fumwffi&mmffiffiKe&€mWKey lease default provisions

f t is more important than

I eve{, given the increasingI- rate of commercial tenant

defaults and evictions, for land-lords to structure the defaultand remedies provisions in theirleases with the serious possibil-ity of tenant default iir mina.Properly drafting and negotiat-ing these provisions is especiallyimportant for out-of-state land-lords operating in Colorado,who may.not be familiar withColorado stafutes and. case lawaffecting a landlord's rights, inthe event a tenant defaults andmay need to be evicted from theleased premises. Careful atten-tion to thg key lease provisionsdiscussed below can bxpedite alandlord's abitity to rdcaptureand lemarket leased space^froma defaulting tenant and increasea landlord's ability-to recoverryoney damages fbr breach ofthe lease.

.l Requirement for noticeof nonpayment of rent.Nonpayment of rent by a ten-ant alwavs will be a defaultunder any lease, corrurrercial orresidenti6f howeveq, it is com-mon for'commercial landlordsto allow for a notice period,typically three to five- days,before nonpayment of rentbecomes a defaultbv the tenant.Additionally, Colorido evictionstatutes require that landlordsmust p_rovide a defaulting ten-ant with written notice, includ-ing a demand for payment ofreit along with a thrbe-day cureperiod (often referrqd to as a/'Three-Day Notice" ot "Thtee-Duy Dernand"), before com-mencing the eviction process byfiling a "Complaint in UnlawftilDetainer" with the court hav-ing jurisdiction ov.er the leasedpremises. See C.R.S. 13-40-104.Because Colorado requires athree-day notice periodby stat-ute, an additional notice periodprovided in the lease beforenonpayment of rent becomes adefault can significantly delay alandlord's abilitv to reiake pos-session of the l6ased p.e*ises.hr this situatioru landlords arerequired to give notice twice toa tenant who defaults for non'payment of rent. For instance ifthe lease provides for a five-daynotice period" before nonpay-ment of rent becomes default,the landlord must provide thiidefault notice after the ten-ant fails to pay rent, wait therequired five days, then pro-vi<ie the statutorv thrbe-dav

J J

notice'and wait an additionil

rent, requiredunder the lease, will be deemedthe same as the notice requiredby Colorado statutes, and not inaddition to it. The inclusion ofthis language allows landlordsto accommodate requests fromtenants for written notice beforenonpayment of rent becomes adefault, while still preservingthe ability to promptly comlmence eviction proceedings andretake possession of the leasedpremises in the event a tenant

"fails to pay rent. Additionally,in order to avoid any ambiguityand potential delays, landlordsshould structure this provisionin such a way that nonpaymentof rent by u tenant is an imme-diate default, and an\r noticeperiod provided'in the leasewill be a period during whichthe tenant can cure that default.

I Abandonment of theleased premises as default.Abandonment of .the leasedpremises also typically is adefault under manv conuner-cial leases. The,,abindonmentdefault provision is' importantbecause it allows landlords toprovide the statutory three-dayirotice and begin the evictioirprocess as soon as possible aftera tenant vacates, rather thanhaving to wait until the vacat-ing tenant violates another cov-enant of the le4se, most likelyby nonpa5rment of rent, to di)so. For instance; if a tenantabandons the leased premisesduring the middle of th-e month,but alrbady has paid the fullmonth's reht, witliout an aban-donment default provision inthe .lease the

"hndlord would

be rhable to begin the evictionprocess until-the- beginning ofthe next month when the tenant,now long gone, fails to make itsrequired rental payment.

OfterU .tenants will requestthat landlords remove the aban-dorlment default provision ormodify the provision to makeabandonment "a default onlywhen u".otnp"ttied by

""rp;i-

ment of rent. It is unwise forlandlords to delete abandon-ryent default provision fromtheir leases. Additionally, theoften-requested rhodifiiationconditioning abandonmentdefault on nonpayment of ientis inadvisable, is"it defeats thepurpose of an abandonmentdefault provision. Nonpaymentof rent already will be

-an event

of default unher anv lease. Bvconditioning abandontn"tttdefault on the occurrence ofanother default (nonpayment ofrent) the abandonm^enl defaultprovision is essentially ren-dered moot.

Also, abandonment of the' leased premises a{rd/or discon-tinuance of business operationsin the leased premisel by ten-ants is a signihcant concern inretail leases. This concern tvpi-cally will not be addretr"d'u,a simple default provision, butrathei by either d "ContinuousOperations" provision in thelease, requiring a tenant to con-duct normal businerss opera-tions within the leased frem-ises, or a "Go-Dark" 'provisien,

granting .a tenant thr! right tocease its business ope:ratiorts inthe premises.

I Tenant liability for lostfuture rent. Most commercialleases in Colorado als<l will con-luir a provision granting thelandlord the option of terriinat-ing the leas.e,-in the event thetgnant defaults, or terminatingthe defaultirg tenant's right t5possession of the lea:ed prem-ises, without terminating thelease. The inclusion or omissionof this type of provision hassignificant consequences underColorado law and landlordsowning property in Coloradoshould be careful to tiailor theirlease forms to include'this lan-guage.

