July 30, 2020
Stroock Special Bulletin
By: Trevor T. Adler, Jeffrey R. Keitelman, Ross F. Moskowitz
In August of 2019, New York State Assembly Bill A8482 (the “Bill”), which would require landlords to mitigate damages when commercial tenants vacate premises in violation of the terms of the lease, was introduced in the State Assembly and referred to the Judiciary Committee. At the time the Bill was introduced last year, COVID-19 was not an issue facing New York State, the country, or the world at large. Now, however, things have drastically changed. As a result, the State Legislature has been grappling with the overwhelming task of attempting to mitigate the myriad of issues resulting from this global pandemic. In particular, the State Legislature has focused on ways to offset negative effects of the pandemic on tenants and the real estate industry as a whole, which traditionally provides the State with a large amount of fiscal support annually.
This Bill takes on a new level of importance during pandemic times. Perhaps motivated by the pandemic, in June of this year the Bill was passed by the Assembly, delivered to the Senate (New York State Senate Bill S7053), and was referred to the Rules Committee. In this client alert, we provide a summary of the Bill and a brief overview of similar statutes passed in other jurisdictions.
The Bill proposes changes to the Real Property Law (“RPL”), Section 227-e. RPL Section 227-e is currently only applicable to residential leases and provides that a landlord has a duty to mitigate damages in any lease or rental agreement “in good faith and according to the landlord’s resources and abilities during the term of the tenancy” if the tenant vacates the premises in violation of the terms of the lease. The Bill proposes to make RPL Section 227-e applicable to commercial leases. As a result, if passed, this Bill would impose a duty to mitigate damages on commercial landlords, which must be made “in good faith and according to the landlord’s resources and abilities” and requires that commercial landlords “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” (emphasis supplied). Moreover, if the commercial landlord does rent the premises per the above, the new commercial tenant’s lease, once effective, terminates the previous commercial tenant’s lease and mitigates damages that were otherwise recoverable as a result of the previous commercial tenant vacating the premises. The burden of proof is on the party seeking to recover damages. Lastly, this duty to mitigate may not be waived by either party.
It is important to note that, while this Bill, if passed, will have an important impact on commercial landlords and tenants, similar mitigation requirements already exist in other jurisdictions prior to the pandemic. For instance, California imposes a requirement on landlords to mitigate the damages caused by the tenants’ breach or abandonment of the property (California Civil Code Section 1951.2)[1]. Texas also imposes a duty to mitigate damages on landlords (Texas Property Code Section 91.006), and like the Bill, this requirement cannot be waived. In addition, Illinois imposes a requirement on landlords to mitigate damages recoverable against a defaulting lessee (Illinois Code of Civil Procedure, Section 9-213.1), but unlike the duty to mitigate in Texas and the Bill, Illinois permits two commercial parties to waive the mitigation requirement (see Takiff Properties Group Ltd. #2 v. GTI Life, Inc., 2018 Il App (1st) 171477 (2018).
If passed, this Bill would have far-reaching consequences to commercial leases even in the absence of the COVID-19 pandemic, because commercial leases in New York generally do not impose upon the landlord a duty to mitigate damages in the wake of a defaulted tenant. This Bill, and the similar bills from other jurisdictions described above, were, after all, introduced prior to the global pandemic. Now, given the substantial impact of the COVID-19 pandemic on commercial leases in New York, the impact of this Bill would be even more significant.
______________________________
For More Information:
Eva C. Schneider
[1] Note, the California statute outlines more detailed requirements (as compared to the Bill) of both lessor and lessee to recover damages, one of which is that the lessor “acted reasonably and in good-faith to mitigate damages.” (California Civil Code Section 1951.2(c)(2)
This Stroock publication offers general information and should not be taken or used as legal advice for specific situations, which depend on the evaluation of precise factual circumstances. Please note that Stroock does not undertake to update its publications after their publication date to reflect subsequent developments. This Stroock publication may contain attorney advertising. Prior results do not guarantee a similar outcome.
