This article analyzes the obligation of a tenant to pay rent under provisions in residential or commercial lease agreements.

The merging of a lease, a recession, and attitudes

Recessions expose a domino effect in the world of property management which leasing agents, owners and tenants experience every business cycle.

However, few participants today have any recollection of — much less personal experience with — the normal recessionary ripples about to deeply affect landlord-tenant relationships. It’s all about money; not property, not a pandemic.

For starters, a recession commonly weakens a tenant’s business or employer, which has the adverse effect of diminishing the tenant’s income. In time, reduced income hinders the tenant’s ability to timely make scheduled rental payments to the landlord.

This financial stress is especially acute in California — more than half of our residential tenants are seriously cost-burdened.

A residential or commercial lease agreement

entered into by a landlord and a tenant is a conveyance. The agreement is coupled with the physical transfer of the right to possession of the described property for a specific period. [See RPI Form 550 and 551]

The right of possession

More to the point for this writing, a lease agreement creates tenant and landlord obligations, such as the payment of rent amounts and the costs of care and maintenance of the real estate, called additional rent. Again, it’s about money.

The property rights conveyed by an owner to the tenant equal the possessory interest to exclusively occupy the described real estate. This possessory interest is called a leasehold estate, or simply a lease. [Calif. Civil Code §761(3)]

Once conveyed, the tenant exclusively owns the right of possession, a tangible which is separate from the other rights and obligations of the rental or lease agreement.

On expiration of the lease term, the right of possession to the real estate reverts to the landlord. Thus, the landlord under a lease remains the fee owner with a reversionary interest in the leased parcel or space during the lease term, while the tenant holds the right to possession.

However, the tenant’s right to continue in occupancy of the real estate is conditioned on their performance under two sets of provisions in the lease agreement:

  • one calling for the payment of rent; and
  • the other laying out obligations the tenant assumes to maintain the leased property.

When the tenant materially breaches the lease agreement — as occurs on the tenant’s failure to pay rent — the landlord may act to prematurely regain possession of the real estate — repossess — by declaring a forfeiture of the tenant’s leasehold interest of the right to possession.

Critical for collecting money owed under the lease agreement, forfeiture of the tenant’s right of possession does not cancel the lease agreement. Rather, the lease agreement which calls for the tenant to pay rent and other amounts for the duration of the lease term remains intact — enforceable by both the tenant and the landlord after a forfeiture of possession. [See RPI e-book Landlords, Tenants and Property Management, Chapter 18]

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Forfeit possession, then calculate rent lost

Consider a residential or commercial tenant who fails to pay delinquent rent. The landlord serves the tenant with a three-day notice to pay rent or quit. [See RPI Form 575]

The notice to pay contains a declaration of forfeiture provision stating the tenant’s right of possession — the real estate leasehold interest owned by the tenant — is forfeited when the tenant does not pay the delinquent rent before expiration of the three-day notice. The declaration of forfeiture provision is also known as a forfeiture-of-lease clause, the lease here meaning the leasehold estate, not the agreement. [See RPI Form 575 §5] Confusingly, the word “lease” has become morphed to identify two separate legal concepts:

  • the property rights in ownership of possession, the leasehold, held solely by the tenant, which can be terminated by forfeiture; and
  • the contract rights in provisions of the lease agreement held by both the landlord and tenant, which are terminated by cancellation.

An agreement is not property and cannot be forfeited. Alternatively, the right of possession is property and subject to forfeiture, never cancellation. Thus, the statement that “this is the lease we signed” uses the word lease to reference contractual rights under provisions in the lease agreement which can be cancelled to avoid future enforcement, never forfeited.

Unlawful detainer action

On the landlord’s declaration of a forfeiture and failure to receive delinquent rent before the three-day notice expires, the tenant either:

  • voluntarily vacates, in which case the tenant returns possession of the unit to the landlord or the landlord’s agent (or there is a surrender); or
  • remains in possession without the landlord’s consent, which to recover possession requires the landlord to evict the tenant exclusively through an unlawful detainer (UD) action. [See RPI Form 575 §3]

To collect delinquent rents and lost future rents, the landlord files a separate civil action against the tenant to pursue collection of rent accruing during:

  • the period prior to termination of the right of possession by forfeiture as declared in the three-day notice;
  • the holdover period after the forfeiture of possession and prior to vacating; and
  • the remaining period under the lease agreement after the tenant vacated until expiration of the lease.

The lease agreement remains intact, enforceable after a forfeiture of possession. [Danner v. Jarrett (1983) 144 CA3d 164]

Also, a landlord does not need to first evict the holdover tenant in a UD action prior to filing a separate money action to recover lost rents. Remember, the right of possession and the contractual rights and obligations agreed to in the lease agreement are enforced separately, independent of one another.

