The first instinct of any commercial real estate landlord may be to sue a tenant defaulting on rent. However, the American Bar Association warns that litigation may not always be the preferable option.
Here are some circumstances that may affect the profitability of taking a defaulting tenant to court.
Is the tenant solvent?
If the company that occupied the space has gone under, it may not be able to satisfy a judgment. Winning will not mean much if there is no money. With some research or the assistance of a private investigator, a landlord may find useful information regarding the company’s ownership or lack of assets.
Does the lease include damages?
Lost rent is rarely a small matter, but the landlord must weigh that against the potential expense and time of litigating. However, leases often give landlords the right to pursue other damages. These may include:
- Late fees and interest
- Property taxes and insurance
- Utilities
- Maintenance and repairs
- The expenses of re-leasing the property
Has the landlord tried to limit the damages?
A judge will want to know that the landlord has taken reasonable steps to mitigate the damages. Allowing a space to stand vacant is one example that the courts frown on. Reasonability is key, though. A commercial broker may provide expert witness that the landlord took reasonable steps, but that the expense of doing more, such as making extensive modifications, was not feasible.
Does the lease address attorney fees?
The cost of going to court becomes much less of a concern if the lease includes a clause that puts responsibility for attorney fees on the tenant. In fact, such a clause combined with responsibility for damages may create a willingness on the part of the tenant to find a way to settle rather than go to court.
With a good lease, the probability of recovering at least some of the damages improves exponentially. However, a landlord with a defaulting tenant should always weigh the potential benefits of litigation, even in situations that initially seem less than favorable.
