Remedies for Utah Commercial Landlords in Tenant Defaults

The article will first analyze what constitutes a “breach” and “material breach” of a lease agreement. Second, the article will discuss the legal significance between “abandonment” and “surrender.” Next, the article will address a commercial landlord’s “duty to mitigate” damages. Finally, potential remedies will be outlined.

As this article will explore, a commercial landlord can recover certain damages upon a tenant’s material breach of the lease. But what exactly is a “material” breach? And is a “material” breach required in order to recover damages?

Under certain circumstances, a breach of a lease agreement will result in “forfeiture,” i.e., the loss of a tenant’s property right. Black’s Law Dictionary (9th ed. 2009), forfeiture. In these cases, a commercial landlord has the right to terminate the lease. Forfeiture may result by virtue of a clause in the lease providing for forfeiture upon a breach of a certain lease covenant or condition. Hackford v. Snow, 657 P.2d 1271, 1275 (Utah 1982); see, e.g., Russell v. Park City Utah Corp., 548 P.2d 889 (Utah 1976) (“Parties are free to contract according to their desires in whatever terms they can agree upon and forfeiture is to be allowed where the terms of the agreement are clear.”); Red Cliffs Corner, LLC v. J.J. Hunan, Inc., 2009 UT App 240, ¶ 26, 219 P.3d 619, 626–27 (holding that a commercial lease’s termination provision was triggered by three non-material defaults, because the lease provided that if the tenant “shall default in the payment of any Rent, and such default shall continue to be repeated for three (3) consecutive months,” then, notwithstanding any cure, any further or additional default would allow landlord to terminate the lease).

In the absence of such a provision, however, Utah “disfavors” forfeitures. Hous. Auth. v. Delgado, 914 P.2d 1163, 1165 (Utah Ct. App. 1996). In such cases, a commercial landlord’s remedy is generally a claim for damages. Hackford, 657 P.2d at 1275. This is true whether the breach is for nonpayment of rent, nonpayment of taxes, or waste. Id.

To further Utah’s policy of disfavoring forfeitures, the “substantial compliance doctrine” rescues a commercial tenant from forfeiture when the tenant has “substantially complied” with the lease in good faith. Grassy Meadows Sky Ranch Landowners Ass’n v. Grassy Meadows Airport, Inc., 2012 UT App 182, ¶ 14, 283 P.3d 511, 518 (quoting Delgado, 914 P.2d at 1165). When determining the materiality of a breach, i.e., whether the breach was so insubstantial as to trigger the application of the substantial compliance doctrine, the fact-finder will review the following factors:

Id. (quoting Cache Cnty. v. Beus, 1999 UT App 134, ¶ 37, 978 P.2d 1043, 1050); see, e.g.,Olympus Hills Shopping Ctr., Ltd. v. Smith’s Food & Drug Centers, Inc., 889 P.2d 445, 458 (Utah Ct. App. 1994) (“Whether a party has materially breached a lease is generally a question of fact for the fact finder.” (citations omitted)); GeoNan Props., LLC v. Park-Ro-She, Inc., 2011 UT App 309, ¶ 13, 263 P.3d 1169, 1174 (reversing summary judgment because a genuine issue of material fact existed as to whether lessee’s failure to make an advanced rent payment was a material breach of the lease agreement).

Notably, if a commercial landlord “waives” a tenant’s breach, the landlord may not later demand the tenant’s strict compliance with the lease, terminate the lease if the breach is material, or claim forfeiture. The elements of waiver consist of: (1) an existing right, benefit, or advantage; (2) knowledge of the existence of that right, benefit or advantage; and (3) an intention to relinquish the right, benefit, or advantage. Living Scriptures, Inc. v. Kudlik, 890 P.2d 7, 9 (Utah Ct. App. 1995) (quoting Pasker, Gould, Ames & Weaver, Inc. v. Morse, 887 P.2d 872, 876 (Utah Ct. App. 1994)); see McCleve Props., LLC v. D. Ray Hult Family Ltd. P’ship, 2013 UT App 185, ¶ 14, 307 P.3d 650, 656 (holding that a commercial landlord waived its right to strictly enforce lease’s assignment and purchase-option provisions because he knew the lease had been assigned).

