Liability for Wear and Damage to Commercial and Industrial Leased Property
Please note that, while this article accurately describes applicable law on the subject covered at the time of its writing, the law continues to develop with the passage of time. Accordingly, before relying upon this article, care should be taken to verify that the law described herein has not changed.
Damages to Leased Commercial Real Estate
Commercial leases commonly contain one or more provisions dealing with the subject of who is liable for wear and damage to the leased premises during the time of the lease. A typical provision is as follows:
“The Lessee shall at its sole expense maintain the Property in good operating order, repair, condition, and appearance other than normal wear and tear, acts of God, and natural disasters and furnish all required labor, parts, replacements, and repairs and at all times during the Term otherwise keep the Property in Eligible Condition.”
Provisions similar to the one above require the tenant to keep the property in the same condition as it was when the lease began, less normal wear and tear. See 49 Am. Jur. 2d Landlord and Tenant § 694 (hereinafter “Landlord and Tenant”) (“In general, where the contract does not show a contrary intent, a tenant must leave the premises in essentially the same condition in which they were received, and in the condition in which the tenant was obligated to keep them during the term. Thus, a tenant is required to surrender the premises in good condition at the end of the term with allowances generally made for normal wear and tear.”).
But what happens when such a provision is breached? How is such a provision breached? Who decides when the provision is breached? If the property is damaged, can the landlord immediately evict the tenant from the property or must it wait until the property is surrendered? If the property is returned in poor condition, what are the landlord’s remedies?
This article will outline several important points a tenant and landlord should consider before dealing with damage to leased commercial real estate property.
Who Is Liable For The Damage?
Commercial leases usually specify which party will be responsible for what types of maintenance and repairs. See, e.g., Rose v. Freeway Aviation, Inc., 120 Ariz. 298, 585 P.2d 907 (Ct. App. 1978) (holding that because the lessor was obligated under lease terms to maintain leased premises in at least as good condition as when lease commenced, the lessor was obligated to rebuild such building after it was destroyed by windstorm); Royal Neckwear Co. v. Century City, Inc., 205 Cal. App. 3d 1146, 1150–53, 252 Cal. Rptr. 810, 813–15 (Cal. Ct. App. 1988) (holding that where commercial lease provided that lessor was to make roof repairs except those necessitated by acts of lessee, duty to repair leaks caused by lessee’s failure to properly seal roof vents was lessee’s duty).
There are two general time frames for a covenant to keep a property in good repair: 1) maintain in good repair and 2) surrender in good repair. A tenant’s covenant to “maintain” the property in good repair is an ongoing duty and can be breached at any time during the lease. “Maintain” means to “keep in repair; keep up; preserve; preserve from lapse, decline failure or cessation; provide for; Rebuild; repair; replace. A covenant to maintain includes a covenant to rebuild.” Rose v. Freeway Aviation, Inc., 120 Ariz. 298, 299, 585 P.2d 907, 908 (Ct. App. 1978). On the other hand, the covenant to “surrender” the property in good repair can only be breached at the end of the lease, i.e., when the tenant “surrenders” the property back to the landlord. Cote v. A. J. Bayless Mkts., 128 Ariz. 438, 442, 626 P.2d 602, 606 (Ct. App. 1981).
When leased property deteriorates to a less than agreed-upon condition or is returned in such a manner, the initial question is whether and to what extent the tenant will be held responsible. For general repairs, the key will be found in the wording of the lease. See Landlord and Tenant § 694 (“The question whether damage or deterioration to leased property is of a type for which the lessee is responsible depends primarily upon the terms of the lease agreement, which may modify the lessee’s normal duty to make repairs or restoration by either creating additional duties or eliminating other duties.”).
“[I]n the absence of an agreement to the contrary, the landlord is not obligated to make repairs upon demised premises or to keep them in repair during the term of the lease.” Grizzle v. Runbeck,
74 Ariz. 92, 95, 244 P.2d 1160, 1162 (1952); Friedman v. Le Noir, 73 Ariz. 333, 335–6, 241 P.2d 779, 780 (1952) (same); see 1 Tiffany Real Prop. § 103 (3d ed.) (“The landlord is under no obligation whatever to the tenant to keep the leased premises in repair, in the absence of an express stipulation binding him so to do . . . .”). Thus, absent an agreement, if the tenant wants certain repairs done to the property, it must foot the bill.
