The legal duty of landlords to “mitigate damages” resulting from a tenant’s default can put you in a tough spot when the tenant abandons or gets evicted from the property. The risk arises if you sue the tenant for money damages. The tenant may contend that you violated your duty to mitigate by not making reasonable efforts to find a new tenant. If the court agrees, it will subtract the amount it thinks you could have collected from a substitute from a substitute tenant from the damages award. And that may cost you a ton of money. The mere risk of mitigation deductions may pressure landlords into doing things they wouldn’t normally do to re-let the space, such as accepting less than fair market rent or substitute tenants that don’t meet the property’s standard financial qualifications.  

The bad news is that you may not be able to completely contract out of your duty to mitigate damages; the good news is that you can limit it. But to do so, you need to add specific language to your lease. Here’s how to draft and negotiate a fair, reasonable, and legally enforceable mitigation of damages limitations clause, along with a Model Lease Clause that you can adapt for your own use. 

The Law of Mitigating Damages

Contracts Law, 101: When a party breaches a contract, the non-breaching party is generally entitled to what are known as compensatory damages putting them in the position they would have been in had the breach not occurred. Thus, for example, if a tenant paying $30,000 per month in rent abandons a property with 10 months left on the lease, the landlord would be entitled to $300,000 in damages.

But compensatory damage rights are also subject to restrictions. The non-breaching party must try to mitigate the damages it incurs as a result of the default. In the context of a tenant’s lease breach, mitigation of damages means “reasonable efforts” by the landlord to find a new tenant to take over the property the tenant left behind. 

In most states, mitigation of damages is required by law, at least in commercial contracts (see box below).

States Requiring Landlords to Mitigate Damages

But even in states where it isn’t a legal duty, it’s common for landlords and tenants to add mitigation of damages requirements into the contract to protect each party. Such protection is especially important for tenants that are concerned that if they do breach the lease, the landlord will just let the space remain vacant and keep on billing them for the unpaid rent.

Efforts to Re-Let Must Be Reasonable, Not Extraordinary 

Whether required by law or lease, the duty to mitigate, including the landlord’s duty to re-let, can be modified by mutual agreement. But those modifications must be spelled out in writing, and they must be reasonable. Rule of thumb: Landlords don’t have to go to extraordinary lengths to fill a defaulting tenant’s vacancy. They can follow their normal rental policies and selection criteria in deciding whether to rent to a prospective substitute tenant without having to bend the rules or provide special treatment.

But there’s another condition. Limitations on the landlord’s duty to re-let must also be spelled out in the lease. That’s why it’s crucial to have a lease clause that specifically addresses what you have to do—or more precisely, don’t have to do—to meet your duty to mitigate in selecting substitute tenants. There are nine key elements such a clause should include. 

1. No Duty to Re-Let Space Landlord Doesn’t Possess

There may be situations where the defaulting tenant’s property is vacant, but you don’t have clear legal right to possess it, such as where your eviction suit against the tenant is still in court. Do you have to seek a substitute tenant while the case is pending? You can put that question to bed by spelling out that the duty to mitigate doesn’t require you to market, advertise, solicit, or negotiate with any prospects until you obtain “full and complete possession” of the premises [Clause, par. b(i)]. 

Negotiating Strategy: While you should stand firm on “negotiate,” you may have room to compromise on the other three verbs contained in the clause, i.e., “market,” “advertise,” and “solicit.” 

2. No Duty to Prioritize Defaulting Tenant’s Space Over Other Vacancies

Your duty to mitigate may kick in at a time when there are spaces similar to the defaulting tenant’s available in your building/center. The duty to use reasonable efforts to re-let shouldn’t take away your right to decide which of these spaces to offer a prospect first. To ensure flexibility, spell out that you have no obligation to offer the defaulting tenant’s space to a prospective substitute tenant when there are other “similar” premises suitable for the prospect’s use that are either currently available or will become available with a specific time period, such as three months [Clause, par. b(ii)].

Negotiating Strategy: Stand firm if the tenant wants a specific definition of what “similar” premises mean. But if you must give in, at least try to keep the definition as broad as possible.      

3. No Duty to Accept Below Market Rent

Say that you have no obligation to offer a substitute tenant a rental rate below fair market for properties that are similar to the premises of the defaulting tenant in properties similar to your own building/center [Clause, par. b(iii)].

