Archives for May 2013

The Landlord’s Duty to Mitigate Damages

 

image

When a commercial tenant defaults under a multi-year lease, say by abandoning the premises with several years left on the lease, the law requires the landlord to mitigate its damages.  So, if retail tenant skips out on a 10-year lease after year 2,  the landlord cannot sit idly by for 8 years and then recover 8 years’ worth of rent damages from the tenant.  Instead, the landlord must make measurable efforts to try to relet the property and reduce its monetary loss.

Section 9-213.1 of the Illinois eviction statute codifies the landlord’s duty to mitigate: “a landlord or his or her agent shall take reasonable measures to mitigate the damages recoverable against a defaulting lessee.” 735 ILCS 5/9-213.1.

Whether a landlord has met its duty to mitigate damages is a fact question for the judge or jury.  If a landlord tries to relet commercial property at a higher rate than was being paid by the breaching tenant, it might raise a red flag and result in a failure to mitigate.

What steps should a landlord take then when a tenant to breaches a multi-year lease?  There is no litmus test but Illinois state and Federal courts do provide some guidance.

One Illinois court found that the landlord mitigated its damages when it (1) engaged a building manager to market the site; (2) erected signage on the premises; (3) placed calls to real estate brokers and developers; (4) ran newspaper ads; and (5) offered trial witness testimony that placing advertisements and erecting signs constitute reasonable steps toward reletting the premises. MXL Industries, Inc. v. Mulder, 252 Ill.App.3d 18 (2d Dist. 1993).  (Note: now, in the computer age, a landlord should also list the property on Costar, Loopnet or similar sites.)

By contrast, the Seventh Circuit Appeals Court found a failure to mitigate where the suing landlord (1) waited five months to hire a broker to relet the property; (2) refused to improve the property; (3) attempted to re-rent the premises at a higher rental rate (than the defaulting tenant paid); and (4) didn’t rent the site for 2.5 years after the tenant abandoned. Kallman v. Radioshack Corp., 315 F.3d 731 (7th Cir. 2003).

A landlord should also be careful not to impose too harsh lease terms when dealing with a new tenant.  In Danada Square, LLC v. KFC National Management Co., 392 Ill.App.3d 598 (2d Dist. 2009), the court found that the landlord failed to mitigate when it offered a lease to the tenant with a 60-day “kick-out clause” – the landlord can terminate lease for any reason upon 60 days’ notice.

The take-away from all this is the landlord should promptly take steps to market a property once a tenant breaches a lease.  The landlord should also document its reletting efforts so it can prove in court that it mitigated its damages.

An Illinois Landlord’s Commercial Lease Damages

In a typical commercial lease lawsuit, the tenant is long gone and possession is not in issue.  Usually, it’s a retail tenant whose business is suffering and who can’t pay the required rent.  Because of this, getting a possession order is often an afterthought as the landlord’s main focus is trying to recover damages from the defaulting tenant.

Commercial leases (lease between two business entities) are less scrutinized by courts than consumer/residential leases: the thinking being that two commercially sophisticated parties should be free to craft their own deals with minimal court oversight.

So, if the commercial lease is between two businesses and there is no fraud, compulsion or over-reaching, the lease terms should be enforced as written.

If a tenant skips out on a 10 year lease with 8 years left on a lease, the lessor could conceivably recover the remaining 8 years left on the lease – IF (big IF) the lease explicitly gives the lessor the right to accelerate damages.  However, the damages question becomes murky if the lease is silent on whether the non-breaching landlord can accelerate rental payments through the lease expiration date.

 If there’s no acceleration clause in a lease (and many leases don’t have them), the rule in Illinois is that recovery for breach of lease is limited to the amount due at trial as there is no obligation to pay rent until rent day. Miner v. Fashion Enterprises, Inc., 342 Ill.App.3d 405 (1st Dist. 2003). 

Also, a failure to pay rent when it accrues does not accelerate the unpaid rent in the absence of a provision in the lease to that effect. A landlord then has the option of (a) suing for rent installments as they come due, (b) suing for several accrued installments, or (c) suing for the entire amount at the end of the lease term. Id.

If a commercial lease contains a clear acceleration clause (lessor can immediately recover all rental payments flowing through the end of the lease), it will likely be enforced.  If it doesn’t, the landlord’s recovery at trial will likely be limited to the amounts due and owing on the trial date.  In such a case, if there is a lot of time left on the breached lease, the landlord can file successive motions to amend the judgment as each month’s rental becomes due and unpaid.