Daily Development for Thursday, April 29, 2004
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin Kansas City, Missouri dirt@umkc.edu
LANDLORD/TENANT; LANDLORD’S REMEDIES FOR TENANT BREACH; DAMAGES; SALE OF
PREMISES: Under California damages statute, landlord who retakes possession
after tenant abandonment is not precluded from recovering damages for lost
future revenue, and can, in proper case, elect to sell the property and collect
as damages the expense of sale, regardless of landlord’s profit on the sale of
the property.
Millikan v. American Spectrum Real Estate Services, Inc., 2004 WL 837210 (Cal.
App. 4/20/04)
This extraordinarily well written case makes some significant law in California
and possibly elsewhere in recognizing that when a tenant “jilts” a landlord, and
the landlord cannot continue to carry the cost of the property while seeking new
tenants, the landlord may sell the property and charge the cost of sale to the
tenant, irregardless of whether landlord profits from the sale.
Note that the narrow factual circumstance here is that the tenant abandoned and
the landlord retook possession of the premises in an attempt to mitigate.
Landlord did not file suit to evict the tenant or to establish a damage claim at
the time that it seized possession of the property. Of course, many landlords
find themselves constrained to do exactly what the landlord did here. They are
loathe to spend the money on eviction, and are concerned that common law damages
measures for loss of future rent at this point may be too uncertain.
Landlords often have the common law remedy to “relet on tenant’s behalf in
mitigation.” In this case they treat the lease as continuing in effect and
collect the rent as it falls due.
The California statute gives the landlord an additional option. It expressly
provides that in the event of abandonment the landlord can retake possession of
the premises and, *if the lease so provides* can relet the premises and later
collect the losses not only up to the time of suit but estimated future losses
based upon the amount by which the unpaid rent for the balance of the term after
the time of award exceeds the amount of such rental loss that the lessee proves
could be reasonably avoided.” This statute does not put the landlord at risk of
triggering a surrender when it retakes possession following tenant default. It
does not require the landlord simply to relet as if the lease were still in
effect and collect damages as they fall due. The California court recognizes
that this statute is a departure from traditional law and gives landlord more
options.
Another provision of the California statute gives the landlord the right to
collect “any other amount necessary to compensate the lessor for all the
detriment proximately caused by the lessee’s failure to perform his obligations
under the lease or which in the ordinary course of things would be likely to
result therefrom.” It is in fact this provision that is most at issue in this
case.
The tenant abandoned a five year lease of an entire office building only a few
months into the term. The landlord demonstrated that its carrying costs of the
property exceeded $7000 per month, and that it could not have the cash flow to
meet this obligation without the rent from the property. It was unable to relet
the premises quickly enough to
The court acknowledges that the common law in the event of tenant abandonment is
different. It notes cases in other jurisdictions, and California law prior to
the revision of the damages statute, that hold that the sale of the building is
an event so inconsistent with the continuation of the tenant’s continued rent
obligation as to effect a surrender of the lease.
Although the court doesn’t do the calculation, it appears to be of the view that
the sale of the property can be a reasonable mitigation of the landlord’s lost
revenue from a lease under the statute. It then takes the next step of
concluding that if the sale is a reasonable mitigation, the costs of sale are
reasonably foreseeable damages in the proper case. Here, where the tenant was a
sophisticated real estate company itself, the court concluded that it surely
should have foreseen that the abandonment of a large office building might well
put the landlord into a cash squeeze that would necessitate a sale in lieu of an
effort to relet.
It is interesting to note further that the tenant was not permitted to ask the
landlord about its profit on the sale. The court saw this as irrelevant, as the
landlord, whatever its original cost, was entitled to obtain the rent producing
value of the asset through reletting or through sale.
Comment: In light of its comment on extracting the “lost revenue” computation
from the sale price in the appropriate case (wasn’t done here), the editor finds
it surprising that the court made no effort to prorate the closing costs to that
portion of the sale return that actually mitigated the landlord’s losses for the
balance of the five year lease. Clearly the bulk of the sale related to the sale
of more than just the rent producing capacity for that period.
Now the editor becomes curious as to another issue. Where a landlord relets on
behalf of a tenant, but gets a lease for a significantly longer term, would it
be able to lay off all the cost of the broker’s commission as an incidental
expense of mitigation? Again, prorating would seem to be in order. How do they
do it out there?
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