However, “if the repairs are needed because the tenant has committed waste,” the landlord will have remedies against the tenant. Restatement (Second) of Property, Landlord & Tenant § 13.1, cmt. c (1977) (hereinafter “Restatement”). “Waste” is defined as “[p]ermanent harm to real property committed by a tenant (for life or for years) to the prejudice of the heir, the reversioner, or the remainderman.” Black’s Law Dictionary
(9th ed. 2009). The Restatement provides the following examples:
- L leases a warehouse to T for five years. T promises to return the property to L at the end of the term in the same condition as it was when it was leased. T is only obligated to make repairs resulting from ordinary wear and tear during the term of the lease. T is not obligated to make these repairs until the end of the term.
- L leases a warehouse to T for five years. T promises in general terms to keep the property in repair. T’s obligation is only to make repairs resulting from ordinary wear and tear, but he will be in default if he does not make these repairs from time to time during the term as they are needed.
- L leases a warehouse to T for ten years. T promises to make all repairs arising during the term except for repairs to the exterior walls and to the roof. After two years the floor begins to sag and the timbers below are rotting. T is obligated under his promise to repair the sagging floor and rotting timbers, and to do so within a reasonable time after the condition is discovered.
A prudent landlord will take photographs of the property at the beginning of the lease term to minimize disputes over what damage is new and what was pre-existing. To that end, a lessee will only be responsible for the condition of the leased property during the term of the lease. Thus, even if the landlord proves the leased property was damaged, the tenant will not be liable if the damage occurred prior to the time the tenant took possession of the property. Nor will there be liability if the tenant was not obligated to make repairs to damage that occurred prior to the inception of the lease term. See, e.g., Kanner v. Globe Bottling Co., 273 Cal. App. 2d 559, 78 Cal. Rptr. 25 (Cal. Ct. App. 1969) (holding that the lessee was not liable for vandalism that occurred after expiration of lease but prior to lessor’s re-entry); Polster, Inc. v. Swing,
164 Cal. App. 3d 427, 431, 210 Cal. Rptr. 567, 570 (Cal. Ct. App. 1985) (holding that a tenant was liable for damages to property because while a tenant is “not obligated to . . . restore the premises to his landlord in a better condition than they were at the outset of his lease,” the “damage to the drop ceiling, ceiling tiles, lighting fixtures, ceiling support bars, the interior walls and the front door sill and jamb” was not “normal wear and tear”).
Moreover, although the lease typically answers the question of who bears responsibility for the condition of the property, common law negligence can play a determinate role in certain cases. See, e.g., Alabama Freight Lines v. Stewart, 70 Ariz. 140, 143, 217 P.2d 586, 588 (1950) (“[I]t was negligent for the trucks to be so operated that they rammed into the doors, the door jambs, and the wall of the building while backing into the loading dock at speeds of from 2 to 3 miles per hour. The office of a door is by no means that of furnishing an object to run into, nor of a wall to supply a backstop for trucks. Steering wheels and brakes are provided for these controls.”); Churchill Forge, Inc. v. Brown, 61 S.W.3d 368, 373 (Tex. 2001) (“[T]here is nothing extraordinary or unjust in requiring a tenant to reimburse the landlord for damages negligently caused by the tenant or one occupying the premises with the tenant’s consent. “). Thus, even if a lease requires the landlord to pay for repairs, negligent harm to the property will shift the cost to the tenant.
Notably, many commercial leases are triple net leases, meaning the cost of maintaining the property, including taxes, repairs, and improvements are borne by the tenant. A triple net commercial lease effectively places on the tenant all the burden of ownership, except as specified in the lease. See Capitol Funds, Inc. v. Arlen Realty, Inc., 755 F.2d 1544, 1549 (11th Cir. 1985) (“[T]o analogize to tort theory, [the tenant] assume[s] the risk under the contract that major elements of the premises, such as the roof, would require replacement—rather than repair—before the term of the lease expired”). In these cases, the landlord’s responsibility is usually for capital improvements and common areas expenses, but these expenses are often passed on to tenants, through common area maintenance charges.
