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Striking the Balance: Navigating Mitigation Obligations for Commercial Landlords in Tennessee Lease Cases

Posted by Robert Dziewulski | Aug 10, 2023 | 0 Comments

Under Tennessee law controlling commercial landlord-tenant relationships, lessors (landlords) are obligated to act fairly and reasonably, under the circumstances, in order to mitigate lost rental income when a lessee (tenant) prematurely abandons the property or notifies the lessor of non-compliance with the lease. This requirement implies that the lessor must make reasonable efforts to secure a new tenant for the property. However, determining the specific steps that fulfill the lessor's duty to act fairly and reasonably in finding a new tenant and mitigating damages is subject to case-by-case analysis due to the varied interpretations of the "fair and reasonable" standard. It is important to keep in mind that the lessee (tenant) has the burden of showing there was a failure to mitigate damages.

Since we are unable to reference brighline statutes or case law to determine whether a landlord has fulfilled its duty to mitigate damages, it is beneficial to examine a few relevant cases to understand the factors that may be significant to a Tennessee court when faced with a lessee's argument to reduce its obligations to the lessor based on insufficient efforts by the lessor to find a new lessee meeting the fair and reasonable standard.

Bellevue Properties, LLC v. United Retail Inc., 1999 WL 1086221 (Tenn. Ct. App. Dec. 3, 1999)

In this case, the court determined that the lessor had not failed to mitigate and rejected the lessee's arguments. The leased space in question comprised 1,500 square feet within a mall. When the lessor attempted to re-let the space, it did not market it separately from other available spaces in the mall. Instead, the lessor marketed all its available mall spaces together at trade shows. The court acknowledged that the lessor had made no specific efforts to show the space to potential lessees. However, the court held that such actions, or lack thereof, did not amount to a failure to mitigate.

The lessee's second argument was that the lessor attempted to re-lease the premises at a higher rate than the rental rate specified in the lease. The trial court determined that under Tennessee law, a landlord is not obliged to cap the rental rate when re-leasing premises, and the failure to do so does not constitute a failure to mitigate.

Kahn v. Penczner, 2008 WL 2894827 (Tenn. Ct. App. July 24, 2008)

In this case, the trial court concluded that the landlord's lost rental income damages should be reduced by half due to its failure to mitigate damages adequately.

The lease in question permitted the tenant to sublet the premises, intending to find a sublessee who would occupy the premises and fulfill the rent obligation for the remainder of the lease term. According to the lease terms, any prospective sublessee proposed by the tenant required submission of a financial statement and a business background summary to the landlord. The court acknowledged the parties' understanding that the landlord's approval was necessary for any proposed sublessee.

The tenant provided financial information and a business description of a proposed sublessee to the landlord. While the court agreed with the landlord's contention that the submitted information was incomplete and raised doubts about the financial stability of the proposed sublessee, it faulted the landlord for not requesting more comprehensive information or engaging in further negotiations regarding the proposed sublease. The trial court also found fault with the landlord's mitigation efforts because they involved retaining a broker to lease the property under terms that differed "materially" from the lease agreement with the tenant. The court criticized the landlord for seeking "significantly more rents and a longer lease term." Notably, the lease at issue had a monthly rental amount of $7,425, whereas the landlord sought a monthly rent of $15,000 for re-leasing the property. (The court's objection to the "longer lease term" is unclear based on the facts in the opinion.) The court did not find the $15,000 monthly rate inconsistent with the property's current market value. Presumably, this was the case because Tennessee law does not consider a landlord's attempt to re-let the property at the market rate, as opposed to the rate specified in the breached lease, as automatically failing to mitigate damages.

Loans Yes v. Kroger Ltd. P'ship I, 2020 WL 6386884 (Tenn. Ct. App. Oct. 30, 2020)

In this case, the court dismissed the tenant's claim that the landlord had failed to mitigate damages. The tenant ceased rent payments six months prior to the lease expiration. Within approximately one month of receiving notice from the tenant regarding early lease termination, the landlord entered into a listing agreement with a commercial broker, who agreed to undertake the re-leasing process. The broker promptly sent an email blast to around 335 other brokers, informing them about the available property. Additionally, the broker listed the property on several websites commonly used by brokers and prospective tenants. The broker also included the property in their company's availability report accessible to about 500 other brokers.

In summary, these cases offer some guidance for Tennessee lawyers representing landlords or tenants in commercial lease disputes. However, they also emphasize the importance of recognizing that the outcome of each breach of contract case involving a commercial lease and an allegation of failure to mitigate will heavily depend on the specific facts and circumstances of the case.

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