Breaking a Lease: The Tenant's Legal Liability

By Leonard E. Marquez

[Originally published in The Wendel Report: Restaurants and Wineries, Winter 2010.]

Given the current economic climate, it is no surprise that some businesses feeling the crunch may be forced to reduce costs or, at worst, cease operations. For a company facing those prospects one practical issue is often at the forefront –what to do about the lease.

A company’s lease may be one of its most significant legal obligations and the rent its greatest ongoing month-to-month expense. Understanding the potential liabilities involved in walking away from an existing lease is a must for any tenant facing this unfortunate prospect.

Under California law, a pair of statutes set forth the primary rules governing the respective rights and obligations of a landlord and a tenant when a lease is terminated non-consensually. Those statutes are Civil Code sections 1951.2 and 1951.4.

Section 1951.4 permits the landlord to hold the tenant to the lease (even if the tenant has abandoned the premises). The landlord can then sue for the rent as it comes due and otherwise “enforce all the lessor’s rights and remedies under the lease.” In order for a landlord to be entitled to the remedy provided by Section 1951.4, the lease must expressly state that the landlord has the rights set forth in that statute and the tenant must have the right to subletor assign the premises under the terms of its existing lease with the landlord. This effectively shifts the burden to the tenant to find another tenant to occupy the premises.

The more common remedy sought by landlords is to retake possession of the property and then sue for the past due rent and lost future rent. Section 1951.2 spells out the law governing this measure of damages. The effect of the statute is to allow the landlord to recover certain damages from the tenant after the landlord has terminated the tenant’s “right to possession” and has retaken possession. This is usually done after an eviction or an abandonment by the tenant. In addition to past-due rent, the tenant is liable for the landlord’s lost future rent, i.e. the rent owed for the balance of the entire lease term.

There are two important limitations on the amount a landlord can receive based on lost future rent. First, the award of lost future rent must be reduced by the amount of future rent likely to be received from a replacement tenant. Second, the award must be “discounted” by a certain rate of interest. Essentially, this means reducing the future rent revenue stream to its present value in order to compensate for the fact that the future rent would not have been earned at the time the damages.

In addition to lost rent damages, a landlord may be entitled to recover other damages. Many leases permit the landlord to recover attorneys’ fees, amounts spent on improvements or other consequential losses.

So what can a savvy tenant do to minimize potential liability? The first thing a tenant should consider is that, for many landlords, recouping possession of the leased premises is priority number one. If a tenant is significantly past due on rent payments or has ceased paying altogether, the landlord will want to get the premises back on the market and relet without delay. Moreover, the uncertainty that often exists when the relationship with the tenant has broken down is of particular concern for landlords.

If rent concessions are not sufficient, the tenant will generally want to negotiate a “surrender” of the lease that cuts off any further liability, particularly liability for lost future rent. A tenant that abandons the property and then seeks to negotiate with the landlord over the tenant’s lease obligations will often have far less leverage.

Whether still in possession of the leased premises or not, striking a favorable deal with the landlord will often require creative solutions such as proposing a replacement tenant to the landlord. Whatever course is taken, working with the landlord will often lead to a better result than simply waiting for the process server to show up at the door.