What Does “Wear And Tear” Mean?
Most commercial leases will specify the condition the property must be in at the end of the lease, i.e., a “surrender” provision, usually requiring the property be returned in the same condition as when the tenancy began with “reasonable wear and tear excepted.” See, e.g., Nadler v. Am. Motors Sales Corp., 764 F.2d 409, 414 (5th Cir. Tex 1985). In fact, as a matter of Arizona law, this is a minimum standard. See Ariz. Rev. Stat. § 33-321(“A tenant shall exercise diligence to maintain the premises in as good condition as when he took possession, ordinary wear and tear excepted.”). Accordingly, the “damage the tenant is obligated to repair . . . is not that which is caused by ordinary wear and tear, but by the tenant’s willful conduct or negligence and which amounts to waste.” Landlord and Tenant § 684; see Howe v. Prof’l Manivest, Inc., 829 P.2d 160, 164 (Utah Ct. App. 1992) (holding that a tenant breached its lease for failure to maintain the premises free from weeds or obnoxious growth because the overgrown condition of rental property at issue was a violation of city ordinance and the tenant allowed the condition to exist).
In short, a tenant must treat the property as would a prudent owner. See, e.g., Grizzle, 74 Ariz. at 96, 244 P.2d at 1163 (The tenant has to keep the premises “in the same manner as would a prudent owner thereof.”); Nadler, 764 F.2d at 415 (The tenant “effectively undertook to act as the prudent owner of the property and to make such repairs during the term as a reasonably prudent owner would.”).
A “wear and tear” provision can be significant in a commercial lease dispute. For example, in Dorian v. S.S. Rest. Corp., a commercial landlord claimed the lessee was obligated to replace the roof of a building at the end of a 20 year lease because the tenant contracted to pay for “repairs.” 2011 Ariz. App. Unpub. LEXIS 673, 2011 WL 1856014 (Ariz. Ct. App. 2011). The court could not determine whether a new roof was a “repair” as contemplated by the parties, so it based its decision on the surrender provision which required the lessee to return the property in the same condition except for “ordinary wear and tear from the elements.” id.
at 6. The court held that the tenant was not required to pay for a new roof because the landlord alleged the roof had “outlived its useful life,” and therefore, could not be “repaired” as it was “functionally obsolete.” id.
Aptly, the degree of wear and tear that is allowable must take into account the type of use to be made of the leased premises. Kanner, 273 Cal. App. 2d at 565–66, 78 Cal. Rptr. at 29. Moreover, if the property is in poor condition and particularly susceptible to further deterioration or damage, a greater allowance may be made for wear and tear than would be the case if the property were in good condition. 15 James Lockhardt, Causes of Action 501, § 16 (Originally published in 1988).
What constitutes normal “wear and tear” depends primarily upon the degree of deterioration reasonably expected from normal use of the leased property in the manner contemplated by the parties. id.
The degree of wear and tear that is allowable must take into account the type of use to be made of the leased premises. id.
; see MacLachlan v. Lutz, 249 Cal. App. 2d 756, 759–60, 57 Cal. Rptr. 833, 835–36 (Cal. Ct. App. 1967) (reasoning that lessor’s grant of permission to use premises for dangerous activity not only provided defense to lessor’s breach of contract claim but also provided defense to negligence claim based on lessor’s assumption of risk).
Generally, if covenants of both maintenance and surrender contain the same express wear and tear exception, the covenants will impose the same limitation on both the tenant’s duty to maintain the property during the term of the lease and the tenant’s duty to surrender it in suitable condition. Freight Terminals, Inc. v. Ryder Sys., Inc., 326 F. Supp. 881, 889 (S.D. Tex. 1971). However, if the wear and tear exception applies only to the surrender covenant, the lease agreement may be construed to require the lessee to replace items that become worn out through normal deterioration during the course of the lease, but not to replace items which merely deteriorate, without becoming worn out, during the lease term. Nadler, 764 F.2d at 415.
