Calculating the Landlord's Damages When Premises Are Re-Let after Tenant Breach

When a Tenant breaches a lease agreement by terminating or abandoning the Lease, or when a Landlord is required to terminate based upon some act or omission of the Tenant, the Landlord faces a two-sided problem: First, he or she has vacant rental property and has likely suffered damages as the result of lost rents in the past. Second, the landlord will likely suffer loss of rental proceeds in the future, all the while incurring costs associated with owning and managing the now-vacant property.

As I have previously discussed on this blog, a Landlord has a statutory obligation to mitigate the damages he suffers as the result of a Tenant's actions. See TEX. PROP. CODE ANN. § 91.006. The duty to mitigate losses or damages is usually interpreted as a requirement that the Landlord attempts to re-let the premises vacated by the original Tenant.

Many times after a breach, the condition of the premises or the overall rental climate (supply and demand) can be markedly different than it was at the time the original Tenant first occupied the property. This can result in substantial difficulty in finding a replacement Tenant. Nevertheless, a Landlord is required to use reasonable efforts to find a replacement Tenant, even if the rental proceeds from that new Tenant are less than those that would have been received had the original Tenant fulfilled her Lease obligations.

In those instances where a deficiency exists between the rent received from a replacement Tenant and the rent agreed-to by the original Tenant, a Landlord is entitled to recovery of his damages. Other elements of the Landlord's damages are the costs of re-letting the property (advertising, repairs, make-ready, Realtor commissions, modifications required by the replacement Tenant, etc), and any rents not received between the time that the original Tenant vacates and the replacement Tenant takes possession.

So...how does a Landlord calculate the measure of damages resulting from a Tenant's breach?

Consistent with its statutorily-imposed duty to mitigate, a Landlord seeking damages for anticipatory breach of a Lease Agreement must prove the present value of the future rentals under the unexpired term of the lease, REDUCED BY either the reasonable value of re-renting the leased premises or the rent paid by any new tenant. See Marshall v. Telecomm. Specialists, Inc., 806 S.W.2d 904, 907 (Tex. App.—Houston [1st Dist.] 1991, no writ).

That is, if a Landlord is able to re-let the premises at the same or more rent than the original Tenant agreed to pay, then the original Tenant is only required to pay the costs of re-letting. On the other hand, when a Landlord rents the premises for less rent, the Tenant is required to pay the re-letting costs PLUS the Landlord's shortfall over the term of the original Lease Agreement. see also Crabtree v. Southmark Commercial Mgmt., 704 S.W.2d 478, 480 (Tex. App.—Houston [14th Dist.] 1986, writ ref’d n.r.e.) (limiting damages sought by landlord who treated tenant’s conduct as anticipatory breach to recovery of present value of rentals that accrue, reduced by reasonable cash-market value of unexpired term of lease); Speedee Mart, Inc. v. Stovall, 664 S.W.2d 174, 177 (Tex. App.—Amarillo 1983, no writ)(holding that landlord who treated tenant’s conduct as anticipatory breach could recover contractual rental reduced by amount received from new tenant).

Many Lease Agreements in Texas (and the standard Commercial Lease Form in New York) purport to make the Tenant responsible for all rental proceeds that he or she did not pay, irrespective of whether the Landlord re-lets the property in the future. These provisions are generally not enforceable in Texas, where the Landlord's efforst to mitigate his losses are often the subject of intense scrutiny in lawsuits advanced for recovery of lost rents.

Understanding CAM Charges in the Commercial Lease Context

Common Area Maintenance Charges or "CAM" have become a fixture on the landscape of Commercial Lease Agreements pertaining to strip centers, enclosed malls and other multi-unit/multi-tenant real estate developments. CAM charges are generally defined as the amount of additional rent charged to a tenant (in addition to the base rent), to maintain the common areas of the property shared by all tenants and from which all tenants benefit. However, there exists significant variation in the types of expenses Landlords seek to include in CAM charges, with many such expenses less obvious and less beneficial to any particular Tenant than one might expect.

CAM charges are generally prescribed by specific provisions in Commercial Lease Agreements, and the Lease terms will define the items to be included in calculating the Tenant's CAM obligations. Thus, an agreement to pay CAM charges is contractual in nature, and one of the essential elements of a Lease Agreement.

As stated above, CAM fees vary considerably and cover a wide range of expenses landlords would otherwise pay. They typically include taxes, insurance, property maintenance, repairs, cleaning costs, utility charges and landcaping associated with the area surrounding the leased premises. However, they might also include more latent items such as security systems and patrols, depreciation on capital expense items, salaries of administrative staff who run the development, non-tenant signage, and even the Landlord's corporate overhead expenses that are un-related to the property.

CAM charges can be assessed and paid monthly, quarterly, annually, or even charged from time-to-time as major expenses are incurred by the landlord.

It is particularly important that both the Landlord and Commercial Tenant have a thorough understanding of what charges are (and are not) included in CAM Charges PRIOR TO entering a Commercial Lease Agreement.

Court challenges to CAM fees are common, and often arise from nebulous definitions of CAM charges in a Lease Agreement. In a highly publcized case currently pending in federal court in Austin, Dillard's department store and the owner of the Highland Mall are feuding over whether Dillard's was improperly charged for, among other CAM items, "the cost of maintenance and housekeeping for the food court of the mall." This case presents an interesting example of the different perspectives landlords and Tenants have concerning proper CAM expenses.

