28A — April 27 - May 10, 2012 — Spring Preview — Mid Atlantic Real Estate Journal
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N ew J ersey R eal E state L aw
By Nicholas Racioppi, Jr., Esq. and Matthew H. Lewis, Esq. The commercial landlord’s duty to mitigate damages
W
hen faced with a default by a com- mercial tenant, the
gate” its damages – that is, to make reasonable efforts to re-let the premises. If it fails
landlords’ ability to recover lost rent through litigation; it is also often used by savvy tenants and their counsel to gain leverage in post-default settlement negotiations. It is easy for a defaulting tenant to cast doubt on the landlord’s mitigation efforts, even when the landlord is genuinely trying to re-let the premises. Among other things, tenants may quibble with: the listing amounts, claiming that they are too high (delaying re-rental) or too low (generating too little income); whether enough
effort was put into market- ing the property; whether leads were pursued; whether the property was adequate- ly rehabilitated, etc. Thus, what may, from the landlord’s perspective, be a relatively straightforward lawsuit to recover rent can become sig- nificantly more protracted and complex, involving ex- tensive discovery and expert testimony concerning the “mitigation issue.” For this reason, after a de- fault, a landlord should take prompt actions to re-let the premises. (In New Jersey, a
landlord also may, but is not required to, mitigate by other means, for example selling the premises.) The landlord bears the burden of proving that it took diligent efforts to mitigate and should keep good records of what is being done – hiring brokers, advertising, e-mailing, site visits, listings, etc. The broker should as well. Everything that is done by the landlord or on its behalf can be evidence that it can use to prove its mitigation efforts. Courts have not provided a blueprint for what, specifi- cally, constitutes “diligent” or “reasonable” efforts to miti- gate. However, in a case con- cerning a residential lease, various considerations were cited, including whether the property was shown or adver- tised, a broker was engaged, and a “For Rent” sign put up. What constitutes adequate mitigation efforts is made on a case-by-case basis. Commercial leases some- times include a provision whereby the tenant waives the landlord’s duty to miti- gate. If enforceable, such a provision not only will help to ensure the landlord’s abil- ity to recover in the face of a default, but it also can sig- nificantly reduce the cost and complexity of legal efforts to recover rent and also reduce the tenant’s leverage in nego- tiating a settlement. Whether such waivers are enforceable in New Jersey is unsettled. Although a number of other jurisdictions enforce them, they contravene the common law policy requiring parties to try to minimize losses. On the other hand, the only party hurt by such a waiver is the tenant, who agreed to it, and there is also a strong policy favoring free- dom of contract that supports enforcement of such waivers, at least in the context of com- mercial leases. The contents of this article are for information purposes only. Nothing contained in this article is intended to be relied upon for legal advice. Nicholas Racioppi, Jr. is a partner in Riker Danzig Scherer Hyland & Per- retti LLP’s Real Estate and Financial Institutions Practice Groups. Matthew H. Lewis, Esq. is an Associate with Riker Danzig Scherer Hyland & Perretti LLP. n
amoun t o f prospective rent and oth- er amounts due unde r a lease (the amounts due after the de- faul t ) that the landlord can recover from the ten-
to make such efforts, the l a nd l o r d ’ s potential re- covery may bereducedby the amount that a court o r j u r y finds that it “shouldhave” reduced its
Nicholas Racioppi, Jr.
Matthew Lewis
ant is limited under the law of New Jersey, and most states, by the landlord’s duty to “miti-
losses through reasonably diligent efforts. The mitiga- tion duty does not only affect
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