Tenant's Options After Landlord Breach of Commercial Lease

January 14, 2013
Under California law, a commercial tenant's options when a landlord fails to perform under a lease are generally limited by the terms of the commercial lease.  San Diego businesses often find themselves without a practical legal remedy because the terms they originally agreed to prevent them from withholding rent or terminating the lease.  Tenant's are forced in these circumstances to seek a remedy through litigation which is of course costly and time consuming.  

1188945_into_the_hell_hole.jpgThose tenants that entered into leases without review or who were unable to negotiate better terms often find themselves dealing with landlord breaches.  Some withhold rent immediately not realizing that they might be held in breach of contract.   Others just abandon the premises and end up getting sued afterward.  Whether or not a commercial tenant can do these things for the most part depends upon the actual terms of the lease.  Is it silent as to landlord's defaults?  Does it allow the tenant to make needed repairs and then deduct the cost from rent (repair and deduct)?  Or does it have specific language limiting the tenant's remedies to court action.  For instance, a lease clause might state, "in no event shall the tenant have the right to terminate this lease as a result of landlord's default and tenant's remedy shall be limited to damages and/or an injunction."  

The best way to avoid this peril is to negotiate better terms in the first place.  However, negotiating better terms is dependent on a party's bargaining power.  In most cases, San Diego businesses have little bargaining power because they are new or unknown entities.  In addition, competing businesses are willing to enter into a lease with the landlord under any terms, leaving the more savvy entrepreneurs a difficult tight rope to walk.  Many landlords approach lease negotiation from a "take it or leave it" perspective. This does not mean that San Diego businesses have absolutely no bargaining power, but landlords typically stand strong when it comes to limiting a tenant's remedies.  Nonetheless, a prospective tenant should never shy away from negotiation better lease terms no matter how limited their bargaining power.  Every landlord is different, and the issues that are important to one landlord may not be as important to another.

Ideally, those tenants currently facing landlord defaults which cannot be resolved through informal discussions will consult a commercial lease lawyer.  Of course, paying for an attorney is not always practical.  In such cases, the first step is to review the operative lease and its amendments carefully.  Look for language that limits, or relates to in any way, tenant's remedies upon landlord breaches including language limiting the tenant's ability to terminate the lease, seek consequential damages, seek declaratory relief, withhold rent or any other limitations on tenant's remedies.  Once the tenant has gained a basic understanding of its limitations, it can determine whether seeking legal assistance is necessary.  If there are limitations, consulting a commercial lease lawyer is highly recommended.

If the commercial lease is silent as to tenant remedies for landlord breaches, the tenant may terminate the lease upon a landlord breach.  This option is not without risk however.  Landlords have greater resources.  If a tenant chooses to terminate the lease and leave the premises, landlords are likely to file a damages action forcing the tenant into costly litigation.  Moreover, unlike residential tenants, a commercial tenant does not have the "repair and deduct" remedy available to it unless language in the lease specifically allows it.  Even if a tenant withholds rent pursuant to "repair and deduct" clause, landlords will often proceed with unlawful detainer actions (evictions) forcing tenants to obtain legal counsel or fight the eviction action in pro per (without an attorney).  The process is time consuming and costly regardless of the merits of the tenant's claims.  The ultimate risk is eviction which can devastate a small or growing business. 

It's important that a tenant clearly understand its position and exhaust all efforts to informally work out a resolution with the landlord before taking these risks.  Either way, it cannot be overstated that the best course of action is to first consult with a San Diego commercial lease lawyer.