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Landlord's Duty to Mitigate Damages

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Landlord's Duty to Mitigate Damages

Postby TenantNet » Fri Sep 07, 2012 10:10 am

LANDLORD-TENANT: MITIGATING DAMAGES
Landlord's Duty May Depend on Where You Live
New York Law Journal, December 4, 2001
by Warren A. Estis and William J. Robbins

Where a tenant has abandoned the premises, and assuming the court finds there was no legal justification for doing so, does a landlord have a duty to mitigate damages? This is an issue which may be particularly relevant post-Sept. 11, when some tenants with leases for premises near ground zero may seek to abandon those premises.

The law is clear that in a commercial lease, the landlord has no duty to mitigate damages where the tenant has abandoned the premises. This means that a commercial landlord can refuse to re-rent the premises and can sit idly by while damages pile up on the tenant during the remainder of the lease.

This rule originated in feudal times. According to English common law, a lease (whether for commercial or residential property) was deemed to be a contract of sale of a vested interest in real estate. Rent was deemed to be the purchase price, to be paid in regular installments. Once the tenant "bought" the property, he was obligated to pay the full purchase price, even if he no longer intended to use the premises.{[1]}†

'Holy Properties'

The New York Court of Appeals reaffirmed this doctrine in a 1995 decision in Holy Properties, Ltd. v. Kenneth Cole Productions, Inc.{[2]}† In that case, the tenant had entered into a written lease for premises in a commercial office building for a ten year lease term. After approximately seven years, following a change of owners and an alleged deterioration in the level and quality of building services, the tenant vacated the premises. The new owner then commenced a summary eviction proceeding and obtained a judgment and warrant of eviction. Subsequently, the new owner instituted a Supreme Court action seeking rent arrears and damages.

At trial, the tenant asserted, as an affirmative defense, that the landlord had failed to mitigate damages by deliberately failing to show or offer the premises to prospective replacement tenants. The Supreme Court entered judgment for the landlord, holding that the tenant had breached the lease without cause and that the landlord had no duty to mitigate damages. The Appellate Division affirmed.

The Court of Appeals affirmed the order of the Appellate Division, holding that:

"Once the tenant abandoned the premises prior to the expiration of the lease, . . . the landlord was within its rights under New York law to do nothing and collect the full rent due under the lease."{[3]}†

In support of that holding, the Court cited three Court of Appeals decisions from the 19th century, namely, Becar v. Flues,{[4]}† Underhill v. Collins,{[5]}† and Matter of Havenor.{[6]}†

In Holy Properties, the Court of Appeals explained the theory behind the no-mitigation rule as follows:

"The law imposes upon a party subjected to injury from breach of contract, the duty of making reasonable exertions to minimize the injury . . . Leases are not subject to this general rule, however, for, unlike executory contracts, leases have been historically recognized as a present transfer of an estate in real property . . . Once 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."{[7]}†

The Court of Appeals "decline[d]" to "reject this settled law and adopt the contract rationale recognized by some courts in this State and elsewhere" because:

"Parties who engage in transactions based on prevailing law must be able to rely on the stability of such precedents. In business transactions, particularly, the certainty of settled rules is often more important than whether the established rule is better than another or even whether it is the 'correct' rule . . . . This is perhaps true in real property more than any other area of the law, where established precedents are not lightly to be set aside."{[8]}†

Where a residential lease is involved, however, the duty to mitigate issue is more clouded. There is a 1997 Appellate Term, First Department decision, in Whitehouse Estates, Inc. v. Post,{[9]}† which applied the no mitigation rule in a residential context. In that case, the court quoted the no mitigation rule as set forth in Holy Properties. The court conceded that "a commercial tenancy was the subject of the litigation in Holy Properties, but nevertheless, in the context of the residential tenancy before it, applied the "settled higher authority which relieves a landlord of any obligation to mitigate damages where the tenant has abandoned the premises prior to the expiration of the lease term."

In Whitehouse Estates, the Appellate Term, First Department specified two grounds for applying the no mitigation rule in a residential context. The court pointed out that it had not been referred "to any case decided by the Appellate Division expressly adopting a duty to mitigate in residential cases." The court also stated that:

"[N]either the language nor reasoning employed in the [Holy Properties] decision signals an intent on the part of the Court of Appeals to abrogate the no-mitigation rule in the context of residential landlord and tenant relationships."{[10]}†

The Appellate Term, First Department in Whitehouse Estates did not expand upon its comment concerning the language and reasoning of Holy Properties, except (i) to state in a footnote that the case of Becar v. Flues, cited with approval by the Court of Appeals in Holy Properties, involved a residential lease, and (ii) to cite the case of Duda v. Thompson.{[11]}†

Duda v. Thompson is a Supreme Court, Westchester County case (Donovan, J.), decided approximately eight months after Holy Properties, in which the court concluded that a residential landlord was under no duty to mitigate damages. The court rejected the tenant's argument that, with respect to the issue of mitigation, there should be a distinction between commercial and residential leases.

