Daily Development for
Monday, April 14, 1997

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

This piece was contributed by DIRT reader David E. Schwager, in the Wilkes-Barre, Pennsyvania, firm of Chariton & Keiser. It is case worth noting in view of the recent Texas and New York rulings reported here in the last few months.

LANDLORD/TENANT; LANDLORD'S REMEDIES; DAMAGES; MITIGATION OF RENT: Pennsylvania appeals court rejects mitigation of damages requirement. Stonehedge Square Limited Partnership v. Movie Merchants, Inc., ____ Pa. Super. ____, 685 A.2d 1019 (1996).

This case appears to reverse a prior trend developing in Pennsylvania toward requiring a landlord to mitigate potential damages caused by a tenant's breach of the lease.

In decisions dating back to the 19th Century, Pennsylvania's courts have treated leases as interests in real estate. See Auer v. Penn, 99 Pa. 370 (1882). Beginning with the landmark case of Pugh v. Holmes, 486 Pa. 272, 405 A.2d 897 (1979), and prior to Stonehedge, Pennsylvania courts have exhibited a tendency to treat leases as ordinary contracts, rather than as interests in real estate.

As a result of the shift toward consideration of leases as contracts, the courts have relied on general principles of contract law for the governance of the landlord/tenant relationship. Under such contract law, the non-breaching party must take reasonable steps to mitigate the possible negative impact of the actions of the breaching party. See Henry Shenk Co. v. Erie County, 319 Pa. 100, 179 A. 662 (1935).

In Stonehedge, a commercial landlord sued its tenant to recover the rent owed under the remainder of a shopping center lease after the tenant had vacated the leased premises. The Superior Court held that the landlord had no obligation to mitigate damages. The majority decision was rendered by a three (3) judge panel, in which President Judge Stephen McEwen, Jr., concurred in the result.

Recognizing that the issue of mitigation of damages in the landlord/tenant context has not been addressed by a Pennsylvania appellate court in almost 70 years, the court, in a footnote, noted that it had previously declined to address the issue in Cusamano v. Anthony M. DiLucia, Inc., 281 Pa.Super. 8, 421 A.2d 1120 (1980). Cusamano was decided on other grounds.

The court, in its majority opinion, highlighted the fact that no clause requiring the landlord to mitigate damages appears anywhere in the 37 page lease. The court recognizes, "It is well established that, '[t]he law will not imply a contract different than that which the parties have expressly adopted.' Hutchison v. Sunbeam Coal Corp., 513 Pa. 192, 198, 519 A.2d 385, 388 (1986)." Based upon the absence of such a clause in the lease and the unwillingness of the courts to "imply a contract different than that which the parties have expressly adopted", the court chose not to impose a mitigation requirement upon the landlord in the absence of such a provision in the "expressly adopted" contract.

In doing so, however, the court acknowledged the recent common pleas court decisions which have imposed a duty to mitigate on a landlord in both the commercial and residential context. See Brumbach v. Kauffman Carpet Co., 67 Berks L.J. 18 (1972) (commercial lease); Essex House Apartments v. Kayser, 142 Pitt. L.J. 520 (1994) (residential lease); Harrison v. Irving Shoes, 44 Cumb. L.J. 455 (1995) (commercial lease); Mon Valley Travel, Inc. v. Morgan Management Company, 23 D & C.4th 494 (1995) (commercial lease). See also In re New York City Shoes, Inc., 86 B.R. 420 (Bankr. E.D. Pa. 1988) (commercial lease).

At the same time, the court noted several lower court decisions that followed the Auer case that held that no duty to mitigate exists. See Hoffman Estate, 47 D. & C.2d 32 (1969) (residential lease); West Norriton Industrial Park v. Snappy Car Rental Inc., 118 Montg. L.R. 73 (1986) (residential lease); Blanchard v. DiNardo, 48 D. & C.3d 268 (1988) (commercial lease).

In the final analysis, the court suggested that, absent a decision by the Supreme Court of Pennsylvania contrary to Pugh, the Superior Court of Pennsylvania (and the courts of common pleas) should not "evolve" the law of Pugh and impose a duty to mitigate on commercial landlords. At the time that this article is being written, according to counsel in the case, a Petition for Allowance for Appeal is pending.

Editor's Comment: Many commentators, particularly those who are critical of the "no mitigation requirement" rule, have viewed the question to be whether the lease ought to be regarded as a contract or a conveyance. They have argued that the modern lease contains so many affirmative duties and expectations of both parties in addition to the mere provision of a possession right that it necessarily ought to be regarded as a contract. In the editor's view, these commentators miss the point on two counts.

First, as a matter of historical reality, courts traditionally have regarded leases, like most private land arrangements, as both contracts and conveyances. The two concepts need not be mutually exclusive.

Second, even if we were to view the lease a no more than a contract, the fundamental question ought to be whether there exists sufficient justification to set aside the clear contractual understanding of the parties that the landlord can collect rent for the term without reletting. (The editor views the question of what the rule ought to be when the contract is silent as an insignificant side issue - as leases routinely would contain a "no mitigation rule" if the law required in order for the landlord to have that power.)

In the editor's view, there are sufficient justifications in the case of commercial leases to justify the parties being permitted to agree that the landlord need not mitigate damages. The editor has expressed his "pro landlord bias" on this issue a number of times in the past, and will not repeat the arguments here. The editor is less comfortable with applying to same concept to residential leasing, especially large multi-tenant projects. Particularly in jurisdictions in which the courts have already decided to impose an implied warranty of habitability by common law ruling (as opposed to legislative act), the editor sees no particular basis for withholding additional "consumerist" thinking on the damages issue.

But the editor sees no particularly good reason in law or policy to withdraw from a settled rule that the commercial marketplace has accepted simply because appeals court judges view a different rule as more "fair." No one, least of all the judges, can anticipate all the various applications in which the rule will have an impact. Where it's only money, and the rules are well known, let the market address the problems.

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.

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