Daily Development for Friday, October 18, 2002

 

By: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of
Law
UMKC School
of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City,
Missouri
prandolph@cctr.umkc.edu

 

LANDLORD/TENANT; LANDLORD'S REMEDIES; DAMAGES; RELETTING IN MITIGATION:  Where a landlord responds to a tenant's failure to pay rent by subleasing the tenant's space to another existing tenant, the defaulting tenant is not obligated to pay rent for the space that the sublessee vacated to move into the defaulting tenant's space, and the defaulting tenant is entitled to a credit for the amount of rent the sublessee pays above the rent the defaulting tenant is obligated to pay.

 

Centerline Investment Co. v. Tri-Cor Industries, Inc., 80 S.W.3d 499 (Mo. Ct. App. 2002).

 

Tenant terminated occupancy and spent a year, still paying rent, seeking a subtenant.  Eventually, unable to let the space, Tenant stopped paying rent.   The lease provided that landlord was entitled to "any and all"

damages and to "consequential" damages and  gave the landlord the option of either terminating the lease, or reletting the leased premises as the agent of the tenant without terminating the lease in order to mitigate damages..  The landlord chose the second option and subleased the tenant's space to another existing tenant at a higher rental that tenant had been paying.  The new subtenant then vacated the other space it had been letting, which was at a much lower rent.  The landlord made a claim against the defaulting tenant for the lost rents due to the vacancy of the sublessee's former space, and further claimed that the defaulting tenant was not entitled to a credit for any excess rentals paid by the new sublessee.

 

The Missouri  Court of Appeals reversed the trial court decision on both of these points.  On the issue of damages due to the vacancy of the sublessee's former space, the Court held that the landlord should have "obtain[ed] the defaulting tenant's consent before holding it responsible for rent on space it never contracted to lease."  And regarding the amounts the sublessee was obligated to pay above the amounts due from the defaulting tenant, the Court held that "when the landlord relets spaces 'as the agent of and for the account of' a defaulting tenant, the tenant is entitled to a credit for rents received over and above those it was obligated to pay under the lease unless the lease provides otherwise."

 

Describing the case as one of first impression in Missouri, the appeals court first acknowledged that lease language providing for "consequential" damages and "any and all" damages results in a broader scope of damages than the "natural and direct consequence" damages to which the landlord otherwise might be entitled.  But it indicated that damages still were limited by the foreseeability rule.  Only those damages "within the contemplation of the parties at the time of contracting, or "foreseeable" to them" are collectible.   It noted that only two other cases had been found in which the landlord had made a claim for damages based upon the rent lost when a substitute tenant moves from another space it had rented from landlord, and in both cases the damages claim had been denied.  These cases were in Hawaii and Washington.

 

The court acknowledged that the net result of landlord's actions was to reduce tenant's damages liability, and that it wished to encourage economically efficient actions, but concluded that to grant relief here would be unreasonable.  It noted that the landlord had not notified the old tenant of the fact that another tenant had relocated to the space for six months, and that the old tenant, had it known that landlord was seeking to hold it liable for the tenant's old space, might have been able to seek out some substitute for that space, even though the tenant had been unsuccessful finding a substitute for its own original space.

 

In discussing landlord's claim that tenant got no credit for any excess amounts paid, the court noted that the lease provided that any "rents received" would be applied in tenant's favor.  It concluded that this meant that the lease language itself led to the conclusion that tenant was entitled to the entire amount paid.  It distinguished other cases in which the landlord had been permitted to exclude excess rentals because in those cases the rentals had been paid during months for which the landlord was not seeking to recover.

 

Comment 1: The court is correct in its holding on the first point.  The landlord made a nice argument that what it had done was reasonable mitigation, and that there was a net savings to the tenant.  Nevertheless, the landlord has a burden to show that it had made reasonable efforts to relet in a way favorable to tenant, and to rent to an existing tenant that added a "lug" to the old tenant's damages burden may not be so reasonable in light of possible other alternatives.

 

Comment 2: The editor has seen other cases that treated the mitigation question as a month-by-month issue.  Any excess earned by the landlord in a given month was paid over to the landlord, and could not be applied to liabilities of the tenant for vacant periods prior to the time that the landlord took possession.  Here, the case purportedly turns on the language of the lease, so the holding is not necessarily inconsistent with those cases.  In any event, if tenant's space really is worth more, why shouldn't tenant get the benefit of that extra amount in mitigation of the overall damages payable?

 

The issues are complicated by the court's view of the mitigation activity.

Is it truly a renting as agency of the old tenant, or is the old lease terminated and the only question one for damages?  If the latter, then arguably there can be no damages until the landlord's claim should be a net claim, at least for the period of mitigation, and the tenant should get any credit for "fat months."  This apparently was the position taken by Justice Cardozo in Hermitage v. Levine, 269 N.Y.S. 63 (N.Y. 1928), which also held that the landlord could not sue for damages until the lease term was over.

 

It seems clear, on the other hand, that unless the lease provides otherwise the landlord need not pay over to tenant any excess rents received.   The issues are discussed in Friedman on Leases in Section 16.303 and there is an ALR Annotation, 50 ALR 4th 403.

 

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1‑6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312) 988 5590 or mtabor@staff.abanet.org

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