Waiver is an intensely fact dependent question, requiring a court to determine whether a party has intentionally relinquished a known right, benefit, or advantage. IHC Health Servs., Inc. v. D & K Mgmt., Inc., 2003 UT 5, 73 P.3d 320, 323 (citing Soter’s, Inc. v. Deseret Fed. Sav. & Laon Ass’n, 857 P.2d 935, 940 (Utah 1993). Thus, an appellate court will grant the trial court broad discretion and great deference when reviewing whether a landlord “waived” a tenant’s breach. Id.

At bottom, if a tenant materially breaches a commercial lease or breaches the lease in such a way as to trigger the application of the lease’s termination provision, whether material or not, and the landlord did not waive his right to insist strict compliance with the lease, the landlord will be able to terminate the lease and recover damages. In the absence of a termination provision, the landlord’s remedy will come solely through damages.

The legal distinction between “abandonment” and “surrender” can have a sharp influence on the outcome of a lawsuit between a commercial landlord and tenant. If the tenant “abandoned” the premises before the end of the lease term, the landlord is entitled to recover the remainder of the rental payments due under the lease. On the other hand, if the tenant “surrendered” the property and the landlord accepted the surrender, the landlord is not entitled to recover the remainder of the rental payments.

While a commercial landlord cannot evict a tenant without a court order, the landlord does not need a court order to decide whether the premises have been abandoned. Under the Utah Code Annotated (“UCA”), “abandonment” is presumed in either of the following situations:

Utah Code Ann. § 78B–6–815 (West 2008). As can be seen, only the first example is applicable to commercial property, as the second example involves a “dwelling unit,” i.e., residential property. See also Id. § 78B–6–801(1) (defining “tenant” as “any natural person and any individual, including a commercial tenant”).

These cases are largely factually dependent. For example, in Mariani Air Prods. Co. v. Gill’s Tire Mkt., the Utah Supreme Court held that even though a tenant left personal property on the leased premises, the tenant intended to abandon the property because the tenant returned the keys to the landlord’s agent after discontinuing rent and ceasing regular business operations on the premises. 29 Utah 2d 291, 508 P.2d 808 (1973); see, e.g., Bonnie & Hyde, Inc. v. Lynch, 2013 UT App 153, 305 P.3d 196 (holding that the evidence in dispute between a landlord and a commercial tenant gave rise to a statutory presumption that the tenant abandoned the leased property because the tenant did not notify the landlord that he would be absent from the premises, failed to pay rent within 15 days after it was due, and there was no reasonable evidence other than the presence of tenant’s personal property that he was occupying the premises); Fashion Place Assocs. v. Glad Rags, Inc., 754 P.2d 940 (Utah 1988) (holding that a commercial tenant did not “abandon” a piece of property because the tenant gave notice to the landlord that it was going to vacate the premises).

Merely leaving personal property on the commercial property is not enough to overcome the presumption of abandonment. However, an interesting case arose in Aris Vision Inst., Inc. v. Wasatch Prop. Mgmt., Inc., 2005 UT App 326, 121 P.3d 24. In this case, a commercial tenant did not inform its landlord of any possible absence from the premises, failed to pay monthly rent when due, informed various vendors that it was closing its business, and terminated its office manager. Id. at ¶¶ 3–6, 121 P.3d at 26. Despite this seemingly-telling conduct, the Court of Appeals held that the actions were insufficient to constitute statutory abandonment of the leased premises. Id. at ¶ 19, 121 P.3d at 29. The court reasoned that because doctors, who were independent contractors of the tenant and allowed to use the tenant’s equipment while negotiations for sale of the business took place, continued to perform laser eye surgery using the tenant’s equipment on the premises, it was not reasonable for the landlord to assume the tenant abandoned the property. Id.

