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Tenant's Post-Surrender Liability: Must the Landlord Mitigate Damages?

BY: EDWARD D. LOUGHMAN, III*

The question of a tenant's liability under a lease after surrender of the leasehold contains two parts: 1) whether liability continues at all, and, if so 2) whether the landlord must mitigate the tenant's damages by attempting to relet the premises. Although in a technical sense, surrender, once accepted, terminates the lease, many leases contain language continuing the tenant's responsibility after the lease has terminated. Hence, the extent of the tenant's liability may be in issue even after a surrender is accepted. This article presupposes that a lease exists, has not otherwise expired and the parties have not entered into a carefully drawn agreement of surrender. It will first examine whether liability continues and, if so, its extent, concluding that, despite the Court of Appeals' 1876 decision in Becar v. Flues,1 the landlord does have a duty to mitigate the tenant's damages by taking reasonable steps to relet.

SURRENDER

Surrender of a leasehold by the tenant and acceptance of the surrender by the landlord terminates the leasehold as of the moment of surrender.2 Surrender and acceptance may be effected by express agreement or implied and so effected by operation of law.3 If the term remaining on the lease is one year or less, surrender by agreement may be oral.4 The determination of surrender and its acceptance is generally a question of fact for the jury.5 The failure to submit the question to the jury constitutes reversible error,6 unless there is absolutely no evidence from which a jury could infer acceptance.7 Hence, summary judgment would rarely be appropriate when the issue of surrender is squarely raised.8

Even in the absence of an express agreement, surrender and acceptance has been implied from the landlord reletting of the premises upon the tenant's departure,9 the tenant's departure after the landlord had commenced eviction proceedings,10 upon the landlord's taking of the premises for his own benefit as evidenced by his unreasonable delay in reletting11 or in otherwise acting in a manner inconsistent with the tenant's tenancy.12 Although turning the keys over to the landlord would likely constitute a surrender,18 mere acceptance of the keys does not, by itself, constitute an acceptance of the surrender.14 If surrender has been effected and expressly or implicitly accepted, the tenant's liability would cease; unless, of course, acceptance of the surrender were conditional or liability continued under the terms of the lease.15 Duty to Relet

Assuming that the tenant's liability continues (whether because surrender was not accepted, the acceptance was conditional or liability continued under the terms of the lease), the next question is whether the landlord must mitigate the tenant's damages by trying to relet. Determination of that issue depends upon whether the problem is approached in contract terms or in traditional real property terms.

It is axiomatic that one claiming damages from "breach of a contract may not reasonably sit idly by and allow damages to accumulate.16 As held by the New York Court of Appeals "[t]he law wisely imposes upon a party subjected to injury from the breach of a contract the active duty to make reasonable effort to render the injury as light as possible.17 Thus, under a contract analysis, a landlord would clearly have an obligation to mitigate damages by making reasonable efforts to relet the premises.

Under traditional concepts of real property law, however, a lease is a conveyance and not subject to contract law." Thus, held the Court of Appeals in 1876, a landlord is under no duty to mitigate damages and, after surrender, could sit back and allow rent to accrue." This decision, however, was last followed by the Court of Appeals in 189520 and has come under increasing criticism," been ignored and perhaps legislatively overruled by the enactment of section 235-c of the Real Property Law. It is submitted that Becar v. Flues" is no longer the law of the State of New York.

Although Becar v. Flues,28 has not been expressly judicially overruled, the Appellate Division has assumed arguendo that the landlord has a duty to mitigate damages by making a reasonable good faith effort to relet a surrendered apartment,24 and has implicitly so held by expressly leaving open the determination whether the landlord attempted to relet in good faith." In addition, Appellate Term and numerous trial courts have required the landlord to mitigate damages." The holdings are reached by applying contract theory to leases.

Especially over the last 16 years, the traditional notion of "caveat lessee" has fallen into disfavor in favor of the contract approach." The trend can perhaps be traced to the First Department's 1970 decision in Tai On Luck Corp. v. Cirota28 in which the requirement of good faith was implied into a lease to avoid a 500% increase on a renewal lease. Subsequently, in 1975 the Second Department implied the warranty of habitability in a residential lease," the legislature made leases subject to the contract concept of unconscionability30 and by 1978 the Court of Appeals had held that, at least for Statute of Frauds purposes, a lease was a contract." The concept o has become so engrained that by this year the Second Department casually referred to "a lease like any other contract."32

In addition to the rapidly growing precedents demanding mitigation, mitigation would be required under three other theories. First, a clause allowing the landlord to sit idly by and allow damages to accrue would be per se unconscionable under section 235-c of the Real Property Law; second, upon abandonment of the lease the landlord's remedy becomes damages not rent, hence the doctrine of mitigation of damages should apply and, third, if the landlord purports to lease as agent for the tenant, its fiduciary duty to its principal would require diligent efforts to relet promptly.

