Litigating Commercial Leases, Default and Remedies; Those Pesky and Expensive Frequently

LITIGATING COMMERCIAL LEASES, DEFAULT AND REMEDIES;
THOSE PESKY AND EXPENSIVE FREQUENTLY LITIGATED LEASE ISSUES

Patrick G. Moran
Sonnenschein Nath & Rosenthal, LLP
and
Martin H. Orlick
Jeffer Mangels Butler & Marmaro LLP

Table of Contents

I.Introduction

II.Defining A LEASE Default

III.negotiating the default provision

IV.Remedies Generally

V.Eviction and Delinquent Rent – the illinois experience

VI.eviction and delinquent rent – the california experience

VII.mitigation of damages considerations in general

VIII.The Provisional Remedy of the Pre-Judgment Writ of Attachment – a real attention grabber

IX.Evaluating Alternatives

X.frequently litigated non-monetary lease provisions and remedies

XI.Conclusion

I.Introduction

This article discusses lease litigation and focuses on default, remedies and commonly litigated issues. While we analyze Illinois and California unlawful detainer laws and procedures, this discussion of litigating the lease has broader implications. Our viewpoint is that of the landlord's attorney facing a default by an office, industrial or retail tenant. What course of action should the landlord select? How should that course of action be implemented? What are the likely pitfalls? What does the landlord need to do to protect its investment? What cost-effective dispute resolution strategies are available? To help you answer these questions, we summarize the general opportunities and problems that will arise. As always, each situation will have its own unique facts and you must evaluate the specific language of the lease, economic drivers, the prior dealings of the parties, the dynamics of the personalities involved and the likely litigation or alternative dispute resolution outcomes to find the correct solution.

II.Defining A LEASE Default

Under English common law a default by a tenant, even in the payment of rent, did not give the landlord any right to terminate the leasehold estate and retake possession of the premises. Although statutes in nearly all jurisdictions now give a landlord the right to terminate the defaulting tenant's right of possession or the lease itself, most leases describe at length the events that permit termination. Termination of a lease is a forfeiture and the courts have long required clear proof that such a termination right existed and was properly exercised. Palmer v. Ford, 70 Ill. 369 (1873).

As a result, commercial leases have clauses that describe, in great and, hopefully, clear detail, the type of defaults that can lead to eviction and termination. For example, a typical "event of default" clause found in an office lease reads as follows:

If default shall be made in the payment of the Rent or any installment thereof or in the payment of any other sum required to be paid by Tenant under this Lease or under the terms of any other agreement between Landlord and Tenant and such default shall continue for five (5) days after written notice to Tenant, or if default shall be made in the observance or performance of any of the other covenants or conditions in this Lease which Tenant is required to observe and perform and such default shall continue for ten (10) days after written notice to Tenant, or if a default involves a hazardous condition and is not cured by Tenant immediately upon written notice to Tenant, or if the interest of Tenant in this Lease shall be levied on under execution or other legal process, or if any voluntary petition in bankruptcy or for corporate reorganization or any similar relief shall be filed by Tenant, or if any involuntary petition in bankruptcy shall be filed against Tenant under any federal or state bankruptcy or insolvency act and shall not have been dismissed within thirty (30) days from the filing thereof, or if a receiver shall be appointed for Tenant or any of the property of Tenant by any court and such receiver shall not have been dismissed within thirty (30) days from the date of his appointment, or if Tenant shall make an assignment for the benefit of creditors, or if Tenant shall admit in writing Tenant's inability to meet Tenant's debts as they mature, or if Tenant shall abandon or vacate the Premises during the Term, then Landlord may treat the occurrence of any one or more of the foregoing events as a breach of this Lease, and thereupon at its option may, with or without notice or demand of any kind to Tenant or any other person, have any one or more of the following described remedies in addition to all other rights and remedies provided at law or in equity or elsewhere herein.

Industrial leases are similar, while retail leases may include additional events of default related to violations of use or exclusive clauses, "go dark" rights, store operations and inaccuracies in the tenant's accounting for sales. As a rule, retail leases are somewhat tougher on the tenant than office leases, perhaps in part due to the greater rate of failure of small retail businesses, or the tenant synergy landlords try to create.

