Owner Made Reasonable Efforts to Mitigate Damages

Facts: A franchised restaurant tenant signed a lease with a property owner/developer while the shopping center where it would rent space was still being developed. The tenant as a corporation signed the lease as both tenant and guarantor.

The owner/developer later assigned its interest to a new owner. The tenant also subleased its space to the husband and wife who operated the restaurant on a day-to-day basis. The couple operated the restaurant at the location for two years and then defaulted on the lease. The new owner asked the court for a detainer and permission to forcibly enter the space. At that time, neither the restaurant nor the couple were in actual possession of the space.

The new owner began efforts to lease the premises to another tenant. It posted signs indicating that the space was available and circulated a data sheet to brokers in the area. A number of prospective tenants contacted the new owner about the premises, including a cigar lounge, a beauty parlor, a tanning salon, two sandwich restaurants, a pizza buffet restaurant, two Chinese restaurants, a cell phone distributor, and a bank. But the exclusivity clauses in other tenants' leases prevented the new owner from renting to these prospective tenants. By the time of the trial for the case, the space had been vacant for nearly two years.

The trial court granted the new owner a judgment in its favor without a trial as to the unpaid rent, concluding that it was entitled to 17 months of unpaid rent and late fees because it had a valid and enforceable lease with the tenant. But the trial court determined that the new owner had not mitigated its damages—that is, made reasonable efforts to minimize its losses by renting to a new tenant. Both the tenant and the new owner appealed.

Decision: The appeals court reversed the lower court's decision.

Reasoning: The appeals court determined that the new owner hadn't failed to mitigate its damages. The court pointed out that the lease specifically addressed the new owner's duty to mitigate its damages in the event of the tenant's default: “…if Tenant shall default under the Lease beyond any applicable notice and cure period, Landlord shall have an affirmative duty to mitigate its damages and in no event may Landlord accelerate the rent due for a remainder of the Lease Term.”

The court said that the fact that the lease requires the new owner to mitigate its damages didn't mean that the owner was under an obligation to rent to just any tenant. The new owner had presented undisputed evidence of its efforts to lease the premises to another tenant, and although several tenants were interested, the new owner was unable to lease the premises due to the exclusivity provisions in its leases with other tenants.

An owner didn't breach its duty to mitigate damages solely by complying with an exclusivity provision in a lease with another tenant, said the appeals court. An owner wasn't required to lease the premises to just any willing tenant, it noted. In determining whether to lease the premises to a replacement tenant, an owner could consider whether the tenant is suitable under all the circumstances, including provisions in other tenants' leases.

“The owner was only required to mitigate its damages ‘by the exercise of reasonable diligence,’” said the appeals court. “It was not reasonable to require the owner to breach its lease with other tenants and expose itself to potential liability just to mitigate damages with a tenant that had breached its own lease,” it added. The appeals court stated that, other than the exclusivity provision, the undisputed evidence established that the owner had made substantial efforts to lease the premises to another tenant.

• Arrowhead Ridge I v. Cold Stone Creamery, Inc., July 2011