Are Mortgage Servicers “Suppliers” of “Consumer Transactions” pursuant to the Ohio Consumer Sales Practices Act (Part II)?

On May 14, 2013, the Ohio Supreme Court in Anderson v. Barclay’s Real Estate, Inc., Slip Opinion No. 2013-Ohio-1933 answered the above question posed to it by the Federal District Court for the Northern District of Ohio by holding that “the servicing of a borrower’s residential  mortgage loan is not a ‘consumer transaction’ as defined in O.R.C. 1345.01(a); and “an entity that services a residential mortgage loan is not a ‘supplier’ as defined in O.R.C. 1345.01(C).

A complete background and fact summary of the case can be found in this author’s earlier blog posting of March 4, 2013 appropriately titled: “Is a Mortgage Service Company a Supplier of Consumer Transactions pursuant to the Ohio Consumer Sales Practices Act (“CSPA”)?  Basically, the Anderson case originated in the Federal District Court for the Northern District of Ohio, who concluded (with regard to the CSPA claims) that there was no controlling precedent in Ohio on whether the CSPA applied to mortgage services, so the Federal Court asked the Ohio Supreme Court to answer the following two questions:

1) Does the servicing of a borrower’s residential mortgage loan constitute a “consumer transaction” as defined in the Ohio Consumer Sales Practices Act, O.R.C. 1345.01(a)?  The Plaintiff, Mrs. Anderson  argued that the answer to this first question should be “yes” because mortgage servicers provide a number of services to borrowers, including accepting their payments and working with borrowers to obtain loan modifications.  The servicer, Barclay’s Real Estate, Inc. dba HomEq Servicing (“HomEq”) argued that mortgage servicers perform their services for financial institutions, not for borrowers/consumers, and that therefore the transactions were commercial and not covered by the CSPA.

The Supreme Court of Ohio agreed with HomEq, holding that the servicing of a borrower’s residential mortgage loan is not a “consumer transaction.”  To justify its holding, the court first recognized that one essential element of O.R.C. Section 1345.01(a) was not met:  that there was no “sale, lease, assignment, award by chance, or other transfer of a service [by the servicer]to a consumer”.  Rather, the court reasoned that mortgage servicing is a contractual agreement between the mortgage servicer and financial institution, with no direct contract between the borrower and the mortgage servicer.  While the court acknowledged that the servicer’s duties might involve interaction with borrowers, it reasoned that those interactions are always on behalf of the financial institution. 

The court further reasoned that service provider transactions are not consumer transactions because there is no “transfer of an item of goods, a service, a franchise or an intangible” as required by the statute. The court explained that while a financial institution may contract with a mortgage servicer to service a loan, the mortgage servicer does not transfer a service to the borrower.  The court’s decision was also influenced by:  (1) the CSPA 2007 amendment which added dealings between consumers and loan officers, non-bank mortgage lenders and mortgage brokers as being covered by the CSPA but did not include dealings between consumers and mortgage servicers; (2) Uniform Consumer Sales Practices Act commentary which noted that land transactions should be specifically excluded from Consumer Sales Practices Acts; (3) Ohio court decisions holding that the CSPA does not apply to “collateral services” that are solely associated with the sale of real estate; and (4) other states that wanted real estate transactions and loan servicing covered by their consumer protection statutes specifically defined consumer transactions to include them.

2) Is a mortgage servicer a “supplier”?  Mrs. Anderson argued that servicers are “suppliers” within the CSPA because they essentially function as collection agencies.  The court disagreed, concluding that in order to be a supplier, the servicer would have to be engaged in the business of “effecting” or “soliciting” consumer transactions as provided in O.R.C. 1345.01(c). The terms “effecting” and “soliciting” are not defined in the CSPA, so the court went to Black’s Law Dictionary and found “effect” to mean “to bring about or to make happen”; and  “solicit” to  mean “requesting or seeking to obtain something”. Since servicing a mortgage does not cause a consumer transaction to happen, and mortgage servicers do not seek or request borrowers, the court handily dismissed the plaintiff’s argument and held that servicers are not “suppliers” under the CSPA.

