• The Duty to Mitigate Damages - What is a Commercial Landlord to Do?
  • May 19, 2003 | Author: David W. Woodburn
  • Law Firm: Buckingham, Doolittle & Burroughs, LLP - Akron Office
  • In today's depressed economy, many commercial landlords are finding themselves in the precarious position of having tenants whose businesses are collapsing around them. As a natural consequence, tenants are often unable to pay their rent or comply with the terms of their lease agreement. In such instances, the commercial landlords are faced with a difficult decision on whether to evict the tenant or try and work through the difficult situation. Unfortunately, oftentimes the landlord does not get a chance to make such a decision when the tenant simply vacates the premises. In such an instance, it falls upon the commercial landlord to deal with the breach and seek redress for their damages. The question becomes, what does a commercial landlord have to do in such a situation? This article explains the landlord's options and duties.

    It has long been recognized under Ohio law that when a tenant to a residential lease vacates or abandons the premises, the landlord has a duty to mitigate its damages. Typically, the landlord tries to find new tenants who can replace the older tenant. Until this new tenant is secured, the breaching tenant remains liable for the missed rental payments and other responsibilities allocated to the tenant under the lease agreement.

    While this approach was applied to residential leases for decades, the same approach did not apply to commercial leases. For years, commercial landlords had no duty to mitigate their damages and tenants could be held responsible for the balance of the lease.

    In recent years, Ohio law has deviated from this position. Currently, the majority view among Ohio Courts is that a landlord in a commercial lease has a duty to mitigate damages once the tenant has abandoned the premises. This concept was first recognized by the courts in Newtowne Limited Partnership v. Pier 1 Imports (U.S.), Inc. In this case, the court recognized the general principle of contract law that one who suffers a breach must take reasonable steps to mitigate their damages. The court found that a commercial landlord should mitigate damages by attempting to relet the premises as quickly as possible.

    In the years since the Newtowne case, many courts throughout Ohio have followed this reasoning. From a legal standpoint this new approach makes sense. However, from an economic standpoint, this situation arguably places an unfair burden on landlords who are unable to find tenants and truly mitigate damages in a declining commercial market. That being said, a recent case from Montgomery County provides landlords with a new option to deal with breaching tenants. In Tincher v. Interstate Precision Tool , the Court agreed that a commercial landlord has a duty to make reasonable efforts to mitigate damages when a lessee vacates the property before the expiration of the lease, however, the Court held that the landlord's duty is to only use "reasonable efforts" to mitigate the damages. The term "reasonable efforts" was determined not to require a landlord to make extraordinary efforts to find a new tenant or attempt the unreasonable or impractical. The Court found that the method the landlord actually used to mitigate damages is not controlling, so long as the method employed is reasonable. In Tincher, the landlord reviewed the economic situation involving his commercial property and decided that attempts to sell the property would be more productive than attempts to relet the property. Accordingly, the landlord did not try to lease the premises but instead set out to have it sold. Despite the fact it took approximately one full year to sell, the Court found the landlord's actions to be reasonable and that the tenant was liable for the lease payments during this time frame.

    The Tincher case is significant because it provides landlords with another option on how to mitigate their damages. No longer must the landlord merely seek to relet the premises. Now the landlord has the ability to look at all the facts and circumstances and determine whether or not a sale of the property is more desirable. If that is the case, the landlord can essentially hold the tenant liable for rent payments as it tries to sell the property, thereby placing the burden of carrying the property on the tenant's shoulders. However, before merely deciding to sell the premises, a landlord should properly document the grounds upon which it is making its decision so as to establish that it was a "reasonable" decision.

    While the result of the Tincher case is only controlling in Montgomery County, its theory and rationale are sound. It makes sense that this same rationale could be applied to other cases throughout the state and that, with proper documentation, a landlord could seek to sell their property instead of merely reletting upon the tenant's breach. Obviously, this is an extremely beneficial situation for landlords and provides them with greater options.