Must a Commercial Landlord Mitigate Damages After a Tenant Leaves?

The rule and where it comes from

Texas once followed the older view that a lease was a conveyance and a landlord could let abandoned space sit empty while collecting rent from the departed tenant. The Texas Supreme Court abandoned that view in the 1990s and the Legislature codified the result. Property Code § 91.006(a) states that a landlord has a duty to mitigate damages if a tenant abandons the leased premises in violation of the lease. Section 91.006(b) states that a provision of a lease that purports to waive a right or to exempt a landlord from a liability or duty under the section is void.

The statute sits in chapter 91, which applies to tenancies generally, so it governs commercial leases as well as residential ones. The waiver rule matters because most form commercial leases drafted before 1997 contained an express disclaimer of any duty to relet, and some still do. Those clauses have no effect.

When the duty is triggered

The statutory trigger is abandonment in violation of the lease: the tenant leaves before the term ends without the landlord's agreement. It is not triggered by a tenant that stays in possession and stops paying, because the landlord cannot relet space the tenant still occupies. In that situation the landlord's choices are the lockout, eviction and collection remedies described in what a landlord can do when a commercial tenant stops paying, and mitigation becomes relevant once the landlord recovers possession and seeks future rent.

A lease that gives the landlord a choice of remedies after default, including terminating the lease, re-entering without terminating, or suing for rent as it comes due, does not change the duty. Whichever route the landlord takes, its claim for rent accruing after the tenant left is subject to reduction for what reasonable reletting would have brought in.

What reasonable mitigation looks like

The standard is objective reasonableness, judged by what a prudent landlord would do to relet comparable space in that market. Texas courts look at whether the landlord:

• Listed the space with a broker or marketed it through its own leasing staff, and how soon after the tenant left.
• Put up signage, posted the space on listing services and responded to inquiries.
• Showed the space to prospects and made or considered offers.
• Asked rent in line with the market for comparable space, rather than a premium that no prospect would pay.
• Prepared the space to be shown, for example by removing the former tenant's property and making the premises presentable.

The duty has limits. The landlord is not required to accept a tenant who is financially unqualified, whose use violates other tenants' exclusives or the zoning, or whose terms are below market. The landlord is not required to relet on terms that would damage the building or to give the abandoned space priority over the landlord's other vacancies in every case, although a landlord that steers every prospect to its other space and never shows the abandoned premises will have trouble. And the landlord is not required to succeed; it is required to try reasonably. A landlord that documents a genuine marketing effort and still cannot find a tenant in a soft market recovers the full shortfall.

Who has to prove what

Failure to mitigate is a defense raised by the tenant, and the tenant bears the burden of proving both that the landlord's efforts fell short of reasonableness and the amount by which the landlord's damages would have been reduced had it acted reasonably. In practice the tenant needs evidence of the market: comparable space that leased during the period, the rents it commanded, and often a broker's testimony that the premises could have been relet by a given date at a given rent. The landlord, for its part, should expect to produce its marketing file, because a landlord that cannot show what it did will have a hard time persuading a jury it acted reasonably.

How the numbers come out

The landlord's recovery for the period after abandonment is the rent the lease required, less the rent the landlord actually received from a replacement tenant or, if the landlord failed to mitigate, the rent it reasonably could have received. Added to that are the costs of reletting that the lease allows the landlord to recover: brokerage commissions, the cost of restoring or altering the space for the new tenant, and legal fees under the lease or Chapter 38 of the Civil Practice and Remedies Code. If the replacement tenant pays more than the old rent, the former tenant does not share in the surplus but the landlord's damages for that period are zero.

Acceleration clauses interact with the duty. A clause that lets the landlord demand all remaining rent at once is enforceable in Texas only as a liquidated damages provision that reasonably forecasts the loss, and the amount is still subject to mitigation: the landlord that accelerates and then relets must credit the new rent. Clauses that are drafted as the present value of the shortfall between contract rent and market rent for the remaining term are more defensible than clauses demanding the whole term's rent with no credit, which risk being struck as penalties under the rules in whether liquidated damages clauses are enforceable in Texas.

Example

Suppose a tenant leases 8,000 square feet of office space in Addison at $22 per square foot per year with 30 months left on the term, and moves out in March. The landlord does nothing until July, when a broker is finally engaged at an asking rent of $28, well above the $23 comparable space is leasing for. The space relets in the following March at $23 for a five-year term, after the landlord spends $40,000 on a new tenant's improvements and a commission. The landlord sues the former tenant and its guarantor for 12 months of rent plus the reletting costs. The tenant proves, through a broker and comparable leases, that comparable space in the submarket was leasing within four to six months at market rent in that period, so a reasonable landlord would have relet by about September. The court reduces the landlord's recovery to roughly six months of rent at the old rate, the shortfall between $22 and $23 does not exist because the new rent is higher, and the reletting costs are awarded only to the extent the lease allows them. Had the landlord listed the space in March at market, it would likely have recovered the full period of actual vacancy.

Mistakes landlords make

• Waiting for the tenant to come back or to settle before marketing the space.
• Asking an above-market rent to recover the shortfall from the new tenant.
• Keeping no record of listings, inquiries, showings and declined offers.
• Leaving the departed tenant's property in the space for months, so it cannot be shown.
• Relying on a lease clause that disclaims the duty. It is void.

Mistakes tenants make

• Leaving without written notice and without returning keys, so that the date of abandonment is itself disputed.
• Assuming the landlord's duty wipes out the debt. It reduces damages; it does not excuse the breach, and the guarantor remains liable for what is left.
• Raising failure to mitigate at trial with no evidence of what the space would have relet for. The defense needs market proof.

A tenant weighing an early exit should read whether a business can break its commercial lease in Texas before moving out, because a negotiated termination usually costs less than the mitigated damages a court awards. Tina Wysk represents landlords, tenants and guarantors in lease default and damages disputes in Dallas-area courts through the firm's real estate litigation practice.