Once the tenant’s right of possession has expired or been terminated, the landlord may demand and recover holdover rents and unearned future rents called for in the lease agreement. [Walt v. Superior Court (1992) 8 CA4th 1667]

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Lease agreement obligations survive

Rental or lease agreements contain provisions expressing the contractual rights and obligations agreed to by the landlord and tenant. The tenant holds the granted right to use and occupy the rented property as a separate real property right from contract rights. Further, the rental or lease agreement conveyancing provisions control the terms and duration of the use and occupancy of the tenant’s possessory rights.

However, one contractual provision in lease agreements is the default remedies provision. The default remedies provision creates the right for the landlord to enforce collection of rents for the full term of the lease.

While the landlord’s contractual right to collect future rents is independent of the tenant’s right of possession, they are linked. When the tenant commits a material breach of the lease agreement, possession may terminate. When terminated, the landlord’s right to collect rents throughout the term of the lease remains.

Related article:

The Three-Day Notice to Pay Rent or Quit: a landlord’s remedy for a material breach

Rent awarded in a UD action limited to possession

Rent earned and unpaid up to the time of the UD trial may be awarded in the UD action along with an eviction order.

The UD money award for rent due applies only to periods up to the UD trial, including:

  • the period before termination of the lease for delinquent rent at the rate set by the lease agreement; and
  • during the holdover period after termination of the tenant’s right of possession up to the UD trial for rent of a reasonable amount as determined by the court.

Editor’s note — Typically, UD courts will only award the landlord reasonable rent for rent due in a holdover period. When a lease agreement contains a holdover rent provision, the landlord may consider limiting their recovery in the UD action to a simple recovery of possession. Then, the landlord may file a separate money action to recover the holdover rents due, at the holdover rent rate set in the lease agreement.

A UD award may not include future, unearned rent. Future rents are only enforced through a separate money action on the lease agreement filed after the tenant has been evicted and mitigation of losses has been undertaken by the landlord.

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Three-day notice without a forfeiture 

In a UD action, a landlord may recover possession based on either:

  • the landlord’s prior termination of the tenant’s right of possession by including a declaration of forfeiture provision in a three-day notice; or
  • the UD court’s termination of the tenant’s right of possession on the running of a five-day reinstatement period following a UD award, achieved by the landlord deleting the declaration of forfeiture provision from the three-day notice. [CCP §§1174(a), 1174(c)]

By including a declaration of forfeiture provision in the three-day notice, the tenant who fails to cure the breach before the notice expires no longer holds the right to occupy the real estate. [CCP §1174(a)]

But what happens when the three-day notice does not include a declaration of forfeiture provision, deliberately deleted or not?

Without a declaration of forfeiture provision in a notice to quit, the right of possession — the leasehold — is not terminated until five days has passed after the UD judgment is entered.

During this period, called the reinstatement period, the tenant may cure the breach and avoid a forfeiture of their right of possession by simply following the terms of the UD judgment. When the terms are not met within the reinstatement period of five days, the lease is then forfeited and the tenant evicted. [CC §1174(c)]

A landlord might have good reason to deliberately strike out the declaration of forfeiture provision from a three-day notice. The removal of the forfeiture provision gives an otherwise beneficial tenant extra time to bring overdue rent current. A landlord, by deleting the declaration of forfeiture provision, allows their tenant to bring the rent current during a slightly extended period of time — the period comprised of the three-day notice period, the period until the UD trial and the following five-day reinstatement period. In total, the leniency granted by this extension easily totals more than a month.

When an otherwise acceptable tenant is able to bring the rent current, the landlord benefits by keeping a tenant in occupancy. Further, the landlord avoids further rent collection efforts, the filling of a vacancy by prompt action to re-rent and turnover costs.

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The obligation to pay future rent

On termination of the tenant’s possessory right to the property — the leasehold — using a declaration of forfeiture provision, the landlord is entitled to:

  • file a UD action to physically remove the tenant from occupancy of the property, called eviction;
  • a money award of rent earned and unpaid through entry of the UD judgment; and
  • file a separate money action to recover future rents and any prior unpaid rent due and not awarded in the UD judgment.

In the separate money action to pursue collection of future rents — and any past rent not included in any UD award or as limited by remedy provisions in the lease agreement — the landlord is entitled to recover:

  • all unpaid rent earned under the lease agreement up until the tenant’s right of possession is terminated by forfeiture [CC §1951.2(a)(1)];
  • reasonable per diem rent from the termination of the right of possession, until entry of the UD judgment [CC §1951.2(a)(3)];
  • all unearned rent called for in the lease agreement for the remaining unexpired term of the lease, subject to:
    • loss mitigation;
    • default remedies in the lease agreement;
    • the prior reletting of the premises; and
    • the discounted present worth of the future rent [CC §1951.2(a)(3)];
  • costs incurred by the landlord as a result of the tenant’s breach [CC §1951.2(a)(4)]; and
  • attorney fees incurred when the lease agreement contains an attorney fees provision. [CC §1717]

When the lease agreement includes a default remedies provision, a separate money action to recover future rents may be filed immediately after termination of the tenant’s right of possession. A default remedies provision reserves the landlord’s right to collect future rent due after the tenant’s right of possession has been terminated.

