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Often when I negotiate a lease I am surprised when a tenant or its representative skip over the condemnation provisions in the lease form as they deem these provisions as superfluous boilerplate. The prevailing view is that these provisions will never affect the tenant’s rights as the tenant does not own the fee title to the property and the chance that the property will be condemned is so remote that there is no use worrying about a condemnation during the lease term. A tenant may find that when it receives notice of a taking of its premises, it will need to find a new premises and it will not be reimbursed for its moving expenses, loss of business or, most importantly, the thousands of dollars’ worth of tenant improvements that it put into its premises possibly only a few months ago. Tenants should be aware of what they are getting into prior to agreeing to spend a substantial sum of money in tenant improvements, and they should properly structure their leases so as to preserve any rights they may have.

Generally, a tenant is not entitled to receive an award for the loss of its business, its moving expenses (but it may be entitled to relocation assistance), and the cost of removing its personal property and other removable fixtures owned by it from its premises. If the condemnation provisions in the lease are structured properly, however, a tenant will be entitled to an award for the value of the unexpired leasehold interest and the value of the use of its tenant improvements for the remainder of the lease term. A tenant should follow the following specific steps when drafting its lease so as to preserve these rights.

First, a tenant should require that it is the only party who holds a termination right upon the occurrence of a condemnation, and the termination should not be automatic or exercised by the tenant at any time. Most condemnation provisions in a lease either grant both parties with a termination right upon a “taking” of all or substantially all of the premises by a condemning authority, or automatically terminate a lease upon such a taking. Minnesota courts view both such provisions as an automatic termination of the lease entitling the tenant to neither reimbursement for its leasehold interest nor compensation for the loss of the use of the tenant improvements. As the tenant is only entitled to reimbursement for its interests as of the day of the taking, and the tenant no longer has any interest in the premises as of the day of the taking because the lease has terminated, the tenant no longer possesses a compensable interest. The only way for a tenant to preserve any rights in a condemnation award is by requiring that the lease language read that the tenant alone has the right to terminate the lease upon a taking.

Second, a tenant should not terminate the lease upon receiving notice of a taking of its premises. Once the tenant terminates the lease, the tenant extinguishes any right to receive an award for the same reasons as stated above.

Third, a tenant should pay particular attention to how tenant improvements and fixtures are treated in the lease. If a tenant has paid for the improvements, but it will not remove the improvements at the expiration of the lease, the lease should be drafted to state that the improvements remain the property of the tenant, but will become the property of the landlord at the expiration of the lease. By drafting the lease in this manner, a tenant will preserve its right to obtain an award for the value of the use of its improvements for the remainder of the term. Note that a tenant will not be entitled to an award equal to the value of the improvements themselves so the tenant will not be made whole, but by properly structuring the lease in this manner the tenant will be entitled to at least a partial reimbursement.

Fourth, a tenant should require that the condemnation provisions in the lease do not obligate the tenant to pay rent once a taking has occurred. As the tenant will not be terminating the lease, the tenant does not want to be in a position where it has to pay rent for a premises that it cannot use. Note, however, that if a taking renders a tenant’s premises untenantable, and the tenant vacates the premises, the tenant will no longer have an obligation to pay rent.

Finally, the tenant should not agree to any provision in the lease that states that the tenant waives any rights that it may have to a condemnation award. The parties are free to contract out of any rights that they may have. By agreeing to such a provision, the tenant will have waived all rights that it has to receive an award from the condemning authority.

It is true that a tenant’s premises will likely not be affected by a condemnation proceeding. However, the same could be said about the risk that your house will burn down in the next year or that you will be involved in an accident on your way home from work, yet most people find it advantageous to maintain insurance for their home and car. A tenant should devote the same amount of care when negotiating condemnation provisions in a 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.

An oral lease can be valid if the term is under a year. Any oral lease or sublease for a term over a year is not valid. An assignment of a lease with more than a year remaining on the term, or any oral amendment or modification of a lease with a remaining term of more than one year, is also invalid. There are also prohibitions on landlords maintaining oral leases for residential premises in buildings with twelve or more units regardless of the length of the term.

• Is a landlord liable for injuries suffered by third parties that occur in the tenant’s premises?

