Austin Hill Country Realty, Inc. v. Palisades Plaza, Inc.

Decision Date09 July 1997
Docket NumberNo. 95-1273,95-1273
Citation948 S.W.2d 293
Parties40 Tex. Sup. Ct. J. 924 AUSTIN HILL COUNTRY REALTY, INC. d/b/a Re/Max Austin Hill Country Realtors, Barbara A. Hill, Annette V. Smith and David J. Jones, Petitioners v. PALISADES PLAZA, INC. d/b/a The Palisades, Respondent.
CourtTexas Supreme Court

William Rushing Hemphill, Geoffrey D. Weisbart, David F. Minton, Barry K. Bishop, Austin, for Petitioners.

Kenneth D. Lerner, Austin, for Respondent.

SPECTOR, Justice, delivered the opinion for a unanimous Court.

We overrule the motion for rehearing. We withdraw our opinion of January 10, 1997, and substitute the following in its place.

The issue in this case is whether a landlord has a duty to make reasonable efforts to mitigate damages when a tenant defaults on a lease. The court of appeals held that no such duty exists at common law. 938 S.W.2d 469. We hold today that a landlord has a duty to make reasonable efforts to mitigate damages. Accordingly, we reverse the judgment of the court of appeals and remand for a new trial.

I.

Palisades Plaza, Inc., owned and operated an office complex consisting of four office buildings in Austin. Barbara Hill, Annette Smith, and David Jones sold real estate in Austin as a Re/Max real estate brokerage franchise operating through Austin Hill Country Realty, Inc. On September 15, 1992, the Palisades and Hill Country executed a five-year commercial office lease for a suite in the Palisades' office complex. An addendum executed in connection with the lease set the monthly base rent at $3,128 for the first year, $3,519 for the second and third years, and $3,910 for the fourth and fifth years. The parties also signed an improvements agreement that called for the Palisades to convert the shell office space into working offices for Hill Country. The lease was to begin on the "commencement date," which was defined in the lease and the improvements agreement as either (1) the date that Hill Country occupied the suite, or (2) the date that the Palisades substantially completed the improvements or would have done so but for "tenant delay." All parties anticipated that the lease would begin on November 15, 1992.

By the middle of October 1992, the Palisades had nearly completed the improvements. Construction came to a halt on October 21, 1992, when the Palisades received conflicting instructions about the completion of the suite from Hill on one hand and Smith and Jones on the other. By two letters, the Palisades informed Hill Country, Hill, Smith, and Jones that it had received conflicting directives and would not continue with the construction until Hill, Smith, and Jones collectively designated a single representative empowered to make decisions for the trio. Hill, Smith, and Jones did not reply to these letters.

In a letter dated November 19, 1992, the Palisades informed Hill Country, Hill, Smith, and Jones that their failure to designate a representative was an anticipatory breach of contract. The parties tried unsuccessfully to resolve their differences in a meeting. The Palisades then sued Hill Country, Hill, Smith, and Jones (collectively, "Hill Country") for anticipatory breach of the lease.

At trial, Hill Country attempted to prove that the Palisades failed to mitigate the damages resulting from Hill Country's alleged breach. In particular, Hill Country introduced evidence that the Palisades rejected an offer from Smith and Jones to lease the premises without Hill, as well as an offer from Hill and another person to lease the premises without Smith and Jones. Hill Country also tried to prove that, while the Palisades advertised for tenants continuously in a local newspaper, it did not advertise in the commercial-property publication "The Flick Report" as it had in the past. Hill Country requested an instruction asking the jury to reduce the Palisades' damage award by "any amount that you find the [Palisades] could have avoided by the exercise of reasonable care." The trial judge rejected this instruction, stating, "Last time I checked the law, it was that a landlord doesn't have any obligation to try to fill the space." The jury returned a verdict for the Palisades for $29,716 in damages and $16,500 in attorney's fees. The court of appeals affirmed that judgment. 938 S.W.2d 469.

II.

In its only point of error, Hill Country asks this Court to recognize a landlord's duty to make reasonable efforts to mitigate damages when a tenant breaches a lease. This Court's most recent, and most thorough, discussion of mitigation appeared in Brown v. RepublicBank First National Midland, 766 S.W.2d 203 (Tex.1988). The issues in Brown were whether a termination right in one contract was impliedly included in a sublease agreement between the same parties and, if not, whether the landlord had a duty to mitigate damages upon the tenant's breach. Id. at 204. We held that the termination right was incorporated into the sublease. Id. The tenant thus had properly terminated the sublease agreement, and we did not reach the mitigation issue. Id.

