Tom Stilp JD, MBA/MM, LLM, MSC
Landlords must take reasonable steps to reduce losses, even when the Tenant is responsible for breaking the lease based on a failure to pay rent. The doctrine of “mitigation of damages” does not allow a party (in this case, the Landlord) to sit back and let damages continue if reasonable steps could be taken to stop losses. The basic idea is that losses that could have been avoided should not be recoverable.
But the question has been who is responsible to prove mitigation of damages in the event of a lawsuit. Under the rational that the Tenant was responsible for causing the Landlord losses by breaching the Lease through nonpayment, the law traditionally put the burden on the Tenant. The Tenant had to prove the Landlord failed to take reasonable measures to mitigate the Landlord’s own damages. Ordinary, the Tenant would raise the failure to mitigate as an Affirmative Defense.
And if the Tenant failed to raise the issue by Affirmative Defense, the defense would be deemed waived. Takiff Properties Group Ltd. #2 v. GTI Life, Inc., 2018 IL App (1st) 171477.
The problem was, however, that the Tenant had little if any information concerning the Landlord’s activities about getting a new tenant, re-letting the property, or otherwise taking action to mitigate damages. Thus, the General Assembly created a law that reversed the burden of proof and placed on the Landlord the burden to prove mitigation of damages. 735 ILCS 5/9-213.1. The Landlord had to prove it took reasonable action to mitigate damages, and if the Landlord could not, the Court would reduce the Landlord’s damages by the amount the Landlord failed to mitigate.
Having represented commercial Landlords over many years, a number of items a Landlord could put in the Lease to avoid problems would include:
- A Landlord’s obligation to mitigate can be waived by the Tenant in the Lease; a waiver legally makes the issue of what steps the Landlord took, or did not take, irrelevant because the issue of mitigation would be mooted by the waiver. The Takiff decision, above, was a case of “first impression” that gave the green light for Landlords to include a waiver in Leases.
- A liquidated damages provision may moot mitigation issues. The liquidated damages provision is the parties’ agreement to substitute an amount of damages in lieu of what would ordinarily have to be proven in court. There are several rules to be followed for an effective liquidated damages provision, but courts have enforced “rent differential” formulas with present value calculations and decided such provisions are valid. (See Stilp, Making Money Going Into the Deal: The Art & Science of Real Estate, 2nd ed. 2020, contains a step-by-step analysis of present value calculations.)
We are both transaction and litigation attorneys. We have drafted lease provisions and successfully enforced those same lease provisions in court to benefit our Landlord clients.