When tenants default, landlords should seek to relet vacant space, while tenants should compensate landlords for their costs securing new tenants such as brokerage commissions.
Rent acceleration clauses allow landlords to evict defaulted tenants and demand that they immediately pay all remaining rent through the end of the lease term as liquidated damages. No offsets are allowed for rents received after landlords re-let the premises, nor for the fair rental value of the vacated premises. This remedy can devastate tenants financially.
Landlords cannot accelerate rent unless their leases specifically allow them to do so. Many landlords regard rent acceleration clauses as too onerous, and refrain from using them. Some landlords instead use lease clauses that allow them to demand that defaulted tenants pay unaccrued rent through the end of the lease term, but reduced by the estimated fair rental value of the leased premises.
One might think that Massachusetts courts would decline to enforce rent acceleration clauses as being too harsh. Such is not the case.
In 2007, the Supreme Judicial Court upheld a rent acceleration clause in Cummings Properties LLC v. National Communications Corp., noting that the tenant had not shown that the clause was too punitive to be enforceable. The SJC ruled that the evicted tenant had to pay the landlord more than $500,000 in accelerated rent. Last year, the Appeals Court upheld a rent acceleration clause requiring a tenant to pay over $1.8 million as liquidated damages in Cummings Properties LLC v. Calloway Laboratories Inc.
Quantifying Reasonable Damages
When analyzing rent acceleration clauses, Massachusetts courts compare them to liquidated damages clauses. Those clauses allow parties to demand fixed or easily calculated amounts of damages from defaulting parties. Liquidated damages clauses make sense when actual damages are difficult to quantify. Courts will enforce liquidated damages clauses if they are not so disproportionate to anticipated damages that they are punitive.
For material tenant defaults, such as failures to pay rent, courts usually enforce rent acceleration clauses if: One, the actual damages from a breach were difficult to ascertain when the lease was signed, and two, the method of calculating liquidated damages represents a reasonable forecast of damages from a tenant default. Courts are more receptive to rent acceleration clauses when landlords and tenants are both sophisticated parties.
Last year a commercial tenant narrowly escaped a rent acceleration clause in SpineFrontier, Inc. v. Cummings Properties LLC. A central issue in that case was whether a tenant gave its landlord proper notice to prevent an automatic five-year lease renewal. The tenant emailed its landlord notice that it intended to leave after the lease’s scheduled expiration date. However, the lease required that such notices be sent by constable, certified mail or courier service. Upon receiving the emailed notice, the landlord contacted the tenant about leasing alternative space, but without success. The landlord remained silent about the adequacy of the emailed termination notice.
Shortly after the lease expired, the landlord claimed that the lease had renewed automatically because the tenant’s emailed termination notice was inadequate. The landlord demanded more than $1.7 million in accelerated rent for the unused five-year renewal term. Fortunately for the tenant, the superior court ruled that the emailed notice and the tenant’s other communications with the landlord were adequate to terminate the lease. The Appeals Court upheld that ruling, thus sidestepping the need to address the accelerated rent claim.
Increase in Defaults Likely
As a general rule of contract law, parties are expected to mitigate their damages if a breach of contract occurs. When tenants default, landlords should seek to re-let vacant space, and offset rents collected from new tenants against rents that evicted tenants failed to pay. Defaulted tenants should compensate landlords for costs incurred to secure new tenants, including leasehold improvement costs, brokerage commissions and free rent incentives.
Christopher Vaccaro
If new tenants are not readily available, the damages owed by defaulted tenants should include unpaid rents during the expected time needed to re-let the premises. However, as a matter of fairness, the rent acceleration remedy should allow offsets for the fair rental value of the premises for the remaining lease term after that time. Real estate appraisers can quantify both the expected time needed to relet the premises, and the fair rental value of the premises. This analysis can produce a fair determination of landlords’ actual damages, without penalizing tenants.
COVID-19’s continuing disruptions will increase tenant defaults in commercial leases, resulting in landlord lawsuits against defaulted tenants. When landlords seek to enforce rent acceleration clauses, Massachusetts courts may want to revisit how they view those clauses. In the meantime, tenants should not sign leases with rent acceleration clauses that do not allow proper offsets.
Christopher R. Vaccaro, Esq. is a partner at Dalton & Finegold L.L.P. in Andover. His email address is cvaccaro@dfllp.com.
