Co-author: Jeremy S. Durham
When a residential or commercial tenant defaults on a lease, it is in the landlord’s best interest to make aggressive efforts to mitigate the harm to the landlord. Because landlords do not know whether they can collect damages from the tenant or lease guarantors, landlords will want to do everything that they reasonably can to reduce damages. Regardless of whether the landlord appreciates the benefit of finding a replacement tenant, the law imposes an obligation on the landlord to make reasonable efforts to mitigate damages if he or she wants to try and collect damages from the defaulting tenant.
Schneiker v. Gordon outlines the measure of damages that Colorado courts apply to landlords trying to collect from defaulting tenants. Under Schneiker, lease agreements are subject to the established principles of contract law. The measure of damages that a landlord is entitled to recover is limited to an amount that places the landlord in the position he or she would have been in had the breech not occurred, taking into account the landlord’s duty to mitigate.
Because the landlord’s duty to mitigate is taken into account, the landlord will only be able to recover the difference between the rental rate specified in the lease and the current reasonable market rental rate for the premises, plus reasonable reimbursement for reasonable downtime and marketing costs.
Determining market lease rates can be controversial. One of the best means for a landlord to avoid uncertainty about the reasonable rental value of a property is to make aggressive efforts to re-lease the space. If the landlord finds a tenant after aggressively marketing the property, the new lease tends to establish the market rate. By the time most cases get to trial, aggressive marketing and aggressive lowering of rental rates should produce a replacement tenant. However, even if no replacement tenant is found, the landlord’s efforts will at least produce a ceiling on market rates if the matter of market rates is litigated.
Regardless of the law, a landlord should seek out a substitute tenant. It is possible that a tenant who has stopped making rental payments, and any lease guarantors, will be unable to pay a judgment.
When a guarantor secures a lease, the landlord’s duty to mitigate protects the guarantor in addition to the tenant. When seeking to collect from a guarantor, a landlord’s duty to mitigate may extend beyond simply making a good faith effort to locate a replacement tenant. In Car Wash Leasing v. Consolo, an Ohio court ruled that a landlord’s duty to mitigate on behalf of a guarantor is not excused because the defaulting tenant has not vacated the property. In those instances, the Ohio court ruled that the landlord actually has a duty to “commence eviction proceedings in an effort to mitigate damages.” Thus, at least one court has held that the landlord’s duty to mitigate on behalf of guarantors imposes an obligation to evict defaulting tenants.
Jeremy S. Durham was a law clerk at the law firm of Frascona, Joiner, Goodman and Greenstein, P.C.