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Did Your Tenant Miss His Rent?
Don't Terminate His Lease!

It's almost automatic. A tenant misses his rent payment, and the landlord gives written notice demanding payment. If the tenant still does not pay, the landlord then tells the tenant his lease is terminated, and demands that he vacate the premises.

What happens if the landlord is unable to find a new tenant, or if he does, the rent is less than the previous tenant was paying? Often the landlord calls his lawyer and tells him he wants to sue his prior tenant for the difference.

Unfortunately, there's a problem. A landlord cannot sue for any rent accruing after he "terminates" a lease, even if the termination occurs because of the tenant's default. He can sue, however, for unpaid rent accruing prior to termination and for his expenses in terminating the lease, but this is rarely adequate compensation for a landlord with an empty building.

Solution
Happily, there is a solution if the landlord handles the situation correctly to begin with. As odd as it may seem, the landlord can evict the tenant and preserve his right to future rent if, instead of terminating the lease, he merely terminates the tenant's “right to possession.” Incredibly, the landlord's choice of a few words can make the difference between no claim at all and one that may be worth thousands of dollars or more.

Of course, the landlord still has a duty to mitigate his damages even if he doesn't "terminate" the lease-- that is, he must make reasonable efforts to lease the premises to someone else, and must give the old tenant credit for any rent received. However, he can assert a claim for rent accruing while the building is empty, for the difference between the rent the old tenant was paying and the rent the new tenant will pay once he leases to a new tenant, for brokerage commissions, and probably for leasehold improvements and alterations paid for by the landlord in order to sign the new tenant, so long as he made reasonable efforts to relet the building on the best terms possible. On the other hand, if the tenant (and guarantor, if there is one) is broke, it may be better to terminate the lease and be done with it.

There is one additional issue to consider. If you believe the tenant may file bankruptcy to avoid eviction, you may be in a better position in bankruptcy court if you have actually terminated the lease and evicted the tenant prior to the bankruptcy filing, rather than merely terminating the tenant's right to possession. This is because the bankruptcy court is supposed to honor the termination of any lease that occurs before the bankruptcy filing. As for leases that have not been terminated, the trustee or debtor in possession has 60 days to decide whether to accept or reject the lease, although rent must be paid during this period of time. However, if you have another tenant standing by, or if the space can be re-let at a higher rent, you may prefer to have the lease terminated. Under these circumstances, the issues can become quite complex and consultation with legal counsel may be advisable to best protect your position.

If your tenant defaults, take prompt action. But if you decide it is time to get rid of him, be very careful with your choice of words. A "termination" of the lease can cut off your right to collect future damages, but a failure to "terminate" may prejudice your rights if the tenant files bankruptcy.

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