HARSH RESULT FOR SMALL BUSINESS TENANTS IN NEW YORK: LANDLORD HAS NO DUTY TO MITIGATE AFTER ABANDONMENT
by Christopher P. Parnagian and Tamar Harutunian (Winter 2004)

Generally, when one party breaches a contract, the other party has a duty to mitigate its damages. For example, if X agrees to sell 100 widgets to Y for $1,000 and Y defaults by not buying the widgets, then X has a duty to try to resell the widgets to a third party. If X sells them for $950, then X has a breach of contract claim against Y for $50. Unfortunately for New York commercial tenants which abandon their leases, the rule is different.

In Holy Property Limited, L.P. v. Kenneth Cole Productions, Inc., 87 N.Y.2d 130 (1995), the tenant vacated the leased premises and the landlord commenced an eviction action for nonpayment of rent. The tenant claimed that the landlord failed to mitigate damages by not seeking out prospective replacement tenants. The Court of Appeals noted that although under contract law there is a duty upon the injured party to mitigate its damages, leases are not subject to this general rule. The court distinguished leases from executory contracts by noting that "leases have been historically recognized as a present transfer of an estate in real property."

The Holy Property court stated that when a tenant abandons the premises before the expiration of the lease, the landlord has three options on how to proceed:

(1) it could do nothing and collect the full rent due under the lease, (2) it could accept the tenant's surrender, reenter the premises and relet them for its own account thereby releasing the tenant from further liability for rent, or (3) it could notify the tenant that it was entering and reletting the premises for the tenant's benefit. If the landlord relets the premises for the benefit of the tenant, the rent collected would be apportioned first to repay the landlord's expenses in reentering and reletting and then to pay the tenant's rent obligation.

Based on the holding in Holy Property, a tenant who wants to get out of its lease by simply abandoning the premises should consider the possible consequence of a lawsuit instituted by the landlord for the rent through the end of the lease term.

Questions about this article may be directed to Chris Parnagian at (212) 425-1401.

O'Hare Parnagian LLP is located at 82 Wall Street, Suite 300, New York, NY 10005-3686. The firm specializes in corporate, commercial and insurance law and general business and personal injury litigation.