Lease agreements which do not contain a default remedies clause still allow the landlord to recover future rents — by statute as laid out above, called a statutory recovery. However, before filing to recover rents in a statutory recovery, the landlord needs to first mitigate their losses by actually reletting the premises to liquidate their losses. Only after reletting the premises may the landlord file a money action to recover future rent amounts remaining due under the lease agreement — offset by the rent the replacement tenant agreed to pay. [CC §1951.2(c)]

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Restoring the tenant’s right of possession

After a tenant’s leasehold estate in the property has been terminated by forfeiture, the tenant cannot unilaterally restore their right of possession. Once terminated, only a mutual agreement with the landlord or a court order restores the tenant’s right of possession.

The relief from forfeiture is sought primarily by commercial tenants who hold long-term leases of value to them and are able to cure any defaults.

A tenant who wants to remain in possession after their right of possession has been forfeited and they have been ordered evicted by UD action may immediately petition the court to restore their right of possession, when:

  • the underlying lease had an original term of more than one year;
  • the landlord has not retaken possession of the property;
  • the tenant has not been removed by the sheriff; and
  • the tenant petitions the UD court for relief. [CCP §1179]

Whether the court will grant a tenant relief from forfeiture and reinstate the lease is based on the degree of hardship the tenant suffers by an eviction. Here, everyone involved has to remember that courts tend to abhor forfeitures, and will look to find a way to avoid one’s loss of rights.

Relief from forfeiture

When a court grants a tenant relief from forfeiture, it will be conditioned on:

  • the payment of all amounts, including rents, due the landlord; and
  • full performance of all rental or lease agreement conditions, both oral and written.

Whether the right of possession has been terminated is of no concern to the court when hearing the tenant’s petition for relief from forfeiture. [CCP §1179]

When the tenant employs an attorney to seek relief from forfeiture, a copy of an application for relief and petition for the hearing is served on the landlord or property manager filing the UD action at least five days prior to the hearing. [CCP §1179]

Further, the landlord at the UD trial needs to be prepared to defend the forfeiture they declared when they intend for the forfeiture to be enforced. The tenant may orally request the court at the UD trial to be relieved of the forfeiture and allowed to remain in possession on performance of conditions.

Also, a UD court on its own may initiate an inquiry into whether the tenant is entitled to relief from forfeiture. All this entails the landlord explaining why relief from the forfeiture is unfair to the landlord together with details of the amounts owed and lease agreement conditions to be cured when granting relief.

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Loss mitigation offsets future rents

With or without a default remedies provision in the lease agreement, the landlord who seeks to recover future rents needs to conduct a reasonable, good-faith effort to reduce their loss of rent when a tenant vacates or is evicted. This mandatory activity is known as loss mitigation. A landlord’s loss mitigation efforts are a requisite to recovery of future rents.

When the landlord does not act to reduce loss of future rental income, a tenant has the right to offset any future rent due by the amount of rent the landlord could have reasonably collected in an effort to relet the space. [CC §1951.2(c)]

The reasonableness of the landlord’s conduct undertaken to relet the space is determined based on an analysis of what action the landlord actually undertook. Reasonableness is not determined by introducing alternative courses of action available to the landlord to mitigate damages (such as re-renting to the evicted tenant).

A landlord needs to pursue a course of action likely to reduce the amount of future rent the evicted tenant owes after the tenancy is terminated. Otherwise, the tenant is permitted to offset future rents by showing the landlord’s efforts to relet the property were unreasonable efforts to mitigate the loss of rent.

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Discounted future rent and interest on delinquent rent

The landlord who is entitled to recover future rent under an unexpired lease agreement will only be awarded the present value (PV) of the unearned future rents.

To determine the present value of unearned rents for an amount of the court’s money award, the future rents are discounted (to their PV) at the annual rate of 1% over the Federal Reserve Bank of San Francisco (the Fed)’s discount rate. [CC §1951.2(b)]

The Fed’s discount rate used for calculating the present worth of future rent on an award is 4.50% as of December 2022, as reported by the Fed.

Also, accrued interest is due the landlord on unpaid amounts of back rent from the date of default to entry of the money judgment. The interest accrued prior to judgment is calculated at the rate agreed to in the lease agreement. When not stated in the lease agreement, the interest accrues at the statutory rate of 10% per annum. Further, interest accrues until paid at 10% on the amount of money awarded in the judgment. [CC §§1951.2(b), 3289]

Costs to relet 

A landlord is entitled to recover all reasonable costs incurred to relet the property once a tenant has prematurely vacated or been evicted. [CC §1951.2(a)(4)]

Costs incurred to relet the property include:

  • costs to clean up the property;
  • brokerage and legal fees to find a new tenant;
  • permit fees to construct necessary improvements or renovations; and
  • any other money losses incurred as a result of the tenant’s breach, such as tenant activity which reduced the property’s market value. [Sanders Construction Company, Inc. San Joaquin First Federal Savings and Loan Association (1982) 137 CA3d 387]

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