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.

1 comment :

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