 In spite of the Supreme Court of Ohio’s ruling, many believe that since lenders often disappear once they sell their loans, and the homeowners are left to deal with a servicer exclusively, mortgage servicers are exactly the type of entity intended to be regulated by the CSPA.  Since the court has spoken, however, the only recourse for those who disagree with its decision is to lobby the Ohio Legislature to specifically amend the CSPA to include dealings between consumers and mortgage servicers. 

 

General Provisions in Contracts: "Miscellaneous" does not mean "Unimportant"

Towards the end of every contractual agreement, including real estate purchase agreements and leases, are certain provisions that often come under the heading of “Miscellaneous” or “General Provisions” and are often referred to as the “boilerplate” provisions.

While these provisions may be “boilerplate” in the sense lawyers insert them into nearly every agreement, they remain important and should not be ignored. Below is a summary of some of these provisions and their purpose:

Entire Agreement – Most agreements have a section captioned “Entire Agreement” or “Integration.” The purpose of this section is to clarify that the entire agreement of the parties is embodied in that written agreement, and prior agreements (verbal or written) are integrated into this current signed contract and no longer have separate force and effect. If a party to the agreement later asserts that there were other agreements between the parties and these  other agreements pre-date of the signed agreement containing an integration clause, then the earlier agreements will be considered merged into the newer agreement and enforceable. If there are other agreements that the parties want to remain in effect concurrently with the new contract, then they must revise this ‘boilerplate’ provision to reflect this.

Binding Effect; Assignment  – Most contracts include a provision that states the agreement will be binding upon the parties’ successors and assigns.  If a company is bought out, you may want to ensure the acquirer is still bound to honor the obligations in the contract.  A separate issue to address is what limitations should be placed on a party’s ability to assign the agreement without the other party’s consent. If a buyer on a real estate purchase agreement intends to create a new entity prior to closing to own the real estate, then it will be important to include language allowing the buyer to assign the agreement to an affiliate.

Severability – This provision is included to ensure the entire contract isn’t voided if a court finds that one or more the provisions are unenforceable.  It allows the unacceptable provisions to be severed by the court and the remaining terms of the contract are still enforceable. However, there may be instances where certain provisions are so important to the purpose of the contract, that if a court strikes out any of those provisions, the parties will not want the contract to continue. In that case, a severability clause should not be included in the agreement.

No Waiver – The purpose of a waiver provision is to make it clear that a party can waive one or more breaches and still be free to act on a similar breach later. Without such a clause, the breaching party could argue before a court that prior waivers of a breach by the other party  created a ‘course of dealing’ that amends the contract and the court might agree.

Governing Law; Venue – Governing law matters in an agreement. The laws in one state may be, and often are, vastly different from the laws in other states.  Which state’s law governs can effect the outcome of a lawsuit.   Some contracts also include venue provisions. Be aware that an agreement to litigate in courts of a specific state, or even a specific county within a state, will typically be upheld. 

Notice – The notice section of a contract dictates how notices under the agreement should be delivered and to what addresses.  It is important to follow the requirements in this section precisely if a formal notice under the agreement is given. For example, don’t email or fax a notice to the other party unless the agreement expressly allows for it.

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Types of Commercial Leases-What’s in a Name?

There are as many types of commercial leases as there are creative lawyers to draft them. Most types of leases are defined either by the kind of property involved (industrial, retail, office), or by how the rent is calculated and who pays what.


Industrial/Office/Retail Leases. While industrial, retail and office lease forms will contain many similar provisions, “one size does not fit all”. In a retail lease for example (especially in large shopping centers), the following provisions can be found that are not often utilized in office and industrial leases: a) Continuous Operation (the tenant is required to open and operate their business on the premises, continually, throughout the lease term); b) Exclusive Use (the tenant is granted the exclusive use to operate a particular business in the shopping center); c) Radius Restriction (the tenant is required to covenant that it will not lease space within a radius of so many miles of its leased premises for the same use [e.g., a second pizza hut location too close to the one which is the subject of the lease]; d) Percentage Rent (the tenant is responsible for paying base rent on the property, as well as a monthly percentage of income earned from the business occupying the leased space); and e) Co-Tenancy (the tenant reserves the right to terminate the lease, or pay lower rent if an anchor tenant leaves the shopping center).

