Chapter 22 - § 22.2 • LANDLORD REMEDIES

• Jurisdiction: Colorado

§ 22.2 • LANDLORD REMEDIES

This section discusses 19 remedies a landlord usually reserves for itself in case of a default by the tenant.¹ These remedies can be exercised in conjunction with one another, so that the landlord can keep its options open when exercising its remedies. After describing the specified remedies, the remedies section usually contains a clause stating that the remedies are cumulative and not exclusive of one another, and a catch-all clause that states that the landlord may exercise any other remedies available to the landlord at law or in equity.

§ 22.2.1—Termination of the Lease

One of the landlord's standard remedies for a tenant's default is to terminate the lease by notice to the tenant. If the lease is terminated, the tenant is expected to remove its property and move out, just as it would be required to do if the lease term had ended. By terminating the lease, the landlord may be giving up the right to collect rent for the period after the termination. Many termination clauses, however, provide that, despite the termination of the lease, the landlord is entitled to recover both the unpaid rent for the period before the termination and rent for the balance of the term, less any rent received from a new tenant.² Tenants typically try to discount the future rent to present-day value. The landlord also has a duty to mitigate damages as discussed below.

§ 22.2.2—Recovering Possession of the Premises; FED Actions

Almost all leases provide that, upon a tenant default, the landlord can recover possession of the premises. Many leases provide that the landlord can do this by its own action. A typical clause reads: "Landlord may enter upon and take possession of the premises and expel and remove Tenant, by force if necessary, including removal of all of Tenant's personal property therein, and changing the locks on the premises, all without being liable for prosecution or any claim for damages therefor." This type of action by a landlord is commonly called "self-help"; it is not permitted under Colorado law.³

The permitted method for recovering possession of the premises following a tenant default is by following the procedures of the Colorado Forcible Entry and Detainer (FED) Statute.⁴ This statute provides for an expedited legal proceeding which, if successful, results in the sheriff or police of the county where the real property is located assuring that the tenant moves out and removes its personal property. Under the FED Statute, a landlord must make a three-day written demand for payment of rent or possession of the premises;⁵ then the landlord can bring an action by filing a complaint and serving a summons,⁶ and the tenant will have seven to 14 days to answer the complaint.⁷ After that, a hearing for possession should occur within five days of the tenant's answer date,⁸ and a writ of restitution (under which the sheriff or police restore the landlord's possession of the property) will issue within 48 hours after judgment.⁹ Thus, a more appropriate clause for recovery of the premises in a Colorado lease reads: "Landlord may terminate Tenant's right to possession of the premises and may re-enter and re-take possession and remove all of Tenant's personal property therefrom in any manner permitted by law."

Most leases give the landlord the right to recover possession of the premises with or without terminating the lease. Many leases make it clear that recovering possession of the premises does not constitute a termination of the lease. Only a written notice of termination from the landlord results in a termination. The landlord wants to preserve its options so it can recover the most money possible. If it can relet the premises for more than what the tenant is paying, the landlord will terminate the lease and enter into a new lease with a new tenant, free of the existing lease. If the landlord cannot get more than the existing lease provides, the landlord will lease the premises for what it can get for the account of the defaulting tenant and sue to recover the shortfall from the defaulting tenant or any guarantors of the defaulting tenant's obligations.¹⁰ If the landlord cannot relet the premises at all, the landlord will seek to collect all the rent reserved under the lease from the dispossessed tenant or any guarantors under the lease.

§ 22.2.3—Collect Rent as it Becomes Due

A landlord may reserve the right to collect each installment of rent as it becomes due. This remedy does not require the landlord to terminate the lease or to dispossess the tenant. Sometimes, keeping the tenant in its premises, doing what business it can, results in the best recovery for the landlord. Suing for installments is a bit cumbersome when rent is due monthly, but it can be accomplished either by: (1) filing a complaint and then amending it as each additional installment becomes due until amendment is no longer possible under the procedural rules; or (2) filing separate actions for each installment or several installments together.

