This article presents the differences in the right to collect future rent between a surrender and other landlord remedies when a tenant breaches and voluntarily vacates the leased premises.

Lost ability to recover future rents

 

Before a nonresidential lease expires, the tenant closes out his business operations and vacates the premises, paying no further rent. The landlord serves the tenant with a 3-day notice to pay rent or quit. [See first tuesday Form 575]

 

The notice includes a forfeiture clause declaring a forfeiture of the lease if the tenant fails to pay rent within three days following service of the notice.

 

The tenant responds to the notice by letter, stating he elects not to pay future rent and accepts the landlord’s offer to terminate the lease. The key to the premises is returned to the landlord with the letter.

 

The landlord responds by letter stating:

 

·     neither the landlord nor the tenant owe each other any further obligations under the lease; and

 

·     the tenant is to pay all rent due up to the date the tenant returned the key to the landlord.

 

The landlord then attempts to relet the premises, but without success.

 

Later, the landlord makes a demand on the tenant for payment of rents called for in the lease agreement for the entire remaining term of the lease since the landlord declared a forfeiture of the lease in the 3-day notice which terminated the tenant’s right to possession but did not cancel the lease agreement.

 

The tenant claims the landlord is not entitled to any future rents called for in the lease agreement since the landlord agreed to a surrender of the premises by their communications, waiving any rights the landlord had to collect future rents otherwise allowed on the delcaration forfeiting the lease.

 

The landlord claims entitlement to collect all future rents due under the lease agreement after the tenant vacated, since his right to future rents is preserved by the declaration of forfeiture in the 3-day notice and he undertook reasonable efforts to relet the premises and mitigate his loss of rent.

 

Can the landlord recover future rents from the tenant based on the lease agreement, notices and letters?

 

No! The lease agreement was no longer enforceable having been canceled by the communications agreeing to terminate all obligations under the lease agreement in exchange for possession, called a surrender. [Desert Plaza Partnership v. Waddell (1986) 180 CA3d 805]

 

The tenant’s letter “electing to pay no future rent” coupled with the return of the key (possession) to the landlord initiated a surrender, an implied offer to cancel the lease agreement.

 

The landlord’s letter in response foregoing future rents released the tenant from further liability on the lease agreement. The landlord’s conduct constitutes acceptance of the offer to surrender initiated by the tenant. The landlord failed to stand on his right to collect rents remaining due for the duration of the uncancelled lease agreement, rights statutorily reserved to him by use of the lease forfeiture clause in the 3-day notice. [Calif. Civil Code §1951.2]

 

The tenant forfeited his right to possession, the lease, by not paying the rent within three days. However, he negotiated a cancellation of the lease agreement that would have remained enforceable after forfeiture of the lease.

 

Surrender on failure to forfeit

 

A surrender also occurs when the tenant breaches the lease agreement and voluntarily vacates without being served with a notice to quit and election to forfeit, and then the landlord acts inconsistently with the tenant’s unforfeited right to possession.

 

A surrender results in the:

 

·     termination of the tenant’s right to possession; and

 

·     cancellation of the lease agreement.

 

When a breaching tenant vacates the premises, the landlord may fail to declare a forfeiture of the tenant’s right to possession, or lease, for the period remaining on the lease which he can accomplish by service of either a 3-day notice to pay or quit with election to forfeit the lease or a notice of abandonment. If the landlord then takes possession and relets the premises, he is acting inconsistent with the tenant’s outstanding right to possession that has not been terminated. Thus, the landlord has acted to cancel the lease agreement — the landlord’s right to recover future rents under the lease agreement is eliminated by his own adverse conduct.

 

Any rent lost due to the landlord’s inability to relet the premises after a surrender is not collectible from the former tenant, and becomes part of the market risks any landlord assumes as the owner of vacant rental property. [Desert Plaza Partnership, supra]

 

Editor’s note — Only ownership of real estate and personal property may be forfeited. Conversely, a lease agreement is not property, it is a contract (as well as a conveyance). A contract is evidence of rights and obligations and is not subject to forfeiture.

