Challenges in Commercial Leases During Workouts - Must a Landlord Exercise Remedies and/or Mitigate Damages FAQ
Guest Writer, Laura P. Sims, Winstead PC
This is a special series of blog entries in which we provide quick answers to lenders' frequently asked questions related to tenant leases (FAQ). Leases are "the" whole point of income producing property—and this series is pointed to the simple goal of helping you protect the basic value building block of your collateral—which are the leases. Of course, two things should be kept in mind. First, none of these questions can be answered in a vacuum. Questions should be considered with a thorough review of the file. And secondly, many of the questions are worth revisiting from time to time because subsequent events will impact the answers.
Is Landlord required to exercise its remedies and/or mitigate damages immediately once a default is declared under a commercial lease?
- No, Landlord is not required to immediately exercise its remedies under a commercial lease.
Assuming the original demand letter protected Landlord's rights with respect to exercise of remedies, Landlord is entitled to the immediate exercise of all available remedies or, at its election, to delay the exercise of some or all remedies until a later, more suitable date.
In rough economic times, Landlords may have concerns that compete with the traditional process of repossession or termination of the lease (or terminating the Tenant's right of possession without terminating the lease itself).
- For instance, where a mixed-use or retail development is still within its initial lease-up phase, it might be prudent for Landlord to allow a Tenant occupying a prominent location within the development to remain in operation, particularly through a holiday or other critical period, notwithstanding the existence of an event of default. (Note the discussion of a forbearance agreement below.)
- Even in an office context, where "dark space" is less of an immediate concern, a Landlord might still be inclined to delay termination of a lease in favor of repossession or even to delay taking any action in order to avoid negative press coverage surrounding the exercise of remedies.
For a commercial lease in Texas, under applicable Texas law and absent an express agreement to the contrary, a declaration of a default does not give rise to an obligation for Landlord to mitigate damages. A duty to mitigate arises (in Texas) only when Tenant has abandoned the premises and ceased the timely payment of rent or the Lease provides otherwise.
As such, Landlord is not triggering any additional burdens by completing the process for establishing an event of default and Landlord may, within reason, delay further action pending resolution of competing factors.
Even if termination or repossession are delayed, Landlord should make prompt inspection of the premises and address any immediate repair or maintenance concerns. Application can also be made of the security deposit to cover current deficiencies or Landlord expenses, subject to the specific terms of the lease.
Also, if the the relationship with the defaulting Tenant permits this approach and in the appropriate circumstances, the Landlord should consider entering into a forbearance agreement with the Tenant. This agreement will expressly recognize the default, it will set forth the Landlord's agreement to NOT exercise remedies for a specified time, and it will confirm the Tenant's agreement to perform (on a going-forward basis) the terms of the lease - again, for a specified time. After the time period ends, then the Landlord may exercise its remedies.
If you have thoughts, suggestions or questions on this topic, please post a comment below.