Early this month, the New York State Assembly passed Assembly Bill A6906, requiring commercial landlords to mitigate their damages when a tenant vacates a premises prior to the end of their lease term. Although the bill must clear several more hurdles before becoming law, commercial landlords should prepare themselves for the possibility that they will be legally required to mitigate their damages in the not-too-distant future.
At present, if a commercial tenant vacates its rental premises prior to the end of the lease term, their landlord may sue them for the balance of rent owed under the lease, while leaving the premises vacant. The landlord is under no obligation to search for a new tenant before seeking this unpaid, future rent (unless the lease requires the landlord to mitigate). If the landlord finds a new tenant during the original lease term, that new tenant’s rent during the original lease term will generally be deducted from the amount of damages the landlord can recover in an action against the original tenant.
If signed into law, the new legislation would amend New York’s real property law Section 227-e—which currently requires residential landlords to mitigate damages if a tenant vacates before their lease terminates—by expanding its scope to commercial landlords. Specifically, commercial landlords would be required to “in good faith and according to the landlord’s resources and abilities, take reasonable and customary actions to rent the premises at fair market value or at the rate agreed to during the term of the tenancy, whichever is lower.” If the commercial landlord is able to secure a new tenant “at fair market value or at the rate agreed to during the term of the tenancy, the new tenant’s lease shall, once in effect, terminate the previous tenant’s lease and mitigate damages otherwise recoverable against the previous tenant because of such tenant’s vacating the premises.” If this bill is enacted, there will be open questions to resolve regarding what constitutes proper mitigation under these new circumstances. And, if this happens, commercial landlords should be thinking about how they will satisfy this new duty to mitigate. They should be considering processes and practices to allow them to make good faith efforts to find new tenants, if their tenants vacate leased premises before the end of their lease terms.