The Duda v. Thompson court stated that it was "apply[ing] Holy Properties as it more plainly reads, without distinction as to the lack of mitigation obligation based on the character of the lease itself." Justice Donovan noted "the obvious approval by the Court of Appeals [in Holy Properties] of its own Becar v. Flues residential lease holding" and commented that "the high court itself [in Holy Properties] makes no such distinction between the two types of leases." He also reasoned that:

"[T]he stated legal theory underpinning the holding [in Holy Properties] i.e., that leases, unlike contracts, constitute present transfers of estates solidifying the obligation to pay the full rent, would be vastly contradicted by attempting to continue any such distinction [between residential and commercial leases]."{[12]}†

'Paragon'

It does not appear that any other appellate courts have followed Whitehouse Estates in holding that the no mitigation rule applies in a residential context. In fact, Whitehouse Estates is contradicted by Appellate Term authority from the Second Department that pre-dates it. In a 1983 decision in Paragon Industries, Inc. v. Williams,{[13]}† the Appellate Term, 2nd and 11th Judicial Districts, expressly held that a residential landlord has a duty to mitigate damages:

"[T]his court . . . has not previously had occasion to pass upon the issue of the landlord's duty to mitigate. We now hold that a landlord has such a duty."{[14]}†

The court characterized its holding as part of the trend of modernizing traditional concepts of landlord and tenant law.

In a 1987 decision in Syndicate Building Corp. v. Lorber,{[15]}† the Appellate Division, First Department cited Paragon Industries in support of the statement that courts in New York have "imposed the duty to mitigate damages upon residential landlords." The Syndicate Building Corp. case involved a commercial lease and, therefore, the Appellate Division, First Department did not have to reach the issue of whether it agreed with Paragon Industries in imposing such a duty on residential landlords. In any event, however, the Appellate Division in Syndicate Building Corp. did not express disagreement with Paragon Industries and, indeed, contrasted the cases imposing a mitigation duty on residential landlords with "the contrary [being] true in the context of commercial leases."

Just as Paragon Industries is countervailing Appellate Term authority to Whitehouse Estates, so, too, there is Supreme Court authority contrasting to Duda v. Thompson. In a 1997 decision in Kabushi Kaysha Iwasa Tekkojo v Comico Entertainment, Inc.,{[16]}† the Supreme Court, New York County (Greenfield, J.) expressly took issue with Duda v. Thompson. Justice Greenfield commented that the Court of Appeals holding in Holy Properties:

"[D]eals only with a commercial lease which expressly provided that the landlord was under no duty to mitigate damages. The decision does not purport to overrule the many cases requiring a landlord of residential premises to make a showing of good faith to minimize damages."{[17]}†

In an earlier column discussing Holy Properties shortly after that Court of Appeals decision was issued, we similarly expressed the view that "the Holy Properties holding is properly read as only applying to commercial leases."{[18]}†

In a 1986 decision in Goldman v. Orange County Chapter, New York State Association for Retarded Children, Inc.,{[19]}† the Appellate Division, Second Department, commented that whether or not a residential landlord has a requirement to mitigate damages "is subject to question."

Fifteen years later, it would seem that the same comment could still be made. There is no Court of Appeals decision, and there does not appear to be any Appellate Division authority, expressly holding whether a residential landlord does or does not have a duty to mitigate. There are conflicting Appellate Term decisions.

To the extent that the nature of the lease (i.e., commercial versus residential) makes a difference with respect to a landlord's duty to mitigate damages, the question logically arises why that should be. The cases do not answer that question. In the first article we wrote on the mitigation issue approximately eight years ago, we speculated on possible reasons for a variation in treatment.{[20]}†

Perhaps the difference in treatment is explained by an unarticulated belief that residential tenants both require and deserve more protection than commercial tenants. Without expressly saying so, the courts may regard residential tenants as less sophisticated and less armed with legal advice than commercial tenants when negotiating a lease.

It may also be psychologically more difficult for a judge to allow a landlord to let damages accumulate and increase in a residential context than in a commercial context. Damages against a residential tenant are likely to come out of a person's pocket. Damages against a commercial tenant are likely to be corporate or partnership liability, perceived as a more impersonal liability.

