Owner Didn't Mitigate Damages

Facts: The owner of a shopping center sued a former tenant, a fast-food chain company, after the company's franchisee assumed the company's original lease but then breached by terminating early. Because the company remained the guarantor under the original lease, it made the franchisee's rent payments to the owner after the breach. The company and the owner later entered negotiations for a new lease, which broke down after the company objected to the unreasonable 60-day-out provision that the owner proposed. It subsequently stopped making rent payments.

After the owner sued, the trial court ruled that it had fulfilled its lease obligations and that the company was liable for the breach, but it limited the damages that the owner could recover to the payments already made by the company. The owner appealed.

Decision: The appeals court upheld the trial court's ruling.

Reasoning: The owner acted unreasonably in rejecting the company's counteroffer to enter into a new lease without the 60-day-out provision. The appeals court found that the company was “ready, willing, and able” to enter into a new lease on the same terms as those in the old lease if the 60-day-out provision was removed.

Generally, if an owner cannot show that it took reasonable steps to mitigate its damages, the damages that it could otherwise recover are reduced, and losses that reasonably could have been avoided are not recoverable. The owner breached its duty to mitigate, because it could have avoided all of its damages if it had been willing to accept the company's offer.

“The owner cannot compel the company to bear the costs of its decision when it could have avoided those costs altogether by accepting the company's offer and dropping the 60-day out,” concluded the appeals court.

• Danada Square, LLC v. KFC National Mgmt. Co., June 2009

Editor's Note: Duty to Mitigate

Contrast the Danada Square, LLC, case above, where the owner passed up a perfectly good chance to mitigate its damages, with this case, MOB 90 of Texas v. Nejemie Alter, M.D., in which the court ruled that while the owner has a duty to mitigate, that duty does not require the owner to accept just any tenant to fill the space.

Here, an owner had to deal with a tenant that quickly vacated its space. The owner sued the tenant, arguing that it made reasonable efforts to re-lease the space. The trial court ruled in favor of the tenant, stating that the owner was not entitled to any additional rent because it had not met its duty to mitigate. The owner successfully appealed.

The appeals court noted that an owner in this situation has a duty to make reasonable efforts to mitigate damages when a tenant breaches a lease and abandons the premises. But the court also noted that it is not an “absolute duty,” meaning that an owner is not required to make all known efforts or accept an unsuitable tenant.

Also, the appeals court pointed out the fact that in these cases the tenant bears the burden of proof to demonstrate that the owner failed to mitigate and also the amount by which the owner could have reduced its damages if it had, in fact, done so. In the present case, the tenant did not offer any evidence to support its allegation that the owner failed to make reasonable efforts to mitigate.

• MOB 90 of Texas v. Nejemie Alter, M.D., April 2009