What Is A Landlord’s Duty To Deliver Possession Of The Leased Space?

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Interestingly, and probably not known by many, there are two very different possible legal obligations of a landlord to deliver the leased premises to its tenant. Some jurisdictions require delivery free of occupants and free of other persons entitled to possession of the same leased premises. Other jurisdictions only require that the landlord deliver the “right of possession” to a tenant, leaving it up to the tenant to get rid of any trespassers.

This doesn’t come up very often in commercial leases because almost all of those leases define what constitutes delivery of the leased premises. The smart leases require that the leased premises be delivered free and clear of all occupants and tenancies. Those leases that don’t say that or something like that should be corrected.

Consequently, the real “play” in lease negotiations over delivery issues is “by when,” and what happens, “if not.”

The basic bargain in a lease is that a tenant has the right to exclusive possession of the leased premises in return for the tenant paying rent. Therefore, under a lease, a landlord is obligated to deliver possession of the leased premises to its tenant. That’s what “conveyance” is about! Failure to deliver the leased premises as and when called for in the lease is a breach on the part of the landlord.

Absent an agreement in the lease to the contrary, a tenant is entitled to an award for damages upon breach of its landlord duty to deliver possession and also has the right to terminate the Lease. In addition to other provable damages and possibly consequential damages if the circumstances support such an award, the “damages” include tenant’s loss of its bargain. That loss is measured by the present value of the difference between the “market rent” (if higher) and the rent reserved in the lease. Thus, if the lease was at fair market rental, there should be no “leasehold value” loss. All of the other elements of damages are very fact specific, but tenants should be aware of a court’s reluctance to award speculative damages, such as for “lost profits” where there is no track record of profits in the first place. For these reasons, it is not uncommon to see a tenant with strong bargaining power requiring “liquidated” damages or “Rent Credits.” Following are some typical provisions from a tenant’s perspective:

A. If the Delivery Date does not occur by the Estimated Delivery Date, Tenant will sustain substantial damages including, without limitation, storage costs for fixtures and equipment, employee costs during waiting period, and additional advertising and promotional costs, the exact amount of which would be impracticable or extremely difficult to ascertain. Accordingly, it is agreed that if the Delivery Date does not occur by the Estimated Delivery Date, then Landlord must pay to Tenant as and for liquidated damages two days of Fixed Rent plus the sum of $1,000.00 per day for each day of delay (the “Per Diem Payment”). If Landlord fails to pay Tenant the Per Diem Payment, then Tenant will have the right (without limiting any other right or remedy of Tenant to collect such payment) to deduct such amount, together with interest thereon at the Interest Rate, from Rent and other payments due Landlord.

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B. If Landlord fails to timely satisfy the requirements for delivery of possession of the Demised Premises on or prior to the date of delivery set forth in the Delivery Notice, Tenant will sustain substantial additional costs and expenses, including, without limitation, storage costs for Tenant’s personal property, loss of value affecting inventory, costs associated with employees during such period of delay, additional advertising and promotional costs and other store opening opportunities, and delays in expansion plans in affiliated markets. Landlord and Tenant agree that Tenant will certainly incur such additional costs and expenses, but that it would be impracticable or extremely difficult to ascertain their actual amount. Consequently, Landlord and Tenant agree that a reasonable estimate of such additional costs and expenses is Five Thousand Dollars ($5,000.00) multiplied by the number of days which accrue beginning with the date of delivery set forth in the Delivery Notice and the date Landlord actually delivers the Demised Premises to Tenant or the date Tenant terminates this Lease, whichever is earlier. That amount must be paid by Landlord to Tenant as agreed-upon liquidated damages (and not as a penalty) and Tenant, at its election, is entitled to offset such liquidated damages against any amounts then owing or in the future owing to Landlord by Tenant plus interest at the Interest Rate, including, inter alia, against future installments of Minimum Rent, Additional Rent, and Percentage Rent becoming due hereunder until Tenant offsets the entire amount of liquidated damages. If Landlord has not satisfied the requirements for delivery of possession of the Demised Premises on or before [DATE], then at any time thereafter, but prior to the actual satisfaction of the requirements for delivery of possession of the Demised Premises, Tenant, at its election, will have the right to terminate this Lease by giving Landlord notice thereof. Tenant’s rights to the liquidated damages and Landlord’s obligations to pay such liquidated damages hereunder to Tenant survive the termination of this Lease.

Landlords also need some protection. Beyond a landlord’s ineptitude, negligence or deliberate choice to delay possession for less than a good reason, there are a large number of circumstances, not entirely under a landlord’s control, that could prevent a landlord from making timely delivery of the leased premises to its tenant. Some of these include:

(i)         the existing tenant fails to leave the leased premises on time.

(ii)        permitting and approval delays.

(iii)       construction delays.

(iv)       lender interference or delay’s caused by late funding.

(v)        fire or other casualty.

(vi)       force majeure events.

To avoid owing damages to its tenant and to avert a tenant’s termination of the lease, landlords typically insist that their leases include “protective” provisions. Following are some typical provisions, some very broad in protection, and some tailored to specific circumstances:

Protections that can be placed in the new lease:

A. In no event will Landlord have any liability to Tenant if Landlord is unable to deliver possession of the Demised Premises to Tenant for any reason, including the failure of any existing tenant to surrender possession in accordance with the terms of its lease unless Landlord willfully fails to deliver the Demised Premises or continues to lease it to the prior tenant all or any part of the Demised Premises.

