Circuit City defaulted on a 20-year lease in the Wintergreen Plaza Shopping Center when the electronics retailer relocated to a different Rockville Pike shopping center in violation of a “continuous operation” provision of the lease. And in this case, instructive to landlords and tenants alike, the Court of Appeals of Maryland ruled the subsequent demolition of the leased premises and erection of a larger building, which Wintergreen found necessary in order to attract Food Lion as a replacement tenant, did not terminate Circuit City’s obligation to pay rent.

Circuit City is entitled, however, under both the lease and the 1998 judgment (entered against it for breach of lease), to credit against its continuing obligation for “the net amount of rent received by [Wintergreen], after deduction for all actual and reasonable expenses incurred in re-letting the Demised Premises . . . and in collecting the rent in connection therewith.”

Circuit City had argued, in this attempt to reopen the 1998 case, Circuit City Stores, Inc. v. Rockville Pike Joint Venture LP, that by subsequently allowing Food Lion to demolish the demised premises, Wintergreen forfeited or waived its right to continued rent damages from Circuit City.

At common law, a landlord had three options when a tenant abandoned a commercial lease prior to its expiration. One was to accept a surrender of the lease and thereby terminate the tenancy. If the landlord, expressly or by its conduct, accepts the implied offer and effects a surrender, the tenancy is terminated and the tenant’s obligation to pay further rent is also terminated.

The landlord may, as a second option, re-enter the premises for the account of the tenant, attempt to re-let the property for the tenant’s benefit, and hold the tenant liable for any rent that had accrued at the time of the re-entry as well as any future deficiency if the premises were unable to be re-let or were re-let at a lower rent than was reserved under the lease. Finally, under the traditional common law rule, the landlord could do nothing and hold the tenant liable for the entire amount of rent payable during the remaining term of the lease.

In 1974, the Maryland Legislature, by statute, effectively abrogated that third option with respect to residential leases by requiring residential landlords to mitigate damages that result from a tenant’s termination of occupancy before the end of the term.

The traditional rule with respect to commercial leases remained: “A tenant who abandons leased property is not entitled to insist on action by the landlord to mitigate the damages, absent an agreement otherwise.”

In this case, the Court found, in response to Circuit City’s abandonment, Wintergreen did, indeed, accept a surrender of the lease. It therefore chose the first of the three options and not the third.

When there is a surrender of the lease, the landlord becomes free of the tenancy and may again deal with the property unfettered by it. On the other hand, because a surrender terminates the tenancy, the tenant’s obligation to pay rent ceases. To gain the advantage of a surrender but avoid that consequence, landlords began to insert in leases provisions similar to that contained in the Circuit City lease here, making the tenant liable for the amounts of rent reserved in the lease, notwithstanding any entry or termination by the landlord upon the tenant’s default, and to rely on contract law, rather than property law, for the enforcement of that obligation. That, in turn, rests on the proposition that Maryland courts have embraced, a lease is both a contract and a conveyance of a leasehold estate in land, that, as such, it creates between the parties both privity of contract and privity of estate, and that, as a result, “the obligations which the parties bear to each other may arise out of contract or from the real covenants of the leasehold estate, or sometimes from both.”

The inclusion of such a provision often shifts the focus away from whether a completed surrender occurred, because, even if it did, the tenant may remain liable for the amount of rent reserved in the lease as a matter of contract law. The difference is that the claim is not for the post-surrender rent itself which, under property law, is no longer owed, but for damages arising from breach of the contract.

The appellate court states clearly here for the first time in Maryland, that the landlord has its own obligation to mitigate damages. The Court has recognized generally that, when one party breaches a contract, the other party is required by the “avoidable consequences” rule of damages to make all reasonable efforts to minimize the loss sustained from the breach. And this decision makes clear that the obligation to mitigate extends to landlords.

Circuit City averred that, when a landlord, following a surrender, takes action “inconsistent with the notion of a re-letting at the expense of the former tenant, but instead entirely demolishes the former premises . . . the protection of a survival clause is waived.” The Court held such is not correct and that, when there is a dispute over the matter, “[i]t is normally left to the trier of facts to determine whether the landlord’s efforts to re-let satisfied his duty to mitigate.”

In the crux of the decision analyzing the obligation to mitigate damages, the Court went on to reason: In calculating the amount of credit to which Circuit City may be entitled, a number of things will need to be examined, among which are: (1) the amount of rent received from Food Lion; (2) whether, and to what extent, that amount should be modified by the fact that the area of the leased premises is greater than that rented by Circuit City – whether, in other words, there should be some apportionment; and (3) what, if any, net benefit accrued to Wintergreen from the improvements made by Food Lion or from other provisions in the Food Lion lease.

This decision can leave no question that the obligation to mitigate damages extends to commercial landlords.