Leaseholds

State courts disagree about whether commercial landlords have a duty to mitigate damages

/ Leaseholds

While it is settled now in almost all states that residential landlords have a duty to mitigate damages by attempting to relet the premises if the tenant leaves before the end of the lease term, courts are not in agreement about whether the same principle applies to commercial leases. When there is a duty to mitigate, it is generally nondisclaimable. Thus a liquidated damages clause that requires a defaulting tenant to immediately pay the rest of the rent due for the rest of the lease term will not be honored if it exceeds the amount of damages that would accrue if the landlord had made reasonable efforts to relet the premises. But Massachusetts courts do not apply this principle (either the duty to mitigate or the nonenforcement of liquidated damages clauses) in the context of commercial leases. See Cummings Props, LLC v. Hines, 217 N.E.3d 604 (Mass. 2023) (upholding a …

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Covid-19 closure order does not excuse tenant from paying rent

/ Leaseholds

Applying New York law, the Second Circuit held that a business tenant was not excused from paying rent because of business closure order from the Governor of New York to protect the public from exposure to Covid-19 at the height of the pandemic crisis. In re NTS W. USA Corp., 2022 U.S. App. LEXIS 28811, 2022 WL 10224963 (2d Cir. 2022). The court refused to apply the defensive doctrines of “frustration of purpose” or “impossibility.” The court found that the frustration of purpose doctrine applies only when a catastrophic event renders the lease valueless to one of the parties. Impossibility arises when the inability to perform comes from an unanticipated event. In this case, the express terms of the business lease stated that the tenant had a duty to pay rent even if a condition arose if that condition was not in the landlord’s control. The leas also required payment even if the …

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Second Circuit upholds rent control against a takings challenge post-Cedar Point

/ Leaseholds, Takings

In one of the first important cases to gauge the consequences of the Supreme Court’s physical takings decision in Cedar Point Nursery, the Court of Appeals Second Circuit, in two linked cases has upheld recent amendments to New York City’s rent stabilization law against a claim that is a facially invalid violation of the takings clause applicable to the states through the fourteenth amendment. Community Housing Improvement Program v. City of New York, 2023 WL 1769666 (2d Cir. 2023); 74 Pinehurst LLC v. City of New York, 2023 WL 1769678 (2d Cir. 2023). The court ruled that the law, at least on its face, was neither a physical taking under the Loretto/Cedar Point line of cases nor a regulatory taking under the Penn Central line of cases. The physical taking claims were that the law (the New York City Rent Stabilization Law, as amended in 2019 in the Housing Stability and Tenant Protection Act …

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Commercial rent acceleration clause invalid if it is a “penalty”

/ Estates and Future Interests, Leaseholds, Real Estate Transactions

The Massachusetts courts say that there is no duty to mitigate damages in commercial leases but they sure look like they recognize such a duty when a lease has an acceleration clause (requiring the full remaining rent for the rest of the lease to be paid if rent payments are missed). In the case of Cummings Props., LLC v. Hines, 2022 WL 17409280 (Mass. App. Ct. 2022), a commercial tenant defaulted only two months into a five-year lease and the landlord demanded the tenant pay the full rent for the rest of them five-year lease term in accodance with an acceleration clause in the lease that required this. The rent was $1364.50 per month and the damages would have been $74,000. The court recognized that acceleration clauses were valid and enforceable but applied ordinary contract doctrine that enforces liquidated damages (damage amounts set in contracts) only if they are a reasonable …

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Short-term rentals do not violate “residential use only” covenant

/ Concurrent or Common Ownership, Condominiums and Homeowners Associations, Leaseholds, Real Estate Transactions, Servitudes

The Mississippi Supreme Court has held that short term rental of property is not a commercial use that would violate a covenant limiting land to residential purposes. Lake Serene Prop. Owners Ass’n v. Esplin, 334 So.3d 1139 (Miss. 2022). There has been some disagreement among state courts on this question because the use of property as an Airbnb or other short term rental can be viewed as changing property to “hotel” use, at least when the owner does not share occupancy with the guest.

Tenants have mostly lost “frustration of purpose” claims when they could not pay rent during Covid-19 lockdowns

/ Leaseholds

In accord with most courts, the Connecticut Supreme Court held that a restaurant lease was not void for “frustration of purpose” when the restaurant tenant could not make rent payments because of a gubernatorial order for restaurants to shut down during the early stages of the Covid-19 disaster. AGW Sono Partners, LLC v. Downtown Soho, LLC, 273 A.3d 186 (Conn. 2022). The court found that the lease did not prevent the restaurant from selling food for take-out rather than for consumption in a sit-down restaurant. Nor did the lease contain a “force majeur” clause which (depending on its wording) might or might not classify the pandemic as an “act of God” or similar problem that would entitle the tenant to get out of its lease obligations. A Massachusetts court came to the opposite conclusion when the lease language limited the tenant to operating “only a café with a sit-down restaurant menu and …

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Extended stay hotel residents are tenants

/ Homelessness, Leaseholds

A Georgia court has ruled that residents of extended stay hotels should be classified as tenants with the protections granted by landlord-tenant law. That means they can be removed only by court eviction procedures rather than self-help. Efficiency Lodge, Inc. v. Neason, 870 S.E.2d 549 (Ga. 2022).

Covenants that prohibit all leasing restrictions include short-term rentals

/ Leaseholds, Servitudes

The Texas Supreme Court has held that covenants that prohibit all restrictions on leasing cannot prohibit short term rentals, finding that a lease is still a lease if it only lasts for one day. JBrice Holdings, LLC v. Wilcrest Walk Townhomes Ass’n, Inc., 2022 WL 1194364 (Tex. 2022). In addition, short-term rentals were held not to be “commercial” or “non-residential uses.” The court noted that the covenants provided that they could be retroactively amended through a 75% vote of the owners.

Probation on discriminating against Section 8 recipients does not violate due process

/ Antidiscrimination Law, Due Process, Leaseholds, Real Estate Transactions

The Minnesota Supreme Court has held that a state statute that prohibits landlords from refusing to rent to housing voucher (Section 8) recipients does not violate the due process or equal protection clauses of the Minnesota Constitution. Fletcher Properties, Inc. v. City of Minneapolis, 947 N.W.2d 1 (Minn. 2020). While federal law does not require landlords to rent to tenants whose rent is subsidized by housing vouchers, some states do impose this obligation on landlords. Some landlords object to the Section 8 program because it imposes procedures and costs on such landlords and some substantive terms such as prohibiting eviction without good cause. The court held that the law did not deprive landlords of due process of law because the legislature could reasonably believe that it served the public purpose of enabling voucher holders to find housing. And the fact that some landlords were exempt from the statutory obligations did not violate …

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Banks are both owners and landlords when they buy tenant-occupied property at a foreclosure sale

/ Leaseholds, Mortgages, Real Estate Transactions

Banks seem to have a hard time understanding that when they obtain title to property through a foreclosure sale that they not only own the property but have taken on themselves all the obligations that an owner has. If the property is occupied by tenants, the bank-owner is automatically the new landlord and the law imposes duties on landlords. The law also requires owners not to let their property become a nuisance. But this simple legal truth is repeatedly resisted by some banks. This rule extends to any entity that is the legal owner of the property and that includes the trustee of residential mortgage-backed securities that purchases the property at a foreclosure sale. The Maryland Court of Appeals ruled in Hector v. Bank of New York Mellon, 473 Md. 535, 251 A.3d 1102 (Md. 2021), that a lender that becomes a property owner by buying property at a foreclosure sale …

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