## Facts

- Palisades Plaza, Inc. owned and operated a multi-building office complex in Austin, Texas.
- Palisades and Austin Hill Country Realty, Inc. (with three individual principals/guarantors) executed a five-year commercial office lease on September 15, 1992, with an improvements agreement for build-out of shell space.
- The lease commencement date was defined as the earlier of (1) tenant occupancy or (2) substantial completion of improvements (or when completion would have occurred but for tenant delay).
- The parties expected a November 15, 1992 commencement date, and by mid-October Palisades had nearly completed the improvements.
- Construction stopped on October 21, 1992 after Palisades received conflicting completion instructions from the individual tenant principals.
- Palisades sent letters stating it would not proceed until the principals jointly designated a single authorized representative; the tenants did not respond.
- On November 19, 1992, Palisades notified the tenants that the failure to designate a representative constituted an anticipatory breach; efforts to resolve the dispute failed.
- Palisades sued for anticipatory breach of the lease.
- At trial, the tenants offered mitigation evidence that Palisades rejected (1) an offer by two principals to lease without the third and (2) an offer by the third principal and another person to lease without the other two.

## Issues

1. Whether, under Texas law, a commercial landlord must make reasonable efforts to mitigate damages when a tenant defaults on or anticipatorily breaches a lease.

## Decision

- The Supreme Court of Texas held that a landlord has a duty to make reasonable efforts to mitigate damages when a tenant defaults on a lease and abandons the premises.
- The court rejected the traditional Texas rule that landlords had no duty to mitigate after a tenant’s abandonment.
- The court reversed the court of appeals’ judgment and remanded for a new trial under the correct mitigation standard.

## Legal Principles

- Modern leases have both conveyance and contract characteristics; because of their contract features, ordinary contract mitigation rules apply.
- A landlord must undertake objectively reasonable efforts to relet to suitable tenants after a tenant’s breach and abandonment.
- The landlord is not required to accept any replacement tenant regardless of financial responsibility or unacceptable lease terms; reasonable efforts may account for the landlord’s legitimate business interests.
- The breaching tenant bears the burden to prove failure to mitigate or that mitigation efforts were unreasonable, and to show that reasonable efforts would have reduced damages.
- When a case is tried on an incorrect no-mitigation rule, remand for a new trial is proper so the factfinder can apply the mitigation duty with proper instructions and burden allocation.

## Conclusion

The Texas Supreme Court aligned Texas landlord-tenant law with general contract doctrine by requiring landlords to make reasonable efforts to mitigate damages after a tenant’s lease default or anticipatory breach, placing the burden of proving inadequate mitigation on the breaching tenant and remanding for retrial under that rule.


Austin Hill Country Realty, Inc. v. Palisades Plaza, Inc., 948 S.W.2d 293 (Tex. 1997)