In an office lease, there are typically more services provided (e.g. elevator, janitorial, guard/concierge) by the landlord (which expenses are typically passed on to the Tenant). In addition, the concept of “usable” vs.” rentable” square footage and “load factors” must be understood and evaluated. A Load Factor is a method of calculating total rent of a tenant that combines usable square feet of the premises and a percentage of square feet of common areas. Basically, usable square feet + percentage of common area square feet (for common restrooms, lobby, elevators, stairwells, and hallways) = rentable square feet. This calculation of the addition of a percentage of the common area expenses to monthly base rent is known is the "load factor." In order to simplify and standardize the measurement of office space, the Building Owners and Managers Association International ("BOMA") has adopted uniform standards for the measurement and leasing of office space. The "BOMA Standard" is utilized in many office leases.

In industrial leases, particular attention should be given to the availability of “industrial amenities” (e.g. high pressure gas lines; cranes; truck docks and “drive-ins” and electrical capacity) and environmental provisions in the lease. Representations, warranties, covenants and indemnities are the norm for the tenant and its operations, as well as regarding landlord’s common area operations and past environmental status of the premises. An environmental audit is often recommended so that a “snapshot of environmental status” can be taken at the lease’s inception.

Lease Types based on Rent-Gross vs. Net Leases. Typically, when dealing with commercial real estate leases, a gross or net lease is utilized, with net leases coming in more than one “flavor”. The following summarizes the basic types and their variations on a theme.

In a gross lease – aka a “full service lease”, the landlord pays all of the expenses associated with maintaining and operating its property (such as insurance, taxes, repairs, trash collection…). These costs will be blended with the base rent to determine the overall rent due by the tenants. Gross lease provisions are usually used for industrial/warehouse space, but can be found in office and retail leases as well. The term “Modified Gross Lease” (sometimes referred to as an “Industrial Gross Lease”) describes a lease in which some, but not all operating expenses are absorbed by the Landlord.

A “net lease” requires the tenant to pay, in addition to rent, some or all of the property expenses that normally would be paid by landlord (or "lessor"). These include expenses such as real estate taxes, insurance, maintenance, repairs, utilities, and other items. For “multi-tenant” properties, such as a shopping center, the expenses that are "passed through" to the tenants are usually pro-rated among the tenants based on the square footage of the area leased by each tenant. The tenant’s share of expenses is often referred to as “Tenant’s Proportionate Share”. There are different kinds of “net leases”, with different names to describe same based on what market one is in, and who is describing the lease (e.g., tenant, landlord, broker or attorney) Many in the commercial real estate industry describe the variations of net leases as follows:

Single Net Lease - the tenant pays for real estate taxes as well as the base rent.

Double Net Lease - the tenant pays for real estate taxes and commercial property insurance.

Triple Net Lease (or Net-Net-Net or NNN) – the tenant pays all real estate taxes, building insurance, and costs associated with the repair and maintenance of any common areas. This form of lease is most frequently used for single tenant buildings and retail space.

Absolute Triple Net lease (or "True Triple Net Lease”)- in the so-called “true” triple net or “bondable” lease, tenants will pay (or reimburse landlord for), in addition to real estate taxes, insurance and common area maintenance, their proportionate share of roof replacement and structural costs to the building. Typically, these leases are not terminable by the tenant, nor are rent abatements allowed. Basically, the tenant pays for and assumes every imaginable real estate risk related to the property.

But what’s in a name? As you might expect, there is much disagreement among landlords, tenants, brokers and attorneys re: the type of lease they have. Focusing on the “label,” however is misguided and problematic. Closely analyzing the lease to determine who is responsible to pay for what is much more important, especially regarding the scope of a tenant’s and landlord’s respective liabilities under commercial leases for repairs and replacements.

