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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