Calculating the Landlord's Damages When Premises Are Re-Let after Tenant Breach

When a Tenant breaches a lease agreement by terminating or abandoning the Lease, or when a Landlord is required to terminate based upon some act or omission of the Tenant, the Landlord faces a two-sided problem: First, he or she has vacant rental property and has likely suffered damages as the result of lost rents in the past. Second, the landlord will likely suffer loss of rental proceeds in the future, all the while incurring costs associated with owning and managing the now-vacant property.

As I have previously discussed on this blog, a Landlord has a statutory obligation to mitigate the damages he suffers as the result of a Tenant's actions. See TEX. PROP. CODE ANN. § 91.006. The duty to mitigate losses or damages is usually interpreted as a requirement that the Landlord attempts to re-let the premises vacated by the original Tenant.

Many times after a breach, the condition of the premises or the overall rental climate (supply and demand) can be markedly different than it was at the time the original Tenant first occupied the property. This can result in substantial difficulty in finding a replacement Tenant. Nevertheless, a Landlord is required to use reasonable efforts to find a replacement Tenant, even if the rental proceeds from that new Tenant are less than those that would have been received had the original Tenant fulfilled her Lease obligations.

In those instances where a deficiency exists between the rent received from a replacement Tenant and the rent agreed-to by the original Tenant, a Landlord is entitled to recovery of his damages. Other elements of the Landlord's damages are the costs of re-letting the property (advertising, repairs, make-ready, Realtor commissions, modifications required by the replacement Tenant, etc), and any rents not received between the time that the original Tenant vacates and the replacement Tenant takes possession.

So...how does a Landlord calculate the measure of damages resulting from a Tenant's breach?

Consistent with its statutorily-imposed duty to mitigate, a Landlord seeking damages for anticipatory breach of a Lease Agreement must prove the present value of the future rentals under the unexpired term of the lease, REDUCED BY either the reasonable value of re-renting the leased premises or the rent paid by any new tenant. See Marshall v. Telecomm. Specialists, Inc., 806 S.W.2d 904, 907 (Tex. App.—Houston [1st Dist.] 1991, no writ).

That is, if a Landlord is able to re-let the premises at the same or more rent than the original Tenant agreed to pay, then the original Tenant is only required to pay the costs of re-letting. On the other hand, when a Landlord rents the premises for less rent, the Tenant is required to pay the re-letting costs PLUS the Landlord's shortfall over the term of the original Lease Agreement. see also Crabtree v. Southmark Commercial Mgmt., 704 S.W.2d 478, 480 (Tex. App.—Houston [14th Dist.] 1986, writ ref’d n.r.e.) (limiting damages sought by landlord who treated tenant’s conduct as anticipatory breach to recovery of present value of rentals that accrue, reduced by reasonable cash-market value of unexpired term of lease); Speedee Mart, Inc. v. Stovall, 664 S.W.2d 174, 177 (Tex. App.—Amarillo 1983, no writ)(holding that landlord who treated tenant’s conduct as anticipatory breach could recover contractual rental reduced by amount received from new tenant).

Many Lease Agreements in Texas (and the standard Commercial Lease Form in New York) purport to make the Tenant responsible for all rental proceeds that he or she did not pay, irrespective of whether the Landlord re-lets the property in the future. These provisions are generally not enforceable in Texas, where the Landlord's efforst to mitigate his losses are often the subject of intense scrutiny in lawsuits advanced for recovery of lost rents.