Perhaps there is also an unspoken notion that a residence is more essential than a place of business. The courts may therefore find it more objectionable that a landlord would keep vacant residential space off the market as compared to vacant commercial space.

As we pointed out in that earlier article, however, any such unspoken considerations may be more sentimental than realistic. In the luxury residential rental market, for example, tenants can afford to and do hire sophisticated counsel to represent them in lease negotiations. Conversely, many commercial leases are for "mom-and-pop" stores. These are precisely the kind of businesses that are abandoning long-term leases negotiated years ago at rentals that are now far above market.

If no cogent reasons can be advanced for different treatment, and given that the Court of Appeals has been so definitive that there is no duty to mitigate with respect to a commercial lease, do these circumstances militate in favor of a no-mitigation rule for residential leases? On the other hand, is there likely to be a post-Sept. 11 sympathy for the plight of tenants that, pragmatically, makes unlikely any definitive expansion of the no mitigation rule to the residential context?

In short, the issue of duty to mitigate in a residential lease is a quagmire that both cries out for express guidance from the Appellate Division or the Court of Appeals and, at the same time, perhaps has been complicated by current events. Warren A. Estis is a founding partner and William J. Robbins is a partner with Rosenberg & Estis in New York.

--------------------------
FootNotes: [1]

††† See Rasch, N.Y. Landlord and Tenant, §26:22 (3rd ed. 1988). [2]
††† 87 N.Y.2d 130, 637 N.Y.S.2d 964 (1995). [3]
††† 87 N.Y.2d at 134, 637 N.Y.S.2d at 966. [4]
††† 64 N.Y. 518 (1876). [5]
††† 132 N.Y. 269 (1892). [6]
††† 144 N.Y. 271 (1895). [7]
††† 87 N.Y.2d at 133, 637 N.Y.S.2d at 966. [8]
††† 87 N.Y.2d at 134, 637 N.Y.S.2d at 966. [9]
††† 173 Misc.2d 558, 662 N.Y.S.2d 982 (A.T. 1st Dep't 1997). [10]
††† 173 Misc.2d at 559, 662 N.Y.S.2d at 982. [11]
††† 169 Misc.2d 649, 647 N.Y.S.2d 401 (Sup. Ct. Westchester Co. 1996). [12]
††† 169 Misc.2d at 652, 647 N.Y.S.2d at 404. [13]
††† 122 Misc. 2d 628, 473 N.Y.S.2d 92 (A.T. 2nd Dep't 1983). [14]
††† 122 Misc.2d at 629, 473 N.Y.S.2d at 93. [15]
††† 128 A.D.2d 381, 512 N.Y.S.2d 674 (1st Dep't 1987). [16]
††† N.Y.L.J., April 16, 1997, p. 25, col. 2, 25 HCR 205 (Sup. Ct. N.Y.Co.
1997). [17]
††† 25 HCR at 206. [18]
††† Warren A. Estis and William J. Robbins, "Commercial Leases: Court
Affirms Landlord Has No Duty To Mitigate Damages", N.Y.L.J., Feb. 7, 1996,
at 5. [19]
††† 121 A.D.2d 683, 503 N.Y.S.2d 884 (2nd Dep't 1986). [20]
††† Warren A. Estis, "Feudalism Is Alive and Well: The 'No Duty To
Mitigate' Rule for Commercial Landlords", N.Y.L.J., Oct. 16, 1993, at 5.
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Does a Landlord Have a Duty To Mitigate? No, but Maybe

Postby TenantNet » Fri Sep 07, 2012 10:25 am

Does a Landlord Have a Duty To Mitigate? No, but Maybe
Sateesh Nori
New York Law Journal
08-30-2012

A lease is both a contract between parties -- ­the landlord and the tenant -- and an interest in land. However, this duality has created conflict in determining whether a landlord has a duty to mitigate damages in the event of a tenant's early termination of a lease. The rule that a landlord has a duty to mitigate derives from basic principles of contract law. The doctrine that the landlord has no duty to mitigate, which views a lease not as a contract but as an interest in land, was seemingly mandated by the Appellate Division, Second Department, in Rios v. Carrillo in 2008. Now, four years later, uncertainty still abounds as courts waver in applying contract principles to lease breaches and carve exceptions into the rule that a landlord has no duty to mitigate. This article attempts to identify the factors relied upon by courts where a duty to mitigate has been applied in contravention of established case law.