A landlord can be liable in certain circumstances for injuries suffered by an employee, invitee, etc. (e.g. for violations of housing codes).

• Can a landlord go after the tenant’s spouse for amounts due?

A tenant’s spouse is generally not considered a co-tenant simply by the nature of the relationship of the tenant and his or her spouse. There are limited circumstances when a landlord can go after the assets of a spouse who is not a signatory to the lease, but these circumstances are very limited.

• Can a tenant withhold its rental payment if the landlord does not undertake its obligations under the terms of the lease?

Generally, no. The tenant’s covenant to pay rent is independent of the landlord’s obligation to perform under the lease. There are, however, statutory exceptions to the general rule. For example, if the landlord violates the implied covenant of habitability in a residential lease, the tenant can withhold its rental payment.

• When does the tenant’s obligation to pay rent accrue if the lease is silent?

If there are no provisions in the lease with regard to when the tenant is obligated to pay rent, the tenant is obligated to pay rent at the end of the term of the lease. Note that most leases contain provisions stating that the tenant’s rental amount is due on a monthly basis. This provision will likely be interpreted to mean that the rent payment is due monthly.

• Does a landlord need the tenant’s consent before assigning its interest under the lease?

Generally, no unless the lease specifically requires the tenant’s consent.

• What implied covenants are contained in every lease?

The tenant has the implied duty to not commit waste (i.e. not intentionally or negligently destroy the premises), to make repairs necessary to maintain the premises (but excluding substantial repairs), and to return the premises to the condition that it existed in at the commencement of the lease term including removing any improvements that the tenant added to the premises. The landlord must comply with the implied covenant of quiet enjoyment (i.e neither the landlord nor a third party with superior rights to the landlord may interfere with the tenant’s quiet enjoyment of the premises), and the implied covenant of habitability for residential leases (i.e. all premises are habitable and the conditions in the premises are reasonably suitable for human residence). Note that the tenant’s covenants can be modified by the terms of the lease.

• Can a landlord accept rent without waiving an existing tenant default?

Generally, no. The landlord, however, must have knowledge of the default. There is also an exception if the default is of a covenant in the lease that is part of the consideration that the landlord receives for leasing the tenant’s premises (e.g. the covenant to pay real estate taxes).

• Does a landlord have a duty to mitigate damages?

Until such time as the lease is terminated, the landlord has no obligation to mitigate damages. Once the lease is terminated, however, the landlord does have such a duty.

• Can a landlord or tenant seek attorney’s fees and expenses if it successfully sues to enforce lease covenants?

Absent a specific contractual or statutory obligation (the latter of which is very rare), each party is responsible for its own legal fees. A court will also enforce a lease provision that obligates the losing party to pay the successful party’s legal fees.

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.

Many tenants have been unable to survive in the current economy or have been looking for ways to reduce their overhead. To help solve their financial woes they have tried to offload that extra office space they no longer need or want. Although landlords are hesitant to release tenants from their leases outright, landlords are willing to consider subleases for a portion of a tenant’s space, or an assignment of the leasehold interest to new financially viable tenants. These arrangements, however, do not always work out for the best and many of these assignees or subtenants invariably breach the terms of their leases. Landlords need to know their rights before they consent to any sublease or assignment, and must be cautious with how they structure such a consent so that when the deal falls apart they have their rights protected. Tenants should also correctly structure transactions so as to avoid or reduce potential future exposure.

Liability Under Assignments

When executing a lease, a landlord and tenant develop what is referred to as privity of estate (a relationship based on the tenant’s occupancy of the landlord’s property) and privity of contract (a relationship based on the contract that is entered into between the landlord and the tenant). The liability of a tenant, any assignee, and any subtenant varies depending on whether privity of estate and/or privity of contract exists between the various parties. At the onset of the lease, the landlord can go after the tenant for any covenants that “run with the land” (e.g. any covenant that is intertwined with the possessor of the premises) based on privity of estate, and the landlord can go after the tenant for any personal covenants (e.g. covenants that are personal to the original tenant) based on privity of contract.

Once the tenant assigns its leasehold interest to an assignee, the tenant no longer has the right to occupy its premises and therefore no longer has privity of estate with the landlord. However, unless the landlord expressly releases the original tenant from its obligations under the lease, privity of contract continues to exist between the landlord and the tenant. The landlord can pursue all remedies set forth in the lease against the original tenant based on a violation of the original contract terms.

