It is well known that acquiring property for the purpose of renting to tenants is a potentially highly lucrative endeavor. Rental property can yield enormous financial benefits to property owners, and these benefits can be even greater when owners are equipped with adequate tax knowledge. Huddleston Tax CPAs encourages rental property owners (and future owners) to peruse our material on this topic. If obtaining rental property is within your contemplation, however, it is important to consider that owning such property frequently presents complications. Things do not always go smoothly, and there are snags which can be a severe drain on your supply of mental and physical energy. The case of Reid v. Mutual of Omaha Insurance Company (1989) is a telling example of the sort of headache which can result from owning rental property.
Of course, this case is not intended to discourage rental property ownership. But future owners should certainly be aware that hassles such as the kind in Reid v. Mutual of Omaha Insurance Company are fairly common. Rental property ownership can be extremely rewarding, but it involves a great deal more than just collecting rent checks!
Reid (the plaintiff) contracted with Mutual (the defendant) to rent out a piece of office space for a period of five years. Mutual was supposed to pay Reid a monthly rent of $1100. Approximately two years after the five year lease was signed, another company, Intermountain Marketing, moved into the adjacent space. Mutual made a formal complaint to Reid about the behavior of Intermountain. Mutual claimed that Intermountain was too noisy and that Intermountain employees were using up all of Mutual’s allotted parking spots. Reid failed to adequately address Mutual’s complaint and as a consequence Mutual moved out of the office space and ceased paying rent. Soon after Mutual’s departure, Intermountain expanded into Mutual’s former space and effectively took over Mutual’s lease. However, Intermountain soon went bankrupt and then exited the space.
Reid sued Mutual and argued that Mutual’s failure to pay rent constituted a breach of contract. Mutual argued that Reid’s failure to address Intermountain’s troublesome behavior constituted a “constructive eviction” and therefore Mutual’s contractual obligation was released. Mutual also claimed that Reid had a duty to mitigate any resulting losses from the alleged breach and that Mutual was only liable for a portion of the losses as a consequence.
When a contract has been breached, the breaching party is not necessarily liable for all losses which follow from the breach. The other party of the contract has a duty to mitigate, and the damages which are recoverable are limited to those which were unavoidable despite reasonable effort to mitigate.
The court (Supreme Court of Utah) ruled in favor of the plaintiff, but determined that the plaintiff was not entitled to the full value of the lease because the breach triggered a duty to mitigate. The plaintiff could only recover a sum which represented losses which were deemed unavoidable even after reasonable attempts to mitigate.
Reid v. Mutual of Omaha Insurance Company offers a very important lesson for future rental property owners: even with a long-term lease, unpaid rent is not always recoverable. Cases such as this one emphasize the importance of choosing tenants with extreme care!
Image credit: REIC Vietnam
View the following video to learn more about the tax benefits of real estate ownership