Does a Commercial Landlord Have a Duty to Mitigate Damages After a Tenant Breaches the Lease Agreement?

Generally, a commercial landlord does not have a duty to mitigate or reduce its damages after a tenant breaches the commercial lease agreement.  See Coast Fed. Savs. & Loan Ass’n v. DeLoach, 362 So. 2d 982, 984 (Fla. 2d DCA 1978).  However, there is an exception where the commercial landlord retakes possession of the premises for the benefit of the tenant.  Nevertheless, the better practice may be for commercial landlords and property managers to always attempt to mitigate damages.

Available options upon a tenant’s breach of a lease agreement.

If a written lease agreement exists, the written lease agreement would govern the rights and obligations of the parties upon a breach of the lease agreement by the tenant. However, absent a provision in the lease agreement, a landlord generally has the following three alternative courses of action when a tenant breaches the lease agreement:
Option 1:   The landlord may treat the lease as terminated and retake possession for the landlord’s own account, thus terminating any further liability on the part of the tenant;
Option 2:   The landlord may retake possession of the premises for the account of the tenant, holding the tenant liable for the difference between rent stipulated to be paid under the lease agreement and what, in good faith, the landlord is able to recover from reletting the premises; or
Option 3:   The landlord may stand by and do nothing, holding the tenant liable for the rent due as it matures or all remaining rent due if there is an acceleration clause in the lease agreement and the landlord exercises its option to accelerate rent.
See Coast Fed. Savs. & Loan Ass’n v. DeLoach, 362 So. 2d 982, 984 (Fla. 2d DCA 1978).

Option 1:  Treating the lease as terminated and retaking possession for the landlord’s own account.

Exercising Option 1 is generally not preferable to a commercial landlord because it results in the surrender and termination of the lease agreement thereby eliminating all of the tenant’s unaccrued or future rent obligations.  See Hudson Pest Control v. Westford Asset Mgmt., 622 So. 2d 546, 549 (Fla. 5th DCA 1993).  As such, the duty to mitigate damages is not applicable to Option 1 because the lease agreement and obligations of the tenant terminate.
Since Option 1 will result in the termination of the lease agreement, commercial landlords need to exercise caution when deciding whether to retake possession of the leased premises after breach of the lease agreement by the tenant.  In this situation, a factual question typically arises as to whether the landlord has retaken possession for its own account (Option 1) or for the account of the tenant (Option 2).  Id. at 549.
For example, what happens when a commercial landlord retakes possession of a leased premises and occupies the premises itself?  Is the landlord occupying the premises for its own account (Option 1) or for the account of the tenant (Option 2)?  The actual use of the leased premises by the landlord will likely determine whether the landlord has retaken possession for its own benefit or for the benefit of the tenant.  Id. at 550 (“Occupancy of the premises by the landlord and its operation and use by the landlord does not under all circumstances amount to a surrender by operation of law.”).
In Hudson Pest Control, the court found that the landlord retook possession of the premises for the account of the tenant despite the fact that the landlord retook possession of the premises and used the premises as the landlord’s rental office.  Id. at 549.  The trial court found that the landlord furnished and occupied the premises thereby increasing the attractiveness of the premises and the likelihood that it would be relet.   Id. at 549-50.  The trial court also found that the landlord was not benefiting from the premises because the landlord had other vacant spaces that it could have easily used and it was prepared to move out quickly if a new tenant was located.  Id.
In sum, the express intent of the landlord not to accept a surrender of the lease agreement is an important factor in finding that the landlord took possession of the premises for the account of the tenant. Therefore, it is common practice for commercial landlords to inform tenants in writing that the landlord is retaking the premises solely for the benefit of the tenant.  By putting this intention in writing, a landlord can document its intent to pursue Option 2 and not Option 1.

Option 2: Retaking possession of the premises for the account of the tenant.