Under Utah law, if a commercial tenant “surrenders” leased property back to the landlord before the end of the lease term and the landlord accepts the surrender, the tenant will not be liable for any subsequent rental payments under the lease.

When applying the doctrine of surrender and acceptance, it is “critical” to determine whether the landlord intended to accept the surrender. Reid v. Mut. of Omaha Ins. Co., 776 P.2d 896, 909 (Utah 1989); see, e.g., English v. Standard Optical Co., 814 P.2d 613, 618 (Utah Ct. App. 1991) (holding that the landlord did not accept a surrender because although he changed the locks which kept the tenant out, his intent in changing the locks was to protect workmen’s tools, not to terminate or accept a surrender, and he continued to pursue the tenant for payment of rentals while taking action to preserve the property and mitigate damages); Meyer v. Evans, 16 Utah 2d 56, 57, 395 P.2d 726, 727 (1964) (holding that a landlord did not accept surrender because, without being able to get the key from tenants, the landlord took possession, changed locks on the back door of the premises, advertised for re-lease or sale, and “did about everything a landlord could have done to preserve the property and mitigate any damages”).

Surrender of a lease by operation of law results from acts which imply mutual consent independent of the expressed intention of the parties that their acts shall have that effect. Belanger v. Rice, 2 Utah 2d 250, 252, 272 P.2d 173 (1954). Thus, the intent to surrender and to accept may be express or implied. Id. ; see also Frisco Joes, Inc. v. Peay, 558 P.2d 1327, 1330 (Utah 1977). All of the facts must be considered in determining the legal effect of the landlord accepting the surrender, for to affect a surrender, the surrender must be both offered with the proper intent and accepted with the proper intent. Mariani, 29 Utah 2d at 293, 508 P.2d at 810. Id. Importantly, the burden is on the party relying on a surrender of a lease to prove it; and the proof must be clear where the surrender is to be inferred from circumstances inconsistent with the intention to perform. Id. ; see Reid, 776 P.2d at 901 (“[A] tenant raising the affirmative defense of surrender and acceptance has the burden of proving the landlord’s intent to accept the surrender.”).

In summary, if a commercial tenant abandons a piece of leased property before the end of the lease term, the landlord may recover all subsequent rental payments due under the lease. On the other hand, if the tenant surrenders the property back to the landlord before the end of the lease and the landlord accepts the surrender, the landlord may not recover subsequent rent. The key factor between abandonment and surrender is intent: if the landlord intended to accept the tenant’s intentional surrender, the tenant successfully surrendered the property.

When a commercial tenant wrongfully vacates the premises and defaults on the covenant to pay rent, a commercial landlord has a duty to make reasonable efforts and exercise due diligence to reduce the damages from the breach by re-letting the premises to a new tenant.

Under Utah law, a landlord who seeks to hold a breaching tenant liable for unpaid rent has an obligation to take commercially reasonable steps to mitigate its losses, which ordinarily means that the landlord must seek to re-let the premises. Reid, 776 P.2d at 906. In other words, the landlord must “take positive steps reasonably calculated to effect a re-letting of the premises.” Id. (citations omitted); Comm’l Real Estate Inv., L.C. v. Comcast of Utah II, Inc., 2012 UT 49, ¶ 47, 285 P.3d 1193, 1204 (holding that a landlord must take “such steps as would be expected of a reasonable landlord letting out a similar property in the same market conditions”). Utah enforces this rules so “serious efforts” will be made to make the property financially productive by those who are best able to accomplish that end and who are also best able to prove that required mitigation efforts have been carried out. Reid, 776 P.2d at 906.

A landlord’s efforts will be measured by “objective commercial reasonableness” which “depends heavily on the particularities of the property and the relevant market at the pertinent point in time.” Id. (citation omitted). Significantly, “the burden of proving [a commercial landlord] has not mitigated its damages and that its award should be correspondingly reduced is on [the tenant].” Comcast, 2012 UT 49, ¶ 48, 285 P.3d at 1204 (quoting John Call Eng’g, Inc. v. Manti City Corp., 795 P.2d 678, 680 (Utah Ct. App. 1990)).

