Tennessee commercial landlord/tenant (lessor/lessee) law requires a lessor of a commercial property to act fairly and reasonably, under the circumstances, to mitigate its lost rental income resulting from a lessee/tenant abandoning the property before the expiration of the lease term or notifying the lessor that it no longer intends to comply with the lease. Obviously, this requirement means that the lessor must try to secure a new tenant for the subject property. However, what steps on the part of the lessor satisfy its obligation to act fairly and reasonably to find a new tenant to mitigate its damages necessarily must be decided on a case-by-case basis given the varying interpretations that can be applied to the “fair and reasonable” standard.
Since there are no bright lines to apply to determine whether a landlord has satisfied its obligation to mitigate its damages, it is helpful to look at a few cases on the subject to understand what factors might be important to a Tennessee court faced with an argument from a lessee that what it owes to the lessor should be reduced because the lessor’s attempts to find a new lessee fell short of satisfying the reasonable and fair standard.
Loans Yes v. Kroger Limited Partnership (Tenn. Ct. App. 2020): In this case, the court rejected the tenant’s argument that the landlord had failed to mitigate its damages. The tenant stopped paying rent six months before the lease expired. Within about one month after receiving the tenant’s notice that it wanted to terminate the lease early, the landlord signed a listing agreement with a commercial broker who agreed to undertake re-leasing the property. The broker, promptly thereafter, sent out an email blast to about 335 other brokers notifying them of the availability of the property. The broker also listed the property on several websites known to be used by brokers and by prospective tenants. Moreover, the broker placed the property on his company’s availability report which was accessible by about 500 other brokers.
Kahn v. Penczner (Tenn. Ct. App. 2008): In this case, the trial court determined that the landlord’s lost rental income damages should cut in half because it failed to mitigate its damages.
The lease in the case allowed the tenant to sublet the premises, which it sought to do in order to find a sublessee to occupy the premises and to pay the rent for the remainder of the term of the lease. The lease terms required that, for any prospective sublessee proposed by the tenant, the tenant had to submit a financial statement and business background summary to the landlord. The court found that the parties also intended to agree that the landlord had to approve any proposed sublessee.
The tenant provided financial information and a business description of a proposed sublessee to the landlord. The court agreed with the landlord that the information submitted was incomplete and could indicate that the proposed sublessee was not financially secure enough to comply with the lease terms. However, it faulted the landlord for not following up to ask for more complete information on the prospective sublessee or for attempting to negotiate further about the proposed sublease. Additionally, the trial court found that the landlord had failed to mitigate because it retained a broker to try and lease the property under terms that differed “materially” from the terms of the lease between the landlord and tenant. The court took issue with the landlord trying to obtain “significantly more rents, and a longer lease term.” The monthly rental amount under the lease at issue was $7,425, while the landlord sought rent of $15,000 per month for the re-leasing of the property. (The court’s concern with the “longer lease term” is inexplicable based on the facts contained in its opinion.) The court did not find that the $15,000 per month rate was inconsistent with its current market value. Presumably, that was the case, as, under Tennessee law, a landlord does not, per se, fail to mitigate its damages because it attempts to re-let at the market rate, as opposed to the rate in the lease at issue which had been breached.
Bellevue Properties, LLC v. United Retail, Inc. (Tenn. Ct. App. 1999): In this case, the court found that the lessor had not failed to mitigate and, in doing so, rejected the arguments proffered by the lessee. The leased space at issue was 1,500 square feet inside a mall. When the lessor attempted to re-let the space, it did not market it separately from other spaces in the mall. Instead, it marketed all its available space within the mall together at trade shows. The court acknowledged that the lessor had made “no special attempt to show [the space] to any potential [lessees].” Nevertheless, it found that such efforts, or lack thereof, did not amount to a failure to mitigate.
The lessee’s second argument was that the landlord had attempted to re-let the premises at a higher rate than the rental rate contained in the lease between it and the lessor. The trial court found that, under Tennessee law, a landlord is not required to cap the rental rate when reletting premises and that a failure to do so does not amount to a failure to mitigate.
For Tennessee lawyers representing landlords or tenants in commercial lease cases, while the above cases provide some guidance for sure, they also teach that the outcome in each breach of contract case for a commercial lease, where the tenant alleges a failure to mitigate, will be very fact sensitive.