Mitigation of loss

[Aequitas]

This is a post for all regular contributors.

 

 

During the thirty odd years I practised the law, I never heard a lawyer suggest that a landlord had a duty to mitigate his losses when a tenant under a fixed term tenancy no longer had any use of the premises and attempted to “hand them back”; the one exception was when a trainee solicitor suggested it and he was peremptorily disabused by the landlord and tenant specialist partner! Before the case of Reichman -v- Gauntlett there was, if I recall correctly, some discussion of the question in the standard textbooks, but no cases were cited to support the argument that there was a duty, other than Commonwealth cases – always a sign of a desperate lawyer! If there were a duty to mitigate a body of case law would surely have been established long before now.

 

 

In the last two or three years, the argument has been advanced that there was such a duty; I think that the argument must have originated with a litigator unversed in landlord and tenant law! We are so often concerned with the contractual elements of a tenancy that it is easy to forget that a tenancy is, above all, an estate in land and that, at least in theory, it is perfectly possible for a tenancy to exist without any obligations on either party.

 

 

Since a tenancy is an estate in land it is to the law of property, rather that the law of contract , that ones needs to look to see how a tenancy can be brought to an end - an exception is a contractual right to break.

 

 

Other than by the exercise of a contractual right to break or effluxion of time, a fixed term tenancy can be brought to an end in the following ways:

 

 

1. Surrender

 

 

This can be express or implied. An express surrender must be by deed. There is an implied surrender where a new lease is granted to take effect before the old one ends. Otherwise, there are no hard and fast rules, but there has to be an intention by the tenant to give up the premises and a corresponding acceptance by the landlord. Dropping the keys through the landlord's letterbox at dead of night is not enough on its own!

 

 

2. Merger

 

 

This happens when the tenancy and the reversion become vested in the same person, though it is dependent upon an intention to merge since the law presumes against merger.

 

 

3. Disclaimer

 

 

In certain circumstances a trustee in bankruptcy or a liquidator may disclaim a lease. This does not always bring a lease to an end since anyone interested in the tenancy (i.e. a mortgagee or a former tenant who is liable under privity of contract) may apply to the court for an order vesting the lease in him. It has been decided that a solvent company going into liquidation for the express purpose of getting the liquidator to disclaim the lease does not avoid compensation being payable.

 

 

4. Frustration

 

 

A lease is automatically frustrated when an event occurs which makes it impossible for the lease to be performed. Frustration only occurs rarely – it needs something catastrophic like a property on a cliff edge falling into the sea. (Automatic frustration should not be confused with the operation of a “frustration clause”, which allows the tenant to give notice terminating the lease if any of certain specified events occurs.)

 

 

5. Forfeiture

 

 

A landlord may forfeit a lease if the tenant for breach of covenant if the lease gives him the right to do so. There is no common law or statutory right for a tenant to bring a lease to an end if the landlord is in breach of covenant, or even if the landlord makes a misrepresentation before the lease is granted – the tenant's remedy is to sue for damages or an injunction. A landlord could give the tenant a right to terminate in the event of breach of covenant or misrepresentation, but this would be highly unusual.

 

 

So, a tenant can only bring a fixed term tenancy to an end unilaterally if the lease gives him the right to do so.

 

 

The above argument was not employed in Reichman -v- Gauntlett. That case was decided on the basis that the only way the landlord could mitigate his losses was by bringing the lease to an end and if he did that then, as a matter of law, the tenant's obligations would end from the moment the tenancy came to an end. That would leave the landlord in the position that he could not claim any rent for the period from the date the lease ended until the property was relet, or claim compensation if he could only relet at a lower rent. Further, the judge said as that as the tenant had the right to assign the lease the remedy for finding a new tenant was in his own hands. Reichman -v- Gauntlett has not settled the position decisively as it seems to leave open the posibilty that the duty exists where the tenant does not have the right to assign; however, the argument that a landlord can only mitigate his losses by bringing the lease to an end would still seem to apply. The case also does not rule out the possibility that there may be circumstances where it is equitable that the landlord should attempt to mitigate his losses. However, in a case where the landlord has behaved impeccably and the tenant simply wants shot of the premises it is difficult to see the courts agreeing that a landlord has a duty to mitigate his losses.

 

 

If there were a general obligation on landlords to mitigate their losses it would of course undermine the commercial letting market. You cannot have the situation where supermarket chains for example effectively have the right to walk away from long lease commitments. When it comes to short term residential leases, many would argue that a tenant ought to keep to the bargain he has struck – is it not a trifle unreasonable for a landlord, but not a tenant, to be bound by a fixed term? The problem is that many tenants do not appreciate the effect of signing a fixed term agreement. Perhaps a compromise would be that a fixed term tenancy agreement of residential premises should bear an appropriate warning and that in the absence of such a warning a tenant up-to-date with his rent can give notice terminating the tenancy.

 

 

Finally, I observe that if there were a general obligation on landlords to mitigate their losses it would render much, if not the whole, of the Landlord and Tenant (Covenants) Act 1995 superfluous.

