Mitigation of Damages
A recent decision in a case that came before the BYU-Idaho arbitration panel provides significant insight into the concept of mitigation of damages found in Section 4 of the Student Landlord Housing Contract. The decision and accompanying rationale is attached. Please consider this decision/explanation an important training piece for you and your staff.
In summary, the decision addresses the landlord’s legal responsibility to demonstrate reasonable efforts to mitigate damages by filling a leased space that will no longer be occupied by the student who originally purchased a contract for that space.
There are a few key findings that are worthy of emphasis:
- A landlord’s obligation to mitigate damages is independent of a student’s efforts to sell the contract or find a replacement.
- A landlord must treat the "breached" contract just like the other unsold contracts in his/her inventory. In other words, it is unwise to create two piles of contracts-unsold contracts and breached contracts-and default by marketing and selling the unsold contracts first and only moving the breached contracts once the unsold inventory has been depleted. The concept of mitigation of damages requires the landlord to demonstrate commercially reasonable efforts to fill the leased space.
- A landlord does not need to engage in marketing or advertising efforts above and beyond their normal process to fill the leased space.
One other key note that is not necessarily part of this arbitration decision but has been emphasized in recent discussions with Dave Thomas, BYU/BYU-Idaho Legal Counsel, is the fact that landlords ought not attempt to restrict the market in terms of who may or may not buy a contract from a student who is endeavoring to find a replacement for his/her contract. All those without signed contracts for the period identified in the contract for sale are eligible to purchase the contract. This includes current tenants without signed contracts for an upcoming semester.
Complex A ("Petitioner") v. Student B ("Respondent")
The essential factual dispute that is raised here concerns the conversation on October 11, 2012, to which Respondent points to as her cancellation of the contract. The Petitioner has no recollection of that purported conversation. Where something as important as cancellation of a contract is potentially complicated by disputed memories, or lack thereof, such an issue is always problematic. Thus, in contracting it is customary to require the modification or cancellation of a written agreement to itself be done in writing. In this situation regardless of whether the conversation occurred such oral notification of cancellation probably is not effective under the specific terms of the operative contract to effect a April 2013 cancellation. The contract requires cancellation to be provided “by written notice" which obviates any concern about the fallibility of memory. Even if the arbitration panel were to find that in fact the conversation was had as described by the Respondent that conversation is not sufficient under the contract to cancel the contract without written notice.
Respondent argues that it is the landlord’s obligation to provide the necessary documentation that would serve as the written notice. Respondent bolsters this argument by contending that because of the Respondent’s tender years and lack of sophistication in dealing with contract matters that the landlord must provide for or shepherd the Respondent through the cancellation process. While the arbitration panel acknowledges that the Respondent is relatively unsophisticated, testimony was received that she had sought counsel with her father, arguably more sophisticated, who had provided her with direction. Furthermore, the contract does not obligate the landlord to provide documentation of the cancellation but places the burden of providing written notification on the "initiating party."
Therefore, accepting that the October 11th conversation did occur as represented it was not sufficient to initiate cancellation process as provided in the contract. In addition, from the long interchange of e-mail traffic between the Petitioner and the Respondent it is reasonable to infer that cancellation had not occurred, and that Respondent was attempting to sell her contract.
While it is the determination of the arbitration panel that the contract was not timely canceled and thus the Respondent is obligated for the damages associated with the contract, an issue arises concerning the obligation of the landlord to mitigate its damages. The law of contracts, and specifically the terms of this particular contract provides that "landlord may collect for all the obligations contained in this contract but must demonstrate commercially reasonable efforts to mitigate damages by filling the leased space." Thus, the landlord in order to recover under the contract must demonstrate what it did to fulfill its duty to mitigate its damages.
In this instance, testimony from the landlord provided an indication of how it approaches its duty to mitigate damages. Testimony was received that the landlord feels that it has the right to sell all of its existing inventory before undertaking the obligation to sell the breach contract or fill the leased space. In addition, in this particular situation, testimony was received that some 20 to 30 contracts for spaces in Complex A apartment were sold after it knew that Respondent space would be unoccupied for winter semester. Testimony was received that the landlord did post as a matter of notification of contracts for sale this particular Respondent’s space but did so only for effectively one month’s worth of time between November and December.
The arbitration panel is deeply concerned about whether these efforts were sufficient to demonstrate that the landlord fulfilled its obligation to mitigate its damages. It should first be noted that the landlord’s obligation to mitigate damages is independent of any action taken by the Respondent. Certainly the Respondent has not only responsibility for but should be highly motivated to take care of her obligations under the contract because of the potential penalty of having to cover the full expense of the contract. Be that as it may, the landlord has an independent and separate obligation to mitigate its damages. The limitation that the law places on such efforts as reflected in the contract is that the landlord must take commercially reasonable efforts to mitigate its damages. This means that the landlord must make some effort to mitigate its damages by filling the leased space but does not have to involve itself in a substantial campaign or process to fill that lease space at all costs. All the landlord must do is make an effort which is within the realm of commercial reasonability to fill the lease space. To do nothing is unacceptable under the law and the contract, and to make no effort to fill that lease space as long as it has its own inventory does not fulfill that duty. In this instance where the landlord placed its own inventory over its obligations to mitigate its damages does not indicate a recognizable effort that is required by the contract. Furthermore the fact that 20 to 30 contracts were sold without this contract being dealt with in any fashion seems difficult for this arbitration panel to believe that reasonable efforts were made to mitigate the damages associated with the breach of contract.
Therefore, the arbitration panel determines that the Respondents contract was not canceled, and the obligations contained therein are ones that continued. The amount of the rent as provided in the contract was $1200. However, because the landlord has not made a showing that it used commercially reasonable efforts to mitigate its damages this arbitration panel feels compelled to make an adjustment against the award of the amount of the contract by the amount that could have been mitigated or might have been mitigated if such efforts had been taken. Therefore, the arbitration panel awards to Petitioner the amount of $600.