“Reasonable” Efforts and the Role of the Expert Witness
An expert witness will prove helpful—if not essential—in proving whether the landlord has made sufficient efforts to minimize its damages following a tenant’s default. The standard for reasonable efforts to mitigate is objective, but it is far from a bright-line test. Rather, it presents a question of fact, and courts may consider all facts and circumstances of the particular case in order to make this determination. While jurisdictions vary on the issue of which party bears the burden of proof when it comes to mitigation, both parties will need expert testimony to educate the fact finder on the local market, likely time to relet, and the rental value of the premises.
The inquiry starts with a landlord’s affirmative steps to find a new tenant, but the analysis does not occur in a vacuum. The trier of fact will weigh those efforts against numerous factors, including the particular terms of the lease, the nature of the property, and the relative strength of the local real estate market. A proper expert witness (usually a leasing broker intimately familiar with the local market) can provide valuable insight and testify to factors such as the overall community economic depression, a decline or rise in a particular industry relevant to commercial space, or fluctuations in competition for retail space in a region.
Although the body of national case law illustrates how fact-intensive this inquiry is, there are a number of common elements that arise when a tenant abandons a commercial property and a landlord must mitigate its damages. These include the need to advertise, the engagement of a broker or agent, the failure to relet to a prospective new tenant, the reletting at a higher (or lower) rent, and the election to repair (or failure to maintain) the premises following the tenant’s abandonment.
Generally, a landlord must, at a minimum, advertise the premises for rent (either with a sign at the site or in a local publication or multiple listing service (MLS) or both), show the premises to prospective tenants, and engage a broker. J.M. Grimstad, Inc. v. Scangraphics, Inc., 539 N.W.2d 732, 735 (Iowa Ct. App. 1995) (stating that circumstances required lessor “to do something more than sit by passively and not take an active role” in attempting to enlist prospective lessee). Certain courts have identified these basic requirements as a minimum threshold for establishing reasonable efforts. See, e.g., Pomeranz v. McDonald’s Corp., 821 P.2d 843, 847 (Colo. Ct. App. 1991), aff’d in pertinent part, rev’d in part, 843 P.2d 1378 (Colo. 1993) (commercial landlord failed to mitigate damages arising from tenant’s breach of lease, where, despite poor rental market for commercial real estate in area at time, landlord did not place ad in newspaper, list property with real estate agent, or place sign on property). It is critical to note, however, that doing the bare minimum does not necessarily meet the reasonableness standard in every case. See J.M. Grimstad, Inc., 539 N.W.2d at 735 (“Reasonable diligence may require more out of a landlord in some situations than in others.”).
There can be circumstances in which failing to meet one of these basic requirements does not, standing alone, render the landlord’s efforts unreasonable. Indeed, the specific market conditions existing at the time of the tenant’s breach can significantly hinder the landlord’s ability to secure a replacement tenant—so much so that the relative economic health of a locale can even erode the basic requirements of advertising and the use of a broker. See, e.g., Brendle’s Stores, Inc. v. OTR on Behalf of Bd. of Trs. of State Teachers Ret. Sys. of Ohio, 978 F.2d 150, 158 (4th Cir. 1992) (finding that landlord’s lack of action did not discourage any prospective tenants and that evidence shows that extensive advertising would not have resulted in a new tenant). The proper expert will be equipped to testify regarding local market conditions. Moreover, the duty to mitigate does not impose an obligation to make efforts that exceed the landlord’s typical actions with respect to the letting of its other spaces. In other words, there is no duty to treat an abandoned premises better than other spaces. See, e.g., MXL Indus., Inc. v. Mulder, 623 N.E.2d 369, 378 (Ill. App. Ct. 1993).