When allocating responsibility for maintenance and repairs, most commercial landlords intend for their tenant to make most of the repairs, or be responsible to reimburse the Landlord for same. Does repair mean replacement? Some landlords may think so, however, most courts have decided that if a landlord wants a tenant to replace the roof, for example, vs. patch it periodically, the lease must provide, to the effect, that “it shall be the tenant’s obligation to repair and replace the roof.” See ASP Properties Group v. Fard, 35 Cal Rptr 3d 343 (Court of Appeals, 2005). See also Robert A. Schoshinski, America Law of Landlord and Tenant, §5:18 at 271 (1980). In the ASP case, a lease amendment was prepared after the lease was signed, to add the roof to the list of items that the tenant was to repair and maintain in good and safe condition. However, the Court determined the list to be a list of repair obligations, not replacement obligations for the tenant. Simply stated, “the courts have held that an express covenant to repair will not be enlarged by [language] construction…a covenant to repair does not include a covenant to replace”. Ohio Real Property Law and Practice, Sec. 20.08 [1]-[3] (2007).

The moral of today’s lesson? Don’t worry so much about what you call the lease; make sure you know what it says, and that your intent, especially regards who pays for what and who makes repairs and./or replacements is clearly spelled out. In other words, "watch your language" and “Say what you mean, precisely, or a judge will decide what you meant.”

Brokers' Lien Laws for Commercial Real Estate Transactions

Approximately 30 states now grant a commercial real estate broker the right to place a lien on real property when his or her fee isn't paid. Most states address the lien right in a specific lien statute for brokers’ liens but a few states provide for brokers’ liens as part of their mechanics’ lien law. Delaware is the most recent state to join these ranks with its passage of a commercial real estate brokers’ lien act.

Ohio’s lien law for commercial real estate brokers can be found at ORC 1311.85 through 1311.93 and has been around since the late 1990s.  Ohio recently passed legislation which took effect March 27, 2013 and clarifies the various services covered by the lien act and other details surrounding the creation and enforcement of the lien with respect to each type of services.

The purpose of the lien law is to protect commercial real estate brokers who provide services and then are not paid their brokerage fees. The amount of the fees are at a level where litigation to collect the fees typically eats up the entire amount of the fee and can take a couple of years to work its way through the legal system. Having the ability to enforce a lien on the real property provides the real estate broker with some leverage to ensure prompt payment.

However, as it is typically the case, the devil is in the details. Each state’s definition of what constitutes “commercial real estate” can differ. Typically, it will carve out single family residences and real estate containing a limited number of residential units, although the number of units will vary from state to state. In Ohio, real estate containing one to four residential units falls outside the definition.

Most lien law states require the real estate broker’s fee arrangement to be contained in a written agreement and a handful of states also require that the written agreement contains disclosure of the lien rights. Ohio law requires a written agreement but does not require mandatory disclosure of the lien rights.

The types of real estate transactions covered by the lien rights also differ from state to state. In Ohio, transactions covered by the statute include services related to selling, leasing or conveying any interest in commercial real estate. While the majority of states with brokers’ lien rights apply these rights to both sale and lease transaction, some states limit the brokers’ rights to only sale transactions or to only lease transactions.

Each state’s law also provides specific time frames for filing the lien affidavit and other actions. It is important to carefully review the applicable state’s statute to ensure compliance or risk losing the lien right.

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EPA Extends “Bona Fide Purchaser” Protection to Tenants

Reprinted with Permission from Author: Claire Juliana of Aon Risk Solutions

Earlier this year, the United States Environmental Protection Agency (“EPA”) issued revised enforcement guidance for the treatment of tenants under the Bona Fide Prospective Purchaser (“BFPP”) provision of the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). (See: http://www.epa.gov/enforcement/cleanup/documents/policies/superfund/tenants-bfpp-2012.pdf). This guidance supersedes the EPA’s previous January 2009 guidance and is intended to address remaining uncertainty regarding the potential liability of tenants under CERCLA and the applicability of the BFPP provision given that the provision makes explicit reference to tenants in § 101 (40). Under previous guidance, the BFPP protection was only available if the tenant’s landlord itself qualified and maintained its status as a BFPP or if the tenant’s leasehold right was the equivalent of an owner. The new guidance provides the EPA with expanded enforcement discretion to a tenant of a contaminated site whose owner loses BFPP status or a tenant that itself meets the necessary BFPP criteria as applied to a tenant. This summary is intended to provide details of the new policy.

