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North Dakota Supreme Court • 1986

Ruud v. Larson

392 N.W.2d 62

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Takeaway

In short, this case shows that a landlord's mitigation duty requires genuine, reasonable reletting efforts—not perfection—and a trial court's fact-based finding of good faith will stand unless the record clearly shows error.

Background

Arthur and Ruby Ruud leased Fargo commercial property to Raymond Larson and others in 1966. Larson operated a car wash and gasoline outlet there. In 1976, the Ruuds and Larson entered a second ten-year lease. Larson later failed to make timely rent payments, failed to pay property taxes required by the lease, failed to maintain liability insurance, and failed to keep the property in repair.

The Ruuds sued for breach in March 1982. Complications followed when Larson's corporation, Mid-State Oil Company, filed for bankruptcy and claimed an interest in the premises. After the bankruptcy court determined in November 1983 that Mid-State had no interest in the property, the Ruuds took possession, repaired and cleaned the premises, and tried to find a new tenant.

After a bench trial, the district court found that Larson had breached the lease and that the Ruuds had made diligent, good-faith efforts to mitigate their losses by reletting the property. It awarded the Ruuds damages and attorney's fees under the lease. Larson appealed solely on the ground that the mitigation finding was clearly erroneous.

Issues

Issue #1

Whether the district court clearly erred in finding that the Ruuds made a good-faith, reasonably diligent effort to mitigate damages after Larson's default.

Holding

No. The record supported the finding that the Ruuds acted diligently and in good faith to relet the property, so the finding was not clearly erroneous.

Reasoning

A commercial landlord generally must mitigate damages caused by a tenant's default by making a good-faith effort, with reasonable diligence, to relet the premises. But the defaulting tenant bears the burden to show the landlord's lack of good faith; absent that showing, good faith is presumed. Whether the landlord met this duty is a factual question, and the Supreme Court would reverse only if the full record left it with a definite and firm conviction that the trial court made a mistake.

Larson argued that the Ruuds improperly conditioned a proposed sublease to Charles Luna on Larson's payment of tax arrearages and attorney's fees. The Court accepted for purposes of the case that a landlord ordinarily may not refuse an otherwise acceptable sublease merely because the tenant has not paid all arrearages. But it concluded that this rule did not control the facts here. The Luna arrangement resulted from negotiations between counsel, during which Larson agreed to pay the arrearages required by the lease. When the Ruuds returned a signed sublease reflecting the negotiated arrangement, Larson did not ask for consent to a sublease without that obligation; instead, he declined to sign and proposed different purchase-and-sale arrangements. The trial court could therefore find that the proposed Luna sublease failed because Larson chose not to proceed, not because the Ruuds acted in bad faith.

After the Luna negotiations failed, the Ruuds did not immediately try to relet because Mid-State's bankruptcy counsel had threatened contempt proceedings if they interfered with the premises. Once the bankruptcy court ruled that Mid-State had no interest in the property, the Ruuds promptly took possession, made needed repairs and cleaning, advertised in a local newspaper, maintained a sign, and made more than 140 contacts with roughly 50 prospective tenants. No written lease offers resulted. These substantial efforts supported the trial court's finding of diligent mitigation.

The Ruuds' decision not to hire a real-estate agent did not establish bad faith as a matter of law. Larson himself had used a realtor without success, and he offered no evidence that an agent hired by the Ruuds would have secured a tenant. Likewise, the Ruuds' effort to obtain $1,200 monthly rent rather than the $700 rent under Larson's 1976 lease did not prove bad faith. Larson's own commercial-realtor witness testified that $1,200 was reasonable, Larson had sought the same amount while attempting to relet, and there was no evidence that the Ruuds rejected any offer at a lower fair rental amount.

Dissents

Justice Levine

Reasoning

Justice Levine agreed that a landlord may not condition approval of a sublease on the tenant's payment of all arrearages. But she rejected the majority's distinction between a landlord who initially demands arrearages and a landlord who does so after the tenant had tentatively agreed during negotiations to pay them. In her view, a tenant's later withdrawal from that agreement could not give the landlord a legal right to impose a condition that the landlord could not lawfully require in the first place.

The relevant question, Justice Levine stressed, was the landlord's good faith in mitigation, not the tenant's good faith in negotiations. Larson had produced a willing, able, and suitable subtenant in Luna, and Larson would have remained liable under the original lease for all tenant obligations, including arrearages and attorney's fees. Because those obligations already existed, she saw no need for a separate agreement making payment of them a precondition to the sublease. She therefore concluded that the Ruuds acted unreasonably and without good faith when they declined the Luna sublease on that basis.