No matter what use of the leased property is determined to be reasonable under all the circumstances, normal wear and tear on the leased property by that use is reasonably to be expected by the parties, absent an agreement otherwise. The Restatement provides the following examples:
- L leases [commercial] property to T for two years. Due to normal use, the furnace wears out. There is no breach of T’s obligation by virtue of the fact that the furnace has worn out. Whether the landlord is obligated to replace the furnace [depends on the various circumstances]. If the landlord is not obligated to replace it, the tenant will have to replace it or go without heat; but the landlord has no right against him if he elects not to replace the furnace, except to the extent the lack of heat causes other damage which the tenant could have taken steps to prevent but did not do so, such as allowing the water pipes to freeze.
- L leases [commercial] property to T for two years. The floors in the building were refinished by L just prior to T’s entry on the land. T elected not to provide rugs for the floors and as a result of the normal use of them without rugs, the floors needed finishing again after about one year to eliminate the scuffmarks made by walking on them. There is no breach of T’s obligation because the physical change in the floors has been brought about by normal wear and tear in using the leased property in a reasonable manner. If the lease provided that the tenant would keep the floors covered with rugs, then the [damage to] the floors would not be the result of normal wear and tear.
What Are the Differences Among “Repair,” “Annexation,” “Alteration” And “Improvement”?
One question that occasionally arises is whether the work done to the property was a “repair,” “alteration,” “annexation,” or “improvement.” Without diving too deep, this classification can be important because of the specific provisions of the lease agreement. For example, the lease might obligate the tenant to pay for alterations and improvements while requiring the landlord to bear the cost of repairs.
Under Arizona law, the “essential elements of repair” are the “restoration of some portion of the premises after decay, waste, or injury; that is, restoring to a sound state whatever had been partially destroyed upon the premises.” Friedman, 73 Ariz. at 336, 241 P.2d at 780.
The question of which party to a lease is obligated to repair depends on the intention of the parties as expressed in the lease, interpreted in light of the surrounding circumstances. Landlord and Tenant § 459. Notably, if landlord breaches a covenant to repair or improve the premises prior to the commencement of the lease term, the tenant may refuse to accept the premises and thereby avoid liability for rent, but that if the tenant enters into possession he becomes liable for rent. See Leafdale v. Mesa Wholesale Sales Terminal, 79 Ariz. 112, 114, 284 P.2d 649, 650–51 (1955) (“[W]here the lessor agrees to make repairs or install improvements and the lessee goes into possession and uses the premises for the purposes intended, the lessee cannot defend against the payment of the stipulated rent upon the ground that such installations are inadequate.”).
An entirely different question arises when repairs are ordered by public authority to place the lease property in compliance with applicable laws, rules, or regulations. See, e.g., Glenn R. Sewell Sheet Metal, Inc. v. Loverde, 70 Cal.2d 666, 75 Cal. Rptr. 889 (1969). In these cases, if the alterations or improvements constitute mere repairs or replacements and the landlord has covenanted to repair, it is the landlord’s obligation to bear the expense of such repairs or replacements. id.
; see Portal Enters., Inc. v. Cahoon, 102 Nev. 107, 108, 715 P.2d 1324, 1325 (1986) (reasoning that there is a presumption that the lessor must bear responsibility for making repairs to the leased premises where the repairs are ordered by a public authority). Further, if the landlord covenanted to repair or the order required “structural changes” that were unperformed at the time of the execution of the lease and the landlord failed to disclose this fact to the tenant, the landlord will be liable for the expense of the structural alterations or improvements ordered by the public authority. id.
Likewise, where the tenant covenants merely to repair and the alterations or improvements ordered by public authority are of a structural or substantial nature, the landlord is ordinarily liable. id.
However, if the tenant covenants to repair and the alterations or improvements ordered by public authority are not structural, but are deemed mere repairs or replacements, the tenant will be obligated to bear the expense. id.