Section 235-c allows the court to refuse to enforce or to limit any clause it finds, as a matter of law, to be unconscionable." It is hard to comprehend a provision more unconscionable than to allow a landlord to accept a surrender and then, while the tenant no longer has possession, sit on its hands and allow damages to accrue without taking any steps to relet the apartment. The Governor, upon signing section 235-c into law," noted with approval four prior court decisions which had borrowed the doctrine of unconscionability from the Uniform Commercial Code to strike down an exorbitant rent increase imposed by a landlord upon a tenant's exercise of a renewal option;35 to prevent a landlord from imposing upon the tenant the unexpected and enormous cost (4 times the annual rent) of installing a sprinkler system;36 to refuse to enforce a disclaimer regarding the provision of services;37 and to allow a tenant to rescind a lease, despite an explicit disclaimer clause, for the landlord's failure to deliver possession for four months.38 It seems likely that a clause allowing the landlord to sit back and refuse to take reasonable steps to mitigate the tenant's damages would meet a similar fate.

Second, there is the lack of logic inherent in the Becar v. Flues39 holding. It has long been held that upon termination of a lease prior to its term, a landlord's remedy is actual damages not rent.40 The theory is that having ceased to be a tenant, it is unfair to charge rent without the privilege of possession.41 Thus, once the lease has terminated, the traditional notion of conveyance is inapplicable; as an action for pure money damages, the traditional concept of the requirement to mitigate damages should apply.

Finally, there is the agency concept. Conceptually the landlord is saying that he is not attempting to rent the premises for his own benefit but for the benefit of the tenant. Accordingly, the tenant continues to be liable for the rent because the landlord's possession is for the tenant's benefit. Reletting then is done not for the landlord but for the tenant. In this way, if the landlord leases at a lower rent he can still claim damages against the tenant.

The appeal of this concept diminishes once one applies traditional concepts of agency. As agent, the landlord would owe the tenant the highest form of loyalty-fiduciary duty.42 As a fiduciary, the landlord must act for the greater good of his principal (the tenant) without regard to his own selfish interests. In fact, an agent is prohibited from acting in a manner inconsistent with his agency or trust.43 Accordingly, the landlord qua agent must use best efforts to find a new tenant to release his principal of liability; especially when his failure to use best efforts would continue to benefit the agent, at the expense of the principal. Anything other than best efforts would be a grievous breach of the agent's fiduciary duty leaving the landlord/agent liable to his principal for damages.44

The agency concept again founders when applied to a set of facts wherein the landlord relets at a rent much higher than paid by the surrendering tenant. If the landlord were truly acting as the tenant's agent, the landlord would be obliged to pay over to the ex-tenant the excess of the new rent over the old rent. Although such a result would be a shock to most landlords,46 it is the logical progression of the agency theory.

CONCLUSION

Accordingly, despite the lip service to the outdated theory of lease as a conveyance, it is clear that, under modern concepts, a landlord must mitigate his damages and use reasonable efforts to relet the premises upon a tenant's surrender in order to sue that tenant for damages. Today's lease is clearly a species of contract and there no longer is any reason to treat it any differently.

© Westchester County Bar Association 1986 reprinted with permission


*Member, Muldoon & Horgan, New Rochelle, New York.

164 N. Y. 518 (1876).

2Krasner v. Transcontinental Equities, Inc., 70 A.D. 2d 312, , 420 N.Y.S. 2d 872, 874 (1st Dep't 1979); 34 N.Y. Jur., Landlord & Tenant §388. The traditional concept is that, by surrender, the tenant reconveys the leasehold back to the landlord. Thereby, the leasehold merges into the fee. J. Rasch, N.Y. Landlord & Tenant §854 (2d ed. 1971).

3N.Y. Gen'1 Oblig. L. §5-703; J. Rasch, N.Y. Landlord & Tenant §855 (2d ed. 1971); 34 N.Y. Jur., Landlord & Tenant §388.

4N.Y. Gen'l Oblig. L. §5-703(1). Even though a lease expressly states that surrender must be in writing, this provision can be waived. Goldsmith v. Schroeder, 93 App. Div. 206, 87 N.Y.S. 558 (1st Dep't 1904); Schnae v. Jonas Equities, Inc., 109 Misc. 2d 221, 442 N.Y.S. 2d 342 (App. T. 2d & llth Jud. Dist. 1981); J. Rasch, N.Y. Landlord & Tenant §887 (2d ed. 1971).