Development of Case Law

The traditional rule was that damages for breach of contract are only those that are incidental to, and directly caused by, the breach, and may reasonably be presumed to have entered into the contemplation of the parties. Such damages, under the traditional rule, are not for speculative profits, or accidental or consequential losses. Hamilton v. McPherson, 28 N.Y. 72 (N.Y. 1863). Principles of contract law support the duty to mitigate because contract law encourages efficiency and discourages economic and physical waste. The duty to mitigate often results in a more productive use of property by requiring re-letting by the landlord upon breach. Re-letting decreases the possibility of harm to the property that may happen due to abandonment, prevents landlords from underusing their property, and prevents the landlord from unreasonably allowing damages to accumulate on abandoned property.

Under the rule described in Hamilton, the law imposes upon a party subjected to injury from a breach of contract by the other party, the active duty of making reasonable exertions to render the injury as light as possible (a duty to mitigate). In Hamilton, the Court of Appeals wrote: "…if the injured party, through negligence or willfulness, allows the damages to be unnecessarily enhanced, the increased loss justly falls upon him." Id at 72.

However, in Becar v. Flues, 64 N.Y. 518 (1876), the Court of Appeals changed course and established the rule in New York State that a residential landlord has no duty to mitigate.

In Becar, the court declined to follow the Hamilton rule for contact interpretation, finding instead that "a parol lease for a year, to commence in futuro, is valid and obligatory." Id at 520. In other words, the court held that a lease, unlike other contracts, is like the sale of personal property, where a defaulting purchaser is liable for breach.

Changing course again, in the 1980s New York courts found that residential landlords had a duty to mitigate. See Paragon Industries v. Williams, 122 Misc.2d 628, 473 N.Y.S.2d 92, 93 (App. Term 2d Dept. 1983); See also Syndicate Bldg. v. Lorber, 128 A.D.2d 381, 512 N.Y.S.2d 674 (1st Dept. 1987) (acknowledging the duty of a landlord to mitigate damages in the residential context). These courts seemingly viewed leases as contracts and interpreted contractual breaches with the goal of efficient mitigation of losses.

A century after Becar, the Court of Appeals revisited this issue in Holy Properties v. Kenneth Cole Productions, 637 N.Y.S.2d 964 (1995). In that case, defendant Kenneth Cole Productions entered into a written lease for premises in a commercial office building at 29 W. 57 St. in Manhattan. The term was to commence on Jan. 1, 1985, and end on Dec. 31, 1994. In December 1991, following a change of owners and an alleged deterioration in the level and quality of building services, defendant vacated the premises. Shortly thereafter, the new owner, plaintiff Holy Properties Limited, L.P., commenced a summary eviction proceeding against defendant for the nonpayment of rent. It obtained a judgment and warrant of eviction on May 19, 1992, and subsequently instituted this action seeking rent arrears and damages.

At trial, defendant asserted, as an affirmative defense, that plaintiff had failed to mitigate damages by deliberately failing to show or offer the premises to prospective replacement tenants. The Supreme Court entered judgment for plaintiff, holding that defendant had breached the lease without cause and that plaintiff had no duty to mitigate damages. The Appellate Division affirmed. The Court of Appeals, relying on the distinction carved out in Becar that a lease is different from other contracts and therefore there is no duty to mitigate, also affirmed, setting in place the no duty to mitigate rule­ -- at least for commercial leases.

Following Holy Properties, the rule that landlords did not have a duty to mitigate was extended by courts to residential leases. See Duda v. Thompson, 169 Misc.2d 649, 647 N.Y.S.2d 401 (Sup. Ct. Westchester Co. 1996); Whitehouse Estates v. Post, 173 Misc.2d 558, 662 N.Y.S.2d 982 (App. Term 1st Dept. 1997); Olim Realty v. Big John's Moving, 250 A.D.2d 744, 673 N.Y.S.2d 439 (2d Dept. 1998); 85 John Street Partnership v. Kaye Ins. Associates, 261 A.D.2d 104, 689 N.Y.S.2d 473 (1st Dept. 1999).

Still, the issue remained unsettled. In 2004, a court in the First Department found that there was a duty to mitigate on the part of residential landlords. The court held:

The concept that a landlord can hold a residential tenant hostage to the terms of a lease, doing nothing and permit damages to accrue when leased premises are readily marketable is clearly contrary to common sense, the reasonable expectations of the public, and notions of justice and equity. It is already harsh justice which imposes an indefinite obligation upon a guarantor of a residential lease. To superimpose upon this harsh result the right of a landlord to make no effort to minimize damages is unconscionable, and violative of public policy. 29 Holding v. Diaz, 3 Misc.3d 808, 775 N.Y.S.2d 807 (Sup. Ct. Bronx Co. 2004).