An “improvement” is considered to be a change in the “original construction or installation in order to incorporate advancements in design.” Landlord and Tenant § 457. An improvement changes, supposedly for the better, the original condition of the leased premises. id.
Most importantly, “[i]n the absence of an agreement to the contrary, the landlord is under no duty to the tenant to improve the demised premises.” id.
Alterations or modifications of structures on the leased property may be reasonably necessary changes in the physical condition of the leased property in order for the tenant to use the property in a reasonable manner. Restatement § 12.2, cmt. d. The shorter the balance of the term the more difficult it will be to justify as reasonably necessary substantial alterations and modifications in structures. id.
When the use of the leased property is for commercial purposes, substantial alterations and modifications are more likely to be reasonably necessary than when restricted to residential use. id.
L leases business property to T for ten years. The parties contemplate that T will use the leased property as a department store. The display of goods in a department store in one large open area where the goods can be more readily observed is economically more sound than having them displayed in several different rooms. The removal of nonsupport walls in the building on the leased property by T to provide a large open area for the display of goods is a physical change that is reasonably necessary in order for T to use the leased property in the contemplated manner, and hence their removal by T is a permissible change.
The complete elimination of a structure on the leased property by the tenant may be reasonably necessary in order to use the leased property in a reasonable manner. id.
“Annexed” property is a “fixture [that has] become a part of the realty to which it is attached.” Black’s Law Dictionary (9th ed. 2009). With annexed property, “[i]n the absence of a statutory provision or agreement between the parties to the contrary, the lessor is not obligated to pay the lessee for improvements erected by the lessee upon the demised premises, even though the improvements are such that by reason of their annexation to the freehold they become a part of the realty and cannot be removed by the lessee.” Landlord and Tenant § 458.
Annexations to the leased property in the form of additions to existing buildings, of new buildings, and of various kinds of items placed within existing buildings must be reasonably necessary in order to use the leased property in a reasonable manner or T will violate his obligation by making such annexations. Restatement § 12.2, cmt. d. For example,
L leases commercial property to T for five years. Both parties understand that T will operate a barbershop on the leased property as he did at his previous location. T is privileged to annex barber chairs and sinks to the leased property.
L leases property to T for five years to use as a doctor’s office. T is privileged to install an air conditioning system for the comfort of those in the office quarters, because such installation is reasonably necessary in order to use the leased property in the contemplated manner.
L leases commercial space to T for five years to use as a warehouse. After one year, T decides to change from the warehouse business to the manufacture of plastics. Such change will require the installation of special equipment to synthesize and process the plastic. Not only will this require some alteration of the physical premises, but the machinery will produce noxious vapors. T is not privileged to make the changes in the leased property because they relate to a use of the leased property that is not a reasonable one in the light of all the circumstances.
As an example, suppose a lease requires the tenant to “maintain and keep in good repair the entire premises.” A few years into the lease, the plumbing develops problems and requires repair. The lease agreement does not say anything about which party must pay for plumbing repairs, but the tenant covers the cost for an immediate fix. In the process of repairing the plumbing, vents and traps are added to the sewer line as required by municipal ordinance. Which party must pay for the new vents and traps?
Under these facts, the Arizona Supreme Court held the tenant liable for the costs. In Friedman, the court held that the “character” of the work did not fall within the definition of “repairs.” 73 Ariz. at 336, 241 P.2d at 780. The court reasoned the work “did not amount to a restoration of some portion of the premises after decay, waste, or injury; that is, restoring to a sound state whatever had been partially destroyed upon the premises.” id.
The court noted these were “the essential elements of ‘repair.’” id.
Thus, the court reasoned the work was an “alteration.” id.
Nevertheless, because the tenant was required to “maintain and keep in good repair” the premises, the tenant had certain responsibilities regarding alterations. id.
Indeed, the court held “that in the absence of an express covenant in the lease imposing the duty upon the lessors to make the repairs or alterations made by the lessees under governmental compulsion, the general covenant that the lessees should ‘maintain and keep in good repair’ the premises involved includes repairs made compulsory by municipal ordinance.” id.
at 337, 241 P.2d at 781. Consequently, the term “repair” includes alterations required by public ordinance.
