O'Brien v. Black

OBRIEN_V_BLACK.92-073; 162 Vt. 448; 648 A.2d 1374

[Opinion Filed April 8, 1994]

[Motion for Reargument Denied August 10, 1994]

 NOTICE:  This opinion is subject to motions for reargument under V.R.A.P.
 40 as well as formal revision before publication in the Vermont Reports.
 Readers are requested to notify the Reporter of Decisions, Vermont Supreme
 Court, 109 State Street, Montpelier, Vermont 05609-0801 of any errors in
 order that corrections may be made before this opinion goes to press.


                                 No. 92-073


 Donohoe O'Brien, Burlington                  Supreme Court
 Square Limited Partnership,
 d/b/a Burlington Square
                                              On Appeal from
      v.                                      Chittenden Superior Court


 William R. Black, Karen L. Black             January Term, 1994
 and Pickwick & Perkins, Ltd.


 Alden T. Bryan, J.

 Dennis R. Pearson and Craig Weatherly of Gravel and Shea, Burlington, for
    plaintiffs-appellants

 Paul D. Jarvis and Richard R. Goldsborough of Jarvis & Kaplan, Burlington,
     for defendants-appellees



 PRESENT:  Allen, C.J., Gibson, Dooley, Morse and Johnson, JJ.


      JOHNSON, J.   Today, in affirming the judgment of the superior court,
 we hold that a commercial landlord has a duty to make reasonable efforts to
 mitigate its damages when its tenant abandons the leased property.  This
 duty arises as soon as the landlord has notice of the tenant's abandonment,
 even if the lease has not been formally terminated.
      Landlord, Burlington Square Mall, brought this action to recover rents
 and expenses under a lease after tenant, Pickwick & Perkins, Ltd., abandoned
 the leased premises before the scheduled expiration of the lease term.  The
 lease provided that, in the event of default by tenant, "Landlord may, at

 

 its option, give to Tenant a written notice of its intention to terminate
 this lease."  It further provided that "[a]cceptance of the surrender of
 this lease shall not be effective unless made in writing and signed by
 Landlord."
      The five-year lease was to end on November 1, 1991, but tenant
 abandoned its space in the Burlington Square Mall and ceased paying rent at
 the end of January 1990.  Shortly thereafter, landlord began searching for a
 replacement tenant.  Landlord also sent a notice of default, warning tenant
 that if tenant did not cure the default, landlord could exercise its option
 to terminate the lease.  Although tenant did not cure its default, landlord
 did not formally terminate the lease or otherwise seek to dispossess tenant
 from the premises until August 10, 1990, when it rented the space to a new
 tenant.  Landlord then brought this action seeking to charge Pickwick &
 Perkins rent for the intervening months between abandonment and reletting.
      Tenant defended the action by arguing that landlord's failure to make
 reasonable efforts to mitigate damages relieved tenant of any obligation to
 pay rent.  The dispute over mitigation centers around landlord's response to
 a prospective tenant, Vivien Ginsberg, in February 1990.  The trial court
 found that Ms. Ginsberg, another tenant in the Mall, had approached landlord
 about the possibility of expanding her business and relocating into the
 space vacated by tenant.  Landlord refused to discuss the possibility of
 renting this space with Ms. Ginsberg, telling her that the space had already
 been relet to another tenant.  This was not in fact the case.  Ultimately,
 landlord was successful in leasing to a new tenant that was part of a
 national chain at a substantial increase in rent.

 

      After a bench trial, the court entered judgment in favor of tenant.
 The court held that landlord had a duty to make reasonable efforts to miti-
 gate its damages upon abandonment by tenant, even though the lease had not
 been formally terminated.  The court then found that tenant had presented
 sufficient evidence to sustain its burden of proving that landlord failed to
 mitigate damages, reasoning that landlord's "blatant failure to even discuss
 with Ms. Ginsberg the possibility of renting the premises and [to] listen to
 her proposed terms was unreasonable."  The court concluded that, having
 failed to mitigate its damages when it had the opportunity to do so and
 choosing instead to hold out for a higher paying tenant, landlord "cannot
 recover rent for the waiting period" from tenant.
      Landlord makes two arguments on appeal: (1) that a commercial landlord
 does not have a duty to mitigate damages after the tenant abandons the
 leased premises but prior to the formal termination of the lease, and (2)
 assuming such a duty exists, the trial court's finding that landlord failed
 to mitigate its damages was clearly erroneous.
                                      I.
      Landlord's first argues that, when a lessee abandons the leased
 premises, a commercial lessor does not have an affirmative duty to mitigate
 damages until the lease is formally terminated.  Absent formal termination,
 which is within its control, landlord argues it can allow its damages to
 accrue until the end of the lease period.  This is a question of first

