by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
randolphp@umkc.edu

LANDLORD/TENANT; DUTY TO MITIGATE: Texas decides that Landlord has duty to make reasonable efforts to mitigate damages.

Austin Hill Country Realty, Inc. v. Palisades Plaza, Inc., 1997 Tex. LEXIS 5 (Tex. 1997)

A commercial landlord sued a tenant for anticipatory breach of the lease when the tenant failed to provide proper instructions for the completion of tenant improvements and never occupied the premises. At trial, the tenant attempted to prove that the landlord had failed to mitigate its damages flowing from the tenant's breach. Evidence was adduced showing that the principals of the tenant, in various combinations, had offered to lease the premises in question, and that the landlord had not followed its usual procedures in advertising the premises for lease following the tenant's breach. The trial court stated "Last time I checked the law, it was that a landlord doesn't have any obligation to try to fill the space."

In a 1988 case turning on the existence of a termination right, the Texas Supreme Court did not reach the mitigation issue. In concurring and dissenting opinions, however, five justices indicated that they would hold that a landlord has the duty to mitigate damages following tenant default. Brown v. RepublicBank First Nat'l Midland, 766 S.W.2d 203 (Tex. 1988) (Kilgarlin, J., concurring, joined by Spears, Gonzalez, and Mauzy, J.J.) (Phillips, C.J., dissenting).

The Texas Supreme Court here turned immediately to the common law, finding no statute that addressed the issue. Acknowledging that Texas case law hitherto expressed the traditional common law rule that a landlord has no duty to mitigate damages in cases involving a landlord's suit for past due rent, the Court nevertheless identified cases in which Texas courts have required landlords to mitigate damages when the landlord (i) seeks a contractual remedy such as anticipatory breach, as opposed to a real property cause of action, thereby subjecting the landlord to the usual contractual requirement for mitigation of damages and/or (ii) reenters or resumes control of the premises.

The Court found a wealth of authority from forty-two states and the District of Columbia requiring landlord mitigation of damages in residential and/or commercial lease disputes The Court further noted that these jurisdictions recognized the change in the nature of the landlord-tenant relationship since feudal times, namely, that a modern lease contains elements both of a contract and a real property conveyance, thereby "importing" elements of contractual law, including the contractual duty to mitigate damages.

Pressing on with a public policy analysis, the Court observed that the lack of a duty to mitigate damages encourages both economic and physical waste, as property lies idle and subject to vandalism or casualty. Returning to the theme of congruence with contractual law, the Court found that allowing a landlord to leave property idle while collecting rent from an absent tenant amounts to a contractual penalty upon the tenant, disfavored under the law.

Finally, the Court declared that modern lease arrangements are largely arms'-length transactions and no longer essentially personal in nature, as in feudal times. Therefore, the identity of a tenant should make little difference to the modern landlord so long as such tenant is capable of performing the lease obligations. Moreover, the requirement for mitigation of damages does not require the landlord to accept any replacement, only one who can satisfactorily perform the lease obligations.

In summation, the Court held that a landlord has a duty to use objectively reasonable efforts to fill the premises when a tenant breaches the lease, but stated that the tenant has the burden of proof of proving failure to do so. When the landlord has actually mitigated damages, the tenant need not plead same as an affirmative defense; it may be admitted under a general denial to rebut and diminish the landlord's measure of damages. However, when contending that the landlord failed to mitigate damages, the tenant must plead it as an affirmative defense.

The Court went on to consider the implications of its holding for the four remedies afforded to Texas landlords for breach of lease. These remedies, as discussed in Speedee Mart v. Stovall, 664 S.W.2d 174 (Texas 1983), are to (i) maintain the lease, suing for rents as they become due, (ii) treat the breach as an anticipatory repudiation, repossess and sue for the present value of future rentals (reduced by the fair market value of the premises for the remainder of the term), (iii) treat the breach as an anticipatory repudiation, repossess, release the property and sue the tenant for the difference between the contractual rent and the new tenant's rent or (iv) declare the lease forfeited (if the lease so provides) and relieve the tenant of liability for future rent.

The Court held that a suit for anticipatory repudiation, as in remedies (ii) and (iii), being a contractual cause of action, requires the landlord to mitigate damages. However, felt the Court, requiring mitigation under remedy (i) would force the landlord to reenter the premises, risking terminating the lease or accepting the tenant's surrender, thereby eviscerating the remedy. Accordingly, the Court further held that, when exercising remedy (i), the landlord has a duty to mitigate only if the landlord (a) actually reenters or (b) has a contractual right to reenter without accepting surrender, forfeiting the lease or being construed as evicting the tenant.