What if There Are Conflicting Terms in a Commercial Lease?
Even if a lease appears to require a tenant to cover the cost of repairs, what if there are conflicting terms in the lease? For example, what if one provision compels the tenant to bear the “costs of all necessary repairs” while another provision requires the landlord to pay for “reasonable repair expenses”? Which provision takes precedent?
When analyzing ambiguous lease terms in Arizona, “[t]he predominant and all-essential rule is to ascertain the intent of the parties, and within the limit of legal principles to give effect to it.” Alabama Freight Lines, 70 Ariz. at 144, 217 P.2d at 588–89. “To perform that office all of the clauses must be considered, none ignored; no clause may be given effect as though it stood by itself, disjointed from every other, but all must be scanned; each must be given effect, but all in relation to each other, to bring harmony, if possible, between all parts of the writing.” id.
; see, e.g., Roosen v. Schaffer, 127 Ariz. 346, 348, 621 P.2d 33, 35 (Ct. App. 1980) (“It is well settled in Arizona that leases are to be construed so to give effect to the intent of the parties; all of the clauses must be considered and given effect in relation to each other.”); Gen. Accident v. Traders Furniture,
1 Ariz. App. 203, 207, 401 P. 2d 157, 161 (1965) (“The primary duty of the Court when construing an agreement is to discern the intent of the parties.”).
Notably, when determining the “intent” of the parties, a court must “read [the contract] in light of the parties’ intention as reflected by their language and view of all the circumstances.” McCutchin v. SCA Servs. of Ariz.,
147 Ariz. 234, 235, 709 P. 2d 591, 592 (1985) (quoting Darner Motor Sales. Inc. v. Universal Underwriters Ins. Co., 140 Ariz, 383, 387, 682 P. 2d 388, 392 (1984)). “Evidence of surrounding circumstances [includes] negotiation, prior understandings, subsequent conduct and the like.” id.
If the parties’ agreement unequivocally requires the defendant to repair a particular type of damage to the leased property, a claim in defense that the plaintiff assumed the duty to repair the property will be unavailable. However, since ambiguities in a lease are generally construed against the drafter, which usually will be the landlord, if the type of damage to the property is not referred to in the lease, the tenant may be able to claim that, because certain obligations were expressly imposed upon the tenant as lessee, the landlord as lessor impliedly assumed other, equally apparent obligations of similar nature. See, e.g., Freight Terminals, 326 F. Supp. at 889 (noting that as a general rule, lease agreements drafted by the lessor will be construed against the lessor to the extent of any ambiguity in or doubtful meaning of the written terms of the agreement); Bonneville on the Hill Co. v. Sloane, 572 P.2d 402, 403 (Utah 1977) (same); B & B Vending Co. v. Carpenter, 472 S.W.2d 281, 283 (Tex. Civ. App. 1971) (holding that under lease provision excepting losses due to fire, tornado, or other casualty, lessee was not liable for loss of air conditioning unit apparently either removed by secured creditor or stolen, since such loss fell within category of “other casualty”).
Covenants of maintenance and surrender will be construed in harmony with one another where possible. However, the express terms of the lease agreement control, and application of the terms of the agreement can result in inconsistent obligations on the part of the lessee, such as a duty to maintain the property in significantly better condition than the condition that will be considered acceptable when the property is surrendered, as long as the parties clearly intended such a result. Nadler, 764 F.2d at 414–15.
When to Repair Commercial Real Estate
Suppose a commercial lease unambiguously requires the tenant to maintain the property in good repair and pay for any and all repairs to the property. How can a landlord get the property repaired if the tenant refuses to pay? When should the landlord get the property fixed? Which party will determine the service provider?
