Chapter 22 - § 22.3 • TENANT REMEDIES

• Jurisdiction: Colorado

§ 22.3 • TENANT REMEDIES

Just as the landlord default clause in a lease is often short, if it exists at all (see § 21.2), the provisions for tenant remedies in a lease may be short or nonexistent. In any event, the menu of remedies available to tenants is much shorter. The following sections discuss the nine most common tenant remedies.

§ 22.3.1—Right to Terminate the Lease

For certain types of defaults, the tenant might seek the right to terminate the lease. Lease termination is the "nuclear option"; thus, landlords are very stingy in granting lease terminations. Lenders hate rights to terminate because they interrupt the cash flow stream that pays the monthly debt service (see § 15.2.2). Certain termination rights are typical in a lease (i.e., upon total or substantial condemnation, and upon damage or destruction that cannot be repaired within a certain period, such as 180 days), but only a strong tenant will get a right to terminate the lease for other occurrences.

The kinds of defaults for which the tenant most often will seek termination are those that essentially make it impossible for the tenant to conduct its business in the premises or severely affect the tenant's use or enjoyment of the premises. So, the tenant will want the right to terminate the lease if, for example, (1) possession of the premises are not delivered on time, (2) the tenant is unable to get permits or approvals required to use and occupy the premises, (3) utility services are interrupted, (4) a condemnation reduces the parking or other common areas or the size of the premises, (5) some aspect of the tenant's use that the tenant deems important to its operations becomes unlawful or unavailable (e.g., outdoor seating for a restaurant or drive-through service), (6) access to the premises is impaired (e.g., the entrance becomes right-in/right-out only, truck use is curtailed, or the more convenient access is shut off), or (7) an anchor tenant goes dark. Any right to terminate a lease is usually heavily negotiated.

§ 22.3.2—Setoff

The remedy the tenant usually wants the most is the right to withhold rent and to set off any damages for the landlord's breach from the tenant's rent obligation. It is the easiest of remedies to exercise and usually gets the landlord's attention in a hurry. It is also the remedy a landlord is most likely to curtail. Most leases will provide that the tenant's obligation is to pay rent "without setoff or deduction of any kind whatsoever," or words to that effect. The reason for this is twofold. First, the landlord does not want the tenant to have it so easy — to be able to simply claim a default and not pay its rent. Second, lenders hate rights of offset because they interfere with the income stream that ensures the payment of the monthly debt service. Lenders will "punish" a landlord who allows rent offsets in its leases, either by refusing to lend at all or, more likely, by discounting the value of leases that contain such offsets (and hence reducing the amount they will lend the landlord) or increasing the interest rate to account for the increased risk of non-payment these leases present. If a lease contains a no-setoff provision, the tenant is wise to pay any amount owed, even if the landlord is clearly at fault, because these clauses are enforceable in Colorado⁸⁰ and can support an FED claim.

A strong tenant, such as a national or credit tenant, will sometimes succeed in obtaining a rent offset. The most common default that will trigger a rent offset is the landlord's failure to perform a maintenance or repair obligation or to provide a service. For that type of default, a strong tenant will insist on the right to perform the obligation on the landlord's behalf and to charge the landlord with the cost of performing the obligation. If the landlord does not promptly reimburse the tenant, the tenant will insist on the right to withhold the amount from the next installment of rent. Additionally, if the landlord owes the tenant certain sums of money, such as a tenant allowance, and has not paid those amounts, the tenant may ask for the right to offset the rent due until the amount is fully paid. If the landlord concedes a setoff remedy, it might obtain the agreement of the tenant to limit the amount of the setoff to some percentage (25 to 50 percent) of the monthly rent obligation. This limitation will, to some degree, assuage the lender who is concerned that the landlord's cash flow, after the setoff, will be insufficient to cover the landlord's monthly mortgage payment.

Note that some situations for which a tenant will seek a right of setoff do not involve a landlord default. Some of the situations are beyond the landlord's control. In these situations, the right of setoff is not so much a remedy, but simply a shifting of the risk of certain events from the tenant to the landlord. The same is true for rent abatements and rights of termination, discussed below.

§ 22.3.3—Rent Abatement

The tenant might seek a reduction of rent (sometimes called a "rent abatement") on account of the landlord's default. If, for example, the...