Court Decision Clarifies Rights in Breach of Commercial Lease

A recent federal district court decision helps sort out landlord and tenant rights to damages in terminating a commercial lease under Maryland law. The case is important to both landlords and tenants.

If a commercial lease does not specifically address liability for damages in a termination of the lease or the abandonment of the premises, common law principles will apply. The parties, however, can draft their lease to set their own terms, apart from common law principles.

Under Maryland real property common law, a landlord has three options when a tenant abandons a commercial lease. The first is to accept the surrender of the premises, which would terminate the lease and the tenant’s obligation to pay rent. The landlord’s re-letting of the premises beyond the term of the original lease creates a presumption of the landlord’s acceptance of the tenant’s surrender of the premises, unless there is evidence that the landlord did not intend that result. The second option is to reenter the premises for the account of the tenant, attempt to re-let the premises for the tenant’s benefit, and hold the tenant liable for any unpaid rent accrued at the time of reentry and any future deficiency if the premises are not re-let or re-let at a lower rent. Finally, the landlord can do nothing and hold the tenant liable for all rent payable during the remaining term of the lease. 

These common law provisions, however, may be altered by the terms of the lease. If the lease alters them, the principles of contract law would apply instead of real property common law. Therefore, the terms of the lease can alter both the procedure for terminating the lease upon abandonment as well as the damages the landlord may recover.

In the recent case, the court found that the landlord had not accepted the tenant’s surrender of the premises even though the landlord re-let the premises beyond the term of the lease. The court ruled that way because the lease provided that the landlord could reenter and take possession of the premises without terminating the lease and could only accept surrender of the premises by notifying the tenant in writing. Thus, the landlord’s re-letting of the premises beyond the original term of the lease, which would have constituted an acceptance of the tenant’s surrender under common law, did not constitute an acceptance of the surrender. As a result, the lease remained in effect, the tenant was liable to the landlord for contractual damages and the tenant’s damages were offset by any surplus rent the landlord collected.

To determine damages, the court turned to the lease, which provided that the landlord could collect damages for all costs incurred in re-letting the premises. Based on that provision, the court allowed the landlord to collect damages for a tenant improvement allowance given under the new lease, administrative costs, attorneys fees (including fees for unsuccessfully attempting to address a zoning restriction on signage at the request of the new tenant), fees for a title search requested by the new tenant, real estate taxes and utilities for the period between the tenant’s abandonment of the premises and the re-letting of the premises due to the fact that the lease was triple-net (i.e., the tenant was responsible for taxes, insurance and common area maintenance), and prejudgment interest at the rate provided in the lease.

The lease also provided that if the landlord elected to re-let the premises without terminating the lease, any rent received would be applied to the account of the tenant. Thus, the court found that the tenant was entitled to the surplus rent received under the new lease as a credit against the damages it owed to the landlord. The surplus rent was equal to the amount of additional rent the landlord received under the new lease during the term of the former lease. Notably, the court also stated that the lease could have provided that the tenant was not entitled to surplus rent.

Finally, the court required the tenant to reimburse the landlord for a prorated portion of the broker’s commissions the landlord had paid while re-letting the premises. The court found that the tenant was responsible for the portion of the commissions attributable to the period where the terms of the leases overlapped while the landlord was responsible for the commissions attributable to the period where the term of the new lease exceeded the term of the prior lease.

The message for landlords in this case is to consider including a provision in the lease making tenants liable for rent and damages even if the landlord enters and re-lets the premises or terminates the lease upon tenant’s default. Landlords should also include a provision allowing them to recover all damages related to the tenant’s abandonment, including the costs of re-letting the premises. Finally, landlords will want the lease to provide that any surplus rent under a re-let with a successor tenant does not offset such damages.

Tenants, on the other hand, will want to negotiate in the opposite direction, for a provision that any surplus rent offsets any damages the tenant owes to the landlord. Tenants should also contemplate limiting their damages to the rent owed under the lease and require the landlord to use best efforts to re-let the premises in mitigation of their damages.

For more information please contact Chip Sturm at 410-583-2400 or sturm@bowie-jensen.com.