Most issues concerning a property’s condition arise after the tenant defaults, while others are partially avoidable. For example, if a lease requires the tenant to keep a building in good repair or in the same condition it was at the beginning of the lease, the landlord may monitor the tenant’s performance and keep the tenant from allowing the building to deteriorate too far. On the other hand, if the lease contains a provision requiring a tenant to “surrender the premises in good condition,” the provision “cannot be breached until the end of the term” because the tenant must be given the opportunity to repair the property. Cote, 128 Ariz. at 442, 626 P.2d at 606.
If the property is returned in a damaged condition, a landlord may be tempted to demand the tenant to immediately fix it. However, it is often better for the landlord to make arrangements to get the repairs made and then try to recover the costs from the former tenant. See Iverson v. Spang Indus., Inc., 45 Cal. App. 3d 303, 308, 119 Cal. Rptr. 399, 402 (Cal. Ct. App. 1975) (noting that in some instances specific performance of lessee’s repair obligation may be appropriate, but the preferred remedy is an award of damages equal to cost of repairing property). This approach gives the landlord control over the quality and scheduling of the repairs and avoids the risk that the property will remain vacant because the tenant cannot or will not pay for the repairs. An agreement with the tenant about what repairs are necessary before the landlord begins the repairs can circumvent later conflicts.
Thus, if a landlord is forced to repair the property at its own expense and the tenant was obligated to pay for repairs, the landlord may successfully bring a claim for those costs provided the cost does not exceed the loss in value of the property.
What Are the Damages?
The question appears simple enough, but it stirs litigation: if the tenant damages the property, how much can the landlord recover?
As a general rule, “the measure of damages, under controlling Arizona precedent, is the cost of replacement or repair, subject to the exception that such an award should not exceed the diminution in value sustained as a result of the damage.” Founders Bank of Ariz. v. Chrysler Realty Corp., 86 F. Supp. 2d 968, 971 (D. Ariz. 2000) (citing City of Globe v. Rabogliatti, 24 Ariz. 392, 210 P. 685 (1922)); see, e.g. Polster, Inc. v. Swing, 164 Cal. App. 3d 427, 432, 210 Cal. Rptr. 567, 570 (Cal. Ct. App. 1985) (holding that the cost of repairs is the appropriate measure of damages even where lessor did not make repairs but relet property at lower rate); Iverson v. Spang Indus., Inc.,
45 Cal. App. 3d 303, 308, 119 Cal. Rptr. 399 (Ct. App. 1975) (“In the majority of jurisdictions,  the restoration principle is employed, i.e., where an action is brought after expiration of a term for breach of a lessee’s covenant to keep the premises in repair or to surrender them in good repair or in a specified condition, the measure of damages is the reasonable cost of putting the demised premises into the required state of repair or the condition contemplated by the covenant.” (citations omitted)).
In other words, “[t]he cost of repair or replacement cannot exceed the difference between the fair market value of the structure before and after the injury.” A.I.D. Ins. Servs. v. Riley,
25 Ariz. App. 132, 135–36, 541 P.2d 595, 598–99 (Ct. App. 1975) (citing Rabogliatti, 24 Ariz. 392, 210 P. 685)).
If, however, the injury is “irremediable except at great cost, or where the property cannot be restored to its former condition,” the measure of damages is the difference in value immediately before and immediately after sustaining the injury. Rabogliatti, 24 Ariz. at 399, 210 P. at 687; see SDR Assocs. v. ARG Enters., Inc., 170 Ariz. 1, 2–3, 821 P.2d 268, 269–70 (Ct. App. 1991) (holding that commercial landlord was entitled to receive award for diminution in value of property when the tenant was obligated to return the property in “good condition” but returned it damaged even after the landlord decided to demolish the building).
