Daily Development for
Thursday, January 14, 1999
by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
LANDLORD AND TENANT: Pennsylvania weighs in on duty to mitigate debate refuses to change existing rule Pennsylvania landlords have no duty to mitigate following tenant's abandonment, even where landlord seeks to enforce a rent acceleration clause!!
Stonehedge Square Limited Partnership v. Movie Merchants, Inc., 715 A.2d 1082 (Pa. 1998).
Tenant was assignee of a five year lease. It abandoned the premises and stopped paying rent with about nine months still to run on the lease.
The lease had a rent acceleration clause that provided that the landlord could collect liquidated damages at 25% of the remaining installments of rent, but appeared to define this amount as something equivalent to the actual rent less the stipulated fair value of the premises. The lease also provided that the landlord could recover all the rent due under the lease as it fell due "less net rent, if any, actually collected by the Landlord on reletting.
It is very unclear from the facts exactly what measure of damages the landlord actually sought and obtained. The landlord sued for accelerated rent before the lease ended, but the actual trial occurred after the lease term was over. The court states simply that the defendant did not object to the damages computation, but to the fact that the landlord was not required to account for the fact that the landlord did not attempt to mitigate damages. From other language in the opinion, the editor concludes that the case deals only with the question of mitigation where the landlord does not relet and seeks to collect back rent, rather than the question of whether a rent acceleration clause is enforceable.
The court raised five arguments in support of its conclusion that Pennsylvania should not reform the common law to impose a duty to mitigate:
First, the rule of no mitigation is firmly established in Pennsylvania, and "leases have been drafted and bargained for in reliance upon this rule. Business decisions and structured financial arrangements have been made with the expectation that this rule, which has been the law, will continue to be the law."
Second, "the established rule has the virtue of simplicity. If the landlord is required to relet . . . there is unlimited potential for litigation initiated by the tenant concerning the landlord's due diligence, whether the landlord made necessary repairs which would be required to rent the premises, whether the landlord was required to borrow money to make repairs,, whether the landlord hired the right agents or a sufficient number of agents to rent the premises, whether the tenant who were refused should have been accepted, and countless other questions . . . " The court saw wrangling as "unwelcome" and likely to impeded commercial development.
Third, the Pennsylvania legislature reformed landlord/tenant law generally and did not see fit to change the rule.
Fourth, "there is a fundamental unfairness in allowing the breaching tenant to require the nonbreaching landlord to mitigate the damages caused by the tenant." The landlord loses the benefit of his bargain.
Fifth, "in this case the tenant was in a position to mitigate his damages." The lease permitted subletting ans assigning only with the landlord's consent, but consent could not be withheld unreasonably.
It is still unclear whether or not this commonlaw rule will apply to residential settings. The court cites and distinguishes Pennsylvania authority finding an implied warranty of habitability in residential leases and declaring such leases be contracts, rather than conveyances. It suggests that such a distinction may have significance on the question of whether a duty to mitigate exists.
Although the court's fifth rationale, the tenant's right to sublet or assign, might serve distinguish this case from others, a concurring judge wrote to emphasize that in his view, at least, this was not a relevant factor.
Two other concurring judges emphasized the fact that the parties had agreed specifically by contract that there would be no duty to mitigate, and they were uncomfortable finding no common law duty absent contract in a case in which there was a contract on the point.
Comment 1: The editor would have no problem with a ruling that landlords had a duty to mitigate unless the lease provided otherwise, but concludes that the Pennsylvania court is on target in concluding that parties to commercial leases ought to be able to bargain for a "no mitigation" duty and prefers the result that this is the basic common law rule even absent contract.
Although there is a general duty to mitigate in other contract settings, other contract settings are not real estate contracts. Real estate almost always is a unique asset, with a unique market, and the court is correct that the probems of evaluting the reasonableness of the landlord's mitigation efforts will often be more onerous in real estate leases than in other circumstances.
The editor would not apply the rule to residential tenancies, because residential tenants have not "gone into business" and need not be expected to undertake business risks. But commercial tenants are in business, and ought to accept the consequences of their business decisions, including their decision to default and abandon.
Comment 2: The rule is not likely to lead to great hardship. Few landlords will leave premises vacant when they could relet in a reasonable fashion, particularly because of the well recognized principle that landlords can relet as "agents" for the tenant and continue to look to the tenant if the reletting is unsuccessful. The landlord in such cases has little to lose by reletting, and can be expected to do so when this is commercially reasonable. It is only in the hard cases, where for some reason the landlord has found reletting unpalatable or difficult, that the duty to mitigate is even an issue. In these cases, the tenant has handed the landlord the problem and the tenant should not expect the landlord to solve it at the landlord's financial peril.
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 firstname.lastname@example.org
Items reported here and in the ABA publications are for general information purposes only and should not be relied upon in the course of representation or in the forming of decisions in legal matters. The same is true of all commentary provided by contributors to the DIRT list. Accuracy of data and opinions expressed are the sole responsibility of the DIRT editor and are in no sense the publication of the ABA.