General Practice, Solo & Small Firm DivisionMagazine
Real Estate Law
Tenant Remedies: An Oxymoron
By Richard M. Frome, Marcy C. Helfand, Kerry L. Iris, and Orlando Lucero
A damage suit is a tenant’s most straightforward remedy but not always the most practical, given the time and expense to pursue it. The most frequently applied measure of damages for a landlord lease default is the difference between the rental value of the premises in the condition contracted for under the lease and the rental value of the premises after the default (fair rental value).
The most significant damage to a tenant is usually lost profits, which can be a difficult element of damages to recover. Lost profits as a measure of damages applies when a landlord has committed a breach that results in a delay or prevention of the tenant’s business operations. To be recoverable, the profits must not be speculative or conjectural and must be capable of being determined with reasonable certainty. The key to recovering lost profits is the use of a well qualified expert who has done an exhaustive analysis of similarly situated businesses and, equally vital, the tenant’s past history.
The damages that a tenant can claim for torts or fraud include all of the damages available for a breach of contract, plus punitive damages. Usually, the tenant must have "clean hands" and not be in default to collect punitive damages. In addition, statutes prohibiting fraud in real estate transactions, statutory implied warranties or other statutory landlord obligations often provide for a specific measure of damages, including double or treble damages against the wrongdoer.
Self-help may be a more practical remedy for a tenant than a damage suit because it can be accomplished fairly quickly and with more predictable results, provided the tenant has the financial resources to cure the landlord’s breach. If a tenant seeks an express right of self-help in a lease, the landlord may insist on a notice and cure period. A landlord may also require that before the tenant can use self-help a default occur repeatedly or may insist that burdensome preconditions, such as total cessation of use, be met. Landlords may negotiate other limits on self-help, such as requiring self-help to be the tenant’s sole remedy, dollar caps on amounts that can be offset or payout periods for recovering those amounts by offset. Issues of access, insurance and contractor errors should make almost any repairs outside the demised premises off limits for self-help.
The remedy of constructive eviction is based on a landlord’s breach of the implied covenant of quiet enjoyment, and can only be used when a material breach deprives the tenant of its ability to use the premises. To claim constructive eviction, a tenant must abandon the premises within a reasonable time after the landlord’s default.
For some circumstances, the tenant should negotiate the right to terminate the lease and abandon the premises. The landlord normally will insist on long notice and cure periods before the tenant can exercise that right. A tenant should also provide for partial eviction for temporary situations resulting in loss of use or loss of use of a part of the premises. The most common situations for termination provisions are the failure to make the premises ready for the tenant in a timely manner and the failure to provide utilities.
Courts have been reluctant to extend the implied warranty of habitability to commercial leases, absent an express lease provision or statute. Alternatively, a commercial tenant may make a claim for latent defects, fraud, misrepresentation or breach of the covenant of quiet enjoyment. Some jurisdictions recognize an implied warranty of fitness or suitability in commercial leases. In those jurisdictions, the breach must be egregious, making the premises unusable. If there has been a breach of the implied warranty of suitability, the tenant may have the right to vacate the premises or to sue for damages. The damages for a breach of this implied warranty is the difference between the value of the premises as warranted and the value of the premises as provided. The breach of the implied warranty of suitability can also be used as an affirmative defense to a rent collection or eviction proceeding.
Suing for a declaratory judgment may be appropriate when a landlord has unreasonably withheld its consent to an assignment or sublease, or when the tenant would like to remain in the premises but obtain a rent abatement.
An injunction is the most appropriate remedy for a landlord’s breach of an exclusivity provision or a nuisance that is interfering with the tenant’s business. Other lease covenants susceptible to injunctive relief are the landlord’s agreement not to reduce elevator service below a set number of cars, to permit access, to provide HVAC on weekends and after business hours, to provide specific parking and to restore the premises after a casualty.
A standard lease will usually contain a provision that completely exculpates the landlord from all liability under the lease. Although exculpatory clauses in commercial leases are generally enforceable, they are strictly construed against the landlord. A landlord will often agree in negotiations that it is not exculpated for gross negligence or willful misconduct. In addition, the tenant must make sure that it can hold the landlord responsible for breaches of the landlord’s lease obligations. The tenant should also consider its insurance coverage and assign liability consistently with that coverage.
Indemnity provisions involve liability to third parties, as opposed to the parties to the lease. Most commercial leases include a provision whereby the tenant agrees to be liable for all third-party claims including claims against the landlord. As with exculpation clauses, questions may surround the enforcement of a tenant indemnity provision against a landlord’s own negligence or willful misconduct. Even if the landlord does not try to exculpate itself fully under the lease, normally the lease will contain a provision limiting the landlord’s liability to its interest in the property, such that none of the landlord’s other assets will be available if the tenant obtains a damage award.
The lease may contain a shortened limitations period for filing claims for landlord defaults. These limitations are often permissible under state law, and the tenant needs to revise or delete this clause if at all possible.
The tenant and its counsel should carefully review any proposed Subordination and Nondisturbance Agreement (SNDA). A lender may agree to be responsible for certain types of landlord breaches that occur before foreclosure. Alternatively, a lender may agree to remedy a default that continues after foreclosure. A tenant’s success in negotiating these kinds of provisions is usually directly related to its size.
In preparing to negotiate tenant remedies, the tenant and its counsel should first review the landlord’s obligations. For example, the landlord should be obligated to deliver the space, perhaps build out the space before delivery, possibly provide some or all of the HVAC, electricity, plumbing, cleaning and repairs and ensure premises code compliance. Other lease obligations address the specific needs of the particular tenant, such as consents, expansion rights and exclusives. It is advisable to add to the lease a "landlord default" provision, which few standard leases contain.
Richard M. Frome is a lawyer in New York City and is vice-chair of the Real Property Division’s Assignment and Sublease Committee. Marcy C. Helfand is a lawyer in Dallas, Texas, and is a member of the Real Property Division’s Specialized Leases Committee. Kerry L. Iris is a lawyer with Miles & Stockbridge in McLean, Virginia, and Washington, D.C. Orlando Lucero is a partner with Kelly, Rammelkamp, Muehlenweg & Lucero in Albuquerque, New Mexico, and is vice-chair of the Real Property Division’s Remedies and Miscellaneous Clauses Committee.
- This article is an abridged and edited version of one that originally appeared on page 39 in Probate and Property, January/February 1998 (12:1).