When the original tenant assigns its leasehold interest to its assignee, the assignee occupies the premises and therefore establishes privity of estate with the landlord. The landlord can therefore go after the assignee if any of the covenants that run with the land are violated including the payment of rent and taxes, the obligation to repair the premises, and many other covenants contained in the lease. However, unless the assignee expressly assumes all obligations under the lease, the assignee is not liable for a breach of any personal covenant. The assignee’s liability will also end (absent the existence of fraud) once the assignee assigns the leasehold interest to a third party as privity of estate will end. Such an assignment is especially problematic if the financial strength of the assignee is stronger than both the original tenant and the new assignee, which is usually the case. Note also that the result is the same regardless if the lease contains restrictions on or prohibitions of assignments without the landlord’s consent.

As for the original tenant, it can recover damages it owes to the landlord from the assignee, but such damages are limited. As stated above, the assignee is not liable for personal covenants contained in the lease unless it has specifically assumed them. The original tenant also does not have the right to re-enter the premises and evict the assignee unless it specifically reserves such a right in the assignment document.

Liability Under Subleases

A sublease does not affect the relationship of a landlord and its tenant. Privity of estate and privity of contract continue to exist between the landlord and the tenant as if no sublease had been entered into. The landlord can continue to pursue all remedies set forth in the lease against its tenant regardless of the existence of the sublease.

The landlord’s rights are more limited in a sublease scenario vis-à-vis a subtenant. No privity of estate or privity of contract exists between a landlord and a subtenant so the landlord has no right to seek damages from a subtenant. A landlord does have the right to terminate the prime lease if any covenant set forth in the prime lease is violated, and such a termination will automatically terminate the sublease. The landlord therefore has just as much control over the premises in a sublease as in an assignment, but it does not have as many sources of potential funds to recoup damages.

The tenant under the prime lease, however, has more rights under a sublease scenario. The sublease is treated like a lease between the prime tenant and the subtenant, and the prime tenant will generally reserve remedies under the sublease including the right to terminate the sublease, the right for damages, and the right to evict the subtenant upon the occurrence of a default. A sublease is therefore far more beneficial to the prime tenant.

The Name of the Instrument

Note that courts will not recognize the label of the instrument attempting to create an assignment or a sublease and will analyze the conveyance to determine the nature of the relationship. If a tenant attempts to sublease some or all of its premises for the remaining portion of the term of the lease, the law will treat such a sublease as an assignment of the lease as it applies to that portion of the premises. The prime tenant will lose most, if not all, of the remedies that are set forth in the sublease and may not be able to evict its subtenant from its premises upon the occurrence of a default.

If a tenant attempts to assign the lease, but holds a reversionary interest (e.g. if the assignee is obligated to assign the lease back to the original tenant a day before the expiration of the prime lease), the law will treat such an assignment as a sublease. Such a relationship will benefit the prime tenant, but the landlord will lose the right to go after the assignee as the assignee will be treated as a subtenant of the original tenant.

Going Forward

Landlords should be cognizant of ways to minimize their risk. Before consenting to any assignment or sublease, landlords should confirm that the relationship is as it purports to be. A landlord should condition any consent to an assignment upon the original tenant remaining liable under the lease and upon the assignee expressly assuming all covenants under the lease. Prior to consenting to any sublease, the landlord should confirm that there are sufficient safeguards in place so that the landlord will have adequate assets from which to draw upon if a default occurs, and should further consider requiring that the subtenant enter into an assumption agreement with the landlord under which the subtenant assumes the obligations under the prime lease.

Tenants should also consider the potential ramifications of the structure of their assignment or sublease, and should find ways to reduce their risk. Tenants should obtain a release from the landlord in connection with any assignment, and should include assumption language in any assignment document where the assignee assumes all covenants under the lease. They should also retain a reversionary interest in any premises that they sublease so that they do not inadvertently create an assignment.

Finally, both landlords and tenants should consider consulting a real estate attorney before entering into either of these transactions. Far too often tenants and landlords create a potentially catastrophic scenario that could have been avoided if they would have engaged a qualified attorney.

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.

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.