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What damages can an owner collect when a tenant vacates prior to lease expiration?

(The following article is the ninth in a 14-part series examining the standard Real Estate Board of New York form commercial lease. This series highlights particular clauses in the REBNY lease and how the courts have interpreted them.)

The "REBNY" form office lease, in [paragraph]18, defines what damages landlord may recover - and when - where the tenant has vacated prior to the lease's originally-stated expiration date, whether voluntarily, or pursuant to landlord's invocation of the "conditional limitation" clause, or following a nonpayment proceeding.

Form paragraph 18 provides that (in addition to any rent due prior to termination of the lease), landlord may recover, each month, until the originally-stated expiration date, an amount equal to (i) the rent stipulated in the lease for that month, minus (ii) the rents received, if any, from the re-letting of the premises, plus (iii) landlord's costs of trying to relet, e.g., brokerage commissions, and expenses of demolition of the space.

Until recently, the focus of litigation in this area was the claim by tenants that landlords were subject to an implied obligation to make reasonable efforts to re-let the premises, and so could not obtain damages under form Lease [paragraph]18 until landlords had proven such reasonable efforts. Tenants argued that the "reasonableness" of landlords' efforts was inherently a fact issue that could not be resolved on summary judgment motion, but rather required a full trial, with all the attendant delay.

The Court of Appeals has now squarely resolved this issue, however, in favor of commercial landlords. In Holy Properties v. Kenneth Cole Productions, Inc., the Court of Appeals held that form lease [paragraph] 18 was enforceable as written, and did not give rise to any implied obligation to try to re-let:

"Once the lease is executed, the lessee's obligation to pay rent is fixed according to its terms and a landlord is under no obligation or duty to the tenant to relet, or attempt to relet abandoned premises in order to minimize damages."

Once the tenant abandoned the premises prior to the expiration of the lease, however, the landlord was within his rights under New York law to do nothing and collect full rent under the lease.

The Court of Appeals further explained that form Lease [paragraph]18 imposes a continued monetary liability upon the tenant even after a tenant vacates prior to the original expiration of the lease - i.e., a "surviving" liability - and that such liability is enforceable:

"Although an eviction terminates the landlord-tenant relationship, the parties to a lease are not foreclosed from contracting as they please. If the lease provides that the tenant shall be liable for rent after eviction, the provision is enforceable."

"In this case, the lease expressly provided that plaintiff was under no duty to mitigate damages and that upon defendant's abandonment of the premises or eviction, it would remain liable for all monetary obligations arising under the lease."

Now that these preliminary issues have been clarified, attention is likely to focus on the details of implementing form Lease [paragraph]18: when can a landlord collect damages; and in what amounts.

The month-by-month remedy provided in Lease [paragraph]18 means that a landlord can only recover for the months accrued to the date of a judgment, and would have to return to court to recover for subsequent months. This clause reflects a view that acceleration clauses are of dubious enforceability. Part I notes that landlords may, however, be permitted to take a more aggressive position.

Part II addresses the issue of proration. Suppose a tenant abandons with two years left on its lease, and the landlord is able to immediately re-let to a new tenant for a term of 10 years, and incurs a brokerage commission. Can the landlord hold the old tenant liable for the full amount of the brokerage commission, or is landlord required to pro-rate the commission, and so charge the old tenant with only 20 percent of the brokerage commission?

One final introductory note: Although, under Holy Properties, a landlord is now permitted to keep the space vacant for the balance of the original lease term, we expect that few landlords will choose to do so. Typically, the tenant who vacates has done so because of its own business problems, and the landlord will rarely wish to rely on such a tenant's continued credit-worthiness. Moreover, at least in theory, the landlord is not in any way penalized if it tries to re-let for all those costs are chargeable to the tenant - and if the landlord succeeds in re-letting, he will have a second "credit" to look to, at least to the extent of the rent due under the new lease.

If the landlord tries to re-let, however, he should be careful to make clear that its efforts are solely pursuant to its right, under Lease [paragraph]18, to do so for the former tenant's benefit. If the landlord is careful, its efforts will not be construed as somehow terminating the former tenant's liability.

Lease 18 Permits Only Month-by-Month Recovery

Once a lease has been terminated, the former tenant's surviving liability is no longer for rent, but only for contractual damages. A contract may provide for a measure of damages in advance, i.e., a liquidated damages provision; and that measure will be uphold and enforced so long as it is reasonable.

