Daily Development for Tuesday, February 14, 2006
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

LANDLORD TENANT; LANDLORD’S REMEDIES; DAMAGES; DUTY TO MITIGATE: Although state law imposes duty to mitigate in absence of lease provision to the contrary, a court will enforce language in the lease stating that landlord has no such duty.

Sylva Shops, Ltd. v. Hibbard, 623 S.E. 2d 785 (N.C. App. 1/17/06)

Tenant rented space for a bagel shop on an out parcel in a shopping center development.  The lease contained a default clause that expressly stated that landlord had no duty to mitigate on tenant default:

“In no event shall Landlord's termination of this Lease and/or Tenant's right to possession of the Premises abrogate Tenant's agreement to pay rent and additional charges due hereunder for the full term hereof. Following re-entry of the Demised Premises by Landlord, Tenant shall continue to pay all such rent and additional charges as same become due under the terms of this Lease, together with all other expenses incurred by Landlord in regaining possession until such time, if any, as Landlord relets same and the Demised Premises are occupied by such successor, *it being understood that Landlord shall have no obligations to mitigate Tenant's damages by reletting the Demised Premises.*”

Six months into a five year lease, tenant closed the shop and apparently turned the premises over to landlord without an eviction action.  Landlord posted “for lease” signs and retained a leasing agent and, after some difficulties, relet the space.

When landlord sued tenant for the unpaid rent and the difference between the rent on reletting and the contract rent, tenant objected that landlord had not made reasonable efforts to mitigate because it had demanded too much rent from substitute tenants.  The trial court denied summary judgment to landlord and ordered a trial on the question of whether landlord had been reasonable in mitigating.  The jury found that the landlord might have avoided more than $20,000 of the $35,000 unpaid rent claim by mitigating in a more reasonable fashion.
The court stated that the record was clear that the tenant was knowledgeable (it was advised by a business consultant) and understood what it was signing.  The transaction was arms length (at least as “arms length” as a bagel store in a shopping center can get). 

The court went on to say that, although freedom of contract is the rule, certain contract provisions, although freely bargained, will not be enforced because they violate public policy.  The question, of course, was whether this provision waiving the duty to mitigate is so contrary to the public policy of North Carolina as to be held void, even in a freely negotiated agreement.. 

On landlord’s appeal: held: Reversed.  The anit-mitigation language in the remedies clause is enforceable under North Carolina law. 

The court acknowledged that the North Carolina Supreme Court had already determined that landlords had a duty to mitigate upon tenant default.  But it stated that the high court had not addressed the question of whether this result had been altered by contract. It struck an analogy to the rule about waivers of negligence.  Although such waivers are not favored in the law, they are permitted, albeit subject to “strict scrutiny.”  The court saw an analogy to the question of whether parties could contractually avoid the duty to mitigate.

The court indicated that it was not making any determination about residential leases, which involved different considerations, but noted that many states do not impose a duty to mitigate in commercial leases (citing 75 A.L.R. 5th 1, 103-17.)  It noted particularly that cases in Arkansas, Ohio and Texas have held that, notwithstanding the general rule requiring landlords to mitigate, the parties may avoid the requirement by language in the contract.  (The Texas holding has been overruled by statute.)

The tenant argued further that the landlord’s position was further compromised by the fact that the lease restricted the tenant’s ability to sublet or assign without landlord’s consent, which landlord could withhold in its sole discretion.  The court responded that North Carolina courts had upheld the validity of such anti-assignment clauses, and that it saw no reason to view the presence of the clause as placing the public policy of the anti mitigation clause in doubt.

Comment 1: Before landlords view this case as a Valentine gift from the courts, let’s see if there’s a further appeal and reaction from the North Carolina Supreme Court.  The opinion is very succinct and does not really discuss at any length some important issues.
Comment 2: One issue is the claim that a contract clause rejecting a duty to mitigate might be construed as creating a contractual penalty for breach.  The editor rejects this argument, since a lease really is a conveyance as much as a contract, and the landlord’s position is different from many parties suffering an ordinary contract breach.  But the court really needs to discuss this question and acknowledge the differences.  There is no discussion of North Carolina authority outside of the lease context dealing with mitigation duties in other contracts and penalty analysis in such contracts.

Comment 3: As to the relationship between the anti-assignment clause and the anti-mitigation clause, indeed there has been some argument in the literature that these two issues are tied.  The editor remembers a Colorado case on this point, but a quick search did not turn it up.  Generally speaking, however, most courts do not draw this relationship. 

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