Colorado courts eenerallvhave held that, abserft specificlanguage to the contr;ary in thelease, a landlord's dr:liverv ofthe statutory three-day r,6ti."required to commenc,e evic$onproceedings will be treated asan election bv the landlord toterminate the-lease, and, unlessthe tenant cures the correspond-ing default, the

'lease wi-ll ter-

minate and such tel:minationwill relieve the tenaLnt of itsong_oing_ obligation to pay rentunder the lease. See Aigner a.CoweII Sales Cotnpany, OO'O P.Za907., 908-09 (Colo. fql3g); GTM.

Justin D. Pless-Attorney, Pless Law

Firm LLC, Denver

three.days, allprior to com:mencing theeviction pro-cess with- theappropr ia tecourt.

Land lordscan solvethis problemby provid-ing that anynotice of non-payment of

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Inaestments a. Depot, lnc., 694'P.zd 379, 382 (Colo Ct. App.1884). For example, withorrt'uspecific provision in the leaseto the contrary if a landlorddelivers the statutory three -&aynotice and comrhenies evictioirproceedings against a default-irg tenant, under Coloradolaw, the lease will be deemedterminated when the.tenant isevicted, and the landlord likelvwill lose its right to collect daoi-ages from the tenant for futurelost rent.

This result can be avoided bvinclgding specific_ language iirthe_l€ase,stating that the land-lord has the option to terminatethe tenant's right to possessionof the leased fremisirs withouttermihating the lease, and thafregardless of any termination ofthe right of posiessiory tfre ten-ant will remain liable for.ongo-ing payment 9f rent pursuanftothe lease. Such a provision alsoshould include language per-mitting the landlord to"retakeand relet the leased premisesafter the tenant's right to pos-session has been teiininateh. ltis important to note that theseprovisions must be carefullydrafted becausb Colorado courfswill strictly construe "ongoingliability"

-provisions ag"ainSi

landlords. See GTM lnaes{ments,694 P.zd at 382. Further, land-lords: also must be aware thatsudr provisions will not-relievethembf their duty to attempt tomitigate their damages from atenant default by using reason-able efforts to ielet tlie leasedpremises.- Moreoveq, to avoid any poten-tial ambiguity, it is best_foi land-lords to include similar lan-guage in the statutory three-daynotice, informing the defaultingtenant that the Iandlord is nolelecting to terrr,rinate the lease.By including the leaseprovision

discussed above, landlords cansaifely cofiunence eviction pro-ceedings against a defaulhngtenant, without being deemedto have terminated "the

leaieand potentially losing the rightto col-lect damages foilostfutilrerent from the defaultirg tenant.

These provisionsrnust be carefully

" drafted becauseColorado courts will

strictly construe'ongoing liabilitylprovrslons agarnst

landlord-s.

I Maintaining tenant l iabil-ity after a transfer. While nota default provision per se, rnostcofiunercial'leases will providethat in the event of an'assign-ment oI the lease, or a subleXseof some or all of the leasedprernises, the original tenant will

"

remain liable for all obligationsunder the lease, most

-impor-

tantly payment of rent. Thisprovision is important becauseit provides an additional ave-nue for recovery bv landlordsshould the assigrt6e or sub-tenant default. Eisentially, ,*1goriginal tenant takes on the roleof a,guarantor of performanceby the assignee or subtenant.The guarant6r obligation of theoriginal tenant, in this situa-tion, reduces the landlord's riskthat it will be unable to recovermoney damages in the eventthe new tenant defaults and hasbecome insolven! or otherwiseunable to pay a judgment.

Tenants often will request thatlandlords modify these provi-sions to remove the originil ten:anfs liability in the eveht of cer-tain permi{te{ transfers of thelease, such as an assignment to

an affiliate or successor entitv ofthe origi4al tenant. Landlcirdswould be unwise to release theorigi4al tenant from liabiliff inthis instance. While the l6asemay contain iret-worth or cred-itworthiriess requirements forany permitted transferee, thelandlord is not gualanteed ofthe future financiil performanceof any such entify, and so is bestserved by keeping the orisinaltenant on the hooi, shouli thepermitted transferee default.

,$.d{itionally, tenants oftenwill request a rel'ease from lia-bility at the time a landlord

- gives its consent to an. assign-ment or.sublease. Tenants oftenwill argue that"if the landlordconsents to the.transfer, then thelandlord has determined thatthe transferee is acceptable as atenanf and so the oiiginal ten-ant should no longer-be liablefor performelnce o"f the lease.Landlords should be warv ofreleasing original tenants ftorttliability in these circumstancesas well because, again, there isno guarantee that a new ienantwill remain financially sound.

I Conclusion. For iandlo.rds,there is no better protectionagainst tenant defaults thancareful selection of tenants andcollection bf adequate securitvdeposits and lett-ers of credii.Ofteru in a lease default situa-tiory a tenant already may be.insolvent or have fiied b"ank-ruptcy, and the best a land-lord can hope for is to quicklyrecapfure and remarket theleased premises. However, bypaying careful attention to th-eprovisions aird considerationsdiscussed above and draftingleases with the .possibility oTtenant default irr mind, 6nd-lords can put themselves in thebest position possible to quicklyregain possession of the leasedpremises and potentially recov-er damages for breach of thelease.A'

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