In a broad sense, both Austin Hill Country and the mitigation statute place a duty to mitigate damages upon a landlord when a tenant breaches the lease by vacating the leased premises before the lease term expires. When the duty arises, how it may be fulfilled, and the effect of a landlords failure to meet this duty may vary between the courts decision and the statute. It is therefore important to distinguish the application of the decision and the statute and to identify how each impact litigation between landlords and tenants and the drafting of leases.
Distinguishing Austin Hill Country and 91.006
Several matters distinguish the Austin Hill Country decision from the mitigation statute. First is the type leases that may be affected by each. The holding of Austin Hill Country applies retroactively, i.e. to all applicable leases no matter when the leases were executed. The mitigation statute applies only to leases entered into on or after September 1, 1997. The holding of Austin Hill Country applies only to commercial leases. Chapter 91 of the Texas Property Code applies to both residential and commercial leases. The Texas Supreme Courts opinion allows a commercial lease to provide that a landlord does not have a duty to mitigate damages. Any such waiver or exemption of the landlords duty to mitigate is void under the mitigation statute.3 The Texas Supreme Court placed limits on the landlords duty to mitigate and the effect of the landlords failure to mitigate.4 The statute is silent on such matters. These distinctions can be extremely important in drafting leases and in suits to recover rents or damages by a landlord against a defaulting tenant.
Landlord vs. Tenant
One of the practical effects of Austin Hill Country and the mitigation statute is that suits between landlords and tenants for nonpayment of rent instantly became factual disputes. Both the statute and the Texas Supreme Courts holding supply ample factual issues for litigation, thereby practically precluding the use of the summary judgment procedure.
The landlords duty under Austin Hill Country is to make reasonable efforts to mitigate damages when the tenant abandons the property, unless the commercial landlord and tenant contract otherwise.5 948 S.W2d 293, 299. This duty requires the landlord to make objectively reasonable efforts to fill the premises after the tenant vacates the premises.6 The Court does not further illustrate or define objectively reasonable efforts. It is clear that when reasonable is the standard of conduct that a fact issue exists.
The mitigation statute does not provide any description or guidance with regard to the landlords duty to mitigate. It simply provides that the landlord has a duty to mitigate damages when the tenant abandons the lease premises in breach of the lease.7 It is not certain that it will be the same standard set by the Austin Hill Country decision.8 It is yet to be determined by the courts or the legislature what the standard of care will be for landlords under the Property Code.
The Austin Hill Country decision provides some limitations on the landlords duty to mitigate, but these limitations are also fact issues in litigation. One of the stated limitations on the landlords duty is that the replacement tenant must be suitable under the circumstances.9 Every aspect of a proposed replacement tenants suitability from tenant mix to creditworthiness can clearly be an issue for discovery and the fact finders determination. A second limitation is the amount of mitigation that the landlord could or did accomplish.10 The landlords failure to use objectively reasonable efforts to fill the premises bars or lessens the recovery against the tenant only to the extent that the damages reasonably could have been avoided.11 The extent of the mitigation is a factual issue on every aspect of the lease, e.g. rental rates, tenant build out, term, CAM charges, etc...12 It seems that any provision of the lease that is subject to negotiation can be an issue in the litigation as to whether the landlord used reasonable efforts to fill the premises.
The mitigation statute provides no limitations on the landlords duty to mitigate. Depending upon the degree of duty which the Legislature or the courts apply to landlords, the factual issues surrounding the landlords duty are unlimited. Issues involving the type of commercial lease and replacement tenants will immediately arise. Issues involving the creditworthiness of a potential replacement tenant in both commercial and residential premises are destined to be litigated. A defaulting tenant might be allowed a credit for any potential replacement tenant if tenant suitability is not a factor under the mitigation statute. Unlike Austin Hill Country, the mitigation statute does not provide that the landlords duty to mitigate is only defensive.13 In other words, the mitigation statute may give the tenant affirmative relief to sue or countersue the landlord for breach of a duty in the lease. The possibilities for litigation are currently only limited by the tenant attorneys imagination.
Lease Drafting under the new standards
Traditionally, landlords had four options when a tenant defaulted under the lease and abandoned the premises: 1) maintain the lease and sue for rent as it accrued; 2) treat the tenants actions as an anticipatory repudiation of the lease, repossess and sue for damages measured by the present value of the future rentals less the reasonable cash market value of the property for the remaining lease term; 3) treat the tenants actions as an anticipatory repudiation of the lease, repossess, and sue for damages measured by the contractual rent and rental received from a replacement tenant; and 4) terminate the lease relieving the tenant from liability for further rents. 14 Under the traditional rule, there was no duty to mitigate under the landlords first option of maintaining the lease and suing for rent. Austin Hill Country and the mitigation statute effectively modify these traditional remedies to provide that a landlord has a duty to mitigate in all instances, not just when suing for anticipatory breach. The mitigation statute and Austin Hill Country significantly impact the drafting of the default and remedies provisions of leases.
