Commercial Lease Defaults & Mitigation

A Conveyance in New York, a Contract Everywhere Else: The Mitigation Split

New York anchors the no-duty pole, and it gets there on property law. "The law imposes upon a party subjected to injury from breach of contract, the duty of making reasonable exertions to minimize the injury," but "unlike executory contracts, leases have been historically recognized as a present transfer of an estate in real property" — so "[o]nce the lease is executed, the lessee’s obligation to pay rent is fixed according to its terms and a landlord is under no obligation or duty to the tenant to relet, or attempt to relet abandoned premises in order to minimize damages" Holy Properties Ltd. v. Kenneth Cole Productions, Inc., 87 N.Y.2d 130 (N.Y. 1995). On abandonment the landlord holds three options: it can "do nothing and collect the full rent due under the lease," it can "accept the tenant’s surrender, reenter the premises and relet them for its own account thereby releasing the tenant from further liability for rent," or it can "notify the tenant that it was entering and reletting the premises for the tenant’s benefit." And the parties can contract past even an eviction, because "the parties to a lease are not foreclosed from contracting as they please": "[i]f the lease provides that the tenant shall be liable for rent after eviction, the provision is enforceable."

The contract view owns the rest of the map. New Jersey pivoted first — Sommer v. Kridel, 378 A.2d 767 (N.J. 1977) declared that "the distinction between a lease for ordinary residential purposes and an ordinary contract can no longer be considered viable," held that "antiquated real property concepts which served as the basis for the pre-existing rule, shall no longer be controlling," and put the burden on the landlord to prove "that he used reasonable diligence in attempting to re-let the premises" — and the Appellate Division carried the rule into the commercial setting, concluding that "reason and logic, as well as public policy, support the extension of the mitigation of damage requirements to commercial lease settings," including "denying the injured party the opportunity to sit idly by and exacerbate damages; discouraging economic and physical waste; and society’s interest in encouraging that vacant property be put to a practical use as soon as possible" Fanarjian v. Moskowitz, 568 A.2d 94 (N.J. Super. Ct. App. Div. 1989). Texas reached the same place, then hardened it. Austin Hill Country Realty, Inc. v. Palisades Plaza, Inc., 948 S.W.2d 293 (Tex. 1997) recognized "a duty to make reasonable efforts to mitigate damages when the tenant breaches the lease and abandons the property, unless the commercial landlord and tenant contract otherwise" — a duty of "objectively reasonable efforts to fill the premises" that "is not an absolute duty," since "[t]he landlord is not required to simply fill the premises with any willing tenant; the replacement tenant must be suitable under the circumstances," with "the tenant properly bear[ing] the burden of proof" and failure to mitigate barring recovery "only to the extent that damages reasonably could have been avoided." Two months later the legislature closed the contract-around: Tex. Prop. Code § 91.006 provides that "[a] landlord has a duty to mitigate damages if a tenant abandons the leased premises in violation of the lease" and that "[a] provision of a lease that purports to waive a right or to exempt a landlord from a liability or duty under this section is void." Illinois skipped the common-law step entirely: 735 ILCS 5/9-213.1 commands that "a landlord or his or her agent shall take reasonable measures to mitigate the damages recoverable against a defaulting lessee."

Acceleration clauses are the second front, and courts police them as liquidated damages even where no mitigation duty exists. 172 Van Duzer Realty Corp. v. Globe Alumni Student Assistance Association, Inc., 24 N.Y.3d 528 (N.Y. 2014) reaffirmed that a New York landlord is "within its rights under New York law to do nothing and collect the full rent due under the lease" and held that "the acceleration clause is not per se invalid merely because the landowner terminated the lease and the tenant is no longer in possession" — but the tenants "should have been permitted to present evidence in support of their contention that the undiscounted acceleration of all future rents constitutes an unlawful penalty," because a provision requiring damages "‘grossly disproportionate to the amount of actual damages provides for [a] penalty and is unenforceable,’" and "[t]he burden is on the party seeking to avoid liquidated damages . . . to show that the stated liquidated damages are, in fact, a penalty." Massachusetts runs the same test — Cummings Properties, LLC v. National Communications Corp., 869 N.E.2d 617 (Mass. 2007) held that "[a] rent acceleration clause, in which a defaulting lessee is required to pay the lessor the entire amount of the remaining rent due under the lease, may constitute an enforceable liquidated damages provision so long as it is not a penalty," enforceable where "at the time the contract was made, actual damages were difficult to ascertain and the sum agreed on by the parties as liquidated damages represents a reasonable forecast of damages expected to occur in the event of a breach" — and, for commercial agreements between sophisticated parties, "it may be presumed that the parties intended the provision to apply only to those material breaches for which it may properly be enforced."

The mitigation fight is won or lost at drafting and in the first month after abandonment. In New York, the landlord can stand on the lease — but should paper any reletting as for the tenant’s account, because reentry for the landlord’s own account releases the tenant from future rent. In Texas and Illinois, open the reletting file immediately — list the space, respond to inquiries, document showings and rejected prospects — because the tenant will plead failure to mitigate as an affirmative defense and Texas voids any lease provision purporting to waive the duty. Tenants facing an acceleration clause should concede the concept and attack the math: demand present-value discounting, quantify the gap between the accelerated stream and any plausible actual loss, and make the landlord explain why keeping both the premises and the full undiscounted rent is not a penalty.