The liquidated damages formula in form Lease [paragraph]18 has been enforced as reasonable. By contrast, provisions calling, in effect, for the acceleration, upon tenant's default, of all future amounts that would otherwise have been due under the lease are of dubious legality.

Cases suggest, however, that an acceleration clause would be enforced if it provided for an offset for the reasonably anticipated revenues from re-letting.

The practical problem is that it is difficult to articulate such a measure without becoming involved in issues necessitating litigation. Thus, a clause giving tenant an offset for the current market value for such space, for the balance of the lease term, will involve the landlord in disputes about market valuation. (We suggest defining the offset in terms of an average of the leases existing in the building.)

Nonetheless, it is our view that there are important practical advantages to a landlord in providing, as an additional and alternative remedy to form Lease [paragraph]18, for an acceleration clause. For example, where a landlord is holding a security deposit, but the tenant is threatening to file for bankruptcy, the landlord may be able, if there is an acceleration clause, to quickly declare a termination via a conditional limitation, invoke the acceleration clause, and draw down the entire security deposit, all before the tenant is able to file for bankruptcy and thus freeze the security deposit (by reason of the bankruptcy "automatic stay").

In any event, notwithstanding the absence of an acceleration clause, a landlord may be able to achieve some of the procedural benefits of an acceleration clause if the landlord could seek, in its complaint, not only the damages due to the date of the complaint, but also a declaration, in advance, as to tenant's continued liability for future liquidated damages under [paragraph]18.

In Anon Realty Assoc. v. Simmons Stanley Ltd., the Court held that a request for such a declaration did state a proper cause of action.

In sum, a landlord may - and should - ask for a declaration of future liability.

Measuring Damages

Form Lease [paragraph]18, by its terms, permits the landlord to also recover, in addition to the deficiency between the old stipulated rent and any rent received from the new tenant, "such expenses as [landlord] may incur in connection with re-letting, such as... preparing [the premises] for re-letting."

Where the new lease is for a term extending beyond the expiration of the prior lease, one court has held that the landlord may not, however, recover all of its costs of re-letting, but rather can recover only a prorated portion of such expenses. According to One Whitehall Co. v. Wang Laboratories, Inc., if a tenant abandons its lease with two years remaining on the term, and the landlord subsequently re-lets the premises for 10 years, i.e., the final two years of the old lease term plus 8 additional years, then the landlord can only recover 20 percent of the costs of re-letting, e.g., broker's fees or tenant work, because the remainder of the old lease term constitutes only 20 percent of the term of the new lease signed.

It should be noted, however, that the lease language construed by the court in One Whitehall is subtly different from, and arguably distinguishable from, the REBNY form language. The Court there observed that the lease permitted landlord to recover only the costs of "such re-letting," and held that the word "such" incorporated a prior-stated restriction, that the pertinent re-letting be only "for any part of" a period previously defined as "the period which otherwise would have constituted the unexpired portion of the Demised Term."

The REBNY form [paragraph]18 does not contain the restrictive modifier "such," but provides simply for recovery of landlord's expenses "in connection with re-letting."

Two other features of One Whitehall should be also noted: (i) that Court held that tenant could be held liable for re-letting costs even if those exceeded the proceeds of re-letting - a result clearly indicated also by the standard REBNY language; and (ii) under the lease language there, the Court would imply a condition that landlord could recover only the reasonable expenses of re-letting, not landlord's actual expenses - a result arguably at odds with the standard REBNY language.

We believe that the REBNY form provides for landlord to recover all of its actual costs, without regard to restrictions such as those imposed by One Whitehall; but we recognize that future Courts may not attend to the subtle distinctions here.

Conclusion

REBNY Form Lease [paragraph]18 gives a landlord broad rights to "liquidated damages." The landlord may be able to obtain, by appropriate rider, somewhat broader rights, as an alternative. In any event, the landlord should be careful to follow closely the procedure provided for re-letting in Lease [paragraph]18, lest the landlord be deemed to have released the tenant from liability under the lease.
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Title Annotation:part 9
Author:Claman, Richard
Publication:Real Estate Weekly
Date:Jan 29, 1997
Words:1702
Previous Article:Banco Popular to remain in NYC.
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