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A landlord has a duty to make reasonable efforts to mitigate damages when the tenant breaches the lease and abandons the property, unless the commercial landlord and tenant contract otherwise.
Palisades Plaza, Inc, owner and operator of an office complex consisting of four office buildings in Austin, executed a five-year commercial office lease with Austin Hill Country Realty, Inc., for a suite in the Palisades’ office complex. The parties signed an improvement agreement which called for the Palisades to convert the shell office space into working offices for Hill Country. Palisades had nearly completed the improvements; however, it received conflicting instructions about the completion of the suite from Austin Hill, on one hand, and Annette Smith and David Jones, on the other. Palisades informed Hill Country, Hill, Smith, and Jones that it had received conflicting directives and would not continue with the construction until Hill, Smith, and Jones collectively designated a single representative empowered to make decisions for the trio. Hill, Smith, and Jones did not reply to these letters. Palisades informed the parties that their failure to designate a representative was an anticipatory breach of contract. Subsequently, the Palisades sued Hill Country, Hill, Smith, and Jones (collectively, "Hill Country") for anticipatory breach of the lease. At trial, Hill Country attempted to prove that the Palisades failed to mitigate the damages resulting from Hill Country's alleged breach. In particular, Hill Country introduced evidence that the Palisades rejected an offer from Smith and Jones to lease the premises without Hill, as well as an offer from Hill and another person to lease the premises without Smith and Jones. Hill Country requested an instruction asking the jury to reduce the Palisades' damage award by any amount that could have been mitigated. The trial court rejected the instruction, and the jury returned a verdict for the Palisades for $29,716 in damages and $16,500 in attorney’s fees. The appellate court affirmed the judgment. Hill Country challenged the decision.
Should a landlord make reasonable efforts to mitigate damages when a tenant defaults on a lease?
The Court reversed and remanded for a new trial, holding that Palisades did have an obligation to mitigate its damages following the suit for anticipatory breach. According to the Court, landlords must mitigate damages upon a tenant's abandonment and failure to pay rent. Under a contract view, a landlord should be treated no differently than any other aggrieved party to a contract. A landlord should not be allowed to collect rent from an abandoning tenant when the landlord can, by reasonable efforts, relet the premises and avoid incurring some damages. Moreover, a landlord has a duty to make reasonable efforts to mitigate damages when the tenant breached the lease and abandoned the property, unless the commercial landlord and tenant contract otherwise. The Court averred that the landlord’s duty to mitigate would require the landlord to use objectively reasonable efforts to fill the premises when the tenant vacated in breach of lease. The Court further held that, in the case at bar, Hill Country bore the burden of proof in demonstrating whether Palisades had mitigated or not, and the amount by which any damages should have been reduced.