The “Hardship” Defense in Unlawful Detainer Proceedings under Commercial Leases

California law (CCP §1179) provides a “hardship” defense to the tenant in most unlawful detainer actions brought by a landlord. The California Court of Appeals has recent decided yet another case discussing this defense, Burbank Mall Assoc., LLC v. Georgiou Studio, Inc. (Cal.App.2009).

This hardship defense can be particularly important to a business owner facing declining revenues, but increasing pressure from the landlord to maintain existing lease obligations.  Many companies signed a commercial lease expecting revenues that are no longer realistic in the current economy.  As we move into the year 2010, it is not unusual for a company’s revenue to be down by 60% to 70% from 2007 levels.  Lease payments are increasingly difficult to maintain for many companies as rent becomes a growing percentage of monthly expenses.  Unfortunately, lease defaults are becoming more common.

California business owners should be aware that the “hardship” defense under CCP §1179 can, in appropriate circumstances, be a lifesaver for the business.  When a landlord seeks forfeiture of a lease, the tenant can petition the court to restore the lease on more equitable terms, on account of the hardship.  The theory behind this defense is that unlawful detainer is inherently an equitable remedy, grounded in fairness.  Because the landlord is asking the court to treat it fairly by allowing a retaking of the leased property, the landlord must also extend basic fairness to the tenant in return.

Under CCP §1179, the court should consider the hardship, if any, to the tenant from the forfeiture; the hardship, if any, to the landlord from relieving the tenant from the forfeiture; the willful or other character of the breach; and then use its best discretion in determining whether hardship relief will be granted.  See, Thrifty Oil Co. v. Bartase (Cal.App.1985).

Small businesses can usually show that lease forfeiture, if allowed by the court, would kill its entire business.  The court specifically took this factor into account in Gill Petroleum, Inc. v. Hayer (Cal.App.2006).  The court noted in Gill Petroleum that:

“[I]t is obvious that if defendants forfeit their lease, then the business, as a going concern, will be kaput. Defendants purchased the business as a going concern for $626,965, and then expended significant additional sums on such things as improvements and equipment.[Defendant] declared that if they forfeit the lease, then, with the exception of their liquor license and whatever fixtures and equipment that could be salvaged, their investment would be completely lost.”

In ruling in favor of the tenant, the Gill Petroleum court held that “[t]he evidence establishes that if defendants forfeit their lease, they will lose the business which is their primary source of income and into which they invested substantial time and money; and they will be left with substantial debt. That is significant and manifest hardship.”

Thus, where a company entirely depends on its leased location to operate, and has made material premises improvements needed by the business, a court will likely be sympathetic to the hardship defense in the event of a landlord’s unlawful detainer action.

But CCP §1179 is not a blanket panacea, and it should only be used in cases of clear hardship. The statute requires full payment of rent due so far as practicable, but the court has broad equitable discretion to determine the conditions of payment and performance of other conditions.  Importantly, while §1179 mandates full payment of rent due, it does not make the court require the tenant to pay other sums such as, e.g., security deposit amounts.

Written commercial lease provisions usually appear “black and white,” ostensibly giving complete control to the landlord.  But business owners should be aware that forfeiture provisions must also be exercised fairly under California law.  The hardship defense to a landlord’s forfeiture threats is a very real option in this day and age where many business owners are struggling to just keep the business open.