Commercial Landlords: Use Caution in Drafting and Exercising Default Clauses

A recent Washington Division III Court of Appeals decision serves as a warning to commercial landlords to be careful when drafting and exercising lease default clauses: regardless of the terms of the lease, landlords cannot avoid giving the “pay or vacate” notices required by Washington statute prior to evicting the tenant for non-payment of rent.

The Facts:

In FPA Crescent Assocs. v. Jamie’s LLC, No. 32705-1-III, the Court of Appeals reviewed the circumstances surrounding the termination of a commercial lease in downtown Spokane. FPA Crescent Associates (“Landlord”) owns the Crescent Building and leased a portion of the building to Jamie’s, LLC and Pendleton Enterprises, LLC (“Tenant”). The Tenant owned and operated a business called the “Daiquiri Factory” in its leased space.

The lease provided for a term to begin on February 1, 2014 with an expiration date of July 31, 2021. Like most commercial leases, the lease addressed the potential for termination prior to the expiration date in the event of default by the Tenant.   Most relevant to this decision, a “default” occurred when the Tenant failed to pay any rent when due. The lease provided as follows:

Upon the occurrence of any event of default by Tenant, Landlord shall have, in addition to any other remedies available to Landlord at law or in equity, the option to terminate this Lease, in which event Tenant shall immediately surrender the Premises to Landlord, and if Tenant fails to do so, Landlord may, without prejudice to any other remedy which it may have for possession or arrearages in rent, enter upon and take possession of the Premises and expel or remove Tenant.

When the Tenant missed a rent payment in May of 2014, the landlord served the Tenant on May 9, 2014 with a “Notice of Termination of Lease” and demanded that the Tenant immediately vacate the premises as of the date of the notice. The landlord stated it its notice to the Tenant that if it did not voluntarily and immediately vacate the premises, then the Landlord would immediately take legal action and evict the Tenant (in addition to other remedies). On May 10, 2014, the Tenant sent the Landlord the required payment by certified mail. The tenant sent another payment to Landlord on May 16, 2014. The Landlord returned both checks, and then the landlord filed a lawsuit to remove the Tenant under Washington’s unlawful detainer statute.^1,2

The Landlord initially claimed that the Tenant should be evicted for remaining on the premises after failing to pay rent, but subsequently changed its argument, claiming that the Landlord had terminated the lease, so the Tenant’s continued occupancy was wrongful. These two claims fall under different provisions of RCW 59.12.030, which defines the circumstances constituting unlawful detainer. After various hearings at the trial court level, the court held in favor of the Landlord, holding that the Tenant should be evicted and awarding the Landlord damages of $21,245.61 and attorney fees of $33,324.20. The Spokane County Sheriff evicted the Tenant shortly thereafter.

So, it seems that the Landlord took the right actions under the lease, right? The Tenant failed to pay rent when due, the lease allowed the Landlord to immediately terminate the lease (which it did), and then the Landlord took action to remove the Tenant. It seems that the landlord had all of the authority it needed under the terms of the lease to take the action it did, and the trial court agreed. The Court of Appeals held otherwise.

The Ruling:

In a unanimous ruling, the Court of Appeals reversed the trial court, finding that the trial court was wrong in holding the Tenant to be in unlawful detainer because the Landlord failed to give the statutory three-day “pay or vacate” notice required by RCW 59.12.030(3). Where the landlord’s eviction action is based on a failure to pay rent when due, a tenant may be found guilty of unlawful detainer only after this statutory notice is given and the tenant fails to comply with its terms.

The Landlord argued that there was no need for the three-day notice since the Tenant in this case was a “holdover tenant” and, as a holdover tenant, the Tenant was guilty of unlawful detainer when it failed to leave the premises. A “holdover tenant” is defined in RCW 59.12.030(1) as a tenant who continues in possession after the expiration of its lease term. The Landlord argued that the lease term for the Tenant expired on May 9, 2014, when it gave the “Notice of Termination of Lease.”

The Court of Appeals reasoned that since the expedited eviction process made available by the unlawful detainer statute is in exchange for the lengthy common law remedy of ejecting a tenant, landlords must comply with the unlawful detainer statute’s terms in order to take advantage of the expedited eviction process. Furthermore, the Court said, as a departure from the common law in favor of landlords, tenants are entitled to have any ambiguities in the unlawful detainer statute strictly construed in their favor.

The Court held that the termination of the lease by the Landlord was not the same as “expiration” of the lease under RCW 59.12.030(1), as the Landlord had argued. The Court further held that even though the lease gave the Landlord the right to terminate the lease for non-payment of rent, the Landlord was still required to give the three day “pay or vacate” notice if it wanted to evict the Tenant using the expedited process under the unlawful detainer statute. Since the landlord failed to give this notice, the Tenant was not guilty of unlawful detainer and should not have been evicted.

The Lesson:

This is an expensive outcome for the Landlord, as the Court of Appeals sent the case back to the trial court to decide what remedies will be available to the Tenant for its wrongful eviction. The awards of damages and attorney’s fees to the Landlord were reversed, and it is likely the trial court will award both damages and attorney’s fees to the Tenant.

In drafting commercial leases, it is best to avoid including terms that are unenforceable. This includes default remedies that will not put the landlord in a position to evict the tenant if the default is not cured. In exercising the landlord’s rights in default under a commercial lease, it is best to take a conservative approach with notices to the tenant, so that any subsequent attempt to evict the tenant will be successful. That may mean that the tenant cures the default and the landlord will not have the opportunity to evict, but that is the tenant’s right, as the Court of Appeals clearly communicated in FPA Crescent Assocs. v. Jamie’s LLC.

The bottom line with regard to defaults in the payment of rent is that a tenant must be given notice and at least three days to pay the rent.  In fact, it seems unlikely that there is any circumstance of default that will allow a landlord to evict a tenant without having first given notice and an opportunity to cure, except the circumstances explicitly listed in RCW 59.12.030. Without such notice and opportunity to cure, the landlord will not be able to evict the tenant using the expedited remedies under the unlawful detainer statute.

When confronted with a tenant who is in default, landlords are advised to seek the advice of experienced landlord-tenant attorneys. The process of evicting a tenant under Washington’s unlawful detainer statute is highly technical, and strict compliance is required of landlords. The attorneys of Fennemore have significant experience representing owners of residential and commercial property and addressing tenant defaults.

¹RCW 59.12.030. This statute defines the circumstances constituting “unlawful detainer,” and which entitle a landlord to evict a tenant. The term “unlawful detainer” refers to the tenant wrongfully remaining in possession of the leased premises after its right to do so has ended: the tenant is said to be unlawfully detaining the premises.

²The Landlord was under pressure to evict the Tenant. The Tenant had been receiving significant negative attention in the press and on social media for the name of one of its drinks, and was also being sued by Gonzaga University for trademark infringement. It seems likely this pressure contributed to the Landlord’s decision to pursue eviction on the basis it did.