Walking Out Might Come With Consequences…

In Sacramento Superior Court, Mather Development Partners IV LP (“Mather”) recently filed a substantial lawsuit against Edfund, Inc., a California nonprofit benefit corporation, for an alleged breach of a ten year commercial lease agreement.  According to the Complaint, not only did Edfund enter into the lease agreement, Mather custom-built the building specifically for Edfund. Mather alleges several causes of action against Edfund, and a variety of other defendants, for negligent misrepresentation, breach of fiduciary duty, and breach of contract, among other actions.  Mather seeks injunctive relief and upwards of $40 million in damages.

Apparently, the facility, which is 177,000 square feet, required Mather to obtain in excess of $30 million in financing, in addition to the costs of tenant improvements which were subsequently requested.   As of the date of filing, $40 million was still due in outstanding rental payments for the remainder of the lease term.

While this suit raises a variety of legal issues, at its core is a very common phenomenon occurring in the commercial real estate context.  Businesses are walking out on commercial leases with the philosophy that if they don’t have the money to make their rental payments, the landlord cannot come after them if they just walk out.  Businesses often think winding down their corporation, or bankrupting out of their debts, will solve the problem.  However, these days, with guaranties and a variety of other security tools used by landlords, walking out on commercial leases isn’t as easy as it used to be.  Landlords are having an increasingly difficult time finding tenants for commercial properties and courts are tending to award damages for future rental payments due on the abandoned lease agreements.

Having represented commercial landlords and tenants in a variety of disputes such as this, we can tell you it is important to obtain counsel when entering into commercial lease agreements and when dealing with obligations during the tenancy.  It is clear here that the parties to this dispute either got in over their heads, did not do their homework, or both.  Businesses, both on the landlord side and the tenant side, need to ensure their specific interests are protected by the written terms of these commercial agreements, and when a problem arises, businesses need to pick up the phone and call an attorney…because as seen in Mather’s lawsuit, walking out might come with consequences.

The Sacramento Business Journal wrote a good article on this subject.  You can read it here.

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