Landlord Windfalls Do Not Necessarily Absolve a Defaulting Tenant
March 3, 2020
Most New Jersey commercial landlords and tenants know that landlords have an obligation to mitigate their damages if a tenant defaults under a lease.
However, if a landlord secures a replacement tenant at a much greater rent so the landlord is in a better position than before the default, is the defaulting tenant totally absolved of its remaining lease obligations?
The state Appellate Division recently held that a tenant is not entitled to that relief in 450 North Broad, LLC (“Landlord”) v. Brake-O-Rama, Inc. (“Tenant”), 2020 N.J. Super. Unpub. Lexis 156 (January 23, 2020).
Brake-O-Rama, the tenant, stopped paying rent in February 2016 with four years remaining on the lease. The landlord was able to secure Family Dollar as a replacement tenant, and Family Dollar agreed to pay almost double the rent in the Brake-O-Rama lease. In addition, Family Dollar agreed to invest $200,000 into the premises for leasehold improvements.
The tenant argued that it owed no further rent because the landlord did not suffer a monetary loss—Family Dollar was actually paying a markedly higher rent and adding significant value to the premises.
The Appellate Division disagreed and, like the trial court, ruled that the tenant was still required to pay the amounts owed under the lease between February 2016 and May 2018 when Family Dollar’s rent commenced. Specifically, the Appellate Division found that a defaulting tenant is not entitled to credit the excess rents a landlord receives from a subsequent tenant toward the unpaid rent owed by the original tenant for the period of time the property was vacant. The court emphasized that, as between the wrongdoer and the landlord who properly mitigated its damages, principles of fairness dictated that the benefit must go to the landlord.
“In short, commercial landlords should be aware that they still may have a cause of action against a defaulting tenant even if they are able to strike a more favorable deal with a replacement tenant,” said Donna A. McBarron, of counsel to Giordano, Halleran & Ciesla in Red Bank, N.J. She focuses her practice on commercial lease review and negotiation.
“Similarly, commercial tenants cannot expect to be totally relieved of their lease obligations even if the replacement tenant puts the landlord in a position that is better than whole,” McBarron added.
“Brake-O-Rama affirms that if a landlord has properly mitigated its damages and ends up with a more favorable lease, a windfall to the landlord is going to trump relief to the defaulting tenant,” she said.
The appeals court ruling is available at: https://www.njcourts.gov/attorneys/assets/opinions/appellate/unpublished/a4450-18.pdf?c=Qhz
Posted in: Leasing, Planned Real Estate Development and Real Estate