Landlord Can Collect Rent from Defaulting Tenant After Selling the Property

What Happened: In 2019, a clothing store signed a 10-year lease on commercial property in Chicago, starting in September 2020. But the COVID-19 pandemic hit and the tenant never moved in. In May 2021, the landlord sold the building and terminated the lease. In addition to $1.4 million in unpaid rent from September 2020 to May 2021, the landlord sued the tenant for $3 million representing the rental value of the leased property over the remainder of the lease term after it sold the property. The landlord couldn’t claim further unpaid rent—that is, post-termination rent, after it sold the property and terminated the lease—the tenant argued.

Ruling: The Illinois federal court disagreed, finding that the landlord was entitled to post-termination rent.

Reasoning: While finding no cases specifically addressing the issue in Illinois, the court noted that courts in other states have found that a landlord isn’t entitled to post-termination rent when it sells the property after a tenant defaults. The rationale: The sales price takes into account the expected future income from rental. However, the lease in this case included language not found in the leases of any of those other cases:

Should Landlord at any time terminate this Lease for any breach, in addition to any other remedies it may have, it may recover from Tenant all damages it may incur by reason of such breach, including . . . the cost of recovering the Premises, . . . and including the worth at the time of such termination of the excess, if any, of the amount of Rent reserved in this Lease for remainder of the Lease Term over the then reasonable rental value of the Premises for the remainder of the Lease Term, all of which amounts shall be immediately due and payable from Tenant to Landlord. [emphasis added]

The sale price compensated the landlord for an entire stream of future rental income under the lease, but the lease clause provided for payment of something a sale price wouldn’t cover—namely, the differential between the lease’s future rental income stream and the property’s reasonable rental value. The clause’s intent, in other words, was to compensate the landlord in case the property’s rental value dropped between the start of the lease term and the time of the breach (or the date the property was relet or sold after a breach). As a result, the court ruled that the tenant was on the hook for post-termination rent and a trial would have to be held to determine how much.

• Marol State, LLC v. Everlane, Inc., 2022 U.S. Dist. LEXIS 96180