Protect Yourself from Cost of Consequential Damages After Tenant Moves Out

Generally, commercial leases require tenants to return space in the same condition as it was rented to them. There’s some leeway for “ordinary wear and tear” to the space. But there are several ways that a tenant can negatively affect you when it moves out, or “surrenders” the space, not just by damaging physical items there.

If a tenant violates the lease by not surrendering the space in the required condition—or not at all—this could also result in consequential damages—that is, losses that you suffered as a result of the tenant’s violation but that weren’t direct or immediate. For example, 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 would count as consequential damages.

How can you avoid being left on the hook for fixing consequential damages even though the tenant is the one who failed to surrender the space properly? Make sure that your lease addresses consequential damages, otherwise there’s a good chance that a court won’t award them to you later. We’ll tell you how to protect yourself from consequential damages after your tenant moves out and give you a Model Lease Clause: Get “Consequential” Damages from Tenant Violating Surrender Requirements, that you can adapt for your leases to help you cover your costs if your tenant improperly surrenders its space.

Don’t Rely on Court to Provide Missing Language

If your lease provisions require your tenant to surrender the space on or before the lease’s expiration or termination date and also require 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,” you’ll most likely be able to sue the tenant for the reasonable cost of putting the space back in that condition if it fails to do so. But consequential damages are a different story if you’ve left them out of the lease. Unfortunately, that oversight may mean that you can’t force the tenant to cover some other big bills you could face as a result of the tenant’s violation. That’s why it’s very important to carve out the right to also recover “consequential” damages from the tenant.

Courts have denied consequential damages for owners before. Let’s say that a tenant moves out of its space without performing certain “exit work” and the owner sues it for failing to perform the exit work. The lease doesn’t address whether the owner is entitled to consequential damages. But the owner claims that it’s 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. Although it seems unfair for the owner essentially to have to pay for the tenant’s violation, a court could rule that the owner isn’t entitled to the lost rent and financing costs because the lease didn’t permit the owner to recover those, or any other, consequential damages from the tenant—only the reasonable cost of restoring the space to a specified condition. The result could be very different if the owner had addressed consequential damages in the lease. Don’t rely on a court to more or less provide that right for you later if you overlooking including that language when drafting your lease.

Be Specific About Tenant’s Responsibility

To get the right to recover consequential damages from the tenant, insert a clause addressing consequential damages in the section of your lease that deals with the surrender of the space, says Michigan attorney David G. London. Like our Model Lease Clause, yours should cover two items. London notes that first, you should say that you have the right to recover consequential damages when any one or more of the following three situations occur, says London: (1) the tenant doesn’t surrender its space when required; (2) the tenant doesn’t properly restore the space; or (3) the tenant doesn’t remove all of its property from the space [Clause, par. a].

Second, remember to 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: (1) holdover rent from the tenant [Clause, par. b(i)]; (2) 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)]; (3) 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 (4) 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)].

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, “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. 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.

Insider Source

David G. London, Esq.: Partner, Honigman Miller Schwartz and Cohn LLP, 39400 Woodward Ave., Ste. 101, Bloomfield Hills, MI 48304; www.honigman.com.