In 2007, the Massachusetts Supreme Judicial Court held that accelerated rent clauses are enforceable in commercial leasing agreements. Cummings Properties, LLC v. National Communications Corp., 449 Mass. 490, 494 (2007). However, a recent Massachusetts Appeals Court decision clarified that landlords cannot “double dip” by collecting accelerated rent from a defaulting tenant while also collecting rent from a new tenant. Cummings Properties, LLC v. Darryl C. Hines, No. 21-P-1153.
The Supreme Judicial Court has accepted this case for further appellate review and, the ultimate result may change once their decision is issued, but until that occurs, landlords should consider examining their existing rent acceleration or liquidated damages clauses to ensure they hold defaulting tenants liable for only the differential rent where circumstances dictate.
The facts of the Hines case were uncontested. On April 15, 2016, Cummings Properties entered into a five-year lease with the Massachusetts Constable’s Office. Darryl Hines signed the lease on behalf of the Constable’s Office and as a personal guarantor. Two months into the lease, in July 2016, the Constable’s Office defaulted on its rent payment.
The lease contained a rent acceleration clause that allowed Cummings to terminate the lease and accelerate the rent if the Constable’s Office defaulted:
“If LESSEE defaults in the payment of any rent, and such default continues for 10 days after written notice thereof, and, because both parties agree that nonpayment of said sums is a substantial breach of the lease, and, because the payment of rent in monthly installments is for the sole benefit and convenience of LESSEE, then, in addition to any other remedies, the net present value of the entire balance of rent due herein as of the date of LESSOR’s notice, using the published prime rate then in effect, shall immediately become due and payable as liquidated damages, since both parties agree that such amount is a reasonable estimate of the actual damages likely to result from such breach.”
Cummings filed a summary process action against the Constable’s Office in Woburn District Court. In the judgment, Hines was awarded possession of the premises and liquidated damages in the amount of $74,000. In the spring of 2017, Cummings signed a four-year lease with a new tenant. Despite reletting the premises, Cummings filed suit against Hines in Middlesex Superior Court seeking all rent due under the remainder of the five-year lease and won.
The Appeals Court reversed the judgment, finding that “a [rent acceleration clause] such as this bears no reasonable relationship to expected damages and is thus unenforceable as a remedy.” The Court acknowledged that while a landlord has no duty to mitigate the damages by reletting the premises, a clause permitting “[the landlord] to retake possession of the premises, relet it and collect rent from the new tenant, and recover all the remaining rent owed by the [defaulting tenant], without having to account for the rent received from the new tenant during the term of the original lease” is “grossly disproportionate to the real damages of the breach.”
This ruling has the potential to impact future commercial lease negotiations, as well as current commercial leases. If the Supreme Judicial Court upholds the Appeals Court’s decision, commercial landlords should examine their Massachusetts lease templates to ensure that they include a credit to defaulting tenants when the property is relet to a new tenant. By doing this, Landlords can ensure that their rent acceleration or liquidated damage provisions are not “out of proportion to any reasonable approximation of anticipated harm.” In negotiating future leases, commercial landlords should consider what would be a reasonable forecast of damages resulting from a tenant default.
Prince Lobel’s group of experienced real estate professionals are here to help you navigate these new commercial lease requirements. If you’re interested in discussing the impact of this decision on any of your commercial leases, please reach out to Prince Lobel’s Real Estate Chairperson, Ann Sobolewski, at 617-456-8000 or email@example.com.