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B. If Landlord fails to give Tenant possession of the Demised Premises by the Commencement Date by reason of construction, holdover of any Tenant, delay or other reason, Landlord shall have no liability to Tenant and this Lease shall remain in full force and effect according to its terms, but the Term and the Rent shall not commence until the date Landlord gives Tenant possession of the Demised Premises. If Landlord fails to give Tenant possession of the Demised Premises by [DATE], either party, by notice to the other given prior delivery of such possession, may cancel this Lease, in which case Landlord must promptly return to Tenant all sums previously paid by Tenant under this Lease.

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C. Landlord agrees to deliver to Tenant physical possession of the Demised Premises on or before [DATE] free and clear of all Tenants and occupants and the rights of others. Such delivery shall also be free of liens, encumbrances, and violations of laws, ordinances, and regulations relating to the use, occupation, and construction of the Building except as such may be specified in Exhibit “B” hereof. If, within One Hundred Twenty (120) days after the Effective Date, Landlord is unable to obtain all necessary governmental land use approvals (e.g., not building permits, demolition permits, or the like) needed to do Landlord’s Work (as defined in Article X), then either Landlord or Tenant, by notice to the other before such approvals are obtained, may terminate this Lease on at least ten (10) days’ notice to the other and such termination will be effective on the date set forth in such notice unless such approvals are obtained by such date. Landlord shall promptly apply for all such approvals, diligently prosecute such applications, and use its best efforts to obtain such approvals and Landlord’s right to terminate this Lease pursuant to the provisions of this Article is expressly contingent upon Landlord’s doing so. Upon any such termination, neither Landlord nor Tenant will have any further liability or obligation to the other.

Sample Provision that can be placed in the “old” lease to protect a landlord against a delay in surrender of the leased premises at end of that lease:

If the Demised Premises are not surrendered on or prior expiration of the Term (including the month-to-month tenancy provided above), Tenant must indemnify and hold harmless Landlord against any and all losses and liabilities resulting therefrom, including, without limitation, any claims made by any succeeding tenant founded upon such delay and attorneys’ fees incurred by landlord related to Tenant’s failure to effectuate such surrender.

Regardless of the reason why possession can not be delivered, a well drafted lease will ALWAYS include an “outside” or “drop dead” date so that the parties can go their own ways. A landlord should not allow itself to be in a position where it can never relet the leased premises because of an existing lease under which it can’t deliver the premises. Similarly, a tenant needs to know the date beyond which it can go out and find replacement space without the prospect of having the old, now unneeded space “delivered” months or years later. The inclusion of an “Outside Delivery Date” that gives either party the right to terminate if delivery of possession is not made by that date for any reason can be linked to a waiver of claims or can be drafted to preserve a tenant’s claims for non-delivery. Typical provisions are as follows:

A. [Protecting Tenant Only]. If for any reason whatsoever the Demised Premises have not been delivered to Tenant in accordance with the provisions of this Lease on or before [DATE], or if at any time Landlord fails to comply with the provisions of this Article then and in such event, Tenant, at any time thereafter prior to cure of such default, time being of the essence for the purposes of this Article, may terminate and cancel this Lease by notice in writing to Landlord, and upon the giving of such notice, this Lease shall thenceforth be of no force and effect, except as to those provisions which by their terms expressly survive termination. Such rights of termination and cancellation are not, however, exclusive of any other rights or remedies of Tenant for enforcement of Landlord’s obligations hereunder.

B. [Protecting Tenant Only]. The date on which the later of Landlord or Tenant (or their respective attorneys) receives a fully executed copy of this Lease shall be its “Effective Date.” The Original Term (as defined in Article X) of this Lease shall commence on the Delivery Date (as defined in Article Y). If, for any reason (including, but not limited to, force majeure, as defined in Article Z), the Delivery Date has not occurred within six (6) months after the Effective Date, Tenant, at any time after the expiration of that six (6)-month period, may terminate the Lease by giving Landlord written notice thereof.

C. [Clause Protecting Tenant, But Limiting Tenant’s Remedies]. Not-withstanding anything contained herein to the contrary, if the Term Commencement Date does not occur on or before the Outside Date (as defined in Article X), then Tenant, as its sole remedy, will be entitled to cancel and terminate this Lease by delivering notice thereof to Landlord within ten (10) days after the Outside Date, TIME BEING OF THE ESSENCE, provided that in the event Landlord then delivers possession of the Demised Premises to Tenant and the Term Commencement Date occurs within thirty (30) days after the date on which Landlord receives Tenant’s notice of termination as aforesaid, then such notice of termination will be deemed null and void as if it had never been sent and this Lease shall continue in full force and effect.

D. [Also Limiting Remedies]. For purposes hereof, the “Outside Date” shall mean [DATE]. In the event the Term Commencement Date does not occur on or before the Outside Date, Tenant, as its sole remedy, may cancel and terminate this Lease. Landlord agrees that it will proceed in good faith and with due diligence in obtaining possession of the Demised Premises from the current Tenant and in completing Landlord’s Work.

E. [Bi-lateral Provision]. If for any reason whatsoever, by [DATE] Landlord is unable to deliver possession of the Demised Premises to Tenant in the condition required by this Lease, then either Landlord or Tenant, on thirty (30) days’ notice to the other, will have the right to terminate this Lease. If Landlord delivers possession of the Demised Premises to Tenant in the condition required by this Lease before the end of the thirtieth (30th) day, such termination shall be void ab initio as if it had never been sent. Following such termination, neither party shall have any liability nor any further obligation to the other unless that liability arise out of a party’s intentional, wrongful acts to the extent such acts resulted in the failure to timely deliver possession of the Demised Premises.

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