Limit Your Duty to Re-Let After Tenant Defaults

Consider this situation: With three years remaining on its lease, a commercial tenant decides to pull up stakes, vacate the premises, and stop paying rent. The landlord makes no effort to re-let the space and allows it to remain vacant through the end of the lease term. It then sues the tenant for the full three years’ worth of rent. There’s no clause in the lease requiring the landlord to “mitigate its damages” in the event of a tenant default. Can the landlord recover the full amount of the rent?

The answer is no, at least not in most states.

Under common law—that is, case law made by judges as opposed to statutes made by legislators—landlords had no duty to mitigate their damages unless the lease required them to. In other words, when a tenant defaulted, landlords could simply sit back and allow their damages to accrue through the rest of the lease term without making any attempt to find a replacement tenant.

Today, however, most states have statutes requiring landlords to mitigate their damages, regardless of what the lease says (see “Does Your State Require Landlords to Mitigate Damages?” to find out what your state requires, below). If they don’t, the court can reduce their damages by the amount of rent that tenants can show the landlord could have collected had it made a reasonable attempt to re-lease the space.

How Far Must Landlords Go to Mitigate?

Whether by lease or statute, the usual standard for mitigation is that the landlord take “commercially reasonable steps” to rent the property after the breach occurs. It’s up to the landlord and tenant to define what “commercially reasonable steps” are while negotiating the lease. If, as is often the case, there is no definition in the lease and the dispute goes to litigation, it falls to the court to determine whether the landlord did enough to meet the standard. And while each case is different, decades of case law has revealed certain general principles you can use to determine your own mitigation duties.

What Landlords Do Have to Do

“Commercially reasonable steps” basically means doing what you’d normally do to lease a vacant property—no more, no less. Just sitting back and waiting for prospective tenants to come to you won’t get it done. At a minimum, you’re expected to do at least one of the following:

• List the property with a reputable broker;
• Advertise; and/or
• Post a “for lease” sign on the property.

What Landlords Don’t Have to Do

“Commercially reasonable efforts” to mitigate damages does NOT require extraordinary measures to get the property re-leased. Accordingly, courts have held that landlords aren’t expected to give the tenant’s property priority over all other vacant spaces in the building. And while landlords may have to take less rent than what they got from the previous tenant, they don’t have to accept below-market rent from a prospective replacement tenant. Nor are they obligated to accept a replacement tenant that:

• Would compromise what in the landlord’s reasonable business judgment constitutes the optimal tenant mix for the property;
• Doesn’t meet the landlord’s usual creditworthiness standards;
• Doesn’t meet the requirements of any mortgage or underlying lease affecting the building;
• Would impose an undue burden on building services or facilities; or
• Would otherwise diminish the value of the property or the landlord’s reputation.

Practical Leasing Strategies

The risk you face is getting saddled with overly cumbersome mitigation duties that reduce potential damages you can collect against a tenant that breaches its lease. There are two leasing strategies you can use to protect yourself:

1. "No duty to mitigate” clause. The most desirable option is to include language expressly stating that you have no obligation to mitigate your damages if the tenant violates the lease. Caveat: This strategy is available only if you’re in one of the 15 jurisdictions (see “Does Your State Require Landlords to Mitigate Damages?”) without a statute requiring landlords to mitigate regardless of what the lease says.

2. Carefully drafted mitigation clause. If you can’t contract out of your duty to mitigate, you should negotiate a clause that makes the duty to mitigate mutual and limits your mitigation duties to “commercially reasonable efforts” and defines what that phrase means and doesn’t mean. You can achieve that objective by adapting our Model Lease Clause: Reserve Right to Reject Undesirable Prospects After Tenant Breaches Lease.

Does Your State Require Landlords to Mitigate Damages?

Note: No clear rule in Alaska, Louisiana, Maryland, Mississippi, Nevada, Rhode Island, South Dakota, West Virginia