A court in the Second Department followed, ruling in 2006 in Lora Equities v. Galindo, 12 Misc.3d 1104, 1105, 821 N.Y.S.2d 377, 378 (Civ. Ct. Kings Co. 2006) that "…in this judicial district, a landlord does have a duty to mitigate damages when a tenant leaves before the end of its term." Id at 1106.

The issue was addressed by the Second Department in 2008 in Rios v. Carrillo, 53 A.D.3d 111, 861 N.Y.S.2d 129, which stated that "[w]e reiterate the principle that, in the absence of legislative direction to the contrary, common-law principles control and contrary to lower court authority, an assessment of damages should not require the prevailing party to mitigate damages." Id. at 129. Rios pronounced that even in a residential lease, the landlord has no duty to mitigate damages.

After 'Rios'

The legal landscape after Rios was no less uncertain for landlords and tenants. The temptation to apply contract principles to breaches of leases proved too tempting for many courts. One court described the Holy Properties rule as "harsh." Jonassen v. Kirtland, 24 Misc.3d 1241(A), 899 N.Y.S.2d 60 (City Ct. Ithaca 2009) This court found it unreasonable to apply the no mitigation rule in certain cases, writing:

Feudal real property concepts are significant to seasoned real property lawyers negotiating a lease with brokers for commercial multi-million dollar parties, but are inappropriate to consumer lease rules where a tenant is homeless and a landlord can re let the property without effort in a tight market. Id.


Thus economics played a role in this court's decision on whether to apply a long-standing rule. In essence, the court sought to prevent the unjust enrichment of a landlord who sought to avoid mitigation of damages.

The Appellate Term, Second Department, just a few months after Rios, held that a landlord could be estopped from asserting that it had no duty to mitigate. Salvia v. Dyer, 21 Misc.3d 140(A), 875 N.Y.S.2d 823 (App. Term 2008). In that case, the landlord affirmatively attempted to relet the apartment, and having failed to find a new tenant, was barred from claiming that it had no duty to mitigate.

The court in Salvia also held that "[a] landlord's conduct may indicate his intent to terminate the lease and use the property for his own benefit, thereby releasing a tenant from further liability for rent." Id; See also Deer Hills Hardware v. Conlin Realty, 292 A.D.2d 565 (2d Dept. 2002).

Courts in the First Department were also tempted to apply equitable estoppel as a bar to the no duty to mitigate rule. Frebar Dev. v. Posner, 33 Misc.3d 1210(A), 941 N.Y.S.2d 537 (Sup. Ct. New York Co. 2010). In Hamblin v. Bachman, 23 Misc.3d 1116(A), 885 N.Y.S.2d 711 (City Ct. Rochester 2009), the landlord undertook repairs to the abandoned premises, and was thereby estopped from claiming that it had no duty to mitigate.

In July 2012, in Kings Holding v. Terrick, CV-118388-08/KI (Civil Ct. Kings Co.), NYLJ, July 2, 2012, a Civil Court judge in Brooklyn held that while there was no duty to mitigate, a landlord's damages are limited if the tenant surrendered the premises by operation of law. This court acknowledged the rule in Rios, but was reluctant to grant the landlord damages for the full period of the contractual breach since the tenant had taken clear steps to surrender the apartment. In August 2012, in Ilishaeva v. U-Buy-1 Realty, yet another Civil Court Judge in Kings County relied on Holy Properties to find that a landlord had no duty to mitigate, but recognized the ambiguity in the legal precedents on the issue.

In the four years since Rios v. Carrillo held that there is no duty to mitigate on the part of residential landlords, few cases have relied on Rios (only about seven published decisions referenced the case, and even fewer relied on it). Nonetheless, that there is no duty to mitigate on the part of residential landlords remains a default rule and is followed by both the First and Second departments. However, since 2008, contract principles have become employed with higher frequency, and the language used in the context of residential leases has begun to resemble more and more the language used in the context of contract cases.

Concepts such as equitable estoppel­ -- precluding a landlord from avoiding mitigation where it has taken affirmative steps to mitigate -- ­and unjust enrichment have crept into the courts' vocabulary. As a result, both the First and Second departments have begun carving out exceptions to the default rule. There is no indication that courts will stop creating ways to avoid following Holy Properties and Rios. So does a landlord have a duty to mitigate? No, but maybe.

Sateesh Nori is the director of housing litigation at Bedford Stuyvesant Community Legal Services. Olga Peshko, a summer associate, assisted in the preparation of this article.
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