 

 impression in Vermont,(FN1) though many other jurisdictions have addressed this
 issue and are divided over it.
      Those jurisdictions that follow the traditional rule that a landlord
 has no duty to mitigate damages upon a tenant's abandonment "proceed[] from
 the theory that a lease creates an estate in land and the lessee thus
 becomes the owner of the premises for the term of the lease.  Gruman [v.
 Investors Diversified Servs., 78 N.W.2d 377, 381 (Minn. 1956)].  Under this
 theory the lessor need not concern himself with the lessee's abandonment of
 the lessee's own property."  Mar-Son, Inc. v. Terwaho Enters., Inc., 259 N.W.2d 289, 291 (N.D. 1977) (discussing, but rejecting, traditional rule).
 Thus, under this view, upon the lessee's abandonment of the property, the
 lessor may elect either to: (1) accept the lessee's surrender of the prem-
 ises, thus terminating the lease, or (2) decline to accept the surrender and
 continue to hold the lessee liable for rent as it becomes due.  Schneiker v.
 Gordon, 732 P.2d 603, 607 (Colo. 1987); Rokalor, Inc. v. Connecticut Eating
 Enters., Inc., 558 A.2d 265, 268 (Conn. Ct. App. 1989).  Only if the lessor
 elects to terminate the lease is it obligated to mitigate its damages
 because then the action is one for breach of lease, in which case basic
 contract principles apply.  Rokalor, 558 A.2d  at 268.
      The modern trend, however, is to recognize a landlord's duty to
 mitigate damages.  "In recent years, almost all courts which have faced the

 

 question have refused to allow landlords to recover money from a defaulting
 tenant in damages when the landlord could have avoided those damages by
 leasing the premises to another with no greater risks to the landlord than
 he assumed under the original lease."  5 A. Corbin, Corbin on Contracts {
 1039A (Supp. 1993).  These courts reason that a modern lease is far more
 than a conveyance of an estate in land and treat a lease as both a convey-
 ance and a contract.  See, e.g., Schneiker, 732 P.2d  at 610 ("We can
 perceive no reason why the covenant to pay rent should be treated differ-
 ently than a covenant to pay contained in any other contract."); Bernstein
 v. Seglin, 171 N.W.2d 247, 250 (Neb. 1969) ("It is difficult to find logical
 reasons sufficient to justify placing [commercial] leases in a category
 separate and distinct from other fields of the law which have forbidden a
 recovery for damages which the plaintiff by reasonable efforts could have
 avoided.  The perpetuation of the distinction between such a lease and a
 contract, in the application of the principle of mitigation of damages, is
 no longer supportable."); Wright v. Baumann, 398 P.2d 119, 121 (Or. 1965)
 (noting that a "modern business lease is predominantly an exchange of
 promises and only incidentally a sale of a part of the lessor's interest in
 land" and concluding that "[t]here is no reason why the principle of
 mitigation of damages should not be applied to it").
      Under general contract law, "the nonbreaching party in a contract
 dispute has a duty to make reasonable efforts to mitigate damages arising
 from the breach."  Estate of Sawyer v. Crowell, 151 Vt. 287, 294, 559 A.2d 687, 692 (1989).  This duty to mitigate has alternately been referred to as
 the doctrine of "avoidable consequences," in recognition of the fact that an
 injured party should not be able to recover damages for loss that could have

