Most commercial real estate leases afford the landlord multiple remedies to address a tenant’s default. Frequently, such remedies are cumulative, as the landlord may pursue concurrent options. However, two of the most common remedies — termination of the lease or termination of the tenant’s right of possession without terminating the lease — are mutually exclusive.
Termination of the Tenant’s Right of Possession
If a commercial lease allows the landlord to terminate the tenant’s right of possession without terminating the lease, the tenant will remain liable for future rents that accrue under the lease — to the extent the landlord is unable to mitigate those damages — even though the tenant will lose the right to occupy the premises. When the landlord elects to exercise this remedy, it may commence a dispossessory action in which it will seek to recover possession and rents owed through the date of judgment. Additionally, even after the sheriff’s deputy returns possession of the premises to the landlord, the landlord may file serial suits to recover accrued rent.
Terminating the Lease
In contrast, when a landlord elects to terminate the lease, the tenant will owe the landlord no further obligation once the landlord recovers possession of the premises. If a tenant refuses to vacate the space following receipt of a termination notice, the tenant will remain liable for all rents (at the holdover rental rate, if applicable) through the date on which it departs the premises. From that point forward, however, the landlord will be unable to recover future rents from the departed tenant.
As a Commercial Landlord, Why Would I Ever Terminate the Lease if I Can Simply Terminate the Tenant’s Right of Possession?
To be sure, there is a material downside to terminating a commercial lease: lost future rents. As noted above, upon recovering possession of the premises following termination, the landlord has forfeited the right to seek additional rents. Considering that it may take several months (or longer) to locate a replacement tenant, renovate the premises for the new tenant’s needs, and begin collecting rent, it makes sense that the landlord would seek to prolong the former tenant’s liability for as long as possible as a means of mitigating damages. It is also worth mentioning that, even if a landlord terminates a tenant’s right of possession, it may also later elect to terminate the lease.
However, there are several instances in which a landlord may wish to terminate the lease, notwithstanding the fact that doing so will cap the tenant’s financial liability.
First, suppose the landlord is desperate to recapture the space. Maybe the current tenant’s rent is well below the market rate, and the landlord could easily rent the space to a new tenant at a higher rate. Or maybe the current tenant’s use, though lawful, has become a nuisance. In these situations, the landlord may decide that it would be best to part ways with the offending tenant. In that case, when the opportunity to terminate presents itself, the landlord should take full advantage.
Two of the grounds for eviction are (1) non-payment of rent; and (2) holding over in the premises following the expiration or termination of the lease. The option the landlord elects to use can be critical. In Georgia, if a landlord seeks to evict due to non-payment of rent, the tenant still has an opportunity to create a complete defense by curing its monetary default and paying the cost of the dispossessory warrant within seven days of service (though the tenant can only avail itself of this defense once in any 12-month period). In contrast, if the landlord seeks to evict the tenant for holding over following the expiration or termination of the lease, the tenant does not have the right to cure its default, even if the basis for termination was non-payment of rent. Thus, an eviction action based on the same underlying default — the non-payment of rent — can have significantly different outcomes, depending on whether the landlord elects to terminate the tenant’s right of possession (in which case the tenant may still have an opportunity to cure its default) or terminate the lease altogether (in which case the tenant has no such right).
A second important scenario in which a landlord may elect to terminate the lease instead of terminating just the tenant’s right of possession involves a potential tenant bankruptcy. Once a tenant files for bankruptcy protection, all its assets — including any valid leases — become property of the debtor estate. In the case of a commercial lease, the tenant debtor can elect to reject the lease, assume the lease, or assume and assign the lease, and it will have several months or longer to make its election. Because bankruptcy laws are debtor friendly, a landlord whose lease becomes an asset of the debtor estate loses significant control.
If a landlord suspects that its tenant may file for bankruptcy protection, and if the landlord wants to avoid the lease becoming tied up in bankruptcy proceedings, the landlord should move swiftly to terminate the lease before the tenant files its bankruptcy petition. If the tenant has no lease as of the petition date, it has nothing to assume or assign. Many landlords in these circumstances would gladly forgo the opportunity to collect future rents to avoid becoming embroiled in protracted bankruptcy matters.
Understand Your Remedies
Most leases contain the two competing remedies of terminating the lease or terminating the tenant’s right of possession only. In the abstract, neither option is better or worse than the other. Rather, electing the proper remedy requires an understanding of the advantages and disadvantages of each option and an evaluation of the relevant circumstances that impact the landlord’s decision.