The Texas Property Code recognizes the potential for wide confusion over what charges may be assessed against a Commercial Tenant. Thus, Section 93.012 expressly limits charges to tenants (other than a charge for rent or physical damage) to those whose amounts or method of computation are stated in the lease.

Landlords and Tenants are encouraged to engage in frank discussion and transparency when negotiating Commercial Lease Agreements that provide for CAM charges. Further, all such Leases should include provsions allowing independent audit of the CAM charges.

CAM issues are complex and are fertile ground for dispute and even litigation. Accordingly, a prudent Landlord and Tenant should enagage the assistance of a real estate attorney who is experienced in interpreting Commercial Lease Agreements and the CAM charges to be assessed under those Leases.

San Antonio retail market vacancy on the rise

After being hit earlier this year with the closures of national retailers such as Circuit City, Mervyn’s and Linens N’ Things, the faltering economy continued to impact the local retail market over the past three months.

Sportsman’s Warehouse vacated its 47,000-sf location at The Legacy after having closed the location at Westover Marketplace last year.

According to the survey of nearly 44.5 million sf of area retail space conducted by NAI REOC Partners, the San Antonio retail vacancy rate climbed to 14.5 percent at the close of second quarter 2009, which is a marked increase from the 11.4 percent vacancy rate recorded a year ago.

The market grew by more than 3.5 million sf last year, but less than 849,000 sf of new retail space has been delivered to the area in the first half of the year with less than 250,000 sf expected to come online by year’s end.

In 2Q 2009, nearly 677,000 sf of new retail space came online led by the addition of Woodlake Crossing (305,231 sf) featuring Target, Ross Dress for Less, PetCo, Best Buy and several others.

Aside from the gains produced in the newly completed centers, activity within existing centers overall remains relatively slow, but leases are still being signed. Renewals and extensions led second quarter activity including Big Lots (29,875 sf) at Bandera Festival.

The impact of higher-priced new projects floated up average rental rates and now that the market is feeling the impact of a sluggish economy, quoted rental rates have begun to reflect the downturn. At the close of 2Q 2009, the citywide average quoted triple net rental rate for retail space in San Antonio inched up to $18.33 per sf annually.

Compared to a year ago, the average rent is up $0.86, a 4.9 percent increase, but the $0.10 gain over last quarter registers a growth rate of less than 1 percent.

From the TAMREC

Commercial Leases -- Review Before and Long After you Sign!

As an attorney with an active real estate law practice, I regularly review commercial leases before my clients sign them. Over the years I have represented restaurants, manufacturers, nail salons, gyms, hunters, physicians, snack bars, and other various other business tenants negotiate the terms of their Commercial Leases, and agree to the most favorable terms possible. On the flip side, I have represented several owners of commercial properties in the drafting and negotiation of their commercial leases with every imaginable tenant -- from flower shop owners to barbacoa stands (only in San Antonio!) to nationwide anchor tenants.

Recently, however, I was asked to do something new. The prospectivce client called and inquired as to whether i would perform a "mid-lease review." Though I didn't admit it at the time, I had never been asked to do so, and wasn't exactly sure of the purpose for such a review. After inquiring further, I learned that my prospective client -- a tenant in a large strip center in north central San Antonio -- felt something was amiss with their commercial lease, and the payments they were being asked to make for Common Area Maintenance (CAM) charges and other items of "additional rent." The tenant confirmed that he wasn't even sure that anything was wrong, but said he had a "gut feeling" something "just wasn't right."

After being provided with a copy of the Commercial Lease and all of the Invoices/Monthly Statements received from the landlord during the current lease term (3 years into a 7 year lease), I began a detailed review of the tenant's rent and associated obligations. After completing this review, it became clear that my client's suspicions were dead on -- his business had been overcharged by almost $17,000.00, with no sign of correction coming in the future! If the overcharges went unabated, his business could expect to pay up to $41,000.00 more in rent than he was obligated to pay under the terms of the written Commercial Lease.

In this particular case there were 2 issues:

(1) unpaid "build out allowances" granted to the tenant; and
(2) overcharges for CAM expenses.

After bringing the discrepancy to the landlord and management company's attention, the overcharges were credited back to our client. The result was that his business got to skip almost 2 full rent payments -- talk about a shot in the arm!

This experience got me to thinking about all of the complex lease negotiations we've undertaken in the last several years. What if just one-half of the Commercial Leases we negotiated were being misapplied? Think of all of the overcharges, and perhaps even undercharges, that might be taking place on a monthly basis... Think of the thousands of dollars in adjustments that might be necessary...

Many times, the obligations and payments will match-up and there is nothing to worry about. In other instances, there might be discrepancies about repair bills, rent concessions, security deposit burn-downs, taxes and untimely rent escalations. These issues may arise several years after the Commercial Lease has been signed, and when both the landlord and tenant are "asleep at the wheel."

The point of this posting is to encourage landlords and tenants who have signed Commercial Lease Agreements to have those leases reviewed periodically to ensure compliance and smooth sailing. Just because the Lease is signed and the tenant is paying rent doesn't necessarily mean all is well. The best bet, of course, is to have a qualified real estate lawyer review the lease. The amount you pay in attorneys' fees will likely be well worth the peace of mind or potential discrepancy that the lease review yields.