Contract Law, 101: When a party breaches a contract, the other party can sue for damages in the amount necessary to put it in the financial position it would have been in had the contract been fulfilled. But limitations apply, including the so-called duty to mitigate damages, which requires the non-breaching party to make some level of reasonable efforts to minimize the financial losses it incurs as a result of the breach. In the context of commercial leasing, mitigation of damages typically means efforts by the landlord to market the property and seek a replacement tenant for the property. The idea is to prevent the landlord from sitting back and allowing the property to remain vacant and the damages to add up, knowing it can charge the tenant for the lost income.

There are at least 27 states that specifically require landlords to mitigate their damages regardless of whether the lease expressly spells this out. Even in states where mitigation isn’t automatically read into the lease, landlords may accept a duty to mitigate voluntarily as part of the lease agreement. 

Know the Mitigation Laws of Your State

Landlords that do have a duty to mitigate, whether via operation of law or voluntary agreement, should insert lease language that clearly explains and sets limits on their mitigation duties. You’ll be in a stronger position to negotiate limits if you’re in a state like New York where landlords are allowed but not required to mitigate damages. Here’s a strategy and Model Lease Clause crafted by a seasoned New York leasing attorney. If you come from a mandatory mitigation state, talk to your attorney about adapting the Model Lease Clause to meet your situation and state requirements. 

1. Promise “Commercially Reasonable Efforts” Rather than “Best Efforts”

The first thing you want to clarify is the legal standard by which your mitigation efforts will be measured. There are two basic alternatives that sound the same but have significantly different meanings under contract law:

• “Best efforts,” which requires the mitigating landlord to take all reasonable steps to secure a new tenant for the space, even to its own financial detriment; and
• “Commercially reasonable efforts,” which gives the landlord more leeway to account for its own business interests in finding a replacement tenant.  

If permitted by state law, agree to make “commercially reasonable efforts” and not “best efforts” to re-let the premises [Clause, par. a].

2. Require Tenant to Vacate Voluntarily

Make your duty to mitigate conditional on the tenant’s voluntary surrender of the premises. “I feel that a landlord shouldn’t take on a duty to mitigate damages where a tenant doesn’t have the courtesy or decency to vacate voluntarily and must be ousted through the eviction process,” the New York attorney explains [Clause, par. a]. 

3. List the Actions You Don’t Have to Take to Re-Let

After agreeing to use commercially reasonable efforts to re-let the premises of tenants who voluntarily vacate, list the specific actions that you’re not required to take simply to meet your mitigation duties, which the New York attorney says should include:     

• Prioritizing renting the space over other availabilities in the property, which will give you the latitude to bring in other new tenants while the defaulting tenant’s space remains vacant [Clause, par. b(i)];
• Accepting tenants that would force you to modify or undermine your desired tenant mix [Clause, par. b(ii)]; 
• Leasing the vacant premises on below fair market terms, as you determine at your sole discretion [Clause, par. b(iii)]; 
• Accepting tenants that don’t meet your creditworthiness or other financial standards—mitigation shouldn’t require you to lease to tenants you deem unqualified and wouldn’t normally accept [Clause, par. b(iv)];
• Contracting with any party that doesn’t meet the requirements of any mortgage or ground lease on the property [Clause, par. b(v)];
• Accepting a tenant that may impose an increased burden on the building’s facilities, infrastructure, or services [Clause, par. b(vi)]; and
• Accepting a tenant represented by a broker or agent who asks you to pay a commission in an amount or on terms that you deem unacceptable [Clause, par. b(vii)]. 

MODEL LEASE CLAUSE

Set Clear Limits on Landlord Duty to Mitigate

Many states require landlords to mitigate the damages they incur as a result of a tenant’s breach by actively seeking a new tenant to take over the space. In states where it’s not mandatory, tenants may ask to include mitigation of damages language in the lease to ensure that the landlord won’t simply let the space remain vacant knowing that the tenant is on the hook for the resulting income losses. This is an acceptable demand, a New York City leasing attorney advises, provided that you establish clear limits on what your duty to mitigate does and doesn’t require you to do, as the Model Lease Clause below does. While designed for use in non-mandatory mitigation states like New York, the clause can also be adapted for use in mandatory states. But speak to your attorney first. Thus, for example, the “reasonable commercial efforts” language may be unsuitable in states where statutes or court rulings dictate that landlords use “best efforts” to mitigate their damages.

MITIGATION OF DAMAGES

a.         Landlord Duty to Mitigate. In the event that Tenant voluntarily surrenders the demised premises, Landlord shall endeavor to use commercially reasonable efforts to mitigate its damages in accordance with the terms set forth below.

b.         Limitations. Notwithstanding the immediately preceding sentence, Landlord shall be under no obligation in re-letting the demised premises for purposes of mitigating damages to: 

(i)         Give priority to the rental thereof over other available space in the Building;

(ii)        Modify the tenant mix in the Building that Landlord seeks to achieve; 

(iii)       Contract with any party on a rental below fair market terms, as determined by Landlord in its sole discretion;

(iv)       Contract with any party that fails to meet Landlord’s financial standards and qualifications for tenants, including but not limited to Landlord’s standards of adequate creditworthiness; 

(v)        Contract with any party that does not meet the requirements of any ground lease or mortgage encumbering the Building; 

(vi)       Contract with any party that could impose an increased burden on the services, facilities, or infrastructure of the Building; or 

(vii)      Contract with any party represented by a broker, agent, or salesperson who requests of Landlord a commission in an amount or on terms unacceptable to Landlord.