A typical "event of default" clause in a retail lease reads as follows:

EVENTS OF DEFAULT AND RIGHT TO RE-ENTER. (a)In the event of (1)any failure of Tenant to pay any rent or other charges due hereunder within ten (10) days after written notice that the same is due (provided, however (i)any such notice given by Landlord shall be in lieu of, and not in addition to, any notice required by state law and (ii)Tenant shall pay to Landlord, for each such notice, as additional rent, the sum of $250.00 (a sum which the parties reasonably estimate will compensate Landlord for the cost of such notice), or (2)if Tenant shall fail to move into the premises and to commence the conduct of its business within thirty (30) days after the date specified hereinabove, or fail to continuously operate its business, or if Tenant shall abandon said premises, or permit this Lease to be taken under any writ of execution, or (3)any failure to perform any other of the terms, conditions or covenants of this Lease to be observed or performed by Tenant for more than ten (10) days after written notice of such default shall have been mailed to Tenant (unless such default cannot be cured within ten (10) days and Tenant shall have promptly commenced to cure said default within said ten (10) days and shall cure the same with all reasonable dispatch); then Landlord, besides other rights or remedies it may have, shall have the right to declare this Lease terminated and the term ended (in which event, this Lease and the term hereof shall expire, cease and terminate with the same force and effect as though the date set forth in any required notice were the date originally set forth herein and fixed for the expiration of the term and Tenant shall vacate and surrender the premises but shall remain liable for all obligations arising during the balance of the original stated term as hereafter provided as if this Lease had remained in full force and effect) and Landlord shall have the right to bring a special proceeding to recover possession from Tenant holding over and/or Landlord may, in any such events, without notice, re-enter the leased premises either by force or otherwise, and dispossess, by summary proceedings or otherwise, Tenant and the legal representative of Tenant or other occupant of the leased premises and remove their effects and hold the premises as if this Lease had not been made, and Tenant hereby waives the service of notice of intention to re-enter or to institute legal proceedings to that end.

(b)In addition to the remedies set forth herein for such failure by Tenant, Landlord shall have the further remedy of erecting a barricade at the storefront of the leased premises at such time as possession of the leased premises is deemed vested in Landlord, which barricade may be erected, at Tenant's expense, and without notice to Tenant or occasioned thereby. Notwithstanding the foregoing provisions of this Section, in the event Tenant shall fail to perform or shall default in the performance of the same term, covenant or condition of this Lease on two (2) or more separate occasions during the terms of this Lease, and Landlord has given Tenant notice of each of such two (2) failures to perform promptly after such failures to perform occur, then, even though such failures or defaults may have been cured by Tenant, any further failure or default by Tenant during the remainder of the Lease, shall be deemed a default without the ability for cure by Tenant. During the continuance of any failure of performance or any default by Tenant in the performance of any term, covenant or condition of this Lease, beyond the applicable cure period above, Tenant shall not be entitled to exercise any rights or options, or to receive any funds or proceeds being held under or pursuant to this Lease or to assign or sublet the leased premises, notwithstanding any contrary provisions contained herein. In the event of re-entry by Landlord, Landlord may remove all persons and property from the leased premises and such property may stored in a public warehouse or elsewhere at the cost of, and for the account of Tenant, without notice or resort to legal process and without Landlord being deemed guilty of trespass, or becoming liable for any loss or damage which may be occasioned thereby. In addition, and to the extent permitted by law, in the event of re-entry by Landlord, Landlord may, but shall not be required to, padlock or otherwise secure the entrances to the leased premises without prior notice or resort to legal process and without being deemed guilty of trespass or becoming liable for any loss or damage; all costs and expenses incurred by Landlord in securing the entrances to the leased premises shall be borne by Tenant and shall be payable to Landlord on ten (10) days' written notice; and any such padlocking or securing of the premises shall not constitute or be deemed as an election on Landlord's part to terminate this Lease unless a written notice of such intention shall be given to Tenant or unless the termination of this Lease is decreed by a court of competent jurisdiction. In the event Tenant shall not remove its property from the leased premises within ten (10) days after Tenant has vacated the premises, then such property shall be deemed abandoned by Tenant and Landlord may dispose of the same without liability to Tenant.