 

 been avoided with reasonable effort.  Reid v. Mutual of Omaha Ins. Co., 776 P.2d 896, 904 n.8 (Utah 1989); see also 3 E. Farnsworth, Farnsworth on
 Contracts { 12.12, at 220 (1990) (discussing preclusion of recovery for
 avoidable losses); Restatement (Second) of Contracts { 350 comment b (1981)
 (no recovery for reasonably avoidable losses).
      We conclude that the principles underlying the duty-to-mitigate rule in
 general contract law sound with equal force in the landlord-tenant context.
 Under the traditional no-duty-to-mitigate rule espoused by landlord, when a
 tenant abandons the premises, a landlord can delay termination and
 "unreasonably sit idly by and allow damages to accumulate."  J. Calamari &
 J. Perillo, The Law of Contracts { 14-15, at 610 (3d ed. 1987).  We find
 that it would be palpably unreasonable to provide landlords with what, in
 essence, would be the power to decide when their duty to mitigate damages
 arises.  Rather, the law should be such as to deter "a landlord from pas-
 sively suffering preventable economic loss, to encourage the productive use
 of land, and to decrease the likelihood of physical damage to property."
 Schneiker, 732 P.2d  at 611; see also Abbadessa v. Tegu, 120 Vt. 352, 357,
 140 A.2d 1, 4 (1958) (idle property is economic result not to be
 encouraged).
      Moreover, in the context of residential landlord-tenant law, this Court
 already has discarded the antiquated concepts that defined the landlord-
 tenant relationship solely in terms of property law and recognized "'that a
 lease is essentially a contract between the landlord and the tenant.'"
 Hilder v. St. Peter, 144 Vt. 150, 158-59, 478 A.2d 202, 208 (1984) (quoting
 Boston Hous. Auth. v. Hemingway, 293 N.E.2d 831, 842 (Mass. 1973)).  In
 light of the foregoing considerations, we now expressly discard those same

 

 notions in the context of commercial landlord-tenant law and recognize that
 a commercial landlord has a duty to mitigate its damages when a tenant
 abandons the leased premises.
      Our holding does not in any way undermine the rule of law that, prior
 to termination, a defaulting tenant still has enforceable rights and
 obligations.  See Zermuhlen v. Uchida, 153 Vt. 165, 168, 569 A.2d 480, 482
 (1989) ("breach of a lease provision does not terminate a lease provision by
 itself"); Abbadessa, 120 Vt. at 355, 140 A.2d  at 3 (absent landlord's
 acceptance of surrender, tenant still liable for rent).  The duty to miti-
 gate damages does nothing to affect a tenant's existing obligation under
 the lease to pay rent because our holding does not require landlord to
 accept a tenant's surrender.  By imposing a duty to mitigate damages upon
 commercial landlords, the Court merely seeks to insure that these landlords
 respond reasonably to their tenants' abandonment.  In fact, "[t]he duty to
 mitigate damages [does] not require [a commercial landlord] to sacrifice any
 substantial right of its own; or to exalt the interests of the tenant above
 its own.  Danpar Assocs. v. Somersville Mills Sales Room, Inc., 438 A.2d 708, 710 (Conn. 1980) (citation omitted).
                                     II.
      Landlord next argues that, even if it had a duty to mitigate damages
 upon tenant's abandonment, the trial court erroneously found that landlord
 did not make reasonable efforts to relet the premises vacated by tenant.
 Specifically, landlord argues that: (1) the trial court's conclusion was
 unsupported by the record; (2) because the prospective tenant did not make a
 specific offer, landlord did not fail to mitigate its damages; and (3)

 

 because it succeeded in obtaining a higher paying tenant, the trial court
 could not have found that it failed to mitigate its damages.
      Our standard of review is limited on challenges to the trial court's
 findings of fact.
         Findings of fact challenged on appeal are not to be set
         aside unless, taking the evidence in the light most
         favorable to the prevailing party and excluding the
         effects of modifying evidence, they are clearly
         erroneous.  When the evidence is conflicting, the
         credibility of witnesses, the weight of the evidence and
         its persuasive effect are matters for the exclusive
         determination of the trier of fact, and although there
         may be inconsistencies or substantial evidence to the
         contrary, its determination must stand if supported by
         credible evidence.
 Beyel v. Degan, 142 Vt. 617, 619-20, 458 A.2d 1137, 1138 (1983) (citations
 omitted); see also V.R.C.P. 52(a) (findings of fact will not be set aside
 unless clearly erroneous).  The conclusions of the trial court will be
 upheld as long as "the findings of fact fairly and reasonably support them."
 Goodrich v. United States Fidelity & Guar. Co., 152 Vt. 590, 596, 568 A.2d 385, 389 (1989).
      Landlord first takes issue with the trial court's finding that landlord
 had refused to relet the premises to a potential replacement tenant.  This
 finding was based on the testimony of Vivien Ginsberg, who testified that
 shortly after tenant abandoned the leased premises, she approached landlord
 seeking to rent the store.  She explained her idea and was told that she
 "couldn't make an offer" for the space because landlord "had somebody lined
 up for it."  In fact, there was no new tenant and the premises were not
 relet for another six months.  On the basis of this record, we cannot
 conclude that the trial court's finding that landlord turned Ms. Ginsberg
 away was clearly erroneous.

