Recover Unaccrued Rent After Regaining Possession of Space

Suppose a tenant commits a lease default and you regain possession of the space before the lease is set to expire. You relet the space, but for a lower rent. Then you sue the tenant for the difference between the amount of rent it should have paid during the balance of the lease term (also known as “unaccrued” rent) and the amount of rent the new tenant is paying.

That's probably a situation you've found yourself in—as have many other owners. But if your lease with the tenant is like many we've seen, it may have a loophole that could prevent you from collecting the unaccrued rent. Here's the loophole: The lease doesn't require the tenant to pay any unaccrued rent. So if you sue the tenant for the deficiency, it could argue—and a court could agree—that you're not entitled to any money. And you could be stuck with a rent loss.

To plug this loophole and better protect your finances, make sure your lease contains a “savings” clause (also known as a “survival” clause), advises Chicago attorney Neil T. Neumark. A savings clause makes the tenant liable for unaccrued rent and other charges in this situation, he explains. This way, you won't have to worry about rent losses. There's a Model Lease Clause (see box at right) that you can adapt and use in your leases as a savings clause.

Lack of Savings Clause Hurts Owner

A Montana owner learned the importance of a savings clause when a tenant moved out of its space less than two years into a five-year lease. The lease didn't include a savings clause. The owner terminated the lease and relet the space. The owner then sued the former tenant for unaccrued rent, utilities, taxes, and insurance premiums owing for the balance of the term.

The Montana Supreme Court ruled that the owner wasn't entitled to the unaccrued rent, utilities, taxes, and insurance premiums because the former tenant's lease didn't have a savings clause. The lease said that if the tenant failed to pay rent and the owner terminated the lease, the owner could hold the tenant liable “for damages for its breach,” the court noted. But that language didn't amount to a true savings clause that would let the owner collect the unaccrued rent. “In the absence of clear language expressly preserving the right to unaccrued rents, the tenant will not remain liable for unaccrued rents,” said the court [TSI, Inc. v. American Gem Corp.].

Check State Law

Before you add a savings clause to your leases, check with your attorney to see if your state imposes any limits on when you can enforce a savings clause against a tenant, says Neumark. For instance, Illinois lets an owner enforce a savings clause only if the owner terminates the tenant's right to occupy the space—but not if it terminates the lease, he says. But other states (such as Montana) may let an owner enforce a savings clause when it terminates either the tenant's right to occupy the space or the lease.

Include Savings Clause

Make sure your savings clause says the following:

Termination doesn't release tenant from payment. Clarify that if you terminate either the lease (assuming your state law allows this) or the tenant's possession of the space, the tenant isn't released from paying its minimum rent, additional rent, or any other amounts due through the full lease term, says Neumark [Clause, par. a].

You can recover unaccrued rent. Get the right to recover from the tenant the unpaid, unaccrued minimum rent, additional rent, and other amounts as they become due, says Neumark. Specify that this applies to amounts from the date you notify the tenant of the termination until the lease's expiration date [Clause, par. b].

Practical Pointer: Make sure that your lease says elsewhere that the right to collect unaccrued rent under the savings clause will “survive” the expiration or earlier termination of the lease, advises Neumark. Otherwise, the tenant may try to argue that you're not entitled to that rent once the lease ends.

If Tenant Demands Mitigation Language

Your state may require you to lessen—or, in legal terms, “mitigate”—damages when a tenant defaults. If so, expect a tenant to demand that you say in the savings clause that it will be liable for unaccrued rent only if you mitigate your damages, says Neumark. The tenant also may demand that you say that any rent you get from reletting the space will be offset against the unaccrued rent it owes you, he adds. If you agree to these points, clarify that the tenant has no rights to any rent you get from reletting the space that exceeds the amount it owes you, Neumark says.

CLLI Source

Neil T. Neumark, Esq.: Member, Schwartz, Cooper, Greenberger & Krauss, 180 N. La Salle St., Ste. 2700, Chicago, IL 60601; (312) 346-1300, NNeumark@scgk.com.