Landlords Must Seek Replacement Tenants for Breached Leases
Traditionally, the landlord-tenant relationship, one of the oldest legal arrangements in the history of British and American law, was governed by the principle, "He who has the gold rules." Change–and tenants' rights–have come slowly and with difficulty.
While consumer activism and overreaching residential landlords gradually led to statutes protecting residential tenants, the commercial landlord-tenant relationship was much less susceptible to these kinds of influences. Courts and legislatures were more inclined to take a laissez-faire attitude. The courts, in particular, had a greater tendency to respect the commercial lease's historical origins as not only a contract between parties but also as a conveyance of an interest in real estate.
Principles of contract law, such as mitigation (the duty of a party to do whatever is reasonable to minimize losses in the face of another's breach of contract), were not always applied. Thus, until the middle or latter part of this century, when a tenant breached its lease, commercial landlords usually had no duty to find a replacement tenant to occupy the premises for any remaining portion of the old lease. They could wait for the lease to expire and seek to recover the unpaid rent against the breaching tenant.
Slowly but surely, laws began to change. This made sense, at least if the lease was analyzed from a contract law point of view. Many good economic and legal principles supported the view that mitigation also should apply to commercial leases.
While most states recognize that a landlord has a duty to mitigate damages, as a recent Texas case illustrates, the duty of mitigation is not a uniformly accepted practice. And, while well-settled legally in many states, the issue still could be better understood by landlords and brokers everywhere.
Austin Hill Country Realty, Inc., v. Palisades Plaza, Inc. [temporary citation: 1997 WL 7268, (Tex.)] reaffirms landlords' responsibilities to replace a tenant in a breached lease situation. The lessons from this case are clear for commercial landlords everywhere: If a tenant moves out, the landlord cannot sit around and wait for the breached lease term to expire. The landlord must actively seek a replacement. Failure to do so may limit the amount of damages the landlord can recover.
In the Texas case, Palisades Plaza, Inc., owned and operated an office complex in Austin. On September 15, 1992, Palisades signed a five-year commercial office lease with Austin Hill Country Realty for a suite in the complex. The lease called for the landlord to complete certain improvements in the space before the lease's November 15, 1992, start date.
Construction of the improvements, however, came to a halt when Palisades began receiving conflicting instructions from the tenant's three principals. Unable to resolve the differences, the landlord sued for anticipatory breach of the lease agreement.
At the trial, the tenant attempted to prove that the landlord failed to mitigate damages resulting from the tenant's breach. The tenant argued that if the landlord's damages could have been reduced or avoided entirely by reasonable efforts to find another tenant, any damage award should be reduced by such an amount. The trial judge rejected this position, noting that at the time of trial, Texas law did not require the landlord to mitigate damages caused by a tenant not completing the balance of a lease term.
Reversing the lower court in January 1997, the Texas Supreme Court recognized that the contractual nature of the modern lease agreement (in contrast to the historical view of the lease as a conveyance of real property) supported the idea that the landlord should have a contractual duty to mitigate damages upon a tenant's breach. The court also noted that public policy strongly favored mitigation, which discourages economic waste, returning property to productive use rather than allowing it to remain idle.
A mitigation rule also helps to prevent destruction or damage of the leased property; if the landlord is encouraged to let the property remain unoccupied, the possibility of damage through accident or vandalism increases.
The court noted that a rule favoring mitigation is consistent with the trend disfavoring contract penalties. Allowing a landlord to leave property idle when it could be profitably leased and forcing an absent tenant to pay rent for that vacant property may permit the landlord to recover more damages than he should be equitably entitled to recover.
Finally, because modern lease arrangements usually are business arrangements between strangers, arguments that the landlord-tenant relationship is personal in nature and that the landlord should not be forced to lease to an unwanted tenant also are faulty.
The Texas Supreme Court also was persuaded by the reasoning of the other jurisdictions that a landlord has a duty to mitigate damages. Having made the threshold decision that a landlord has a duty to mitigate, the Texas court also discussed what a landlord might have to do to satisfy the duty to mitigate.
The court held that this duty requires the landlord to use objectively reasonable efforts to obtain a new tenant for the premises when a tenant vacates in violation of the lease. And if the landlord does not try to lease the property after the tenant vacates? "T]he landlord's failure to use reasonable efforts to mitigate damages bars the landlord's recovery against the breaching tenant only to the extent that damages reasonably could have been avoided. Similarly, the amount of damages that the landlord actually avoided by releasing the premises will reduce the landlord's recovery."
If the landlord has a duty to mitigate, must the landlord affirmatively show that it has done so in order to proceed? Not according to this court, which squarely placed the burden of proof on the tenant to demonstrate that the landlord mitigated or failed to mitigate. In other words, the tenant that breached the lease must show that its damages should be reduced by an alleged failure of its former landlord to mitigate damages.
Interested parties should check their own state laws on this matter to clarify details surrounding the issue.