Schiro Law Firm Blog

Landlord's Mitigation

What may a landlord do to recover lost rent on commercial property when there is still a substantial amount of time remaining on a defaulting tenant’s term?  A fairly common occurrence in business litigation is dealing with a tenant who walks away from a long term commercial lease agreement.  Is it possible to recover all the rent still due under the lease’s remaining term?

In Texas a landlord has a duty to mitigate damages when a tenant defaults on a commercial lease agreement and abandons the leased property.  Austin Hill Country Realty v. Palisades Plaza, 948 S.W.2d 293 (Tex. 1997).  The landlord must use reasonable efforts to relet the property.  Id.  This situation is especially bothersome if the tenant breaches a multi-year lease near the beginning of the lease’s term.

What if the landlord has difficulty reletting the property?  How much effort is “reasonable” before a landlord may sue for damages?  The duty to mitigate does not require the landlord to relet the property to any willing tenant.  The replacement tenant must be suitable under the circumstances.  Id. at 299.  Consequently, the abandoned property may sit vacant for a significant time while the landlord searches for a suitable tenant.

As for when to sue, a landlord need not wait until the property has been relet before seeking damages.  When suing the departed tenant for damages the landlord may treat the breach of the lease as an anticipatory repudiationSee Speede Mart, Inc. v. Stovall, 664 S.W.2d 174, 177 (Tex.  App. – Amarillo 1983, writ ref’d n.r.e.).

The measure of damages for anticipatory breach of a lease, where the landlord does not relet the premises or declare the lease forfeited, is the difference between the present value of the rent contracted for in the lease and the reasonable cash market value of the lease for the unexpired term.  See Thomas v. Resolution Trust Corp., 1991 Tex. App. LEXIS 1918 (Houston [1st Dist.] 1991), citing Look v. Werlin, 590 S.W.2d 526, 527 (Tex. Civ. App. – Houston [1st Dist.] 1979, no writ).  See also Speede Mart, Inc. at 177.

In Look v. Werlin the court held that the post-judgment interest rate was an appropriate discount factor for use in calculating the present value of future rent.  Look at 528.  Using this rate as a discount factor is at the court’s discretion; at least one other Texas appellate court used this method, following Look v. WerlinSee Lakeside Leasing Corp. v. Kirkwood Atrium Office Park Phase 3, 750 S.W.2d 847, 851 (Tex. App.—Houston [14th Dist.] 1988, no writ).  As for "reasonable cash market value," the commonly understood meaning of this term is similar to the legal definition of fair market value, namely, the amount the owner could realize in rental on the market.  See Lee v. Dykes, 312 S.W.3d 191, 194-95 (Tex. App.—Houston [14th Dist.] 2010, no pet.) 

In sum, a landlord may not be able to recover all of the rent due under a multi-year lease, but a landlord may recover rent subject to a slight discount.

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