Daily Development for
By: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of
Of Counsel: Blackwell Sanders Peper Martin
Kansas City,
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
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
Items reported here and in the
Parties posting messages to DIRT are posting
to a source that is readily accessible by members of the general public, and
should take that fact into account in evaluating confidentiality issues.
ABOUT DIRT:
DIRT is an Internet discussion group for
serious real estate professionals. Message volume varies, but commonly runs 5 ‑
10 messages per workday.
Daily Developments are posted every workday.
To subscribe to Dirt, send an e-mail to:
To: |
ListServ@listserv.umkc.edu |
Subject: |
[Does not matter] |
Text in body of message |
Subscribe Dirt [your name] |
To cancel your subscription to Dirt, send an
e-mail to:
To: |
ListServ@listserv.umkc.edu |
Subject: |
[Does not matter] |
Text in body of message |
Signoff Dirt |
For information on other commands, send the
message Help to the listserv address.
DIRT has an alternate, more extensive
coverage that includes not only commercial and general real estate matters but
also focuses specifically upon residential real estate matters. Because real
estate brokers generally find this service more valuable, it is named "Brokerdirt." But residential specialist attorneys,
title insurers, lenders and others interested in the residential market will
want to subscribe to this alternative list. If you subscribe to Brokerdirt, it is not necessary also to subscribe to DIRT,
as Brokerdirt carries all DIRT traffic in addition to
the residential discussions.
To subscribe to Brokerdirt,
send an e-mail to:
To: |
ListServ@listserv.umkc.edu |
Subject: |
[Does not matter] |
Text in body of message |
Subscribe Brokerdirt [your name] |
To cancel your subscription to Brokerdirt, send an e-mail to:
To: |
ListServ@listserv.umkc.edu |
Subject: |
[Does not matter] |
Text in body of message |
Signoff Brokerdirt |
DIRT is a service of the American Bar
Association Section on Real Property, Probate & Trust Law and the
DIRT has a WebPage at: http://www.umkc.edu/dirt/