Five justices of this Court, however, expressed that they would hold that a landlord has a duty to mitigate damages after a tenant defaults. Id. at 204 (Kilgarlin, J., concurring, joined by Spears, Gonzalez, and Mauzy, JJ.); id. at 207-08 (Phillips, C.J., dissenting). The concurrence emphasized the contractual nature of modern leases, noting that a covenant to pay rent is like any other contractual promise to pay. Id. at 206 (citing Schneiker v. Gordon, 732 P.2d 603, 610 (Colo.1987)). The concurring justices and the dissenting Chief Justice concluded that public policy requires a landlord, like all other aggrieved parties to a contract, to mitigate damages. Id. at 206 (Kilgarlin, J., concurring); id. at 207-08 (Phillips, C.J., dissenting).

Today we face the issue that Brown did not reach: whether a landlord has a duty to make reasonable efforts to mitigate damages upon the tenant's breach. Because there is no statute addressing this issue, we look to the common law. John F. Hicks, The Contractual Nature of Real Property Leases, 24 BAYLOR L.REV. 443, 446-53 (1972).

The traditional common law rule regarding mitigation dictates that landlords have no duty to mitigate damages. See Dawn R. Barker, Note, Commercial Landlords' Duty upon Tenants' Abandonment--To Mitigate?, 20 J. Corp. L. 627, 629 (1995). This rule stems from the historical concept that the tenant is owner of the property during the lease term; as long as the tenant has a right to possses the land, the tenant is liable for rent. See Reid v. Mutual of Omaha Ins. Co., 776 P.2d 896, 902, 905 (Utah 1989). Under this rule, a landlord is not obligated to undertake any action following a tenant's abandonment of the premises but may recover rents periodically for the remainder of the term. See Gruman v. Investors Diversified Servs., 247 Minn. 502, 78 N.W.2d 377, 379-80 (1956).

In Texas, the traditional common law rule was first adopted in Racke v. Anheuser-Busch Brewing Ass'n, 17 Tex.Civ.App. 167, 42 S.W. 774, 775 (Galveston 1897, no writ). In Racke, a landlord sued to determine the extent of the tenant's liability for holding over past the lease term. Concluding that the holdover rendered the tenant liable under a new tenancy for one year, the Court of Civil Appeals held that the landlord could not "be subjected to damages for failing to let the premises to another, to prevent rents accruing the [tenant]." Id.

Texas courts have consistently followed this no-mitigation rule in cases involving a landlord's suit for past due rent. See, e.g., Metroplex Glass Ctr., Inc. v. Vantage Properties, Inc., 646 S.W.2d 263, 265 (Tex.App.--Dallas 1983, writ ref'd n.r.e.); Apex Co. v. Grant, 276 S.W. 445, 447 (Tex.Civ.App.--Dallas 1925, writ ref'd); see generally E.L. Kellett, Annotation, Landlord's Duty, On Tenant's Failure to Occupy, or Abandonment of, Premises, to Mitigate Damages by Accepting or Procuring Another Tenant, 21 A.L.R.3d 534, 555-56 (1968).

Some Texas courts have, however, required a landlord to mitigate damages when the landlord seeks a remedy that is contractual in nature, such as anticipatory breach of contract, rather than a real property cause of action. See Employment Advisors, Inc. v. Sparks, 364 S.W.2d 478, 480 (Tex.Civ.App.--Waco), writ ref'd n.r.e. per curiam, 368 S.W.2d 199, 200 (Tex.1963); see also Evons v. Winkler, 388 S.W.2d 265, 269 (Tex.Civ.App.--Corpus Christi 1965, writ ref'd n.r.e.). In Sparks, the landlord sued the tenant for anticipatory repudiation of the lease. The court of appeals observed that, because the landlord pursued a contractual remedy, the landlord's damage recovery was "subject, of course, to the usual rules concerning mitigation." 364 S.W.2d at 480. In refusing writ per curiam, this Court expressed no opinion on the appellate court's holding. 368 S.W.2d at 200.

Other Texas courts have required a landlord to mitigate damages when the landlord reenters or resumes control of the premises. See John Church Co. v. Martinez, 204 S.W. 486, 489 (Tex.Civ.App.--Dallas 1918, writ ref'd); Robinson Seed & Plant Co. v. Hexter & Kramer, 167 S.W. 749, 751 (Tex.Civ.App.--Dallas 1914, writ ref'd). Thus, a landlord currently may be subject to a mitigation requirement depending upon the landlord's actions following breach and the type of lawsuit the landlord pursues.

III.

In discerning the policy implications of a rule requiring landlords to mitigate damages, we are informed by the rules of other jurisdictions. Forty-two states and the District of Columbia have recognized that a landlord has a duty to mitigate damages in at least some situations: when there is a breach of a residential lease, a commercial lease, or both. 1

Only six states have explicitly held that a landlord has no duty to mitigate in any situation. 2 In South Dakota, the law is unclear. 3

Those jurisdictions recognizing a duty to mitigate have emphasized the change in the...

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