Under Section 107(a)(1) of CERCLA, “the owner and operator of a … facility….from which there is a release, or a threatened release which causes the incurrence of response costs, of a hazardous substance, shall be liable for …(A) all costs of removal or remedial action incurred by the United States Government….” So, absent liability protection, an owner or operator of a contaminated property is a potentially liable party under CERCLA. Section 107 (r)(1) is the provision of CERCLA that articulates the statutory liability protection for BFPPs as follows:

 

Notwithstanding subsection (a)(1) of this section, a bona fide prospective purchaser whose potential liability for a release or threatened release is based solely on the purchaser’s being considered to be an owner or operator of a facility shall not be liable as long as the bona fide prospective purchaser does not impede the performance of a response action or natural resource restoration.

In general, a BFPP is "a person (or a tenant of a person)" that acquires ownership of a facility after January 11, 2002, and satisfies the following criteria:

·         Conducts "all appropriate inquiries" into the previous ownership and uses of the property.

·         No disposal of hazardous substances at the facility on or after acquisition.

·         Provides all legally required notices.

·         Takes reasonable steps with respect to any hazardous substance releases.

·         Provides cooperation, assistance and access to those conducting response actions.

·         Complies with land use restrictions and institutional controls.

·         Complies with information requests and administrative subpoenas.

·         Is not potentially liable for response costs at the facility or has no affiliation with a responsible party (i.e., other than an affiliation created by the instruments by which title to the facility is conveyed or financed or by a contract for the sale of goods or services).

 

Under the new guidance and on a site specific basis the EPA has the enforcement discretion:

1.    To treat a tenant who derives BFPP status from its owner/landlord as a BFPP even if the owner/landlord has lost its BFPP status (through no fault of the tenant) as long as the tenant meets all of the BFPP provisions, except the all appropriate inquiries provision. That said, the EPA notes that a tenant may still wish to obtain information on prior uses of the facility in order to have an informed basis upon which to perform the other requirements of the BFPP provision. With respect to the “no affiliation” provision, although a lease “is [not] created by the instruments by which title to the facility is conveyed or financed or by a contract for the sale of goods or services” per §101(40)(H)(i)(II), the EPA has the discretion to treat a lease between the tenant and owner an as acceptable affiliation.

 

2.    To treat a tenant as a BFPP as long as the tenant satisfies all of the BFPP criteria including conducting all appropriate inquiries.

 And, like a purchaser who wishes to assert the BFPP defense, the tenant protections will only apply to leases entered after January 11, 2002.

The new guidance addresses a gap in the CERCLA liability protections and allows tenants to follow the same steps as purchasers in order to establish the protection as a BFPP. Many tenants of commercial and industrial properties already routinely perform Phase I environmental assessments as part of their due diligence practices so to the extent that this satisfies the all appropriate inquiries requirement and the other criteria are met, the tenant has some measure of comfort that the EPA is not likely to hold the tenant liable for pre lease contamination. The guidance itself, however, cautions that the EPA has enforcement discretion so where a lease is, for example, designed to allow the landlord or tenant to avoid CERCLA liability, the EPA would likely decline to exercise its enforcement discretion. As always, tenants should consult with experienced advisors in ascertaining what steps should be undertaken to help protect against CERCLA liability.

Copyright © Aon plc 2013.  This Alert is for general informational purposes only and is not intended to provide individualized business or legal advice.  The information contained in this Alert was compiled from sources that Aon considers to be reliable; however, Aon does not warrant the accuracy or completeness of any information herein.  Should you have any questions regarding how the subject matter of this Alert may impact you, please contact your Aon team member or other appropriate advisor

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Aon plc (NYSE: AON) is the leading global provider of risk management, insurance and reinsurance brokerage, and human resources solutions and outsourcing services. Through its more than 61,000 colleagues worldwide, Aon unites to empower results for clients in over 120 countries via innovative and effective risk and people solutions and through industry-leading global resources and technical expertise. Aon has been named repeatedly as the world's best broker, best insurance intermediary, reinsurance intermediary, captives manager and best employee benefits consulting firm by multiple industry sources. M. Claire Juliana J.D. is the Director of Environmental Claims at Aon Risk Solutions. Visit www.aon.com for more information.

