The Timing For The Industrial Effective Breach of Contract Is Now!
The industrial real estate industry is on fire with no signs of slowing down. The vacancy rates in Los Angeles are in the low single digits with high rental rates. This is due partly to the shift from retail to ecommerce and the demand for warehouse space. As a result, breach of lease litigation cases have dropped compared to the recession era in 2009.
In the 4th quarter of 2010 Los Angeles vacancy rates were about 6%. Landlords had extreme difficulty finding a tenant to fill a space then. As a result, the landlord lost several months of rent when a tenant breached a lease. Litigation costs were extremely high for landlords trying to recoup rents from tenants. In contrast, Industrial vacancy rates today are at a historic low around 1%.
The landlord must mitigate the damages and continue to collect rent as it comes due under the law section 1951.4 if a tenant breaches the lease for abandonment or nonpayment. The first plan of attack is to simply file a 3 day notice and then a lawsuit.
The landlord always had to sue a tenant for unpaid rent in the days of the recession, because of the difficulty finding a replacement tenant to rent the property for the same rate or higher. In many cases the owner of the property felt it was too expensive to chase a bad tenant and elected to make a deep cut in the rent to keep the tenant or fill the vacant space.
Today the damages for the breach are minimal due to the property re-lease at higher rates. Now landlords can choose not to litigate if a tenant breaches a lease, because of the escalating commercial rental rates in the last few years and less downtime for re-leasing the property. As a result of the hot commercial market that is not slowing down anytime soon, mitigating damages is minimal or in some cases nonexistent.
In summary, a breach could be a good opportunity for the industrial tenant and landlord if a tenant feels he or she cannot sublease the space or pay off the owner. However, the rent should be at least 20 percent below current market rents. Consequently, the tenants credit rating may be in jeopardy if they abandon the premises.