Daily Development for Thursday, October 6, 2005
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: Where, instead of reletting abandoned premises, landlord operates the business on the premises and does so profitably, landlord may still collect from abandoning tenant the difference between the market rental value of the premises and, if higher,  the contract rent under the abandoning tenant’s lease.

Lu v Grewal (2005) 130 CA4th 841, 30 CR3d 623 2005),

Tenant entered into a long term lease for a mini mart/gas station location in Los Angeles.  The lease required that the tenant maintain the premises in good condition and repair.  Tenant assigned the lease, but did not obtain a release from the landlord, and remained liable for its performance.  Later, the assignee abandoned the premises and stopped paying rent.  Landlord, during the term of the lease, had purchased the fixtures and equipment on the premises from an oil company for about $800,000.  When Landlord came to the premises, the abandoned facility had been thoroughly vandalized.  The gas pumps and related equipment were gone.  There remained only holes in the ground above the oil tanks.  The mini mart was in a shambles and the cash register and other valuable fixtures gone.

Landlord restored the premises and, through dint of extraordinarily hard work outlined by the court, managed to make the business profitable.  Years passed while the rent remained unpaid.  Eventually, Landlord sued the original Tenant for the cost of restoration and for the rent. 

California has codified the concept of the landlord’s duty to mitigate rent following tenant abandonment. Under CC 1951.2, the lease ended when the tenant abandoned and the time stated in the landlord's notice to quit expired; this established the landlord's recovery as the difference between the rent reserved under the lease and the rental value of the premises for the remainder of the term.   Landlord can collect in one claim the past damages, with interest, and future damages, reduced to present value. 

We only have the appellate court’s explanation of the facts  But, based on those facts, the tenant then showed the incredible chutzpah to argue that the landlord was obligated to prove that it had not recovered from the property the amount of the rent, and that the landlord had to credit the profits that it had earned in mitigation of the rent obligation.  And not only that - the trial court had the chutzpah to agree with the tenant!!!  And, since the tenant already had agreed to pay the damages for the ruination of the premises, the trial court ruled that the landlord had not prevailed, so the tenant got attorney’s fees.

On appeal: Held: reversed.

The court ruled, first, that California statute should be read to place the burden of showing any mitigation credit on the tenant, not the landlord.  Second, the California statute does not require that any monies the landlord obtains from use of the premises be credited, but only the reasonable rental value of the premises during the landlord’s occupancy for the balance of the term. 

Remanded for a redetermination of the proper damages and, if the landlord was entitled to a recovery, a redetermination of whether the landlord should get fees.

Reporter’s Comment 1:  So, if the rent reserved under the lease was $5000 a month, but the rental value of the premises was only $4000 a month at the time of abandonment, the landlord is entitled to a rental loss of $1000-5000 less 4000-times the number of months left under the lease, adjusted upward for interest on months prior to trial and discounted for future value on the months left after trial, until the termination date of the lease. This formula puts a de facto duty to mitigate on the landlord, since if her tenant is going to be credited for what she could have relet the premises, it is too dangerous not to try to get that much money herself from a replacement tenant. At the same time, the burden of proving all this is on the tenant, who also has the de facto opportunity to mitigate his liability by finding and proffering a ready and willing replacement (which the landlord rejects at its peril).

Reporter’s Comment 2:  Thus, the "operational profits" and "sale valuation" used by the experts in this trial were out of place and should never have been admitted into evidence.

In general, the landlord's retaking possession does make determination of rental value less subject to the landlord's control. On the other hand, if the landlord believes that it has no real choice but to go back into possession, and operate, it might be better off in creating a new entity and executing the new lease with it, on terms that, while favorable, are not so far out of line as to be rejected out of hand. (If the old tenant wants to match or beat those terms with his own candidate, all the better.)

When the mitigating party is the landlord itself , when, as here, it reenters the premises and runs the business-the above formula should not change. A court still first determines the rental value of the premises, i.e., how much rent the landlord should be paying to herself, and then deducts that amount from the rent the abandoning tenant was supposed to pay. Whether landlord’s business was profitable says nothing about the rental value of the premises where it was conducted. Thus, the "operational profits" and "sale valuation" (130 CA4th at 846) used by the experts in this trial were out of place and should never have been admitted into evidence.

 Also see:  Millikan v. American Spectrum Real Estate Services, Inc.,  2004 WL 837210 (Cal. App. 4/20/04), the DIRT DD for 4/29/04, (California landlord can claim as mitigation the cost of selling the premises following tenant’s abandonment, without taking into account any profit made on resale, when selling the premises was a rationale response to the tenant’s abandonment of a whole building in a down market. 

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