As COVID-19 cases spike again in Texas and elsewhere in the U.S., many business owners continue to deal with the repercussions of closures and broken contracts. Landlords, property managers, and commercial property owners in particular have been faced with challenges surrounding lease disputes between building owners and large retailer tenants. When a tenant breaks its lease entirely due to COVID-19 related downturn, the fallout can leave landlords unsure of what to do next. Knowing the remedies available to landlords can help them to move forward during the ongoing pandemic.
Breaking a Lease During COVID-19
COVID-19 has had an unprecedented effect on businesses across various industries. Countless storefronts have had to close their doors indefinitely and sometimes for good. With the continuing increase of companies being forced out of business, landlords are now facing the reality that many of their commercial tenants may wind up breaking their leases altogether.
Though many landlords have been mandated to suspend rent payments following state regulated eviction moratoriums in place since March, tenants will still face ongoing rent obligations. As businesses make the decision to close or slow down, landlords are being inundated with tenant requests for relief from financial obligations under their leases. This ultimately leaves landlords wondering what their rights are in the midst of the COVID-19 pandemic, especially if a lease is terminated.
As with most business agreements, the specific language of the lease will govern the obligations and responsibilities of all parties. In most long-term and triple net leases, tenants largely agree to pay rent “without abatement, set-off or deduction” during the lease term. Now, amid COVID-19, many tenants seek to cite force majeure clauses in order to trigger lease termination in certain circumstances.
Most leases have force majeure clauses that carve out the payment obligations of the tenant. These clauses typically reference triggering conditions – such as adverse or extreme weather, casualty, condemnation, war, strike, acts of god, governmental regulation, and others. While these clauses would toll certain performance obligations affected by the pandemic, they are generally not broad enough to cover a tenant’s full financial obligation under a commercial lease. In fact, most leases expressly state that events of force majeure do not curtail the tenant’s obligation to pay rent. Because most policies don’t reference pandemics, epidemics, or mandated quarantines within existing force majeure clauses, renters will have an incredibly difficult time being excused from contractual obligations to make lease payments due to COVID-19.
Recoverable Damages for Landlords
It’s important to remember that leases are legally binding contracts. Once they are signed, both parties can only alter it by agreement. Typically, if a renter breaks the lease, a landlord has the right to keep the security deposit and can sue the tenant for losses or damages incurred until the space is rented out again. States have various legal justifications for lease breaking; in Texas, most include being on active military duty, being the victim of sexual assault or stalking, unsafe rental conditions, or violation of privacy rights. With this being said, COVID-19 or pandemic events will not constitute a legal justification to break most Texas commercial leases.
Under Texas law in particular, when a lease is broken with no legal justification, the landlord becomes responsible for making a reasonable effort to re-rent the space. Due to the continuing spread of coronavirus, re-renting a commercial space will be incredibly difficult, leaving the tenant liable for paying the rent for the remainder of the lease term. While the security deposit can typically go towards this, if it is insufficient, landlords can sue to collect the missing payments and other damages, including:
Lost Rent Not Paid
When the landlord is unable to find a new tenant to take the place of the old one, the landlord is then entitled to damages including the remaining rent due under the lease, any reasonable advertising expenses incurred in attempting to find a new tenant, as well as charges for any necessary repairs and cleaning after the tenant moves out.
Present Value of Remaining Lease
While the minimum lease payment refers to the lowest amount a landlord can expect to receive over the lifetime of the lease, the present value of the remaining lease encompasses the minimum lease payments as well as the value of the total lease. The landlord would thus be entitled to damages for the present value of the leased property, including any residual value at the end of the lease term in the form of estimated value remaining within the leased space.
Agreed Upon Liquidated Damages
Liquidated damages are typically included when the tenant signs the lease. A liquidated damages clause specifies a predetermined amount of money that must be paid to the landlord in the event the lease is broken. With commercial leases, this clause may allow for the acceleration of future rents owed following early termination of the lease.
Commercial leases typically contain a clause regarding attorneys’ fees. This is triggered in the event a landlord pursues litigation against the tenant for a broken lease. If the landlord wins, the tenant would be responsible to pay the landlord’s attorneys’ fees. Because of this stipulation and the many complications surrounding lease agreements amid COVID-19, it is incredibly important that landlords and property owners have an experienced insurance coverage attorney by their side to ensure they are properly compensated.
Texas Commercial Property Damage Attorneys
Business owners are facing unprecedented challenges as COVID-19 continues to spread across the United States. Landlords in particular are feeling the pressure from commercial tenants forced to close their doors permanently amid the pandemic. At Raizner Law, we work to ensure commercial property owners and landlords are properly compensated when the unexpected happens. Contact us today to see how we can best assist you.