III.negotiating the default provision

The most popular areas of negotiation on default clauses are as follows:

(A)Need for Notice of Non-payment. No tenant wants a lease terminated because of inadvertence. If a rent payment is lost in the mail or otherwise delayed by no fault of the tenant, the tenant should know about the problem before losing its leasehold estate (which may include valuable leasehold improvements and a below market rate). If the landlord is concerned about habitual late payments, a late charge based on a percentage of the missed payment or an interest charge on the missed payment can be assessed. Some landlords will address this problem by deeming any late payment above some maximum (say, twice in any year) to be an event of default that can no longer be cured. Leases often provide that if the tenant has failed to pay rent or additional charges within a specified period after receipt of a delinquent notice, the landlord shall only be obligated to accept certified funds.

(B)Need for Notice of Non-Monetary Defaults and a Reasonable Opportunity to Cure. Landlords and tenants will negotiate the terms and conditions of non-monetary defaults. Typical non-monetary defaults include assignments or transfers without landlord consent, breach of operating covenants, exclusive use violations, commission of waste or violation of environmental laws. Non-monetary defaults are generally more difficult to prove and litigate. The most commonly negotiated issue is an extended notice period and opportunity to commence and complete the cure. If the tenant fails to timely commence and diligently complete the cure, the landlord lawfully may, in addition to other remedies available at law or in equity, pursuant to summary dispossession or other legal proceedings, enter the premises with or without terminating the lease and sue for damages. Often, the landlord can cure the default for the tenant's account with or without terminating the lease.

(C)Length of Cure Periods. Since in many jurisdictions there is typically a statutory minimum number of days notice for nonpayment of rent before eviction, as discussed below, most landlords will give a tenant a specific number of days to cure non-payment of rent or additional rent. For non-monetary defaults, statutory or contractual minimum notice periods are longer and permit cure periods of fifteen (15) or thirty (30) days. Most leases provide for an extension of the cure period for defaults which cannot by their nature be cured within the stated period so long as the tenant has commenced working on a cure within the required period, diligently pursues and completes the cure by some outside date. Certain events of default may not be curable, such as transfers of the tenant's leasehold estate without the landlord's consent, breaches of representations or warranties or habitual late payment of rent.

IV.Remedies Generally

(A)Cumulative Remedies. Most leases provide that the landlord's remedies are cumulative and the landlord can pursue all remedies at law or in equity. There are any number of defaults which are not so easily remedied by recovery of possession and a judgment for rent. Clauses limiting a retail tenant's use of the premises should be enforceable by injunctive relief. Violations of exclusive use clauses by the landlord or rogue tenants are also typically enforceable by injunctive relief or contractual rent concessions. Certain continuing lease obligations, such as indemnities against the release of hazardous waste, may give rise to damage claims in the future. There may be claims for actual damage to the premises caused by the tenant. As a result, leases provide that all of the landlord's remedies are cumulative. Typically, such obligations survive the expiration or earlier termination of the lease term.

(B)Waiver. Regardless of the lease language, certain actions of the landlord may be deemed to be a waiver or an election of certain remedies. For example, in certain holdover situations, the landlord may trigger an extension of the lease term by continuing to accept rent without objecting to the tenant's continued occupancy. A landlord may waive its claim for future rents by oral undertakings made in accepting the surrender of premises by the tenant. There is a fine line between accepting the keys and permitting a tenant to vacate under protest and creating the impression that the tenant has been released and that the landlord has retaken full responsibility for the premises. A court may find that the landlord by conduct is equitably estopped from declaring a lease termination. The crucial issue here and in the holdover situation is the landlord's (and not the tenant's) intent at the time. SeeTroccoli v. L & B Products of Illinois, Inc., 189 Ill. App. 3d 319 (1989). Also lease provisions do not survive if holding over is at sufferance.

Most sophisticated tenants will negotiate for a continuation of the same rent and lease terms during a hold-over. Landlords are entitled to recover damages including, in some states, punitive damages if a tenant's holding over interferes with re-leasing efforts.