Negotiating Strategy: This is a must-have even though you have the legal right to sue the defaulting tenant for the revenues you lose by leasing to the substitute tenant at a cut rate. After all, there’s no guarantee that you’ll ever be able to collect that money, especially if the defaulting tenant is financially insolvent. Accepting below-market rent may also damage your building or center’s reputation and compromise your bargaining leverage with other prospects and tenants.

4. No Duty to Grant Unacceptable Lease Terms

Make it clear that you have no obligation to offer a substitute tenant lease terms and conditions that you wouldn’t accept from any other tenant seeking to lease that space just to fill the defaulting tenant’s vacancy [Clause, par. b(iv)]. 

Negotiating Strategy: There’s no room for compromise on this one. The good news is that, according to attorneys, the provision is anything but a deal breaker and tenants will probably understand and accept it. However, they may want you to furnish documentation of your rental policies and attach them as exhibits to the agreement. 

5. No Duty to Accept Financially Unqualified Prospects

Clearly reserve your right to reject substitute tenants that don’t, in your reasonable judgment, have sufficient financial resources or operating experience to run the business “in a first-class manner.” The duty to mitigate, in other words, doesn’t require you to set aside your standard criteria for determining whether rental prospects are financially qualified [Clause, par. b(v)].

Negotiating Strategy: While likely to accept this provision in principle, tenants may want a description or documentation of your financial eligibility screening criteria.

6. No Duty to Accept Harmful or Disruptive Uses

You may want to reject a substitute tenant that’s financially qualified, willing to pay fair market rent, and accept your standard lease terms if its proposed use would have a harmful or disruptive impact on the building/center and/or its current tenants. So, stipulate that you’re under no obligation to lease to a substitute tenant whose use would, in your reasonable judgment: 

• Disrupt the tenant mix or balance, (e.g., as a Dollar Store in a posh, upscale mall) [Clause, par. b(vii)(A)];
• Violate a restriction, covenant, or requirement, (e.g., where the substitute tenant sells items to which a current tenant has an exclusive) [Clause, par. b(vii)(B)];  
• Harm the reputation or image of the building/center [Clause, par. b(vii)(C)]; or
• Be incompatible with the operation of the building/center as a first-class facility [Clause, par. b(vii)(D)].

7. No Duty to Remodel or Alter the Space

An otherwise acceptable substitute tenant may insist that you remodel or make alterations to the premises before moving in. You need to be able to reject these demands to ensure that you don’t get stuck with the costs of alterations that you don’t want or can’t afford. But you might see things differently if you don’t actually have to pay for the proposed alterations. Even if you do have to pay for them, you may determine that the proposed improvements are worth the money, e.g., where the total costs are less than the higher rent the substitute tenant is willing to pay for the remodeled space. 

To balance all of these interests, say that you’re not obligated to spend money for remodeling or alterations to make the space suitable for use by the substitute tenant while at the same time reserving your right to do so if either: 

• The tenant pays you a sum of money as security in advance before you execute the lease with the substitute tenant; or
• You determine, in your sole discretion, that the expenditures are financially justified [Clause, par. b(vi)]. 

Negotiating Strategy: Specify that any money the tenant shells out to cover the alterations in accordance with the first bullet above is separate from and not a substitute for or offset against the money it owes you for defaulting on the lease.   

8. Tenant Acknowledgement of Proper Mitigation 

While the language laying out the parameters for proper mitigation is the heart of the clause, there are a couple of other legal details to attend to minimize the risk of subsequent mitigation claims by the tenant. First, get the tenant to expressly acknowledge that your compliance with the terms and conditions for re-letting set out in paragraph b of the clause fully satisfies your duty to mitigate damages under the lease [Clause, par. c].

9. Tenant Waiver of Mitigation Claims

For the finishing touch, get the tenant to waive its rights to assert any defenses, counterclaims, and offset or recoupment claims based on the landlord’s failure to mitigate damages under the lease in any lawsuits or legal proceedings the landlord brings to enforce the lease. Exception: The waiver doesn’t apply if the landlord “maliciously or in bad faith” fails to comply with the requirements of the clause [Clause, par. d].