 

Options for Handling Environmental Risk in Real Estate Acquisitions

In any acquisition that includes real estate, a buyer needs to take care to properly assess the real property to be acquired for potential issues, both in general and specific to the buyer's plans for the property.  Any purchase agreement for real property needs to build in sufficient time to determine these risks and negotiate other provisions in the purchase agreement that allocates the environmental risks between the buyer and seller to each party's satisfaction.

Sometimes conducting a Phase I environmental review may be sufficient, but in many cases, it is not. Depending on prior and/or current uses of the property, further environmental testing many be necessary to determine whether any contamination is present that would trigger strict liability on any landowner in the chain of title.  Also, a buyer needs to take into consideration what will be done with the property after closing. If demolition and construction will occur, many additional issues will need to be considered, such as the presence of asbestos, whether there are wetlands on the property, or any special designations (e.g., endangered species or historical designations), any of which could prevent or significantly delay a project. 

Here are some options for dealing with potential environmental issues when acquiring real estate:

• Adequate Due Diligence Periods -- To the extent a buyer does not already possess complete environmental diligence on the property prior to entering into a purchase agreement, sufficient time needs to be provided for in the agreement to conduct all the reviews, studies, tests, etc. that are appropriate to fully understand the condition of the property and the regulations that may affect how it is developed.  Earnest money frequently becomes nonrefundable after expiration of the due diligence, such as title, survey and environmental.  A seller may be willing to allow sufficient time for the diligence to be conducted but no more. From the seller's perspective, it is important to ensure that the transaction keeps moving and is not unnecessarily prolonged.
• Closing Conditions; Remediation -- If a buyer has specific plans for the property and the presence of certain environmental conditions or regulatory hurdles can prevent these plans or severely delay them, then appropriate closing conditions should be included in the purchase agreement that allows the buyer to walk if a condition isn't met.  The seller needs to consider the risks to a failed closing due to these closing conditions. Whether or not a seller should accept any closing condition, and/or the refund of any earnest money, will depend on how desperately the seller needs to sell and whether there are any other potential buyers to consider.  A seller will want to negotiate the closing conditions as narrowly as possible to minimize delays and risks to closing.  In instances where the contamination is known to both parties, the buyer may want to require the seller to remediate the contamination to an agreed upon condition prior to the buyer closing on the sale.  There can be substantial risks to both parties in this situation. What if, despite the remediation, regulatory action is initiated against the buyer after closing? Who retains responsibility after closing, the required level of cooperation between the parties,  and other potential issues should be considered and addressed in the agreement.
• Indemnification -- The ultimate tool for allocation of risk, buyers and sellers can negotiate who will be responsible for environmental liabilities that arise on the property post-closing, including allocating percentages of responsibility, survival periods for seller's obligations, deductibles and caps, and other limitations or remedies.  
• Escrow -- The parties may also want to consider paying a portion of the purchase price into an escrow account held by a third party. If buyer claims arise under the indemnification obligations during a proscribed time frame, then final claims can be paid out of the escrow account.  This option is especially useful if a buyer has any concern that the seller and the purchase funds will be not be around later to pay a claim that might arise. 
• Insurance -- In some instances environmental insurance might be an option. Insurance coverage for potential property contamination will require a significant deductible and premiums will be paid in advance. It's usefulness is in allowing the parties to quantify a known dollar exposure for claims made during the policy term, based on the deductible, premium costs, etc. dictated by the policy terms. How these costs are allocated between the buyer and seller is a matter of negotiation.  Other insurance policies are available when the contamination is known and the cost of remediation can be adequately estimated. This insurance will cover any additional costs beyond what was estimated. Again, its purpose is to limit the monetary exposure.

