Get ‘Consequential’ Damages if Tenant Violates Surrender Requirements

November 1, 2004

If your lease is like most, it probably requires the tenant to surrender the space—that is, move out—on or before the lease's expiration or termination date. And it probably also requires the tenant to return the space in a certain condition—for instance, in the same condition as when the tenant first got the space, “ordinary wear and tear excepted.”

If your lease is like most, it probably requires the tenant to surrender the space—that is, move out—on or before the lease's expiration or termination date. And it probably also requires the tenant to return the space in a certain condition—for instance, in the same condition as when the tenant first got the space, “ordinary wear and tear excepted.”

With these provisions, if a tenant violates the lease by not surrendering the space in the required condition or not at all, you'll most likely be able to sue the tenant for the reasonable cost of putting the space back in that condition. But you may not be able to force the tenant to cover some other big bills you could face as a result of the tenant's violation. That could happen if the lease has the following loophole: It doesn't say that you've got the right to also recover “consequential” damages from the tenant. Consequential damages are losses that you suffered as a result of the tenant's violation but that weren't direct or immediate. So, for example, consequential damages are the rent you lost out on when you couldn't deliver the space to a new tenant on time because the outgoing tenant left the space in bad shape or didn't move out. If a lease doesn't address consequential damages, there's a good chance that a court won't award them to you.

To plug this loophole, CLLI, with the help of Michigan attorney David G. London, will tell you what to say in your lease to get the right to recover consequential damages from the tenant. There's a Model Lease Clause on p. 7 that you can adapt and use in your lease that gives you this right of recovery.

New York Owner Denied Consequential Damages

A New York owner learned the importance of addressing consequential damages in the lease after a bank tenant moved out of its space without performing certain “exit work.” The owner sued the tenant for failing to perform the exit work. The lease didn't address whether the owner was entitled to consequential damages. But the owner claimed that it was entitled to lost rent and the financing costs associated with the extensive restoration work that it had to do because the tenant had failed to do the exit work.

A New York appeals court ruled that the owner wasn't entitled to the lost rent and financing costs. The lease didn't permit the owner to recover those—or any other—consequential damages from the tenant, the court said. The lease permitted the owner to recover only the reasonable cost of restoring the space to a specified condition. “Where a party fails to insert a provision permitting consequential damages into a lease agreement, the court will not supply it,” the court explained [Chemical Bank v. Stahl].

What Lease Should Say About Consequential Damages

To avoid finding yourself in the same situation as the New York owner, insert a clause addressing consequential damages in the section of your lease that deals with the surrender of the space, says London. Like our Model Lease Clause, your clause should cover these two steps:

Step #1: Say when you're entitled to consequential damages. Say that you've got the right to recover consequential damages when any one or more of the following three situations occur, says London:

  • The tenant doesn't surrender its space when required;

  • The tenant doesn't properly restore the space; or

  • The tenant doesn't remove all of its property from the space [Clause, par. a].

Step #2: Specify which consequential damages you're entitled to. Say that once any of the three situations listed above occurs, you're entitled to recover all of the following types of consequential damages:

  • Holdover rent from the tenant [Clause, par. b(i)];

  • Lost rent (if you can't deliver possession of the space to a new tenant that had already signed a lease for the space) [Clause, par. b(ii)];

  • Costs passed on to you by the new tenant because you couldn't deliver possession of the space on time (these costs may include holdover rent the new tenant had to pay to remain in its old space, the cost of temporary space the new tenant had to take, and any additional storage costs, moving costs, and relocation costs the new tenant incurred as a result) [Clause, par. b(iii)]; and

  • Extra costs you incurred because you were forced to restore the space on an expedited basis (including loan financing costs, interest, and overtime labor costs that you incurred) [Clause, par. b(iv)].

Practical Pointer: A strong tenant might balk at a clause listing the types of consequential damages you can try to recover from it, notes London. As a compromise, consider using more general language in the surrender clause, he says. For example, London suggests saying that “If Tenant fails to [insert three situations triggering consequential damages], then Landlord shall be entitled to all remedies available at law or equity or under this Lease, including, but not limited to, the recovery of any consequential damages.” Although this compromise language may be less effective for you (and there's a risk that a court won't enforce it because it's so general), a strong tenant will probably find it less threatening. And using the compromise language is much better for you than not addressing consequential damages at all in relation to surrender of the space, London points out.

CLLI Source

David G. London, Esq.: Member, Miro Weiner & Kramer, PC, 38500 Woodward Ave., Ste. 100, Bloomfield Hills, MI 48303-0908; (248) 646-2400; DLondon@mirolaw.com.

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