Some courts have observed that a landlord’s duty to mitigate can include an obligation to make repairs necessary to actively market premises for rent. See, e.g., Montgomery v. Sollberger, 94 N.E.3d 24, 27 (Ohio Ct. App. 2017); Borough of Fort Lee v. Banque Nat’l de Paris, 710 A.2d 1, 7 (N.J. Super. Ct. App. Div. 1998). However, a landlord may not be required to restore a property to marketable condition as a prerequisite to mitigation when the tenant left the premises in poor condition. See, e.g., Tripps Rests. of N.C., Inc. v. Showtime Enters., Inc., 595 S.E.2d 765, 768 (N.C. Ct. App. 2004) (observing that “plaintiff presented evidence that defendants left the property in such poor condition that it would have cost several hundred thousand dollars just to restore it to a condition in which it could be rented”). Similarly, mitigation does not entitle an abandoning tenant to a reduction of damages in the amount of any unpaid tenant allowance provided under the lease. See, e.g., Tech Ctr. 2000, LLC v. Zrii, LLC, 363 P.3d 566, 572 (Utah Ct. App. 2015).
Signing a New Lease
The question of the landlord’s efforts extends to whether it does, in fact, sign a new lease once a prospective tenant is found. Litigants may want an expert to offer testimony regarding the appropriate uses of the premises, the qualifications of proposed replacement tenants, and similar issues. For example, the duty to mitigate does not require a landlord to accept any and all replacement tenants. See, e.g., Conn. Gen. Life Ins. Co. v. Melville Realty Co., Inc., 591 So. 2d 1376, 1378 (La. Ct. App. 1991) (lessor’s efforts to relet were reasonable despite ultimate failure to relet premises, where lessor found prospective tenant at time when market was very soft and failed to relet premises to tenant due to lease guarantor’s reservation of right to object to proposed rental terms). Likewise, a landlord may reject a replacement lessee that cannot demonstrate reasonable creditworthiness or where the proposed new use of the premises violates existing exclusives or is otherwise incompatible with a current tenant mix. See, e.g., Austin Hill Country Realty, Inc., 948 S.W.2d at 299 (a landlord’s duty to make reasonable efforts to mitigate does not require that the landlord accept replacement tenants who are financial risks or whose business was precluded by the original lease). Further, it may be unreasonable to require a landlord to provide significant tenant allowance funds in order to secure a replacement tenant.
Expert witnesses can also testify regarding the reasonableness of the rental rate the landlord seeks from a replacement tenant. Because economic conditions at the time of the tenant’s breach may be vastly different from those that existed at the inception of the lease, the expert should be familiar with what constitutes a reasonable rent at the time of mitigation. For example, a landlord may be deemed to have failed to mitigate if it rejects an acceptable replacement in the hope that a more economically favorable tenant comes along. In this regard, some courts have found that requiring reasonable efforts to mitigate by a landlord does not impose the financial risk of certain business decisions or strategies on the abandoning tenant. See, e.g., O’Brien v. Black, 648 A.2d 1374, 1378 (Vt. 1994) (landlord could not charge the abandoning tenant with the risk and cost of its decision to refuse to entertain a prospective tenant in order to pursue a more lucrative tenant).
On the other hand, some courts have ruled that the fact that an abandoned property was leased—or offered—at a higher rent than the one charged in the original lease did not result in a failure to mitigate damages. See, e.g., Del E. Webb Realty & Mgmt. Co. of Colo. v. Wessbecker, 628 P.2d 114, 116 (Colo. Ct. App. 1980). A determinative factor in reaching this conclusion is often whether the new, higher rate sought is consistent with the comparable market rate. In such a case, an expert witness’s testimony is the most effective way to present this evidence.
Even in the absence of a common-law, statutory, or contractual duty to mitigate damages, reasonable landlords will almost always be well served to relet a vacant premises following a tenant’s abandonment. But where the landlord has an affirmative duty to mitigate, a key issue in any later litigation may be whether it has carried that burden. To address that question, expert testimony regarding the reasonableness of the landlord’s efforts can be critical. The analysis concerns not only whether the landlord took appropriate steps to market the space to prospective tenants; the inquiry also entails questions regarding the reasonableness of the rental rate demanded, the necessity of repairing the premises, the qualification of a replacement tenant, and the use to which a new tenant will put the space, among others. These factors are neither uniform nor static. The prudent use of an expert witness familiar with the local market and economic climate may make the difference in proving the extent to which a landlord has undertaken reasonable efforts to mitigate its damages.