 

      Nonetheless, landlord argues that because Ms. Ginsberg did not make a
 concrete offer, it cannot be said to have failed to mitigate its damages.
 Cartin v. Continental Homes of New Hampshire, 134 Vt. 362, 367, 360 A.2d 96, 100 (1976) (burden of proving a failure to mitigate damages "is not met by
 merely arguing the possibility [of mitigation]; absent concrete evidence,
 the issue is speculative, since the result could well have been a greater,
 rather than a lesser, loss to the defendants").  Landlord cites Bernstein
 v. Seglin, 171 N.W.2d 247, 250 (Neb. 1969), for support.  In that case, the
 Supreme Court of Nebraska found that a landlord's failure to rent the
 abandoned premises to a prospective tenant did not constitute a failure to
 mitigate when that prospect did not make a concrete offer to lease.  Id.
 There was no evidence in that case, however, that the landlord discouraged
 an offer.  Rather, we find that this case is factually similar to S.N.
 Mart., Ltd. v. Maurices Inc., 451 N.W.2d 259 (Neb. 1990).  There, a
 prospective tenant for a vacated space left several messages with the
 landlord's office about his interest in the leasehold, but the landlord did
 not respond.  Id. at 261-62.  On those facts, the Nebraska court concluded
 that the landlord had failed to mitigate its damages by refusing the over-
 tures of the interested prospective tenant.  Id. at 263.  Here, landlord
 lied to and discouraged a potential tenant, and on these facts, we cannot
 conclude it was clearly wrong for the trial court to find that landlord
 unreasonably failed to mitigate its damages.
      Landlord's final argument is that because it ultimately secured a
 tenant at a substantial increase in rent, its conduct was "eminently and
 objectively reasonable."  When tenant abandoned the leased premises, land-
 lord refused to entertain an offer from a prospective tenant.  Instead,

 

 landlord decided to wait for a national chain store tenant -- a tenant that
 could pay higher rent than the breaching tenant.  This strategy took some
 time to accomplish and, in the end, provided a greater return to landlord
 than if the breaching party had fulfilled the original lease.  Landlord's
 argument is that because its strategy turned out to be a profitable business
 decision, it cannot amount to a failure to mitigate.  Landlord's argument
 misses the point.  The issue is not whether landlord's conduct was sound
 from a business perspective or in hindsight.  The issue is whether, having
 made the decision to refuse to entertain a prospective tenant and to pursue
 a national tenant, the landlord can charge the abandoning tenant with the
 risk and cost of its decision.  We agree with the trial court's conclusion
 that landlord cannot impose the cost of its decision on the breaching
 tenant and recover rent for the waiting period from tenant.
      Affirmed.

                                    FOR THE COURT:



                                    _____________________________
                                    Associate Justice




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                                Footnotes


FN1.  In Deschenes v. Congel, 149 Vt. 579, 547 A.2d 1344 (1988), this Court
 assumed arguendo the existence of a landlord's duty to mitigate upon a
 tenant's abandonment.  In that case, however, the tenant prevented the
 landlord from retaking possession and reletting.  We held that, in that
 circumstance, the landlord had no duty to mitigate.  Id. at 584, 547 A.2d 
 at 1347; accord Sullivan v. Lochearn, Inc., 143 Vt. 150, 153, 464 A.2d 745,
 746 (1983) (no duty to mitigate when breaching party hinders or prevents
 mitigation).  Deschenes is inapposite to this case because the landlord here
 could have reentered the leased premises immediately.