5Hadcock v. Soslow, 257 App. Div. 906, 12 N.Y.S. 2d 138 (4th Dep't 1939); Saracena v. Preisler, 180 App. Div. 348, 167 N.Y.S. 2d 871 (1st Dep't 1917); see Stahl Associates Co. v. Mapes, 111 A.D. 2d 626, 490 N.Y.S. 2d 12 (1st Dep't 1985).

6Hadcock v, Soslow, 257 A.D. 2d 906, 12 N.Y.S. 2d 138 (4th Dep't 1939).

7Saracena v. Preisler, 180 A.D. 2d 348, 167 N.Y.S. 2d 871 (1st Dep't 1917).

8See, e.g., Reisler v. 60 Grammercy Park North Corp., 88 A.D. 2d 312, 453 N.Y.S. 2d 186 (1st Dep't 1982).

934 N.Y. Jur., Landlord & Tenant §393.

10Rosenfeld v. Aaron, 248 N.Y. 437, 442 (1928); Jacob Hoffman Brewing Co. v. Wuttge, 234 N.Y. 469, 474 (1923); Cornwell v. Sanford, 222 N.Y. 248, 252 (1918); J. Rasch, N.Y. Landlord & Tenant §779 (2d ed. 1971). Although statutorily, the lease does not terminate until issuance of the warrant, E.P.A.P.L. §749(30); a tenant's voluntary departure during the pendency of the proceeding cancels the lease as "[t]he removal is the precise act and effect the landlord sought through the service of the precept and the proceeding, and it is entirely immaterial, within the law, whether it is produced through the warrant or the conduct of the tenant in obedience to the precept." Cornwell v. Sanford, supra at 252-53.

115757 Broadway Corp. v. Kirby, 199 N.Y.S. 599 (App. T., 1st Dep't 1923).

12Stahl Associates Co. v. Mapes, 111 A.D. 2d 626, 490 N.Y.S. 2d 12, 14 (1st Dep't 1985) (eviction of a sub-tenant).

13E.g., Gadek, Inc. v. F.W.B. Corp., 26 A.D. 2d 807, 273 N.Y.S. 2d 825 (1st Dep't 1966).

14Schnee v. Jonas Equities, Inc., 109 Mis. 2d 221, 442 N.Y.S. 2d 342 (App. T. 2d & llth Jud. Dist. 1981).

15A further issue, not discussed in this article, would be whether acceptance of the surrender and thereby modifying the lease (at least to the extent of changing the term) would constitute a waiver of the post-surrender liability provisions.

16J. Calamari & J. Perillo, Contracts §14-15, p. 538 (2d ed. 1977).

17Losei Realty Corp. v. City of New York, 254 N.Y. 41, 47 (1930).

18E.g., Becar v. Flues, 64 N.Y. 518 (1876).

19Id.

19Id.

20Matter of Hevenor, 144 N.Y. 271. Becar v. Flues, supra, was, however, cited in obiter dictum by the Fourth Department as recently as 1977, Centurion Development Ltd. v. Kenford Co., Inc., 60 A.D. 2d 96, 400 N.Y.S. 2d 263 (4th Dep't 1977), app. dism 'd, _____ N.Y. 2d __, 408 N.Y.S. 2d 507 (1978); and by the County Court of Yates County in 1984. Spohn v. Fine, 124 Misc. 2d 1075, 479 N.Y.S. 2d 139 (Co. Ct. Yates Co. 1984).

21E.g., Forty Exchange Co. v. Cohen, 125 Misc. 2d 475, 479 N.Y.S. 2d 628, 636 n. 3 (Civ. Ct. N.Y.Co. 1984). The Second Department has recently noted that the continued validity of Becar v. Flues, supra, "is subject to question." Goldman v. Orange County Chapter, N. Y.S. Ass'n for Retarded Children, __ A.D. 2d __, 503 N.Y.S. 2d 884, 886 (2d Dep't 1986).

2264 N.Y. 518 (1876).

23Id.

24Helmsley v. Anderson Clayton & Co., 60 A.D. 2d 808, 400 N.Y.S. 2d 544 (1st Dep't 1978).

25Howard Stores Corp. v. Robinson Rayon Co., 36 A.D. 2d 911, 320 N.Y.S. 2d 861 (1st Dep't 1971).