For most landlords, Option 2 is the preferable option because it allows the commercial landlord to secure a new tenant (and future rental income) while keeping the former tenant liable for all unrecovered rent.  However, if a commercial landlord chooses Option 2, the landlord has a duty to mitigate damages.
Specifically, if a landlord selects Option 2, upon retaking the premises the landlord has a duty to exert reasonable efforts to relet the premises, which is essentially a mitigation of damages. See Fairway Mortg. Sols., Inc. v. Locust Gardens, 988 So. 2d 678, 681 (Fla. 4th DCA 2008) (holding that a landlord did not have a duty to relet the premises or mitigate damages until the landlord retook the premises). Stated differently, the landlord must make a good faith effort to find a new tenant to rent the premises at a fair market value.  See Hudson Pest Control, Inc., 622 So. 2d at 549. If the landlord secures a new tenant, the landlord must give the prior tenant a credit for any rents obtained from the new tenant during the remainder of the prior tenant’s lease term.  Id.
For example, in Fairway Mortg. Sols., Inc., the court held that a commercial landlord satisfied its duty to mitigate damages by reletting the premises within three months of retaking the premises despite the fact that the landlord allegedly rented other properties to prospective tenants before it rented the prior tenant’s premises.  Fairway Mortg. Sols., Inc., 988 So. 2d at 678.
Therefore, as long as a landlord makes reasonable, good faith efforts to secure a new tenant, the landlord will likely satisfy its duty to mitigate damages even if the landlord is unable to immediately secure a new tenant.  In order to document the good faith efforts taken to mitigate damages, landlords and their property managers should keep a record or log of all of the steps taken to locate a new tenant, which such steps should be similar to actions taken to lease other similar commercial properties owned by the landlord (if applicable).

Option 3: Stand by and do nothing.

Option 3 is not commonly utilized by commercial landlords for various reasons.  Most notably, it may result in the premises remaining vacant for a long period of time without any rental income.  Also, if the prior tenant is insolvent, the landlord’s failure to relet the premises may be more harmful to the landlord than to the prior tenant.  Nevertheless, there is no duty to mitigate damages under Option 3.
In Hudson Pest Control, Inc., the Fifth District Court of Appeal noted that it could not locate any appellate cases where Option 3 was chosen.  Hudson Pest Control, Inc., 622 So. 2d at 549.  Additionally, the Fifth District Court of Appeal acknowledged that Option 3 “seems at odds with the law in other jurisdictions, as well as [Option 2], which clearly requires a landlord to mitigate damages.”  Id.
Additionally, if there is an acceleration clause in the lease agreement, the landlord cannot double-dip by collecting accelerated rent from the prior tenant while reletting the premises to a new tenant for the remainder of the lease term and retaining all rental proceeds.  See Horizon Med. Grp., P.A. v. City Ctr. of Charlotte Cty., Ltd., 779 So. 2d 545, 546 (Fla. 2d DCA 2001).  Any rental proceeds received from reletting the premises during the remainder of the lease term would have to be applied against the accelerated rent.  Id.  Additionally, if the landlord obtains a final judgment against the tenant that breached the lease agreement, the final judgment should include a reservation of jurisdiction to consider a motion for an accounting should the landlord relet the premises during the remainder of the lease term.  Id.

Good Practice:  Attempt to mitigate damages.

While the law supports the position that a landlord has no legal duty to mitigate damages unless it retakes possession for the account of the tenant, judges may be reluctant to hold tenants liable for unpaid rent when the landlord has failed to take any efforts whatsoever to relet the premises. Even minimal efforts to relet the premises may present a more favorable impression to a judge in the event a landlord seeks to hold a tenant responsible for the entire amount of unpaid rent under the lease agreement.  Therefore, it is good practice for commercial landlords to make good faith attempts to mitigate their damages after a tenant breaches the lease agreement.

Authors:

• Austin T. Hamilton, Esquire
• Melissa Murrin, JD Candidate