>Daily Development for Wednesday, November 12. 2003 >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; DAMAGES; >DUTY TO MITIGATE: A lease provision making the tenant liable for >the difference between contract rent and the amounts the landlord derives >by reletting operates as a contractual undertaking, and applies >notwithstanding any "surrender" of the lease itself. Nevertheless, the >landlord's demolition of the building on the leased premises and >combining of that premises with several other properties in a new lease >may amount to a breach of the duty to mitigate under the contractual >provision. > >Circuit City Stores, Inc. v. Rockville Pike Joint Venture, 829 A. 2d 976 >(Md. 2003) > >Tenant had a lease with a continuous operation obligation. It had the >right to assign or sublet, but only with the landlord's consent. Tenant >elected to move to a new location, and landlord reviewed the proposed >substitute tenant and found it unacceptable. Lots of litigation ensued, >most of which was finalized in an earlier order, the finality of which the >court here upholds. Under that order, the tenant was viewed as in breach >of the continuous operation clause, and as a consequence of that breach, >occurring prior to its tender of a substitute tenant, landlord had no duty to >accept the proposed new tenant. > >The landlord later elected to relet the premises to a larger grocery store >operation, and to facilitate that terminated three other leases on adjacent >premises and rolled those three premises together with the old Circuit >City location to create a site for the new grocery store. It demolished the >existing buildings and undertook to construct a new grocery store. The >process of demolition and construction took around a year and a half. >The trial court order, had left open the question of the amount of credit >against its rent obligation to which tenant was entitled to as a >consequence of the lease to the grocery store. The landlord took the >position that the obligation included the time of demolition and >construction. > >Although, apparently, the tenant would have been content to have paid >the pro rata difference between the grocery store rent and its original >rent, the tenant felt that the landlord had violated the "pig" rule, and thus >came back with a more extreme position of its own. The tenant claimed >that the landlord's destruction of the existing buildings and the extended >construction resulted in a termination of its lease obligation, either >because the lease was formally "surrendered" or because the landlord had >otherwise breached its duty to mitigate. > >The lease provided that, in the event of tenant default, the tenant would >remain liable for the rent, (subject to a credit if landlord were to opt to >relet) notwithstanding any reentry by the landlord. > >The court concluded that in fact there had been a surrender even prior to >the reletting to the grocery store, as the landlord at an early point in the >dispute had unequivocally declared the lease at an end. It further >concluded, however, that the fact of surrender did not end the tenant's >liability, since it had contractually agreed to remain liable for the >difference between what the tenant's lease provided and what the >landlord could get in mitigation. > >The court went on to say, however, that since this was a contract remedy, >the landlord did have an obligation to take reasonable steps to relet. It >concluded that the issues below had become so muddled that there really >was no clear resolution as to whether the landlord had breached its duty >to mitigate by the demolition of the premises and combination with other >space in connection with the lease to the grocery store. Further, the court >noted that, even if the relet to the grocery store was reasonable >mitigation, it was even unclear whether it made damages computation >impossible. Thus it remanded for further proceedings. > >Comment: The case is correct, and an interesting analysis of the contract >remedies available for tenant breach. Even if there had been no contract >provision dealing with reletting, the tenant still would have been entitled >to the damages of the difference between the contract rent and rental >value up to time of judgment. That's really all it is going to get here. >Surrender would have nothing to do with the issue, since the damages >remedy accrued when the tenant abandoned. > >But there's a bothersome little feature of the court's analysis that might >cause later difficulties. The court talks about the landlord's right to relet >in mitigation as a contract right, because it is set forth in the lease, as >opposed to a property right. > >What's the difference? In this case, as it now stands, perhaps nothing. >But here's the problem: > >If the tenant has breached the lease, the statute of limitations begins >running on that breach. The tenant's damages must be established by a >lawsuit brought within the statutory period. The cases that have >addressed the landlord's ability to prove the difference between the >future fair rental value and the lease rent have limited the landlord's >ability to make such a proof to nine years or less. Thus, in many cases, >as least, the landlord who has a tenant default early in a long term lease is >unable to collect contract damages for the entire term. The statute of >limitations compels the landlord to bring its suit at a time when it is >impossible to prove damages for that term. > >The reason that lawyers and courts devised the fiction of "preserving the >lease and leasing on the tenant's behalf" was to permit an argument that >the landlord's remedy was not limited by the statute of limitations, since >it could sue for the rent as it fell due, deducting whatever it had collected >for those rental obligation periods already passed. > >The Maryland court may be suggesting here that the parties, by agreeing >that the rent obligation continues notwithstanding the termination of the >lease, could agree by contract to suspend the statute of limitations on the >landlord's contract damages claim. If this is so, the editor sees it as >something of a revolutionary statement, opening up all kinds of drafting >possibilities for the parties. > >The editor has not researched the question of whether the parties can >contractually extend the statute of limitations. Contracts professors he >has contacted, however, indicate that a contemporaneous agreement to >suspend the running of the Statute of Limitations is likely void as against >public policy. (Later agreements are OK.) The case law does provide, >however, that the parties can shorten the period of limitations. This case >might give landlords in Maryland quite a lot to chew on in devising new >contract remedy clauses. > >Comment 2: Careful lawyers with powerful landlord clients >often put into their leases some redefinition of what constitutes >"reasonable efforts to mitigate." There certainly is some latitude >available here. For instance, the lease might have contained a stipulation >by the parties that the premises were of such a nature that reasonable >efforts to mitigate might include demolition or expansion of the >premises. This might have helped. > >Readers are encouraged to respond to or criticize this posting. > >Items reported on DIRT and in the ABA publications related to it are for general information purposes only and should not be relied upon in the course of representation or in the forming of decisions in legal matters. The same is true of all commentary provided by contributors to the DIRT list. 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