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Tremitek, LLC v. Resilience Code, LLC.

2023 COA 54. No. 22CA1009. Commercial Leases—Tenant’s Breach of Lease—Liquidated Damages Provision—Landlord’s Duty to Mitigate Damages.

June 15, 2023

In 2017, Tremitek, LLC (landlord) and Resilience Code, LLC and Prusmack (collectively, tenant) entered into a 128-month commercial lease (the lease), which contained a liquidated damages provision. In January 2020, landlord hired a commercial real estate broker and listed the property for sale, marketing it as a “net lease investment.” In October 2020, tenant stopped paying rent and defaulted on the lease. In January 2021, landlord listed the property for lease on several commercial real estate websites. Tenant vacated the property in February 2021. Landlord sued tenant in April 2021 for breach of contract and unjust enrichment, seeking as damages the unpaid rent under the lease. The property was listed continuously through the time of trial. The district court found that tenant had breached the lease. But while seven years remained on the lease when tenant defaulted, the district court limited landlord’s recovery to five months of unpaid rent for the period between October 2020 and February 2021, while tenant occupied the property, because it found that landlord reasonably could have sold the property during that time.

On appeal, landlord argued that the district court erred by not enforcing the liquidated damages provision, under which it was entitled to the full present value of the remaining rent. A liquidated damages provision is enforceable only if (1) the parties intended to liquidate damages; (2) at the time of the contract, the liquidated damages amount was a reasonable estimate of the actual damages that a breach would cause; and (3) at the time of the contract, the actual damages amount was difficult to ascertain. Here, the liquidated damages provision granted landlord the full present value of the remaining rent, without deducting the property’s reasonable rental value. That would be a reasonable estimate of landlord’s actual damages only if the parties reasonably anticipated at the time of the lease that landlord would be unable to find a suitable replacement tenant during the lease term, which the record indicates was not the case. The measure of actual damages for a tenant’s breach of lease is the amount required to restore the landlord to the position it would have been in without the breach, while considering the landlord’s duty to mitigate. Because the liquidated damages provision allowed landlord to recover the full amount of unpaid rent without deducting the reasonable rental value of the property for the remaining lease term, it is unenforceable.

Landlord also contended that the district court erroneously imposed a duty on landlord to sell its property to mitigate tenant’s breach of the lease. When a tenant defaults on a commercial lease, a landlord has a duty to mitigate the damages caused by the tenant’s breach, which typically means a landlord must make commercially reasonable efforts to find a replacement tenant. But the mitigation duty does not require a landlord to sell its property to remedy a tenant’s breach. And no Colorado case has required a landlord to use reasonable efforts to sell its property to mitigate damages from a tenant’s breach of a lease. Accordingly, the district court erred.

Landlord further argued that the district court erred in concluding that it failed to mitigate its damages with regard to finding a tenant, because it took reasonable steps to re-lease the property, including by hiring a commercial real estate broker, listing the property at a rental rate below that in the lease, and marketing the property. Here, the district court’s damages award rested solely on landlord’s failure to sell the property, and it did not explain the basis for, or effect of, its subsidiary finding regarding the failure to re-lease. Therefore, the court of appeals was unable to review the district court’s finding.

Landlord requested an award of its appellate attorney fees, and tenant did not dispute that landlord is entitled to its attorney fees if it prevails. Because this action is one to enforce or interpret lease provisions and landlord is the prevailing party, the Court awarded landlord its reasonable attorney fees incurred on appeal.

The judgment was reversed with respect to damages only and the case was remanded for further proceedings.

Official Colorado Court of Appeals proceedings can be found at the Colorado Court of Appeals website.

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