December 15, 2022

Commercial Leasing in Massachusetts: Commercial Landlord Cannot Collect Accelerated Rent as Liquidated Damages and Rent From New Tenant

On December 5, the Massachusetts Appeals Court issued an important decision impacting commercial landlords’ ability to accelerate rent as liquidated damages after a Lessee’s default in Cummings Properties, LLC vs. Darryl C. Hines, No. 21-P-1153 (Dec. 5, 2022). The case concerned a commercial Lessee who defaulted on the payment of rent two months into a five-year lease. The Lessor brought suit in Superior Court against an individual Guarantor to recover the remaining rent as liquidated damages. The Appeals Court ruled that the acceleration clause at issue was an unenforceable penalty and remanded for further proceedings.

The case arose out of a commercial lease in Woburn, Massachusetts. Lessee (not a party to this action) was a process server who leased space from Lessor (who “owns over 11 million square feet of commercial real estate in Woburn,” according to the decision) in order to be close to its new client, the Massachusetts Department of Revenue.

The lease provided that, if Lessee defaulted on the payment of rent and failed to cure said default within ten days, Lessor could terminate the lease and accelerate the rent:

In the event that . . . LESSEE defaults in the observance or performance of any term herein, and such default is not corrected within 10 days after written notice thereof, then LESSOR shall have the right thereafter, without demand or further notice, to declare the term of the lease ended, and/or to remove LESSEE's effects, without liability, including for trespass or conversion, and without prejudice to any other remedies. 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.

Defendant, who was Lessee’s principal, both signed the lease and a personal guaranty, by which he agreed to “personally and unconditionally guarantee [] the prompt payment of rent by LESSEE and the performance by LESSEE of all financial and nonfinancial obligations arising out of . . . this lease.”

Less than a month into the lease, the Department of Revenue terminated its contract with Lessee.  Defendant “contacted Cummings to explore his options with regard to the lease,” but was not permitted to terminate the lease. The following month, Lessee defaulted on the payment of rent and Lessor provided notice that failure to cure within ten days “shall result in the automatic termination of the lease without further notice,” along with eviction, and liquidated damages owed to Lessor in the amount of $74,076.24 (a purportedly net present value discount over the amount due over the remainder of the lease).  

Lessee did not pay, and Lessor initiated summary process in the District Court, which was resolved by an agreement for judgment. Judgment thereafter entered in Lessor’s favor, awarding possession and the full $74,076.24 in damages. Approximately one year into the original five-year term with Lessee, Lessor relet the property to a new tenant. Lessor thereafter brought suit against Defendant in Superior Court to recover the rent due under the remainder of the term with Lessee.

The Superior Court judge held that the acceleration clause was enforceable as liquidated damages, reflecting a reasonable estimate of Lessor’s anticipated damages and entered judgment in Lessor’s favor, awarding $82,143.01 comprising damages, prejudgment interest, and costs.

In its ruling, the Appeals Court noted the Supreme Judicial Court’s prior ruling (involving the same Lessor) that “[a] rent acceleration clause, in which a defaulting lessee is required to pay the lessor the entire amount of the remaining rent due under the lease, may constitute an enforceable liquidated damages provision so long as it is not a penalty” and that it was Defendant’s burden to prove otherwise (Cummings Props., LLC v. National Communications Corp., 449 Mass. 490, 494, 494-495 (2007)). However, the Court also noted that a liquidated damages provision will generally be enforced if (1) damages difficult to determine at the time of contract formation and (2) the provision reflects a reasonable forecast of damages (See TAL Fin. Corp. v. CSC Consulting, Inc., 446 Mass. 422, 431-32 (2006)).

Here, the Court held, the provision fails. Because Lessor could collect the remaining rent under the lease but also relet the premises, the provision provided no reasonable estimate of actual damages. As the Court held: “at the time of contract formation a reasonable estimate of expected damages would have included either some accounting to [Lessee] for any rent received from a new tenant or some discounting of the stipulated damages to reflect the likelihood of reletting.”  The Court further noted that this “conclusion is consistent with the unanimous view of other courts.”

The Court also explicitly rejected several arguments by Lessor. First, the Court distinguished the prior Cummings case, because that case reflected no dispute about the reasonableness of the damages estimate. Second, the Court distinguished prior cases holding that “in the case of an enforceable liquidated damages provision, mitigation is irrelevant and should not be considered in assessing damages” (NPS, LLC v. Minihane, 451 Mass. 417, 423 (2008)). The Court reasoned that it was significant here that Lessor actually did relet the property — whether or not a duty to mitigate exists in the context of liquidated damages, a landlord cannot collect liquidated damages equal to the balance of rent for the lease term and rent from a new tenant. Third, the Court dismissed any concern about impracticalities, which it held are “outweighed by the strong public policy against terms fixing liquidated damages that are out of proportion to any reasonable approximation of anticipated harm.”

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