Breaking Your Lease? Beware the Ghost of Holy Properties v. Kenneth Cole Productions

In this edition of Dirt Law I’m looking at the distinct financial peril assumed by a commercial tenant who prematurely vacates its space and simply depends on the landlord to promptly re-rent and so mitigate its losses.

The bottom line here was set in judicial stone nearly 20 years ago when New York’s highest court, the Court of Appeals, ruled that a commercial landlord was under no obligation to re-rent or do anything else to mitigate its damages. Tenant had agreed to pay rent for a fixed term and for that term of years the space was his, usefully occupied or not.

The modern trend towards fairness (a landlord shouldn’t be allowed to sit back and not lift a finger to ameliorate this predicament) be lease-legally darned. Precedent and stability in real estate dealings demand attention and loyalty.  The case I’m referring to is Holy Properties Limited, L.P. v. Kenneth Cole Productions, Inc. (87 N.Y. 2d 130 (1995).

The facts, please: tenant (Kenneth Cole Productions) entered into a lease due to expire in 1994.  In 1991, three years before the expiration date, tenant vacated and stopped paying rent. Landlord evicted and sued for rent arrears and damages. At trial tenant asserted, as an affirmative defense, that landlord had failed to mitigate damages by deliberately failing to show or offer the premises to prospective replacement tenants. The lower court ruled for landlord; on appeal, the Court phrased the legal issue as whether on these facts landlord had a duty to mitigate its damages. Its answer was a resounding “No.”

Doesn’t sound fair, right? And the Court admits it’s ruling would have been different had this been a breach of contract action: “The law imposes upon a party subjected to injury from breach of contract, the duty of making reasonable exertions to minimize the injury….” [However] “Leases are not subject to this general rule…for, unlike executory contracts, leases have been historically recognized as a present transfer of an estate in real property” (citing cases going back well-over a hundred years).

Tradition! Tradition!..or We’d Rather be Old School than Fair

From Judge Simons: “Once the lease is executed, the [tenant’s] obligation to pay rent is fixed …and a landlord is under no obligation …to relet, or attempt to relet abandoned premises in order to minimize damages.” (Citations omitted.) So once Kenneth Cole Productions had “bought” its piece of space on West 57th Street for a certain term at a certain rent the long settled common law rule in leasing (no obligation to mitigate) was not to be casually discarded. The fact that most US jurisdiction had done so, had taken a more contract-oriented legal approach and imposed such an obligation would not sway our Court. The “stability of …precedents…the certainty of settled rules [,] is often more important than whether the established rule is better than another or even whether it is the “correct” rule….[especially in real property law] …where established precedents are not lightly to be set aside….”

So we learn several lessons: first, breaking a lease has more negative economic consequences then cancelling an order for the latest Hilary-style pantsuits. Remember that shouting “HOWEVER” from a few paragraphs ago? Real estate law trumps contract law. The judge said so and Holy Properties remains the law of New York State. FYI, its legal progeny such as Rios v. Carrillo (citation omitted) have extended the rule to residential leases, traditionally dealt with in a kinder fashion by the courts.

LEASE DRAFTING AND NEGOTIATING TIP: The Real Estate Board of New York landlord’s form has the “no obligation to mitigate damages” language. Tenant’s counsel should try hard to negotiate a provision requiring landlord to expend at least some minimal efforts.

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