Don't Bet the Business

When a client, or prospective client, wants to discuss a claim for breach of a contract, one of the first questions to ask is what are the likely damages if a breach is shown?

A situation that aptly illustrates this point is a breach of a commercial lease. When the breach results from non-payment of rent, the amount of the rent claim is often a simple mathematical calculation – monthly rent times the number of months the tenant is past due. The claim for past due, or back rent, is intuitive and easily accepted. But what if the breach occurs two years into a five year lease after the tenant vacates the premises?

Shouldn’t a claim for future rent for the years left on the lease be just as intuitive? As is typical in contract litigation, the answer may depend upon what the lease actually says.

To get started, we first should distinguish between the types of claims a landlord can make. When a landlord is seeking only rent and is not asserting a breach of contract, some of the contract rules simply do not apply. This is because a landlord's action for rent has been recognized as a distinct cause of action that differs from other available remedies for breach of a lease contract. In this example, we are assuming the landlord is seeking “damages” for breach of a lease contract.

As a qualification, a detailed treatment of the rules and procedures governing summary proceedings, which are typical in commercial landlord – tenant disputes, is beyond the scope of this discussion. For this example, we assume that, after a summary proceeding for non-payment of rent, a district court has entered a judgment of possession and the defaulting tenant has vacated the leased premises.

As permitted under applicable law, the landlord then sues the former tenant in circuit court for breach of contract, hoping to recover the rent owed under the lease, including not only back rent but all future rent owed for the years remaining on the lease-term.

Perhaps the most important question that needs to be answered is what amount of rent is actually owed. While the tenant unquestionably owes the back rent, is the rent that would have been due during the remaining years of the lease-term also part of the landlord’s claim? Can the landlord recover this future rent even after the tenant has vacated the leased premises? More likely than not, the answer to that question is “yes.”

It is common for a commercial lease to contain an acceleration clause. After a tenant’s default, including a default for non-payment of rent, an acceleration clause gives the landlord the right to demand the entire amount of unpaid rent owed under the lease, including the amounts yet to come due for the remainder of the lease-term.

If the lease contains such a clause, the landlord is entitled to claim and recover as damages not only the back rent, but also all future rent – even after the tenant has vacated the leased premises. But what if the lease does not contain an acceleration clause? Is the claim for future rent barred?

Under Michigan law, a commercial lease is a contract, and it is interpreted like any other contract. A claim for breach of a contract arises when a party – in this case the tenant – fails to do what it is contractually obligated to do, issuing the timely payment of rent. In such a case, the landlord claiming contract damages must show that the damages claimed were caused by the tenant’s breach of the lease.

As with other contracts, the landlord’s remedy for the tenant’s breach of contract is limited to the damages that naturally arise from the breach or those that the parties contemplated when the lease was signed. So, was it contemplated that the tenant would continue to owe rent even after the landlord has recovered possession of the premises? In this example, one could argue that that it was the landlord’s re-entry to recover the premises that actually caused the loss of future rent because the landlord could simply have left the tenant in possession and sued for rent as it came due.

To counter such a claim, the law permits the parties to include in their contract specific rights and remedies that will apply after a breach. Specifically, the lease may provide that the landlord can recover future damages notwithstanding the lease termination and the recovery of the leased premises.

Back to our example of a commercial lease that lacks and acceleration clause. In the circuit court action for future rent, the absence of an acceleration clause would not be the end of the discussion. The Michigan Court of Appeals has ruled that the absence of such a clause means only that the landlord cannot claim future rent payments are due immediately. Additional damages for rents lost in future years may still accrue. Indeed, Michigan law provides that when a contract calls for installment payments but lacks an acceleration clause upon a default, claims based upon a breach of the contract accrues as each separate installment comes due.

The appellate court recently concluded that when a commercial lease lacks and acceleration clause, but otherwise permits the landlord to recover “all damages provided by law,” the landlord is entitled to the benefit of its bargain. In such a case, the proper measure of damages is the pecuniary value of the benefits the landlord would have received if the lease had not been breached. This means, the landlord may recover future rent as damages even after recovering possession of the premises but subject to any duty to mitigate those damages as required by law.

The rules governing commercial leases can be complex, appear at times to be conflicting and, quite frankly, can be confusing to even seasoned attorneys. That’s why we're here. Call us if you need help.