The Commercial Landlord's Duty to Mitigate Damages
| Publication year | 1992 |
| Pages | 1401 |
1992, July, Pg. 1401. The Commercial Landlord's Duty to Mitigate Damages
Over the course of this century, there has been a substantial shift in the way the common law of Colorado has viewed the obligation of a landlord of commercial property to mitigate damages after the tenant has breached the lease. This article examines the shift and questions whether recent decisions comport with a wise public policy.
Earlier in the twentieth century, the question concerning a commercial landlord's duty to mitigate damages was not an issue. The "black letter" property law was that a landlord had a clear-cut option when the tenant breached the lease. The landlord could elect to do nothing and hold the tenant liable for all rent for the remainder of the term. Alternatively, the landlord could recover or accept surrender of possession of the premises, in which case the lease would be terminated and the tenant thereby would be relieved of the duty to pay further rent.(fn1) In neither case was the landlord under a duty to re-lease the premises to reduce the tenant's liability for rent.
This rule of law placed the landlord in a dilemma. On one hand, the landlord could allow a defaulting tenant to remain on the premises without receiving a current stream of rent, with the possibility of never being able to collect anything. On the other hand, if the landlord should take back possession of the premises, the benefit of the lease bargain with the tenant would be sacrificed. To deal with this problem, it became a common practice to draft commercial leases so as to allow the landlord to recover possession of leased premises and re-lease them to be credited against the tenant's indebtedness on the lease, without terminating the tenant's ongoing rent obligation. Such clauses were strictly construed by the courts,(fn2) but routinely enforced.(fn3)
In the 1987 case of Schneiker v. Gordon,(fn4) the Colorado Supreme Court thoroughly revisited the subject of the rights and duties of a landlord of commercial property on the tenant's default. In Schneiker, the court noted that a modern commercial lease has many of the attributes of a garden-variety contract and that contract principles, rather than strict property law principles, should apply in determining a commercial landlord's obligation to mitigate damages.(fn5)
Following general contract law, the court held that a commercial landlord is under an affirmative duty to mitigate damages after the tenant has surrendered or abandoned the leased premises.(fn6) Conversely, a commercial landlord may recover from a defaulting tenant possession of the leased premises without terminating the defaulting tenant's ongoing obligation to pay rent.(fn7)
The case law repeatedly concludes that a commercial landlord must exercise "reasonable efforts" to mitigate damages. While this duty is stated easily, its application is not always as easy.
The essence of a commercial landlord's duty to mitigate damages is to attempt to re-lease the leased premises. The efforts to re-lease then are subject to the defaulting tenant's scrutiny from the perspective of hindsight. The tenant legitimately may question every aspect of the landlord's efforts to re-lease the premises, including the amount of rent sought,(fn8) the cleaning and remodeling of the premises to make them more desirable for releasing(fn9) and the methods used for releasing.(fn10)
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