Keeping Excess Rent from Sublet of Space That Breached Lease

The circumstances that retailers based their leasing decisions on can change, leaving them wondering how best to deal with space they no longer need. Subletting space is often a solution. But savvy tenants will want to angle for keeping some of the profit if the sublet rent is higher than the tenant’s base rent. Sometimes, the owner agrees.

Sublet profit rules are typically hashed out and drafted in the lease. But if they’re not, it can create a gray area rife with arguments. Complicating matters is a scenario in which the tenant engages in an illegal sublet under a lease that doesn’t permit sublets at all. Common sense would dictate that the owner would keep the profit from a violation of its lease with a tenant. But that’s not always the case.

A Utah court, in a somewhat surprising decision, allowed a tenant who had entered into a sublet arrangement that breached the lease to keep the resulting profits.

So, while this case shouldn’t encourage tenants to enter into illegal sublets for profit, it does show the importance of careful lease drafting on both sides. That’s because the main reason the tenant prevailed in terms of keeping the profit was because the lease didn’t specify—although subletting without permission was a breach—that the owner would keep the profits.

In that case, a landlord and tenant signed a lease for a warehouse building for a two-year term. The lease prohibited the tenant from subleasing the warehouse without prior written consent.

However, the tenant made an oral agreement to sublet the warehouse to a subtenant—the same day the lease went into effect—without the landlord’s written consent.

When the landlord discovered that the tenant was subletting the warehouse, it sent the tenant a letter, giving the tenant written notice of its default of the sublease provision and giving it 10 days to cure—that is, fix the problem—by paying the landlord $30,000. Because the tenant chose not to cure the breach, the landlord terminated the lease pursuant to its default provisions. The tenant promptly vacated the warehouse.

The landlord sued the tenant, alleging that it unlawfully detained the warehouse, breached the lease, and was unjustly enriched by the sublease—in other words, that the tenant collected money that it wasn’t entitled to. The landlord claimed that it had been damaged by the sublease in the amount of $53,100, arguing that it would have agreed to the sublease if the tenant had paid it the difference between the tenant’s rent and what the tenant received from the subtenant. The landlord said that the sublease amounted to an unlawful detainer under state statutes. It brought claims for breach of contract or unjust enrichment, stating that “it would be unjust for the tenant to retain the benefit from the sublet rent that it received.”

The tenant and the landlord each asked a district court for a judgment in its favor without a trial. The trial court ruled in favor of the tenant, and the landlord appealed. A Utah appeals court affirmed.

On appeal, the tenant asserted that the landlord’s unlawful detainer claim failed because the tenant returned possession of the warehouse to the landlord before the term of the notice expired. It further argued that the landlord had no remedy for breach of contract because the lease allowed the landlord to terminate the lease, which it did, and charge the tenant a penalty, which the tenant paid. But, according to the tenant, nothing in the lease entitled the landlord to the rent from the sublease. Finally, it argued that without evidence of an unlawful detainer or a provision in the lease that would entitle the landlord to such damages, the landlord couldn’t claim that the tenant was unjustly enriched from the rent collected under the sublease.

The district court had concluded that nothing in the unlawful detainer statute or the lease supported the landlord’s claim for damages for rent the tenant obtained from the subtenant. The court determined that “the only remedy [Landlord] appears to be entitled to is a declaration under [the unlawful detainer statute] that the [lease] is forfeited due to [Tenant’s] failure to perform a condition or covenant therein.”

The district court said that the tenant complied with the landlord’s notice to vacate when it elected to promptly vacate the warehouse rather than cure the breach and therefore did not unlawfully possess it. The court further concluded that even if the tenant was in “unlawful detainer” of the warehouse under state statutes, for unauthorized subletting, that section “does not specifically provide for damages for unauthorized subletting” and neither did the lease.

But the appeals court agreed with the district court that the lease “does not provide for damages as requested by [Landlord].” The landlord argued that “the law must provide a remedy in damages” and that “damages are properly measured by the amount necessary to place the nonbreaching party in as good a position as if the contract had been performed.” It also asserted that “it is an undisputed material fact that [it] would have agreed to the sublease if [Tenant] had paid [it] the difference between [Tenant’s] rent and what [Tenant] received from [Subtenant].” The landlord argued that, had the parties entered into that agreement, it would have been paid the excess rent it now seeks.

The appeals court said that, though this might be true, it didn’t see how this legally entitled the landlord to the excess rent from the sublease without a provision in the lease providing for those damages. Instead, “it appears the landlord is requesting the court to enforce ‘an alternative benefit to the bargain’ than the agreement it reached with the tenant in the lease based on ‘something it might have contracted for under different circumstances,’” said the appeals court. There was no agreement to pay the difference between the tenant and the subtenant’s rent, and there is nothing in the record to suggest that the tenant would have agreed to the landlord’s conditions for consenting to the sublease, the appeals court pointed out [Gardiner v. Anderson, August 2018].

 

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