandonment of the premises in violation of the lease (TPC § 91.006). The duty to mitigate does not require a landlord to take undesirable tenants or to ultimately succeed in reletting, but failure to list the premises for lease or to consider reasonable offers to lease may reduce recovery from the defaulting tenant.
Laura P. Sims, a Partner at Crouch & Ramey, LLP, specializes in real estate development, asset management and leasing matters. She can be reached at firstname.lastname@example.org.