26E.g., Paragon Industries v. Williams, 122 Misc. 2d 628, 473 N.Y.S. 2d 92 (App. T. 2d 8th & llth Jud. Dists. 1983); Jaysons Holding Co. v. Leviton, N.Y.L.J., 12/21/79. (App. T. 9th and 10th Jud. Dist.); Grade Towne House, Inc. v. Weinstein, N.Y.L.J. 3/14/73 (App. T. 1st Dept.); Lefak v. Lambert, 89 Misc. 2d 197, 390 N.Y.S. 2d 959 (Civ. Ct. Queens 1976); Parkwood Realty Co. v. Maicano, 77 Misc. 2d 690, 353 N.Y.S. 2d 623 (Civ. Ct. Queens 1974). No longer may "a landlord sit idly by and collect his rent while making no attempt to relet the premises." Paragon Industries v. Williams, supra, 473 N.Y.S. 2d at 93. At least one court has put the burden on the landlord to prove mitigation as part of its direct case. Paragon Industries Inc. v. Williams, supra, 473 N.Y.S. 2d at 92.

27Comment, Leasehold Unconscionability; Caveat Lessor, 7 Urban L.J. 337, 343 (1979).

2835 A.D. 2d 380, 316 N.Y.S. 2d 438 (1st Dep't 1970), app. dism'd29 N.Y. 2d 747, 326 N.Y.S. 2d 400 (1971); accord, 57 E. 54 Realty Corp. v. Gay Nineties Realty Corp., 71 Misc. 2d 353, 335 N.Y.S. 2d 872 (App. T. 1st Dep't 1972).

29Tonetti v. Penati, 48 A.D. 2d 25, 367 N.Y.S. 2d 804 (2d Dep't 1975). The implied warranty of habitability was codifed that year in R.P.L. §235-b. L. 1975, c. 597.

30L. 1976, c. 828 (enacting R.P.L. §235-c).

31Geraci v. Jennette, 41 N.Y. 2d 660, 666, 394 N.Y.S. 2d 853, 857 (1977).

32Goldman v. Orange County Chapter, N.Y.S. Ass'n for Retarded Children, __ A.D. 2d __, 503 N.Y.S. 2d 884, 886 (2d Dep't 1986).

33Real Property Law §235-c provides:

1. If the court as a matter of law finds a lease or any clause of the lease to have been unconscionable at the time it was made the court may refuse to enforce the lease, or it may enforce the remainder of the lease without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result.

2. When it is claimed or appears to the court that a lease or any clause thereof may be unconscionable the parties shall be afforded a reasonable opportunity to present evidence as to its setting, purpose and effect to aid the court in making the determination.

34Governor's Memorandum on L. 1976, c. 828 (7/26/76), McKinney's 1976 Session Laws 2447.

35Tai On Luck Corp. v. Cirota, 35 A.D. 2d 380, 316 N.Y.S. 2d 438 (1st Dep't 1970).

36SKD Enterprises v. L & M Offset, 65 Misc. 2d 612, 318 N.Y.S. 2d 539 (Civ. Ct. N.Y. 1971).

37Harwood v. Lincoln Square Apartments, Section 5, Inc., 78 Misc. 2d 1097, 359 N.Y.S. 2d 387 (Civ. Ct. N.Y. 1974).

38Seabrook v. Commuter Housing Co., 72 Misc. 2d 6, 338 N.Y.S. 2d 67 (Civ. Ct. Queens 1972), aff'd 79 Misc. 2d 168, 363 N.Y.S. 2d 566 (App. T. 2d & llth J.D. 1973).

3964 N.Y. 518 (1876).

40Kottler v. New York Bargain House, Inc., 242 N.Y. 28 (1926); J. Rasch, N.Y. Landlord & Tenant §795 (2d ed., 1971).

41Hermitage v. Levine, 248 N.Y. 333, 338 (1928); J. Raach, N.Y. Landlord & Tenant §798 (2d ed. 1971).

42Meinhard v. Salmon, 249 N.Y. 2d 458, 463-64 (1928). Although Chief Judge Cardozo noted that such an agent "is not an agent in a true sense," Lenco, Inc. v. Hirshfeld, 247 N.Y. 44, 50 (1928); he cites no authority for this distinction other than to say that the landlord is using the term as "a prescribed method to ascertain the damage," id; i.e. the loss in rent occasioned by the tenant's departure. Despite the use of feudal concepts of conveyancing, what the court seems to be doing is applying traditional concepts of damage and rejecting the inappropriate use of the agency concept.

43Lamdin v. Broadway Surface Advertising Corp., 272 N.Y. 133 (1936); 3 N.Y. Jur. 2d, Agency §195.

443 N.Y. Jur. 2d, Agency §195.

45See Gabin v. Goldstein, __ Misc. 2d __, 497 N.Y.S. 2d 985 (Civ. Ct. Kings Co. 1986).

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