In some cases, evidence describing the condition of the property on other dates may be necessary to show the full scope of the damage to the property. See Manges v. Willoughby, 505 S.W.2d 379, 385–86 (Tex. Civ. App. 1974) (permitting introduction of photograph made during summer following termination of lease for limited purpose of showing extent that lessee had allowed property to become infested with weeds, which could be shown only when weeds were in full bloom)
Often, merely awarding the plaintiff damages measured by the cost of performance or diminution in value will not be sufficient to make the plaintiff whole. This is the case where the defendant’s failure to surrender the leased property in suitable condition prevents the plaintiff from making use of the property until it can be repaired or restored to usable condition. In these cases, in addition to actual repair or restoration costs, the plaintiff may recover damages for any loss resulting from the inability to use the property for its intended purpose during the period needed to repair or restore it to usable condition. Worthington v. Kaiser Found. Health Plan, Inc., 8 Cal. App. 3d 435, 442, 87 Cal. Rptr. 272, 276 (Cal. Ct. App. 1970); see Iverson, 45 Cal. App. 3d at 308, 119 Cal. Rptr. At 402 (“An allowance may also be made for the loss of rental during the reasonable time required to make such repairs or restoration.”).
Does a Landlord Have a Duty to Mitigate?
Like other parties in contract law, a harmed landlord is under a “duty to mitigate,” i.e., make reasonable efforts to limit the resulting harm. For example, suppose a tenant negligently harmed leased property by spilling chemicals which damaged the building’s foundation but did not repair the damage before surrendering the property back to landlord. The landlord attempted to re-let the property but was unable to find a new party because of the damage. The landlord sued the tenant for lost rent, but the tenant argues he is not liable because the landlord was required to “mitigate” the damages by leasing the property, even if at a low price. Is this a valid argument?
Under a commercial landlord’s duty to mitigate, he must only make a “reasonable effort” to rent the property at a “fair rental” price thereby leaving intact the tenant’s contractual obligations under the lease subject to the landlord’s failure to make reasonable efforts to mitigate. Dushoff v. Phx. Co., 23 Ariz. App. 238, 532 P.2d 180 (Ct. App. 1975); see, e.g., Next Gen Capital, L.L.C. v. Consumer Lending Assocs., L.L.C., 234 Ariz. 9, 316 P.3d 598, 601 (Ct. App. 2013)(“A basic principle of the law of damages is that one who claims to have been injured by a breach of contract must use reasonable means to avoid or minimize the damages resulting from the breach.” (quoting W. Pinal Family Health Ctr., Inc. v. McBryde, 162 Ariz. 546, 548, 785 P.2d 66, 68 (Ct. App.1989)); Fairway Builders, Inc. v. Malouf Towers Rental Co., Inc.,
124 Ariz. 242, 255, 603 P.2d 513, 526 (Ct. App. 1979) (“The key requirement is that the injured party exercise Reasonable care to mitigate damages. No extraordinary or risky actions are required unless it would be unreasonable to fail to take those actions.”); Tempe Corp. Office Bldg. v. Ariz. Funding Servs., Inc., 167 Ariz. 394, 807 P.2d 1130 (Ct. App. 1991) (reasoning that the duty to mitigate damages requires a landlord to make reasonable effort to rent abandoned premises at fair rent before recovering for future rent due for balance of lease term and if landlord makes reasonable but unsuccessful efforts to relet premises, he is entitled to full amount of rent due under lease); H. Naito Corp. v. Quest Entm’t Ventures, LP, 58 F. App’x 778 (9th Cir. 2003) (holding that a landlord did not fail to mitigate damages, because its efforts to find suitable tenant included placing signs in window, posting listings on commercial real estate data bases, mailing brochures to over 100 restaurants, and showing the property to at least seven viable tenants, and nothing showed that landlord rejected suitable viable tenants).
Accordingly, the above argument will not be valid unless the tenant can show that the landlord failed to make a reasonable effort to rent the property. See Fairway, 162 Ariz. at 548, 785 P.2d at 68 (“The party in breach has the burden of proving that mitigation was reasonably possible but not reasonably attempted”).
There are many important issues to consider when leased property is damaged and needs repair. Commercial leases are often complex, and it is important to understand the ramifications of each provision.
The attorneys at Mitchell & Associate have experience reviewing, negotiating, and litigating commercial leases. If you have questions concerning a possible commercial lease issue, we would be happy to discuss your potential commercial lease matter with you. To arrange a consultation, please contact Robert Mitchell at firstname.lastname@example.org
or at (602) 452-2730.