§ 22.2.4—Acceleration of Rent; Damages

Most likely, the landlord will suffer substantial damages as a result of the tenant's default and the termination of the lease. Such damages may include not only the loss of rent and other charges payable over the balance of the term but also the costs associated with finding a new tenant for the balance of the term. Damages may include (1) cleaning the premises, (2) removing the defaulting tenant's fixtures and other property, (3) advertising costs and brokers' commissions, (4) tenant improvement allowances and other concessions for the new tenant, and (5) other consequential damages. The total amount of such damages may not be known (or knowable) until the scheduled expiration date of the lease. Waiting until the original expiration date to recover damages from a defaulting tenant is not likely to be a satisfactory remedy for the landlord. In addition, the landlord may have a duty to mitigate damages.¹¹ This would include using reasonable efforts to relet the premises to another tenant for the balance of the term. A landlord often will reserve the right to collect the entire unpaid amount of the rent due for the balance of the lease term following its termination of the lease. This is sometimes called an "acceleration" clause because it accelerates or hastens the time for the payment of rent. Instead of becoming due monthly over the balance of the term, all the rent becomes due immediately.¹² Sometimes leases treat the accelerated amount as "liquidated damages" for the tenant's default.

A tenant will generally object to an acceleration clause insofar as it gives the landlord both the premises (which have been vacated by the tenant voluntarily or through an FED proceeding) and the right to all the rent for the term. A tenant will also object that the landlord is seeking more than it bargained for under the lease — the landlord gets more by obtaining all the rent immediately than by obtaining the rent over time, as the lease contemplates.

Because an acceleration clause without more is of dubious legal enforceability,¹³ the landlord often tempers the clause in two ways. First, it reduces the lump sum being sought by the fair rental value of the premises (which the landlord presumably will be able to recover by finding a new tenant). Second, it discounts the lump sum award to its present value. With those two changes, the landlord essentially collects the damages it will suffer on account of the tenant's anticipatory breach.¹⁴

Reduction by Fair Rental Value

A lease may simply state that the accelerated lump sum award will be reduced by the fair rental value of the premises at the time of the termination of the lease (or at the time of the suit). In that case, the fair rental value will be determined in a court proceeding to recover the lump sum.

Sometimes a landlord will state in its lease that the fair rental value will be determined by an appraiser chosen by the landlord. The lease may also state what the qualifications of the appraiser must be. Often the kind of appraiser specified is not a licensed appraiser, but an experienced real estate broker who, presumably, knows the leasing market well enough to render a legitimate opinion as to the fair rental value of the premises (e.g., "a licensed real estate broker with at least ten years' experience in commercial real estate in the Denver Metropolitan area"). The tenant usually wants the appraiser to be independent (e.g., one who has not done business with the landlord in the recent past) and, perhaps, an approval right over the appraiser. The landlord usually will not allow an approval right because it does not want recovery of its damages to be delayed by a dispute over who should act as the appraiser. Some landlords might give the tenant a right of reasonable approval of the appraiser.

Some lease clauses provide details as to how the fair rental value is to be determined, especially if there is something unique or unusual about the premises. For example, the fair rental value calculation will assume the present condition of the premises, which will take into account particularly lavish or particularly Spartan tenant finish. The clause may also refer to present market conditions in considering how long the premises are expected to remain vacant before a replacement tenant is found.

Discounting to Present Value

Discounting the accelerated amount to present value requires an understanding of the time value of money. A dollar today can be invested and earn interest and thus is worth more than a dollar tomorrow or next year. In addition, an economist will say that because prices generally rise over time (inflation), a dollar a year from now is worth less than a dollar today. Both factors, the time value of money and inflation, are usually reflected in the interest rates available for investments. In addition, the risk and creditworthiness of the payee also affect the interest rate. Thus...