Court favors owners on relet obligations.

Our highest court has recently struck down yet another challenge to the time honored rule that landlords have no duty to relet. See Holy Properties Ltd., LP v. Kenneth Cole Productions, Inc., 87 N.Y.2d 130, 637 N.Y.S.2d 964 (1995).

In this case, the tenant, Kenneth Cole Productions, Inc. ("Kenneth Cole") entered into a 10-year commercial lease scheduled to end Dec. 31, 1994. Paragraph 18 of the lease provided that the landlord was under no duty to mitigate its damages by releasing and that if the tenant abandons the premises or if eviction occurs, the tenant will remain liable for all amounts due under the lease agreement.

In December 1991, the case reports that there was a change of landlord ownership and an alleged deterioration in the level and quality of building services. Defendant, Kenneth Cole, vacated the premises at that time. Thereafter, the new owner and landlord Holy Properties Ltd., LP ("Holy Properties") commenced a summary eviction proceeding for non-payment and obtained a warrant of eviction. Holy Properties thereafter brought an action to collect the rent due to the end of the lease term.

A defense raised by the tenant, Kenneth Cole, was that the landlord failed to mitigate its damages by "deliberately failing to show or offer the premises to prospective replacement tenants." The question presented to our highest court was whether the no duty to mitigate rule will still apply and bar a subsequent action for money damages after the landlord had evicted the tenant thereby severing any landlord-tenant relationship.

The Court of Appeals held that the "no duty to mitigate" role still applied even where money damages were sought in an action following a summary eviction proceeding. The court reiterated the three basic options always available to a landlord which are (1) do nothing and collect full rent due under the lease; (2) accept the tenant's surrender, reenter the premises and relet the premises for the landlord's own account, thereby releasing the tenant from further liability for rent; or (3) notify the tenant that the landlord is reentering and reletting the premises for the tenant's benefit. The court noted that if the landlord relets the premises for the tenant's benefit, the rent collected would be apportioned first to pay the landlord's expenses in reentering and reletting and then to pay the tenant's rent obligation.

The court also reiterated that the landlord was within its rights to do nothing and collect the full rent due under the lease. This is predicated on the legal principle that a lease has been historically recognized as a present transfer of an estate in real property and that once the lease is executed, the tenant's obligation to pay the rent is fixed.

The court also noted that if the lease provides that the tenant shall be liable for rent after eviction, such provision is enforceable.

Aside from the court giving reassurance to the industry that the no duty to mitigate rules still applies, the decision also gives guidance on what specific language would be acceptable in lease agreements. The Court of Appeals also gives assurance that the broker fees charged for reletting will be chargeable to the defaulting tenant rather than absorbed by the landlord.