 

Vacated space and a breached lease

 

When a tenant breaches his lease agreement and vacates the premises without service of a 3-day notice to quit, the landlord may respond in one of four ways:

 

1. Terminate the tenant’s right to occupancy and cancel the lease agreement by a surrender, then relet or occupy the premises himself.

 

2. Terminate the tenant’s leasehold by a declaration of forfeiture (3-day notice or notice of abandonment) and relet the premises to mitigate losses.

 

3. Take possession of the premises and relet it on the tenant’s behalf.

 

4. Enforce any tenant-mitigation provision in the lease agreement, leaving the tenant in possession to relet the premises.

 

Surrender is an interaction between the tenant and the landlord, residential or nonresidential, causing a termination of the tenant’s right to possession and cancellation of the lease agreement.

 

A surrender occurs and cancels the lease agreement by either:

 

·     mutual consent of the landlord and the tenant [CC §1933(2)]; or

 

·     operation of law, a surrender implied due to the conduct of the landlord.

 

Surrender by mutual consent

 

Consider a tenant who makes a written offer to his landlord to surrender the premises — to vacate and return possession in exchange for cancellation of the tenant’s obligations under the lease agreement.

 

The landlord believes a new tenant, who will pay more rent for the space than the current tenant, can be easily located.

 

Still, the landlord demands an early-termination penalty equal to three months’ rent to cancel the lease agreement. The tenant pays the fee and the landlord cancels the lease. A surrender has occurred.

 

Editor’s note — Mid-term leases sometimes contain an early-termination provision for a surrender, allowing the lease agreement to be canceled in exchange for a fee, usually in the amount of two to six months’ unearned rent — a type of prepayment penalty or contract liability limitation provision.

 

Here, a surrender functions like a deed-in-lieu of foreclosure that conveys the real estate to the lender (possession returned to the landlord) in exchange for the lender’s cancellation of the note obligations (cancellation of the lease agreement).

 

Surrender by operation of law

 

Now consider a tenant on a lease with a ten-year term. A few years after entering into the lease agreement, the tenant vacates the premises. The tenant removes all of his personal property and returns the key to the landlord. The tenant has no intention of returning and has breached the lease agreement by failing to pay rent.

 

Knowing a surrender would cancel his right to future rents due under the lease agreement, the landlord informs the tenant he will not accept the tenant’s return of possession to the premises as a surrender. He will enforce the collection of future rent called for in the lease agreement.

 

Without prior notice to the tenant, the landlord retakes possession, refurbishes the vacated space and re-rents it to a replacement tenant. A lease agreement is entered into with the replacement tenant at a lower rental rate for the unexpired term remaining on the breached lease. The landlord notifies the prior tenant he has leased the premises to mitigate his loss of rent.

 

The landlord makes a demand on the prior tenant for the payment of rent, the amount being the difference between:

 

·     the total amount of rents remaining unpaid over the remaining unexpired term of the prior tenant’s lease; and

 

·     the amount of rent to be paid during the same period under the new lease by the replacement tenant.

 

Can the landlord recover the lost rent from the prior tenant who vacated the premises and returned possession to the landlord?

 

No! Before entering the space to prepare for reletting the premises, the landlord failed to:

 

·     terminate the tenancy by serving a 3-day notice with a declaration of forfeiture or a notice of abandonment; or

 

·     notify the tenant he was taking possession of the premises as an agent acting on the tenant’s behalf.

 

The conduct of the landlord at the time he unilaterally took possession to relet the premises violated the tenant’s unforfeited right to possession. Although the landlord did not intend to accept a surrender, he acted to take possession on his own behalf without first forfeiting the tenant’s leasehold or advising the tenant of the landlord’s intent to act on the tenant’s behalf to relet the premises.

 

A surrender by operation of law occurred due to the landlord’s actions adverse to the tenant’s right to possession. Taking possession without authority to do so is inconsistent with the tenant’s remaining possessory interest under his lease (which had not been terminated) and constituted an acceptance of an implied offer to surrender initiated by the tenant’s vacating the premises. The landlord’s activities, inconsistent with the tenant’s outstanding right to reoccupy, terminated the tenancy and canceled the lease agreement as a surrender. [Dorcich v. Time Oil Co. (1951) 103 CA2d 677]

 

Re-possession on the tenant’s behalf

 

To act on behalf of the tenant when the tenant’s right to possession has not been terminated, the landlord who intends to take possession and act on the tenant’s behalf to relet the premises as his agent must twice notify the tenant:

 

·     once before taking possession of the premises; and

 

·     again when the premises is relet.