Interestingly, the UCA appears to make the common law requirement of mitigation optional. Indeed, the UCA states that “[i]n the event of abandonment, the owner may retake the premises and attempt to rent them at a fair rental value . . . .” Utah Code Ann. § 78B–6–816 (West 2008). Nevertheless, the strong common law requirement of a landlord’s duty to mitigate will most likely be enforced in these cases.

If a commercial tenant breaches the lease agreement or abandons the premises, can the landlord recover all past and future rent payments? Opportunity costs? Damages for alterations and improvements? Re-letting expenses?

In Reid, the Utah Supreme Court adopted the “retained-jurisdiction approach” whereby a court retains jurisdiction over the parties and subject matter in order to enter new damages as they accrue, allowing a landlord to bring the action at any time. Id. As the Court described:

Id. at 908–09; see Utah Code Ann. § 78B–6–816(1) (West 2008) (“A commercial tenant who abandons a premises is liable for: (a) the entire rent due for the remainder of the term; or (b) rent accrued during the period necessary to re-rent the premises at a fair rental value, plus the difference between the fair rental value and the rent agreed to in the prior rental agreement, plus a reasonable commission for the renting of the premises and the costs, if any, necessary to restore the rental unit to its condition when rented by the tenant less normal wear and tear.”).

Notably, a court can base the damages award on past events and take the landlord’s mitigation efforts into account. Reid, 776 P.2d at 908. Likewise, because Utah requires commercial landlords to seek new tenants, the costs reasonably incurred in readying the property and in re-letting or attempting to re-let are added to the amount recoverable from the breaching tenant. Id. at 907 (citation omitted). Such costs include not only expenses incurred in seeking new tenants, but also costs of repairs or alterations of the premises reasonably necessary to successfully re-let them. Id. (citation omitted). So long as the expenses incurred in the process of re-letting, or attempting to re-let the property are commercially reasonable, the breaching tenant will be liable for them. Id. (citation omitted).

Of course, a landlord should fully understand the lease agreement’s provisions—they may limit the amount of recoverable rent. For example, in Benchmark, Inc. v. Salt Lake Valley Mental Health Bd., Inc., a commercial lease provided that the tenant could terminate the five-year lease at-will, provided it gave six months’ notice to the landlord. 830 P.2d 218, 219 (Utah 1991). Two years into the lease, the tenant notified the landlord that it was going to vacate and terminate the lease, but only gave two months’ notice. Id. Because it believed the tenant breached the lease agreement by failing to provide adequate notice, the landlord sued for recovery of the remaining 36-monthly payments. Id. While the Utah Supreme Court agreed that the tenant likely breached the agreement, it capped the recoverable rent damages at six-months—the notice requirement. Id. at 219–20.

If a commercial tenant breaches a lease provision, the landlord will have a valid claim for breach of contract. The elements of a prima facie case for breach of contract are (1) a contract, (2) performance by the party seeking recovery, (3) breach of the contract by the other party, and (4) damages.” Cook Assocs., Inc. v. Utah Sch. & Inst. Trust Lands Admin., 2010 UT App 284, ¶ 35, 243 P.3d 888, 901(quoting Bair v. Axiom Design, LLC, 2001 UT 20, ¶ 14, 20 P.3d 388, 391). Thus, a commercial landlord who sues for breach of a lease must establish that it has been damaged as an essential element of its claim. Id. The landlord must also prove the fact of damage with reasonable certainty, and the amount of damages may not be speculative. Id. ; see TruGreen Cos. v. Mower Bros., 2008 UT 81, ¶ 15, 199 P.3d 929 (“[W]hile the standard for determining the amount of damages is not so exacting as the standard for proving the fact o damages, there still must be evidence that rises above speculation and provides a reasonable, even though not necessarily precise, estimate of damages.”); Sawyers v. FMA Leasing Co., 722 P.2d 773, 774 (Utah 1986) (“The fact of damages must be proven with reasonable certainty and the amount by a reasonable though not necessarily precise estimate.”).

