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Should the Commercial Landlord Have a Duty to Mitigate Damages After the Tenant Abandons?: A Legal and Economic Analysis
Michigan Law Review (2013)
  • David Crump
Abstract
ABSTRACT When a commercial tenant abandons the premises, the landlord’s costs continue. Does the landlord, then, have the burden of mitigating damages for a suit against the tenant? Two different rules apply in different states. Some states, including Pennsylvania, put the burden of mitigation on the breaching party: the commercial tenant. Other states, however, put the burden entirely on the non-breaching party: the landlord. Texas follows this latter approach, placing the burden solely on the innocent party and not on the breaching party. The Texas rule, which puts the burden of mitigation on the non-breaching commercial landlord, has serious disadvantages. First, it places no obligation on the tenant to do anything, and thus it discourages the tenant from removing its possessions, cleaning the tenancy for re-letting, or even notifying the landlord. It thus delays the time when the landlord can be sure of the fact of abandonment. Without this certainty, the landlord foresees a significant risk of potential liability from re-entering the premises or removing anything. The tenant is discouraged from cooperating with the landlord about the configuration or buildout of the premises. In fact, the tenant has no incentive to cooperate at all in mitigating damages, because the message is that “It’s the landlord’s problem.” The tenant is not motivated to negotiate with the landlord to agree to a buyout of the rest of the lease. Furthermore, having no responsibility to look to the future of the leasehold, the tenant has less hesitation in abandoning in the first place. Often, the commercial tenant simply sneaks away in the dead of night, leaving the landlord to figure out what has happened. Economically, a society wants its factors of production, or its resources, used efficiently, in their best uses. The Texas rule, although it purports to advance this goal, actually interferes with it. The society also wants its resources to produce the largest market basket possible. Economists refer to this goal as an effort to produce at the “production possibility frontier.” Again, the Texas rule fails to support this objective. Unfortunately, the Texas court did not recognize these effects of its rule. The approach that places the entire burden of mitigation on the nonbreaching party, the commercial tenant, appears to be based upon two tacit assumptions. First, it appears to assume that commercial tenants are uniformly weak and commercial landlords always powerful. On the contrary, commercial tenants are just as often huge entities such as Wal-Mart, Sears, or McDonald’s, and commercial landlords are just as often relatively small entities. Second, the rule appears to assume that tenants have no ability to mitigate damages. On the contrary, commercial tenants seeking new leasehold spaces often employ real estate agents, and as the Pennsylvania court observed, are just as capable of mitigating damages as the landlord when they breach their leases. Although residential leases present different issues, the Pennsylvania approach of putting the burden of mitigation on the commercial tenant is the better rule. In the first place, as the Pennsylvania court explained, this rule is more consistent with deontological ethics, or with a moral philosophy of right and wrong, because it puts the burden of mitigation on the party who has caused the damage: the commercial tenant who has breached the lease. In the second place, the Pennslyvania rule is economically sound. The commercial landlord is tied to the leasehold and remains motivated to see it efficiently used. The commercial tenant is not so tied, but the Pennsylvania rule encourages responsibility on the part of the tenant. The Pennsylvania approach thus is more likely to lead to efficient use of resources and to production at the production possibility frontier.
Disciplines
Publication Date
2013
Citation Information
David Crump. "Should the Commercial Landlord Have a Duty to Mitigate Damages After the Tenant Abandons?: A Legal and Economic Analysis" Michigan Law Review (2013)
Available at: http://works.bepress.com/david_crump/12/