Civil Code §1951.2 Damages and Reentry: In Lu v. Grewal (2005) a commercial tenant abandoned and the landlord took over the premises and revived the business that the tenant had been operating. In the lawsuit to collect the unpaid rents, the tenant claimed that he was entitled to credit for the landlord’s profits from the revived business.

The court held that the lease ended when the tenant abandoned and the time to cure under the notice to quit expired. That established the landlord’s remedy as the difference between the lease rents and the fair market rental value for the remaining lease term. The formula puts the duty to mitigate on the landlord and the burden of proof on the tenant. The formula does not change because the landlord is the new "tenant" on the property. The old tenant still is credited with the fair market rental value, regardless whether the landlord makes a profit in the business.

Civil Code §1950.7 and Security Deposits: 250 LLC v. PhotoPoint Corp (2005) points out a problem for commercial landlords with security deposit handling. Civil Code §1950.7 mandates that the security deposit be accounted for and any unused portion returned within two weeks after the landlord regains possession. In 250 LLC there were 18 months to run on the lease when it terminated with the landlord holding a substantial security deposit. The court rejected the landlord’s contention that the rent defaults included the landlord’s CC §1951.2 rent damages for the remaining lease term. The court’s theory was that the remaining rent damages was not a calculation which the landlord could make at that time as it could change based upon later events.

Economically this means that when a commercial tenant vacates leaving a substantial deposit and future rents owing, but the landlord has no immediate replacement prospect, the landlord is never the less required to by CC §1950.7 to account for and return any unused deposit within the two week period. The fact that the landlord will then have to separately sue for the additional rents does not seem to make any difference.

Solutions? Here are three possible ones — but none of them is perfect.

• Send the tenant the required accounting within the two week period, but state that you are holding the money back as a "setoff" against the tenant’s statutory claim for its return. The law generally allows this, but you may be inviting a lawsuit. It also is unclear whether a common law "setoff" will hold up against a statutory obligation to return the money. In summary, this is a technical "lawyer trick" but it might work.

• A second way to do it is to not terminate the lease. Keep it in force and apply the security deposit as the rents come due. It should work, but it creates all sorts of other problems.

• A final way is to change your lease forms to have the tenant waive CC §1950.7. The language would read something like "tenant waives all rights under Civil Code §1950.7." While there is no reason I can point to why it would not work. That said, the courts are generally hostile to waivers in the landlord/tenant context, but this is between commercial parties and not in the residential setting so it might work. Just do not expect us to give you any guarantees about its success.