Another common way a commercial landlord can recover damages from a troublesome tenant is through an unlawful detainer action. Under the UCA, a commercial tenant will be guilty of an unlawful detainer if the tenant: 1) remains in possession, in person or by subtenant, of the property or any part of it, after the expiration of the specified term or period for which it is let to him; 2) remains in possession of the property when requested to quit; 3) remains in possession of property after default in the payment of rent or other amounts due; 4) assigns or sublets the leased premises contrary to the lease; 5) carries on any unlawful business on the leased property after three days notice to quit; 6) permits or maintains any nuisance after three days notice to quit; 7) commits a criminal act on the premises and remains in possession after service of a three days notice to quit; 8) continues in possession after failing to perform any condition or covenant of the lease agreement. Utah Code Ann. § 78B–6–802 (West 2008).

In an unlawful detainer lawsuit for failure to perform a condition or covenant of the lease under which the property is held, or after default in the payment of rent, the judgment must also declare the forfeiture of the lease. Id. Such forfeiture does not release a defendant from any obligation for payments on a lease for the remainder of the lease’s term nor does it change any obligation on either party to mitigate damages. Id. Recoverable damages include those resulting from 1) forcible entry; 2) forcible or unlawful detainer; 3) waste of the premises during the defendant’s tenancy, if waste is alleged in the complaint and proved at trial; 4) the amounts due under the contract, if the alleged unlawful detainer is after default in the payment of amounts due under the contract; and 5) the abatement of the nuisance by eviction. Id.

Notably, a judgment will include rent, three times the amount of the recoverable damages, and reasonable attorney fees. Id. Moreover, if a commercial landlord is successful in the proceedings, the judgment must include an order for the restitution of the premises. Utah Code Ann. § 78B–6–811 (West 2008). “Restitution” means that the tenant is directed to vacate the premises, remove its personal property, and restore possession of the premises to the landlord. Id. § 78B–6–812(1) (West 2008).

If a commercial tenant abandons the leased premises but leaves personal property behind, the landlord is entitled to remove the property, store it for the tenant, and recover actual moving and storage costs from the tenant. Utah Code Ann. § 78B–6–816(2)(a) (West 2008). If the property has been in storage for at least 15 calendar days and the tenant has made no reasonable effort to recover the property after notice was sent, pay reasonable costs associated with the inventory, removal, and storage, and no court hearing on the property is pending, the owner may:(A) sell the property at a public sale and apply the proceeds toward any amount the tenant owes; or(B) donate the property to charity if the donation is a commercially reasonable alternative. Id.

A landlord is not required to store the following abandoned personal property: (a) chemicals, pests, potentially dangerous or other hazardous materials; (b) animals, including dogs, cats, fish, reptiles, rodents, birds, or other pets; (c) gas, fireworks, combustibles, or any item considered to be hazardous or explosive; (d) garbage; (e) perishable items; or (f) items that when placed in storage might create a hazardous condition or a pest control issue. Id. at (6). These items may be properly disposed of by the landlord immediately upon determination of abandonment, and a tenant may not recover for disposal of these abandoned items. Id. at (8).

In summary, depending on the tenant’s conduct, the UCA and Utah common law provide commercial landlords a myriad of remedies. If a tenant abandons the premises before the end of the lease term and defaults on rental payments, the landlord will be able to recover past rent, any future rent under the lease term, attorneys’ fees, and damages for any expenses incurred while trying to re-let the property. Similarly, if a landlord successfully brings a claim for unlawful detainer, she will be able to recover rent, three times the damages incurred through the action, attorneys’ fees, and entitled to restitution. Finally, if the landlord removes a tenant’s personal property from the premises, the landlord can recover moving and storage costs from the tenant.