Thanks for including photos; they were very helpful.

The affected area looks like it's on a SW slope, an ideal exposure for mites to thrive in the lawn Feb-May.   Banks grass mites have caused lots of dead areas in lawns this winter-spring. 

When you are out walking in your neighborhood, look for similar dead spots on similar S, SW, W and SE exposures, particularly on slopes, near rocked areas, on the S and W side of structures and at the S and W side of evergreen trees like spruces.              At your site, look at some of the green grass blades in or immediately adjacent to brown (dead) grass.  Using a hand lens/magnifying glass, you should see several to many small white spots on the grass blade; these are spots where mites have "sucked out" the fluids out of cells in the blade.  Brown (dead) grass nearby was more heavily fed upon.

Banks grass mites and clover mites can damage or kill large lawn areas under the right exposure and conditions.   When we have dry warm snowlessperiods in winter, mites will proliferate on and damage lawn areas on warm exposures.   Mite numbers plummet after we start watering lawns in April/May...so WATER is the key to keeping their numbers down.  Using a hose and sprinkler, water/sprinkle prone areas several times during dry warm snowless periods Feb-end April.
More info see http://www.ext.colostate.edu/pubs/insect/05505.html  
See also photos of mite injury attached.

As for what you can do now, cut out and remove dead area in as rectangular or square a pattern possible.   Replace with new KY bluegrass sod. 

Thanks, Robert.  To follow up if I don't replace the sod right away will the mites spread and cause more damage?

Not much if at all - Mite numbers plummet after we start watering lawns in April/May.

Banks grass mite does persist well into summer despite lawn watering, but numbers will be way down.