Updated: Mar 2, 2020
In 1995, the Court of Appeals in Holy Properties Ltd., L.P. v. Kenneth Cole Productions, Inc., 87 N.Y.2d 130 , threw landlord tenant law into a tailspin when it held that landlords had no duty to mitigate their damages by re-letting the premises where the tenant abandons prior to the expiration of the lease. Although Holy Properties dealt with a commercial lease, courts widely extended the application of this rule to residential leases as well.
However, the recently enacted Housing Stability and Tenant Protection Act of 2019 (the “2019 Tenant Act”), which Governor Cuomo signed into law on June 14, 2019, has now completely abrogated the no-mitigation rule in the context of residential leases.
Rationale Behind the No-Mitigation Rule
Generally, the law imposes upon a party who suffers an injury, as the result of a breach of contract, the duty to make reasonable efforts to minimize the injury. Wilmot v. State of New York, 32 N.Y.2d 164 ; Losei Realty Corp. v. City of New York, 254 N.Y. 41 . Notwithstanding this general principle of law, the Holy Properties Court ruled that where a tenant breaches a lease by vacating the space prior to termination and the lease entitles landlord to recoup rent following an eviction, the law allows the landlord to do absolutely nothing to re-let the space. Moreover, while the landlord sticks its head in the sand, it can then still sue the tenant for all of the future rent becoming due under the lease through and including the termination date, along with attorney fees and costs to boot. Therefore, there is no surprise that New York’s no-mitigation rule absolving landlords from mitigating their damages following a tenant abandonment of its leasehold before a lease’s expiry – places it in the minority when compared to other jurisdictions – particularly since the rule promotes laziness, which the law abhors.
Although the rule appears, at least, on its face to be counterintuitive, the Holy Properties Court rationalized that it serves to impart stability and certainty into business transactions, especially in the context of real property, which is sui generis, thus requiring adherence to established precedents more so than in any other area of the law. 159 MP Corp. v. Redbridge Bedford, LLC, — N.E.3d —, 2019 WL 1995526 (N.Y.), 2019 N.Y. Slip Op. 03526. In other words, parties, who are free to contract as they please, will be held to the benefit of their bargain, with the language of their contracts being enforced in accordance with their plain language and meaning. Vermont Teddy Bear Company Co, Inc. v. 538 Madison Realty Company, 1 N.Y.3d 470 .
Abrogation of Rule in Residential Arena
In promulgating the 2019 Tenant Act, whose main purpose was to afford better protections to tenants in order to halt their increased displacement, the Legislature decided to completely nullified the no-mitigation rule espoused under Holy Properties in the residential setting. The plight to minimize tenant evictions and their consequent widespread dispossession from their homes is presently at the forefront for the City given the current affordable housing crisis so abrogation of the rule in residential leases is concomitant with the underlying purpose of the newly enacted legislation.
Section 4 of the 2019 Tenant Act amended the Real Property Law (“RPL”) by adding a new section 227-e, which explicitly imposes upon landlords a duty to mitigate damages if a tenant vacates the premises in violation of the terms of the lease. In particular, Section 227-e applies to any lease or rental agreement covering premises occupied for dwelling purposes. Hence, while the statute applies across the board to all residential leases, inclusive of free market leases, it clearly does not apply to the ambit of the commercial universe, meaning that Holy Properties has only been provisionally repudiated by the 2019 Tenant Act, at least for the present.
Beyond this, the statute places the burden of proof to show that the landlord properly mitigated upon the landlord where the landlord seeks the recovery of damages following abandonment by tenant prior to the lease expiring. Further, section 227-e explicitly exempts any contractual lease provision in which landlord’s duty to mitigate is absolved, as void for being contrary to public policy.
Critically, the statute provides that a landlord mitigating its damages must, “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.” Under this statutory framework, the onus is squarely on a residential landlord to take affirmative steps to re-let the abandoned space by, inter alia, engaging professional residential real estate brokers, marketing and advertising the space. The statute gives broad deference to the factfinder to determine whether the landlord acted in good faith, and took reasonable steps commensurate with its subjective “resources and abilities” in mitigating. This leaves a vast gray area in the law which will be further developed as residential landlords and tenants fight over whether a landlord aptly mitigated.
More importantly, however, the landlord will need to document all of its mitigation efforts since the statute has shifted the burden of proof to prove mitigation upon the landlord. Contrarily, the statute arms tenants, who vacate their leases before expiration, with a powerful weapon to combat against the landlord’s claims for recovery in any subsequent collection cases in instances where tenants vacate before their leases terminate. Much to their chagrin, the 2019 Tenant Act also bars landlords from charging for residential application fees, limits the fees that can be charged for background checks to $20, and extends by five days a tenant’s time within which to pay rent before the landlord may serve a default notice (see RPL 238-a).
In light of the Legislature’s penchant for progressive policy changes to the real property law for the purpose of further augmenting tenant protections, it will be interesting to see whether the no-mitigation rule is similarly voided in the commercial context through subsequent legislation.
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