Landlords and tenants should give special attention to default and lease provisions in light of Austin Hill Country and the mitigation statute. On leases entered into after September 1, 1997, the lease cannot waive or exempt the landlords statutory duty to mitigate damages.15 Nothing in the mitigation statute, however, seems to prohibit the parties from contracting for specific actions by the landlord that meet the requirements of Austin Hill Country and the statute. For example, the lease could contain a provision that the landlord would have fulfilled its duty under the mitigation statute if within a specified number of days the landlord advertises the property for rent by placing a For Lease sign in the premises and by publishing the availability of the space in the classified section of the local newspaper. The landlord will, of course, want a minimum standard to meet the duty to mitigate and the tenant will desire a high standard for the landlord to meet its duty to mitigate.
Discretion in determining the tenant mix and the acceptability of a replacement tenant can be a significant aspect of lease drafting in light of Austin Hill Country and the mitigation statute. As noted above, Austin Hill Country provides some limitations on a landlords duty to mitigate in that the replacement tenant must be suitable under the circumstances.16 The mitigation statute is silent on such point. A landlord will want the sole discretion to determine the suitability of a replacement tenant for tenant mix, creditworthiness or other reasons. A tenant will want any replacement tenant to be acceptable. The possible variations on these two extremes is infinite.
The effect of the landlords failure to properly perform its duty to mitigate is another area where careful drafting can avoid potential problems in litigation for landlords and tenants. Although Austin Hill Country limits the effect the landlords failure to mitigate, the mitigation statute does not. A careful landlord will require the lease to provide that in the event the landlord fails to mitigate damages that the tenants sole remedy will be a credit against the damages or rents due . A careful tenant will desire the lease to provide that the landlords failure to mitigate relieves the tenant from liability. The possibilities for drafting provisions addressing such issues are endless.
In light of the uncertainties caused by Austin Hill Country and the mitigation statute, one possible effective method of addressing the concerns of landlords and tenants is to provide for liquidated damages. By contractual provision, the landlord and tenant could provide for liquidated damages in the event of the tenants abandonment. Liquidated damage provisions are enforceable when the damages caused by breach of the contract are difficult or impossible to ascertain at the time of the contract formation and the amount of liquidated damages provided for in the contract is a reasonable forecast of just compensation.17 Importantly, liquidated damage provisions are not generally subject to the rule of mitigation.18 Even with a liquidated damage provision, drafting objective standards by which the landlord will meet its duty to mitigate would seem a prudent action on the part of the landlord in light of the anti-waiver provision of the mitigation statute.
Conclusion
Austin Hill Country and the mitigation statute will change the way attorneys for landlords and tenants look at leases and suits to recover rents against defaulting tenants. The certainty that previously surrounded a landlords remedies has yielded to ambiguous duties. The uncertainty caused by the Texas Supreme Courts decision and the amendment to the Texas Property Code will likely be addressed in the courts and the legislature over a period of time. Until clarified, the new world of mitigation of landlords damages offers substantial opportunities for creative draftsmanship and litigation.
Attorney B. D. Griffin practices Real Estate law in The Woodlands, Texas. He is Board Certified by the Texas Board of Legal Specialization in the areas of Commercial Real Estate Law and Residential Real Estate Law.
11 948 S.W. 2d 293 (Tex. 1997).
22 Tex. Prop. Code Ann. 96.001 (Vernon 1997).
3 Tex. Prop. Code Ann. 96.001(b) (Vernon 1997).
4 948 S.W.2d 293, 299.
5 Ibid.
6 Ibid.
7 See, Tex. Prop. Code Ann 96.001(a) (Vernon 1997).
8 See, Austin Hill Country Realty, Inc. v. Palisade Plaza, Inc., 948 S.W.2d 293, 299 (Tex.1997)([T]he courts of this state have developed differing language regarding a partys duty to mitigate in other contexts.) citing, City of San Antonio v. Guidry, 801 S.W.2d 142, 151 (Tex.App.San Antonio 1990, no writ).
9 948 S.W.2d at 299.
10 Ibid.
11 Ibid.
12 See e.g., Nautilus Training Center No. 2 v. Seafirst Leasing, 647 S.W.2d 344 (Tex.Civ. App. Corpus Christi 1982, no writ).
13 See, Tex. Prop. Code Ann. 91.006 (Vernon 1997). It is interesting to note that subsection (b) speaks to liability or duty on the part of the landlord. An argument could certainly be made that 91.006 creates affirmative liability on the part of the landlord if he fails to mitigate by the use of liability in subsection (b).
14 Speedee Mart v. Stovall, 664 S.W.2d 174, 177 (Tex.App.Amarillo 1983, no writ); Austin Hill Country at 300. For an excellant discussion of the traditional basis of a landlords rights upon a tenants default, see, Bliss, Robert Harms, Mitigation of Landlords Damages: Making Sense of Austin Hill Country Realty, University of Texas School of Law 31st Annual Mortgage Lending Institute.
15 Tex. Prop. Code Ann. 91.006(b) (Vernon 1997).
16 948 S.W.2d at 299.
17 See, Commercial Union Ins. Co. v. La Villa I.S.D., 779 S.W.2d 102 (Tex.App.Corpus Christi 1989, no writ).
18 Nautilus Training Center No. 2 v. Seafirst Leasing, 647 S.W.2d 344, 347 (Tex.App. Corpus Christi 1982, no writ); Texas Federal Savings & Loan v. Sealock, 737 S.W.2d 870, 881 (Tex.App.Dallas 1987, no writ).