The options identified above barely scratch the surface of all the forms these negotiations can take.  It is critical that each party be advised by competent real estate counsel who can help to identify all the potential issues and negotiate an allocation of risk acceptable to both parties.
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Commercial Landlord’s Duty to Mitigate in Ohio- a Primer

Is a lease a transfer of a property interest, a contract or both? The answer to this question has changed over the years, and Landlord’s obligation to mitigate (i.e., lessen) damages (as a result of a tenant’s default) has changed along with it.

Background/History. Under common law, leases were traditionally understood to be mere transfers of a property interest. So, when a tenant abandoned its leasehold interest, the landlord no longer owed any duty to the tenant. There would be no duty to mitigate damages, because that was a contract principle of law, not one of property law.

Over the years, the nature of commercial leases changed. As deals became complicated, the leases became more complicated. Modern commercial leases soon contained a number of covenants and conditions such that they looked more like an exchange of promises (i.e, a contract) than a mere transfer of a property interest. Accordingly, as summarized by the Court of Appeals of Ohio for the 6th Circuit in New Towne Limited Partnership v. Pier 1 Imports, 1996 Ohio App. LEXIS 3203, “various jurisdictions shifted the law regarding commercial leases away from traditional property rules toward the more modern approach of analyzing leases under contract principles”.

The Law in Ohio. While there had been some prior authority, Ohio emphatically adopted the “modern approach” in Frenchtown v. Lemstone, Inc., 2003 Ohio LEXIS 1977 by holding: “the duty to mitigate arises in all commercial leases of real property, just as it exists in all other contracts”. The court in Frenchtown simply reasoned that the duty to mitigate damages (otherwise known as the doctrine of avoidable consequences) is a basic principle of contract law, and since commercial leases were recognized as at least part-contract, contract principles would apply.

What Exactly Must Landlord Do? According to the court in Frenchtown, the duty to mitigate requires only “reasonable” efforts, and a Landlord can consider its “tenant mix” when trying to find replacement tenants. For example, a landlord could reject an offer from a prospective bail bonds tenant as a potential replacement tenant in an upscale retail/office building. The reasonableness of the Landlord is a question of fact for the judge or jury, and may change based upon the circumstances. Two Eighth District Court of Appeals cases may help landlords understand what specifically is required to mitigate damages. In Oakwood Estates v. Crosby, 2005-Ohio-2457, the court ruled that running advertisements for a 600 unit building with a vacancy rate of 15-20% was not enough. According to the court, the landlord should have supplemented the ads (at least in the spring/summer months) with “unit specific marketing” such as open houses with sign-up sheets. In The T Building Company v. HVL, Inc., 2013 Ohio App. LEXIS 824, the Eight District Court of Appeals held that sending out hundreds of marketing flyers to brokers and personally calling and meeting with a few of them constituted reasonable efforts to mitigate.

Can Landlords and Tenants Contract to Eliminate Landlord’s Obligation to Mitigate?

Contract law principles such as mitigation favor the tenant in a commercial lease. On the other hand, commercial contract law principles regarding enforceability of contract terms often favor the landlord (except re: “tenant form leases”). Generally speaking, courts will typically uphold language in a commercial lease, unless it is contrary to statutory law or public policy. Consequently, commercial landlords and tenants have a lot of leeway in allocating the risk and responsibility of issues inherent in commercial leases. While there has not been a Supreme Court of Ohio case that definitively addressed written disclaimers of mitigation obligations, the court in Frenchtown came close. That court held that “…barring contrary contract provisions [emphasis added], a duty to mitigate damages applies to all leases". The only Ohio Court of Appeals case discovered that specifically addressed disclaimers of mitigation rights was the New Towne case. The court in New Towne could not have been clearer by holding: “In the present matter, the term negating any duty to mitigate damages contained in the lease does not violate any principle of law. Similarly, it does not injure the welfare of the public in any way. As a result, the provision does not violate public policy”.

Moral of the story for tenants? If you don’t specifically see language in the lease requiring the landlord to use commercially reasonable efforts to mitigate damages, don’t worry, they have that duty by law (of course, it never hurts to specifically add mitigation language). On the other hand, if you see language nullifying or disclaiming or waiving the obligation of landlord to mitigate damages, insist that it be deleted.