Softening the Blow: The Duty to Mitigate Damages

This is another article that contemplates my guilty pleasure, Landlord/Tenant law.  Sit tight if Personal Injury is more your speed; there's another great PI article coming on Friday!

Let's start today's article with an imaginary scenario.  You inherited a house in Reidsville from your parents a few years ago, and since you live in Cary, it obviously wouldn't make much sense for you to live in your parents' place.  For sentimental reasons, you didn't want to sell the property, so you opted to rent it to a family that had just moved to the area.  You signed a lease agreement with the tenants for a year's term, with rent due on the first of each month in the amount of $1,500.  

The lease began on January 1st, and for three months everything went smoothly.  The tenants were happy, they paid their rent promptly on the first, and you didn't have any problems.  But after April 1st came and went with no rent check, you tried calling the tenants several times with no answer.  On April 10th, you go to Reidsville to check on the place, only to discover that the tenants have vacated the property with no prior notice.  After doing a little digging, you discover that they rented a smaller house down the block for $1,000 per month.

Now you're in a tough spot.  You've got a signed lease agreement stating that the tenants owe you $1,500 per month for another nine months, so you can take them to court and recover the remaining $13,500 that you're owed, right?  Well, maybe, but there are some things you'll have to do first.  

In North Carolina, like in most states, a wronged party to a breached contract has a duty to make a reasonable effort to avoid, or "mitigate," any damages caused by the other party's breach.  This is an "implied" duty that will apply whether or not the lease agreement says so, and in a residential or otherwise non-commercial contract, the duty to mitigate damages can't be waived.  Remember also that the over-arching remedies theory in a breach of contract action is to place the wronged party in the position she would have ended up in had the contract been performed fully.

So returning to the example above, your tenants ditched after three months on a twelve-month lease.  Let's say that you looked and looked for a new tenant, put up ads all over the place and did absolutely everything that you could, and couldn't find a replacement anywhere for the entire nine months.  In this example, you would be legally entitled to the $13,500 contemplated by the lease agreement, since that's what you would have gotten had the contract been fully performed.  

However, let's say that one week after the tenants abandoned the property, a guy named Leroy knocked on your door and asked to rent the Reidsville property.  You reply by saying, "No thanks, I'm just going to sue the folks who just abandoned the lease on that property."  In this case, you can't recover the $13,500 because you failed to mitigate despite having a golden opportunity to do so.  If you allow Leroy to rent and still sue the abandoning tenants, bad news; you're not going to recover your $13,500 twice.  

The weird gray area pops up if you have documented requirements pertaining to a tenant's credit score, income, references, et cetera.  For instance, let's say that Leroy knocked on your door a week after the original abandonment and asked to lease the property.  In accordance with your normal requirements, you check Leroy's references and discover that his last landlord evicted him in summary ejectment for nonpayment of rent.  In this case, you can probably deny Leroy's application and still sue the original tenants for the $13,500 that you're owed without running afoul of your implied duty to mitigate.  To this point, it's a good idea (i) to have requirements pertaining to an applicant's credit, income and references, and (ii) to document these requirements in very clear terms in the lease agreement itself.  Generally, your lease agreement will afford you the maximum amount of protection if its terms are clear, cohesive and favorable to your interests.

I hope this helps.  Get in touch with me with any questions!