Can Tenant Waive Landlord’s Duty to Mitigate Damages?

WHAT HAPPENED

A restaurant tenant isn’t happy about what it deems to be the landlord’s inadequate efforts to market the mall and abandons the property. Instead of immediately seeking a replacement, the landlord lets the space remain vacant and sues the tenant for rent.

We didn’t default on the lease, the tenant insists. And even if we did, we shouldn’t be on the hook for full rent payments because the landlord didn’t take steps to mitigate its damages.

The court sides with the landlord on the default issue. Having found the tenant liable, the court now must decide how much unpaid rent it owes the landlord.

WHAT THE LEASE SAYS

The lease includes the following clause: “Landlord has no duty to attempt to mitigate any damages resulting from Tenant’s failure to observe or perform any of the terms, covenants, and conditions of this Lease.” The lease is subject to the laws of Ohio, which like many states, hold that all commercial leases and contracts include a duty to mitigate damages.

QUESTION

Should the court cut the landlord’s damages for failure to mitigate?

A.            Yes, because Ohio is a mandatory mitigation state.

B.            Yes, because the tenant’s purported waiver of the landlord’s duty to mitigate is unenforceable.

C.            No, because the tenant waived the landlord’s duty to mitigate.

D.            No, because there’s no duty to mitigate when the tenant is in default.

ANSWER

C. The landlord didn’t have a duty to mitigate because the tenant expressly waived it.

EXPLANATION

Most states require parties to a commercial contract to mitigate their damages when the other side defaults regardless of whether the agreement actually spells out the mitigation duty. In the context of a commercial lease, mitigation typically means the landlord must take reasonable steps to market the property and seek a replacement after a defaulting tenant abandons or gets evicted. This scenario, which is based on a recent Ohio case illustrates the reach and limitations of the mandatory mitigation rule [Frenchtown Square P’ship v. Nick Enters., 2021-Ohio-663, 2021 Ohio App. LEXIS 660, 2021 WL 857734].

The punchline is that even in states where the duty to mitigate is mandatory, it can be waived (subject to one exception explained below). And that’s what happened in this case. The Ohio court held that the lease clause relieving the landlord of its duty to mitigate in the event of a tenant breach was an enforceable waiver. So, C is the right answer.

States Requiring Landlords to Mitigate Damages

WHY WRONG ANSWERS ARE WRONG

A is wrong because while it’s true that the duty to mitigate exists regardless of whether it’s written into the lease, it can also be written out of the lease via clear and express waiver, the way the landlord and tenant in the scenario did.  

B is wrong because states that make it mandatory to mitigate damages also allow for waiver. The one significant exception is Texas, where waiver of the duty to mitigate is unenforceable. Courts in New Jersey are also split on the enforceability of mitigation waivers.

D is wrong because mitigation of damages by a landlord is only an issue if and when the tenant is in default. After all, without a default, there are no damages for the landlord to mitigate.

2 WAYS TO LIMIT MITIGATION DUTIES IF TENANT DEFAULTS

The takeaway is that landlords can take steps to limit their duty to market and relet the space after a tenant has abandoned it or been evicted, even in mandatory mitigation states.

1. If you’re in a state where mitigation isn’t mandatory. In states where it’s not mandatory for parties to mitigate their damages, protection is automatic unless the lease specifically spells out that the duty to mitigate does exist. So, if you don’t want to be held to a duty to mitigate, just don’t address it in the lease. But be aware that absence of mitigation duties can cut both ways and that your tenants won’t have to take steps to mitigate their own damages if you’re in default.

2. If you’re in a state where mitigation is mandatory. If you’re in a mandatory mitigation state and want to limit that duty, do what the landlord in the Frenchtown Square case did and include clear language indicating the tenant’s agreement to waive your mitigation duties.

Option 1: Use the exact same language the landlord did since it did pass muster with the court. This approach especially makes sense if you’re in Ohio.

MODEL LEASE LANGUAGE

Tenant Waiver of Landlord Mitigation Duties

Landlord has no duty to attempt to mitigate any damages resulting from Tenant’s failure to observe or perform any of the terms, covenants, and conditions of this Lease.

Option 2: Here’s a more elaborate and extensive mitigation duty waiver clause that you can consider adapting with the advice of your attorney:

MODEL LEASE LANGUAGE

Tenant Waiver of Landlord Mitigation Duties

a. Waiver: If Landlord terminates this Lease or Tenant’s right to possession of the Premises, Landlord shall have no obligation to mitigate Landlord’s damages except to the extent required by applicable law. If Landlord has not terminated this Lease or Tenant’s right to possession of the Premises, Landlord shall have no obligation to mitigate under any circumstances and may permit the Premises to remain vacant or abandoned.

b. Extent of Mitigation: If Landlord is required to mitigate damages as provided herein: (i) Landlord shall be required only to use reasonable efforts to mitigate, which shall not exceed such efforts as Landlord generally uses to lease other space in the Center; (ii) Landlord will not be deemed to have failed to mitigate if Landlord or its affiliates lease any other portions of the Center or other projects owned by Landlord or its affiliates in the same geographic area, before reletting all or any portion of the Premises; and (iii) any failure to mitigate as described herein with respect to any period of time shall only reduce the Rent and other amounts to which Landlord is entitled hereunder by the reasonable rental value of the Premises during such period.

c. Right to Reject Replacement Tenant: In recognition that the value of the Center depends on the rental rates and terms of leases therein, Landlord’s rejection of a prospective replacement tenant based on an offer of rentals below Landlord’s published rates for new leases of comparable space at the Center at the time in question, or at Landlord’s option, below the rates provided in this Lease, or containing terms less favorable than those contained herein, shall not give rise to a claim by Tenant that Landlord failed to mitigate Landlord’s damages.