For California real estate investors, rental property can produce reliable revenue streams, but these come with responsibilities. Landlords leasing residential properties in California have numerous obligations under various implied warranties. Leases for commercial property have far fewer built-in obligations for landlords. A commercial landlord’s obligations are often limited to the specific terms of the lease contract. Commercial tenants, on the other hand, may have many additional obligations beyond paying rent. While this might appear to benefit landlords, it can also mean significant losses if a commercial tenant breaches their lease. California investors should know the remedies available to them.
Commercial vs. Residential Leases
As mentioned earlier, commercial leases are subject to fewer requirements under California law than residential leases. A commercial lease, for example, does not include the implied warranty of habitability, which obligates a landlord to maintain leased premises in liveable condition for the benefit of tenants. By contrast, maintenance of the property, or even construction of improvements on the property, could be a tenant’s obligation under a commercial lease. Commercial landlords could lease a property on an “as is” basis, as long as the tenant has given informed consent to this arrangement.
Commercial landlords in California are usually bound by the covenant of quiet enjoyment, which protects the tenant’s right to use the property for the purposes expressed in the lease. Unlike residential leases, this covenant can be waived in commercial leases, with the agreement of both parties.
Types of Breach
A tenant can breach a commercial lease in many ways besides not paying rent. A tenant who terminates the lease prior to the expiration of the term agreed upon by the parties is also in breach. Failure to perform other obligations required by the lease agreement, such as maintenance of the property, may also constitute breach.
Remedies and Damages
If a commercial tenant breaches their lease, the landlord is entitled to relief. The type of relief depends on the circumstances of the breach.
Eviction: If a tenant has breached a lease, but retained possession of the property, the landlord may go to court to evict the tenant. The legal process for this is known as “unlawful detainer.” A landlord must be able to show that a valid lease contract exists with the tenant, that the tenant has breached this contract, and that they have provided the tenant with the required notice of default under either the lease or state law. A landlord can also recover unpaid rent and other damages in an unlawful detainer proceeding.
Monetary damages: If a tenant breaches a lease, they may be liable for rent owed under the terms of the lease, as well as compensation for losses resulting from failure to perform other obligations, such as property maintenance. Damages for unpaid rent include arrearages for time periods that have already passed, as well as rent payable through the remainder of the lease term. This amount, however, is limited by a landlord’s duty to mitigate damages. This duty essentially states that a landlord cannot allow rental property to sit unused for the remainder of a lease term, if it could otherwise be leased to a new tenant. Many residential leases include provisions for liquidated damages for early termination by a tenant. Commercial leases may include similar provisions.
Specific performance: This is a form of equitable relief, in which a court orders a party to a contract to fulfill certain obligations of that contract. Courts are reluctant to award this type of relief, since it would force litigants to continue a likely-unpleasant relationship. Eviction and monetary damages are the most common remedies.
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