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.