Note: In Texas, commercial tenants have long been required to mitigate damages upon wrongful eviction by their landlords. See Frank v. Kuhnreich, 546 S.W.2d 844 (Tex. App. 1977.) and Birge v. Toppers Menswear, Inc., 473 S.W.2d 79 (Tex.. App. 1971).

Comment: Although the court purports to follow the vast majority of jurisdictions, it includes in its count of the "vast majority" states that have adopted tenant protective statutes in the residential context. Residential leases tend to be short term consumer instruments in which the interest of the tenant has a much greater weight than any interest in the landlord in preserving the "no-mitigation rule." But to say that residential leases should be subject to the duty to mitigate does not necessarily address the policy considerations affecting commercial leases, which tend to be long term and generally do not involve fungible property or fungible tenants.

Although the point is a difficult for a court to understand, not everyone trust's the court's judgment as to what constitutes "commercially reasonable behavior." When a landlord is left with a vacant premises as a consequence of a tenant default, the landlord may want to evaluate many options before deciding to relet and how to carry out the reletting. Will the landlord enlarge the premises by combining it with other spaces which may presently be under lease, but those leases will terminate at some future time; or will the landlord attempt to lease all or a portion of the premises to tenants when they come off of leases elsewhere? These are only examples of a million possible options that a landlord will want to evaluate, given the fact that the tenant has forced upon the landlord the reality that it cannot view the premises as providing a guaranteed occupancy and income flow from this tenant for the original lease term.

Where a non-waivable duty to mitigate exists, the landlord's judgment will be colored considerably by the concern that a court may "second guess" the landlord as to the reasonableness of its conduct. The fact that the court may penalize the landlord if it does not take marketing steps that the court, at some later time, views as "reasonable," will restrict the landlord's options at a time when the tenant's breach already has created an emergency for the landlord. It is true that the mitigation doctrine does the same to parties suffering breach in other contexts; but the fact that leases have elements of contract as well as conveyance does not mean that all contract doctrines ought to apply. The law has always regarded real estate as an asset that is unique in character, in part because decisions affecting real estate investment often affect the long term and cannot easily be compared to decisions in other market contexts.

The argument that the "no-mitigation" rule leads to waste and inefficiency is a blind denial of the realities of modern investment. No landlord can afford to leave a premises vacant except when rational economic choices so dictate. To leave a premises unoccupied creates the risk of significant deterioration from weather, vandals, and other factors. Insurance considerations alone will press the landlord to consider carefully any opportunity to keep the premises in use. Further, no thoughtful landlord really wants to rely for the long term upon collection of rent from an out of possession tenant who has already defaulted on the lease.

Landlords generally do not use the "no mitigation rule" to oppress vacating tenants. That would be economically foolish because of the twin risks of damage to the vacant premises and inability to collect from the old tenant . The threat that the landlord will not mitigate, of course, may lead some tenants to avoid resort to vacating the premises as a tool in their dealings with the landlord. This may tip the scales a bit in the landlord's favor, but probably not enough to justify all the brouhaha about this rule.

Comment 2: The court's final comments concerning when the rule will be applied are puzzling. Although the court has come out with a strong policy pronouncement in support of the mitigation requirement, the court does not view the policy as so strong that it will apply the requirement to every case. It indicates that the requirement will not apply where the tenant has vacated and the landlord has not, by contract, reserved the right to reenter the premises without being construed as "repossessing," and thus terminating the tenant's liability under the lease. Contract rights of the latter sort commonly appear in leases, setting up the landlord as the tenant's "quasi-agent" for purposes of reletting the premises. But many jurisdictions would permit landlords to do an "agency reletting" simply by letter notification to the vacated tenant, and would not require that the lease permit such a device. It is unclear why the court doesn't take the further step and approve the letter notification technique. Now landlords' lawyers in Texas are between a rock and a hard place. If they do not write in the "agency reletting" language, they have the threat of "no mitigation," holding the tenant in place. If they do write it in, then the tenant knows that if it vacates the landlord has a duty to mitigate, and this not only eases the threat on the tenant but poses an affirmative threat to the landlord.

Not many judges are commercial landlords. It is unlikely that courts will be able to grasp the realities of the landlord's business position in reviewing the landlord's choices regarding reletting. Landlords, knowing this, will take actions that might, in fact, risk the very economic waste the Texas court here feared - reletting quickly to avoid creating a loss for which it will have no "coverage" from the vacated tenant.

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