Commercial Landlord's Duty to Mitigate
In a recent case, Circuit City Stores, Inc. v. Rockville Pike Joint Venture Limited Partnership
, the Court of Appeals of Maryland clarified Maryland law relating to a commercial landlord's duty to mitigate damages following a default by a tenant.
Under common law real property principles applicable to leases, a commercial landlord did not have any duty to undertake any efforts to mitigate damages, absent an agreement in the lease to the contrary. Under a contract, however, the common law imposed a duty to mitigate damages on the parties in the event of a breach by one of them.
Interestingly, by statute, residential landlords have long had the duty to mitigate damages. Section 8-207 of the Real Property Article of the Annotated Code of Maryland provides:
"(a) Duty to mitigate damages. - The aggrieved party in a breach of a lease has a duty to mitigate damages if the damages result from the landlord's or tenant's:
(1) Failure to supply possession of the unit;
(2) Failure or refusal to take possession at the beginning of the term; or
(3) Termination of occupancy before the end of the term.
(b) No obligation to lease vacated unit in preference to others. - The provisions of subsection (a) do not impose an obligation to show or lease, the vacated dwelling unit in preference to other available units.
(c) Sublease of unit where tenant does not take possession or vacates. - If a tenant wrongly fails or refuses to take possession of or vacates the dwelling unit before the end of his term, the landlord may sublet the dwelling unit without prior notice to the tenant in default. The tenant in default is secondarily liable for rent for the term of his original agreement in addition to his liability for consequential damages resulting from his breach, if the landlord gives him prompt notice of any default by the sublessee.
(d) Waiver prohibited. - No provision in this section may be waived in any lease.
Section 8-207 is applicable only to residential leases. Note that in a residential lease, a waiver of either party's duty to mitigate damages is not enforceable.
Since the legislature only changed the common law applicable to residential leases, many practitioners thought the common law rule of "no duty to mitigate damages" still protected commercial landlords. The Court has now clarified that there is, and has been, under contract principles, a common law duty to mitigate imposed even on commercial landlords in certain circumstances.
The Court ruled that, following a lease termination by the landlord, the landlord’s claim is one for money damages, and not for rent since the tenant no longer has a right to possession. The landlord's right to collect damages must be governed by contract law principles and not real property law principles. As a result, if a landlord terminates a lease, or accepts a surrender of possession of the premises, it has a duty to use reasonable efforts to mitigate damages.
The lessons, therefore, are (a) landlords should not rush to send termination letters to tenants, and (b) landlords should include a clause in their leases clearly negating any duty to mitigate damages, as a matter of contract law, even after the landlord terminates or retakes possession of the premises. Tenants, on the other hand, are advised to include provisions requiring landlord to (a) mitigate its damages even if it does not terminate the lease, or (b) terminate the lease as a condition of filing a claim for acceleration of rent or future damages.
This article is published for the clients and other friends of Whiteford, Taylor & Preston L.L.P. This article has been prepared for general informational purposes only and are not intended as legal advice.