Lu v. Grewal
(05 C.D.O.S. 5740, June 28, 2005)

By Mary Hedley

A tenant who abandons a commercial leasehold cannot escape all liability for its breach by taking advantage of the landlord’s work in restoring the space and making it profitable. In Lu v. Grewal the tenant abandoned a gas station with almost 3 years left on its lease. When the landlords re took the premises, they found that the gas pumps had been torn out of the ground, gasoline was pooling in holes in the ground, computer controls had been ripped off the walls, the premises were vandalized, and the convenience-store items were missing or broken. The landlords worked around the clock to repair the property and operate the business themselves. They sued the tenant for breach of the lease, including damages for removing fixtures and a claim for the rent that was due following abandonment.

The tenant argued that the amount it owed should be reduced by the landlords’ profit from operating the gas station, which would have eliminated the tenant’s liability. The trial court agreed. The appellate court reversed, saying that under Civil Code Section 1951.2, the tenant can offset the landlords’ claims only by the fair market value of rent that could have been obtained by re-letting the premises. A breaching tenant cannot take advantage of the landlord’s operation of a business on the property any more than a tenant can claim a share of the landlord’s proceeds upon the sale of the property. The landlord is entitled to recover 1) the cost of repairing the property, plus 2) the unpaid rent at the lease rate, less 3) the amount of rent that the landlord could have gotten in the open market.

For more information please contact Mary Hedley. Mary Hedley is an attorney in the Real Estate, Land Use and Environmental Practice Group in the firm’s San Francisco office.