July 30, 2020
Stroock Special Bulletin
By: Trevor T. Adler, Jeffrey R. Keitelman, Ross F. Moskowitz
In August of 2019, New York State Assembly Bill A8482 (the “Bill”), which would require landlords to mitigate damages when commercial tenants vacate premises in violation of the terms of the lease, was introduced in the State Assembly and referred to the Judiciary Committee. At the time the Bill was introduced last year, COVID-19 was not an issue facing New York State, the country, or the world at large. Now, however, things have drastically changed. As a result, the State Legislature has been grappling with the overwhelming task of attempting to mitigate the myriad of issues resulting from this global pandemic. In particular, the State Legislature has focused on ways to offset negative effects of the pandemic on tenants and the real estate industry as a whole, which traditionally provides the State with a large amount of fiscal support annually.
This Bill takes on a new level of importance during pandemic times. Perhaps motivated by the pandemic, in June of this year the Bill was passed by the Assembly, delivered to the Senate (New York State Senate Bill S7053), and was referred to the Rules Committee. In this client alert, we provide a summary of the Bill and a brief overview of similar statutes passed in other jurisdictions.
The Bill proposes changes to the Real Property Law (“RPL”), Section 227-e. RPL Section 227-e is currently only applicable to residential leases and provides that a landlord has a duty to mitigate damages in any lease or rental agreement “in good faith and according to the landlord’s resources and abilities during the term of the tenancy” if the tenant vacates the premises in violation of the terms of the lease. The Bill proposes to make RPL Section 227-e applicable to commercial leases. As a result, if passed, this Bill would impose a duty to mitigate damages on commercial landlords, which must be made “in good faith and according to the landlord’s resources and abilities” and requires that commercial landlords “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” (emphasis supplied). Moreover, if the commercial landlord does rent the premises per the above, the new commercial tenant’s lease, once effective, terminates the previous commercial tenant’s lease and mitigates damages that were otherwise recoverable as a result of the previous commercial tenant vacating the premises. The burden of proof is on the party seeking to recover damages. Lastly, this duty to mitigate may not be waived by either party.
It is important to note that, while this Bill, if passed, will have an important impact on commercial landlords and tenants, similar mitigation requirements already exist in other jurisdictions prior to the pandemic. For instance, California imposes a requirement on landlords to mitigate the damages caused by the tenants’ breach or abandonment of the property (California Civil Code Section 1951.2)[1]. Texas also imposes a duty to mitigate damages on landlords (Texas Property Code Section 91.006), and like the Bill, this requirement cannot be waived. In addition, Illinois imposes a requirement on landlords to mitigate damages recoverable against a defaulting lessee (Illinois Code of Civil Procedure, Section 9-213.1), but unlike the duty to mitigate in Texas and the Bill, Illinois permits two commercial parties to waive the mitigation requirement (see Takiff Properties Group Ltd. #2 v. GTI Life, Inc., 2018 Il App (1st) 171477 (2018).
If passed, this Bill would have far-reaching consequences to commercial leases even in the absence of the COVID-19 pandemic, because commercial leases in New York generally do not impose upon the landlord a duty to mitigate damages in the wake of a defaulted tenant. This Bill, and the similar bills from other jurisdictions described above, were, after all, introduced prior to the global pandemic. Now, given the substantial impact of the COVID-19 pandemic on commercial leases in New York, the impact of this Bill would be even more significant.
______________________________
For More Information:
Eva C. Schneider
[1] Note, the California statute outlines more detailed requirements (as compared to the Bill) of both lessor and lessee to recover damages, one of which is that the lessor “acted reasonably and in good-faith to mitigate damages.” (California Civil Code Section 1951.2(c)(2)
This Stroock publication offers general information and should not be taken or used as legal advice for specific situations, which depend on the evaluation of precise factual circumstances. Please note that Stroock does not undertake to update its publications after their publication date to reflect subsequent developments. This Stroock publication may contain attorney advertising. Prior results do not guarantee a similar outcome.
