When a commercial tenant’s business is failing, it’s fairly common for the tenant to tender a sublessee to the landlord as a way to avoid a future damages lawsuit and judgment.
Gladstone Group I v. Hussain, 2016 IL App (1st) 141968-U, examines when a non-breaching landlord must accept a proposed sub- or new tenant from a defaulting lessee and what conduct satisfies the landlord’s duty to mitigate damages.
When the corporate tenant’s barbecue restaurant foundered, the landlord sued the lease guarantors to recover about $60K in unpaid rent. At trial, the guarantors provided written and oral evidence that it offered three potential subtenants to the landlord – all of whom were refused by the landlord.
The trial court found that the landlord violated the lease provision prohibiting the landlord from unreasonably refusing consent to a sublease offered by the tenant. Critical to the trial court’s ruling was the fact that the tenant proposed a subtenant who offered to pay $7,500 per month – only about $800 less than the monthly sum paid by the defaulting tenant.
The landlord appealed. It argued that the lease did not require landlord to accept an offer that wasn’t an actual sublease or to agree to accept less rent than what a breaching tenant owed under a lease.
The critical fact was that no prospective tenant contacted by the defendant submitted a sublease to the landlord. Instead, all that was given were “offers” to lease the premises. There was no evidence that any of the businesses that submitted offers were ready willing and able to step into defendant’s shoes. While a landlord’s refusal of various subtenant offers is relevant to the landlord’s duty to mitigate, the burden is still on the defaulting tenant to prove that the proposed subtenant is ready willing and able to assume the tenant’s lease duties.
While a landlord’s refusal of various subtenant offers is relevant to the landlord’s duty to mitigate, the burden is still on the defaulting tenant to prove that the proposed subtenant is ready willing and able to assume the tenant’s lease duties.
Since the tenant failed to carry its burden of proving the subtenant’s present ability to take over the lease, the Court found that the landlord was within its rights to refuse the different subtenant’s overtures. The appeals court remanded the case so the trial court could decide whether the landlord satisfied its duty to mitigate since the evidence was conflicting as to the landlord’s post-abandonment efforts to re-let the premises. (¶¶ 23-25)
The dissenting judge found that the landlord failed to satisfy its duty to mitigate damages. It noted trial testimony that for several months from the date tenant vacated the property, the landlord did nothing. It didn’t start showing the property to prospective tenants until several months after the tenant’s abandonment.
The dissent also focused on the landlord’s refusal to meet with or follow-up with the three prospects brought to it by the defaulting tenant. It cited a slew of Illinois cases spanning nearly five decades that found a non-breaching landlord met its duty to mitigate by actively vetting prospects and trying to sublease the property in question. Here, the dissent felt that the landlord unreasonably refused to entertain a sublease or new lease with any of the three businesses introduced by the defendant.
There is a legally significant difference between an offer to sublease and an actual sublease. A defaulting tenant has the burden of proving that its subtenant is ready, willing and able to assume the tenancy. If all the tenant brings to a landlord is an offer or a proposal, this won’t trigger the landlord’s obligation not to unreasonably refuse consent to a commercially viable subtenant.
A landlord who fails to promptly try to re-let empty property or who doesn’t take an offered subtenant seriously, risks a finding that it failed to meet its duty to mitigate its damages after a prime tenant defaults.