[genes]

me and my husband rented a salon from the leaseholder on the 4th of January 2007. after we have refurblished and spent a lot of money in the shop, he asked us to sign a shorthold tenancy agreement for residential property. at that time, we had no choice but to sign it. we signed it dated 29th of january 2007 for one year. the landlord said he will renew the agreement every year. when we asked for a proper lease, he said that it would be given to us by the end of the tenancy agreement. the agreement ended on the 29th of january 2008.

 

we spent about £20,000.00 to refublished the place and set up our own clients. unknowling to us the leaseholder only wanted to use us to build up his lost clients as he was doing a salon there before as well. we asked him to renew the agreement and give us a proper agreement and he said we have to move out as soon as possible as the freeholder want to refurblish the whole building. we contacted the freeholder and she told us it is a liar. the freeholder said his lease end in June 2008 and he is not going to renew it for him and would like to offer us the lease but that will be in june 2008.

 

the leaseholder now sent us a letter to vacate the shop in the next six days. he has been to the shop to take out our light and the keys. he said we have to move out.

we have spent a lot of money and time to set the place up. we should not have taken out a loan from the bank if we know the p[lace was only for one year.

 

please what should we do ?

 

we would like to drag this matter till june when they will have no lease anymore. can we get court injuction on them despite the fact that we do not have a valid agreement anymore?

 

but was the agreement valid in the first place?

 

what is court reactions to cases like this?>

 

do we have any case at all?

 

thank you.

[Joa]

Why suddenly this post Aequitas? You do seem to be very moved by the issue

 

The question "what happens if I leave early" is a typical one in welfare advice sector. The adviser would then run through possible consequence, invariably including the issue of liability for rent and landlord being able to pursue it through the court. And then the "sweetener": but the landlord would have to show that he was making a reasonable effort to mitigate his loss by re-letting. It was a standard drill.

And then Reichman and Dunn v Beveridge and Gauntlett arrived and we now have been issued an errata for older versions of our booklet which states: If the tenant has a fixed term agreement, s/he must comply with its terms. S/he will be liable to pay rent for the whole period, unless the tenancy agreement allows her to leave early or the landlord agrees to this. If the tenant leaves before the end of the fixed term, the landlord can take legal action to recover the rent for the rest of the period and does not have to mitigate her/his loss, for example, by trying to re-let the accommodation The advice before was definitely of landlord's duty to mitigate, and now it is clear that such duty has been removed. The above quote comes from CAB's information system which is made available to all advice groups belonging to an AdviceUK network; so pretty much all your "certified" welfare advice agencies are using it. Whatever you may say about particular advisers (some are great some are not), the information system (a regularly updated series of CDs) is prepared by top specialists.

So, coming back to your post, where you say that in your 30 years of practice you have not encountered the "duty to mitigate"; it was out there, in NFP advice sector, very much alive and kicking, oft quoted and now it is gone.

[Aequitas]

I have to say that I think the advice was plain wrong.

 

I did have a discussion on another forum a year or so ago before the recent case and no one was able to give any authority for the proposition that a landlord has a duty to mitigate his loss.

 

I think that anyone familiar with landlord and tenant law who thought the matter through would have come to the conclusions I set out above. Whilst contract law does have some application to landlord and tenant law, it is best on the whole to think of the latter as separate and subject to its own rules.

[MrShed]

I know but Aequitas, contract law clearly does apply, and is simply superceded in some areas by landlord and tenant acts. Therefore, as in contract law there is an obligation to mitigate loss, and as this obligation is not EXPLICITLY declared as not required in landlord tenant acts, I would argue that the obligation is clearly still there.

 

Not saying you are neccessarily wrong(I am not a lawyer!) but thats the way I see it, and I am yet to see a convincing argument as to why that is not the case.

[Aequitas]

1. A tenancy is first and foremost a legal estate in land. It is, to quote the Law of Property Act 1925, "a term of years absolute". It can only come or be brought to an end as set out above. The contractual elements are only incidental to the arrangement. In theory it is possible to have a tenancy without obligations.

 

2. It would be unreasonable for a landlord but not a tenant to be bound by a fixed term. If a tenant can rely on contractual security of tenure, a landlord ought to be able to assume his income is assured for the period the tenant has agreed to. A duty to mitigate is virtually tantamount to giving the tenant a unilateral right to require a landlord to accept a surrender.

 

3. The only way a landlord can mitigate his losses is in fact to forfeit the lease. Once he does that, he loses the right to claim any rent after the forfeiture. So in trying to mitigate his losses he may in fact increase them.

 

4. If there is a duty to mitigate losses it would undermine the commercial letting market. The Landlord and Tenant (Covenants) Act 1995 would be a largely irrelevant piece of legislation.

 

5. If there were a duty to mitigate there would surely by now be a body of case law setting out the circumstances in which the duty arose. There is not, so far as I know, even one case that supports the idea. This is not of course conclusive since the courts often come up with surprises, but it has to be significant.

[MrShed]

Out of interest, are there cases that go against the idea either?

[Aequitas]

Out of interest, are there cases that go against the idea either?

 

So far as I know, only the recent one.