Challenges in Commercial Leases During Workouts - Defaults & Lease Termination 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.
What kinds of default will support termination of the Lease or repossession of the premises?
Most Texas courts (and courts in other states as well) are reluctant to enforce a Landlord's right to terminate a lease or repossess a Tenant's premises in the absence of a specifically negotiated or egregious non-monetary default, if the Tenant is otherwise in compliance with the lease.
By contrast, even a relatively small monetary delinquency will be enforced per the plain language of the lease.
Accordingly, where the lease provides Landlord the right to cure non-monetary defaults and obtain reimbursement of such costs from Tenant as additional rent, it may be expedient for Landlord to exercise such right to cure, so that if and when Tenant fails to reimburse such costs, Landlord can proceed on a claim of monetary default.
However, at least in Texas, non-monetary defaults such as abandonment, voluntary bankruptcy, failure to pay utilities to third parties, and allowing the attachment of liens have provided a basis for exercise of Landlord's more aggressive remedies.
Furthermore, if the lease sets forth termination or repossession as the specific remedy for a given non-monetary failure (such that Landlord is not relying on "catch-all" non-monetary default language), a court is more likely to enforce the parties' negotiated remedy.
- For instance, where Landlord and Tenant have negotiated an obligation for Tenant to open for business by a certain, critical date, with a clearly stated and unique right of termination for failure to perform by such date, the declaration of default and exercise of such termination right should be enforced.
- Conversely, even where a lease requires Tenant to take occupancy or open for business by a date certain, if no specific remedy is stated for that failure, it is unlikely that a Texas court would allow Landlord to terminate the Tenant's lease for such failure, particularly if Tenant occupies the premises or opens for business within a short period following the originally required date.
As a general rule for evaluating the strength of non-monetary defaults as a basis for termination or repossession consider:
- Whether the breach affects the negotiated bargain between the parties
- Whether the harm to Landlord is commensurate with the loss a termination or repossession would cause the Tenant
- And further consider obtaining the opinion of an experienced litigator or real estate attorney before making a final decision about pursuit of remedies
If you have thoughts, suggestions or questions on this topic, please post a comment below.
