"Leasing Review - Unintentional Termination Through Acceptance" originally published on the NAIOP Minnesota online blog.
In the current economic market Landlords are increasingly facing defaulting tenants that are not making their rent payments or undertaking their lease obligations. Some of these tenants simply close up shop, hand over the keys to the landlord, and abandon their premises. Such an act by the tenant, and the landlord’s subsequent response to the tenant’s actions, can potentially have severe negative repercussions on the landlord’s ability to enforce the lease and go after the tenant for unpaid rent and other outstanding obligations. The problem is that most landlords are unaware of the consequences of their response.
What are the Repercussions of a Surrender?
Many tenants abandon their premises and attempt to evade lease obligations when they no longer desire to use their lease space. Such a unilateral act, however, has no legal impact on the landlord’s ability to enforce the lease and collection past due rent. It is only when the landlord “accepts” the surrender of the tenant’s leasehold interest that the landlord’s rights are curtailed. The surrender by the tenant, and the landlord’s subsequent acceptance, has the legal effect of terminating the lease and relieving the tenant from future obligations. Under such a scenario the landlord will only be able to recoup lost rent or enforce lease covenants for obligations that arose through the date that the landlord is deemed to have accepted the tenant’s surrender.
The problem is that many landlords do not realize that they are accepting the tenant’s surrender. Any activity that is considered incompatible with the continued existence of a landlord-tenant relationship will be deemed such an acceptance. This could include acts as simple as a landlord re-entering a tenant’s premises in connection with enforcing its rights, the landlord accepting keys from a tenant without objecting to the tenant abandoning its premises, or the landlord changing the locks on the doors to the tenant’s premises. There are many factors that a court will consider in finding such an acceptance and which, taken individually, seem to be innocuous. Taken as a whole, these factors may all lead to a court finding that the landlord has terminated the lease.
Luckily, a court will only find that a lease has been terminated if the landlord takes unequivocal steps towards accepting a surrender, and the tenant has the burden of proving this. However, there are far too many cases where courts have found an acceptance by an ignorant landlord, and the repercussions of this scenario are far too severe, to take this issue lightly.
How Do I Avoid Accepting a Surrender?
At the end of the day a court will ask what the landlord’s intent is. A landlord will therefore need to behave in such a way as to make it absolutely clear to the tenant (and potentially a court) that it is not accepting the tenant’s surrender of its leasehold interest. The best way to accomplish this, of course, is by delivering a written letter to the recalcitrant tenant expressly stating that the landlord is not accepting the tenant’s surrender and that the tenant’s obligations under the lease are still intact. Landlords must further behave as if the tenant is still occupying the premises under a valid lease (e.g. continue to send monthly bills for past due rent, not make alterations to the premises, etc.). A landlord should also consider requiring that the tenant provide a written statement acknowledging that the landlord has not accepted the tenant’s surrender before agreeing to consider any conciliatory measures requested by the tenant. Finally, under no circumstances should the landlord use any of the premises for its own use as such use will be deemed to be an acceptance of the tenant’s surrender.
A more difficult situation arises when the landlord attempts to relet the tenant’s premises. Many courts have found that such activities are inconsistent with not finding an acceptance of a tenant’s surrender. It is therefore important that landlords inform tenants that they are attempting to relet the tenant’s premises only as the tenant’s agent and only in order to reduce any potential liability that a tenant may have. Even if a landlord finds a replacement tenant, it is likely that the new tenant will be paying a lower rent and the terms of the new lease will be more tenant friendly considering the current lease market. Further, a landlord will have additional tenant improvement costs and leasing commissions that it will want to recoup. All of these costs will likely be lost if a court determines that the landlord has accepted the tenant’s surrender.
For future leases, Landlords should always confirm that the remedies provisions in their lease forms include re-entry rights in favor of the landlord in the event of a tenant default and additional language that states that such a re-entry will not be deemed a forfeiture of rent. Courts are not as eager to find an acceptance of a tenant’s surrender when the landlord attempts to relet the premises if the lease specifically grants the landlord with the rent to re-enter the premises.
If you follow these procedures, you should be able to preserve your rights under your lease.
DISCLAIMER: These articles are to be used for general information purposes only, not as a substitute for in-person evaluations. The information contained herein is not legal advice and no attorney-client relationship is formed through these articles.