 

Even though a tenant fails to pay rent, removes all of his personal property, vacates the leased premises and has no intention of returning, the tenant does not and cannot unilaterally terminate his right to possess the premises, the leasehold, and escape his rent obligations under the lease agreement.

 

Until the tenant’s right to possession is terminated on a declaration of forfeiture by the landlord, no person other than the tenant may occupy the premises, unless the landlord acts as the tenant’s agent or to preserve the landlord’s reversionary interest from waste.

 

Thus, a landlord interferes with the tenant’s right to possession and cancels the lease agreement by a surrender when the landlord takes possession of the vacated premises before either:

 

·     terminating the tenancy by forfeiture or abandonment; or

 

·     notifying the tenant he is taking possession to relet the premises as an agent acting on behalf of the tenant. [Respini v. Porta (1891) 89 C 464]

 

Inconsistent behavior while reletting

 

Consider a landlord notifying a tenant who has breached the lease agreement and vacated the premises that the landlord will enter the premises, take possession and relet the premises as an agent acting on the tenant’s behalf.

 

The landlord relets the premises for less rent and for a period extending beyond the expiration of the term remaining on the tenant’s lease. The landlord notifies the tenant he has relet the premises on the tenant’s behalf.

 

A demand is made on the tenant for the loss in rent resulting from the reletting of the premises at a reduced rent. The tenant refuses to pay, claiming a surrender occurred, canceling the lease agreement since the terms and conditions of the new lease agreement exceeded the term of the tenant’s remaining right to possession under the breached lease agreement.

 

Here, a tenant’s right to possession runs only until the expiration of the period fixed by his lease agreement. Had the vacating tenant sought to sublet the premises himself, the term of the sublease could not extend beyond the date set for expiration of the tenant’s right to occupy the property.

 

Thus, the landlord who does not terminate the tenant’s lease and then acts to relet the premises as the tenant’s agent for a longer term than the unexpired term remaining on the lease:

 

·     is not renting the premises on behalf of the tenant; and

 

·     has worked a surrender — a cancellation of the lease agreement — since his conduct is inconsistent with the vacating tenant’s unexpired and unterminated right to possession. [Welcome v. Hess (1891) 90 C 507]

 

Now consider a landlord who, on notice to a vacating tenant, takes possession on behalf of the tenant. The landlord maintains and cares for the vacated premises while attempting to relet the premises.

 

The tenant claims the landlord’s care and maintenance of the property constitutes a surrender since the landlord exercised independent control over the premises by his maintenance activity.

 

Here, the landlord’s care and maintenance is conduct entered into on the tenant’s behalf. Care and maintenance of the property is activity consistent with the landlord’s agency duty owed the tenant, when acting on the tenant’s behalf, to perform the tenant’s obligation under the lease agreement to care for and maintain the property.

 

As the agent of the vacated tenant, the landlord must make a good faith effort to lease the premises, called mitigation of losses. The landlord, as would the tenant, will be unable to lease the premises in a dilapidated, ill-maintained condition. [B.K.K. Company v. Schultz (1970) 7 CA3d 786]

 

In an attempt to avoid all these adverse legal consequences (for failure to know or abide by the rules), some lease agreements contain a remedies provision with a clause stating a surrender can occur only if the tenant enters into a written cancellation and waiver agreement. [See first tuesday Form 552 §20]

 

However, the landlord’s improper conduct in response to a tenant’s breach of the lease agreement and vacating of the premises, acting alone and without a writing, results in a cancellation of the lease by surrender. The landlord’s conduct supersedes the lease agreement provisions requiring a written agreement to cancel the lease. Landlord/tenant law controls the result, barring application of contract law principles that would have ignored the landlord’s conduct.

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