(C)Payments to Third Parties for the Tenant's Account. If the lease so provides, a landlord may retain the right to remedy a breach by paying obligations incurred by a tenant to third parties, along with the right to perform certain of the tenant's obligations for the tenant's account. In each case, the lease may permit the landlord to recover the amount paid or the cost of performance, plus interest, as additional rent. This is most often found when landlords cure maintenance, tax or insurance obligations or pay mechanics' lien claims or the cost of environmental cleanup caused by the tenant. These "self-help" remedies are useful to prevent damage to the premises and to avoid encumbrances on the building, but obviously either trigger an eviction or add to a later damage claim against the tenant. Credit tenants typically reserve the same right to cure a landlord's default by exercising "self-help", at the landlord's expense, by back charging the landlord or by rent abatement.

V.Eviction and Delinquent Rent – the illinois experience

(A)What Not To Do. The hardest thing for most landlords to understand is that the failure of a tenant to pay rent does not allow the landlord to take immediate retaliatory action, such as denying services or access to the premises by cutting off power, changing the locks or erecting a barricade to put pressure on the tenant to pay its delinquent rent or vacate the premises. Any action of this sort, without a court order, is as likely to excuse the tenant from its rent obligations and generate a counter suit, as it is to facilitate rent collection.

(B)The Statutory Unlawful Detainer Procedure Under Illinois Law. Most states have an expedited statutory procedure to evict a defaulting tenant. For example, this procedure is set forth in the Forcible Entry and Detainer Act (the "Act"), 735 ILCS 5/9-101, et seq., enacted in 1827, to provide a speedy alternative to the previous "tedious action of ejectment". Billings v. Chapin, 2 Ill. App. 555 (1839).

(C)Scope of the Act. The Act has a very narrow scope. The court is given special and limited jurisdiction to determine who is entitled to possession of the premises and to adjudicate the amount of rent that is due to the landlord through the date that possession is awarded. The court does not have other equitable powers and there are very few defenses that may be raised by a tenant. The Act is intended to defuse confrontations over the right to possess real estate. However, if the premises have been abandoned or voluntarily surrendered, an action under the Act is not necessary to confirm the validity of the landlord's possession.

(D)Notice. In nearly every jurisdiction, the first step is to provide a timely, particularized notice to the tenant that a default has occurred and to clearly advise the tenant that failure to cure that default within the required period will expose the tenant to eviction. Most often the default involves the non-payment of rent. In such cases the tenant must be given at least five (5) days to cure the rent default before the lease and possession may be terminated. §9209. If the default involves a different covenant under the lease, at least ten (10) days notice must be given. § 9-210. The Act describes the method of serving these notices, including the right to post the notice on the premises if no one is in actual possession. §9-211. The Notice may be given by the landlord, its property agent or attorney. A defective, imprecise notice will likely cause the proceeding to be dismissed and may put the landlord in the unenviable position of paying the tenant's attorney's fees and litigation costs. The eviction process would have to begin anew.

(E)Recoverable Amounts. Once the cure period has expired, the landlord may file a complaint under the Act to regain possession and, if rent is due, to collect that rent together with court costs and attorney's fees. It is not permissible to attempt to recover future rents in this proceeding. However, if the lease expressly provides for the continued obligation of the tenant to pay rent after reentry by the landlord, the tenant's liability will continue. Broniewicz v. Wysocki, 306 Ill, App. 187, 28 N.E. 2d 283 (1940); Klein v. Ickovitz, 121 Ill. App. 2d 191, 257 N.E. 2d 187 (1970).

(F)The Process. Once a complaint has been filed under the Act, a summons must be served upon the defendant/tenant and a hearing will be scheduled on a date from fourteen (14) to forty (40) days after filing. Continuances may be granted if the tenant is persuasive and has some prospects for curing the default. Once a judgment for possession and delinquent rent is obtained, the sheriff's office will enforce the judgment for possession by removing the tenant and its property from the premises. While enforcement of a judgment of possession is generally expedited, depending upon the sheriff's schedule, this process may take a number of weeks.