Do Tenants in Breach Get Discount on Damages if Replacement Tenant Pays Higher Rent?
SITUATION: With 24 months remaining on its lease, a tenant vacates the premises and stops paying its $10,000 per month rent. After six months of marketing and sales efforts, the landlord finds a replacement tenant willing to pay $15,000 per month. The replacement tenant also pays the landlord a $200,000 allowance to make improvements to the property. Six months later, the new tenant moves in and begins paying rent. Meanwhile, the landlord sues the original tenant for the unpaid rent left on the lease.
QUESTION: How much, if any, unpaid rent can the landlord recover from the original tenant?
A. $240,000 for the 24 months left on the lease when the tenant vacated
B. $120,000 for the 12 months the premises were vacant
C. $60,000 ($120,000 - $60,000), representing the rent differential between the original and replacement tenant over 12 months
ANSWER: B. The landlord is entitled to $120,000 in unpaid rent for the 12 months the property was vacant.
EXPLANATION: Damages are designed to compensate landlords for the losses they suffer as a result of a tenant’s breach. In most states, the landlord is also required to mitigate—that is, keep its damages as low as possible by making reasonable efforts to re-let the property. This scenario, which is based on an actual New Jersey case, poses the question of what happens when the landlord actually ends up with more money than it would’ve gotten had the tenant not breached.
The rule: Tenants don’t get a rebate because the landlord happens to come out ahead as a result of their breach. Or, in the words of the New Jersey court, “the defaulting tenant is not entitled to credit the excess rent the landlord receives from a subsequent tenant towards the unpaid rent owed by the original tenant for the period of time the property was vacant.”
The rationale: Fairness dictates that, between the tenant who improperly violates its lease and the landlord who properly mitigates its damages, any benefit must go to the landlord. Accordingly, B is the right answer [450 N. Broad, LLC v. Brake-O-Rama, Inc.: 2020 N.J. Super. Unpub. LEXIS 156, 2020 WL 373374].
WHY WRONG ANSWERS ARE WRONG:
- A is wrong because the rule applies only for as long as the property is vacant. In other words, landlords can’t double-dip by collecting rent from both the defaulting and replacement tenants.
- C is wrong because the landlord is entitled to the full rent amount for as long as the property remains vacant as a result of the tenant’s breach regardless of how much the replacement tenant subsequently pays.
- D is wrong because the amount of money the landlord receives from the replacement tenant has no impact on the breaching tenant’s liability during the period the property is vacant.