16 September 2020

COVID-19 relief package – potential required landlord mitigation under commercial leases


Overview

Commercial tenants in New York may soon find themselves with additional negotiating leverage when requesting rent deferrals and/or abatements from their respective landlords. In an effort to assist hurting commercial tenants in the State of New York, the New York State Assembly on July 22, 2020, passed Assembly Bill A8482 (the “Proposed Legislation”) which would require commercial landlords to mitigate damages in the event a commercial tenant vacates its premises in violation of the terms of the applicable lease. Initially introduced on August 7, 2019 (i.e., pre-COVID-19), the Proposed Legislation has taken on greater importance due to the COVID-19 pandemic and would require that commercial landlords act in accordance with standards previously reserved for residential tenancies. While we note that the Proposed Legislation has been submitted to the State Senate and not yet signed into law, we highlight that the Proposed Legislation would mark a stark contrast to existing commercial landlord/tenant law in the State of New York which, unlike other states such as California, imposes no requirement on commercial landlords to mitigate their damages in the event of a tenant default.

Summary of the Proposed Legislation

The Proposed Legislation seeks to amend Section 227-e of the Real Property Law to apply to all tenancies, rather than just residential leases. If a commercial tenant terminates its lease or rental agreement prior to the scheduled expiration date in breach of such lease or rental agreement, the Proposed Legislation would require that the landlord “in good faith and according to the landlord’s resources and abilities, take reasonable and customary actions to rent the premises at fair market value or the rate agreed to during the term of the tenancy, whichever is lower” in any lease or rental agreement. Further, the Proposed Legislation requires that, once the landlord rents the premises at fair market value or the rate agreed to during the term of the tenancy, the new lease terminates the previous tenant’s lease and mitigates damages otherwise recoverable against the previous tenant. Lastly, the Proposed Legislation would place the burden of proof on the party seeking to recover such damages.

Challenges to the Proposed Legislation

Currently, in the State of New York, commercial landlords are not typically obligated to mitigate their damages in the event of a tenant default. Generally speaking, in the absence of statutory protections, commercial tenants are left to negotiate (with varying success) the landlord’s mitigation of damages in the event of a tenant default. Therefore, the primary detractors of the Proposed Legislation are, to no one’s surprise, commercial landlords. Commercial landlords, already facing the bleak prospect of falling revenues, would be forced to seek new tenants to offset damages in a down market. In other words, commercial landlords would be forced to seek new tenants rather than having the option of keeping their spaces vacant and waiting for market conditions to improve. Further, it is anticipated that the Proposed Legislation will face constitutionality challenges surrounding the Proposed Legislation’s seemingly impermissible, unilateral amendment of existing, valid contracts. On the heels of other tenant-friendly legislation (See COVID-19 Relief Package – Temporary Relief for Personal Guarantors under Commercial Leases), commercial landlords could soon face even more obstacles during these tough economic times.

Withers Bergman LLP is an international law firm with substantial experience with diverse leasing from anchor tenancies in shopping centers to large office leases, luxury brand single city retail leases, and multiple city retail rollout programs, warehouse occupancies as well as residential portfolios. For additional guidance on this recently passed legislation and other COVID-19 related matters, please reach out to our New York Commercial Real Estate Team to develop a legal strategy to plan for near- and long-term solutions tailored to achieve your specific goals.

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