Daily Development for Monday, August 13,
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
LANDLORD/TENANT; LANDLORDS REMEDIES; DAMAGES; ACCELERATED RENT: Massachusetts high court upholds rent acceleration clause.
Cummings Properties, LLC v. National Communications Corp., 869 NE.2d 617 (Mass 2007)
The lease provided that the parties stipulated that nonpayment by the tenant of a number of charges provided for under the lease, including nonpayment of rent, would be a significant breach of the lease, and that payment of rent in monthly installments is for the sole benefit of [Tenant]. The lease went on to say that in the event of Tenants uncured default in one of these payments The entire balance of rent which is due [under the lease] shall become immediately due and payable as liquidated damages.
Based upon earlier authority in Massachusetts, the lower courts had treated the clause as an unenforceable penalty because it could have been triggered by a relatively insignificant failure to pay a charge (other than rent) and thus was not proportionate to the potential damage to be suffered by landlord. But the Supreme Court here elected to reverse the prior authority upon which these decisions were based. The court stated that it still might not grant enforcement of an acceleration clause in the event of an insignificant default, but that nonpayment of rent certainly in significant and it didnt wish to deprive the landlord of the benefit of the clause in such a case. It commented that the language of the lease could be interpreted to apply only to truly significant types of nonpayment, even though all nonpayments were stipulated in the lease language to be significant.
Interestingly, the court commented that an increasing number of courts are electing to leave sophisticated parties where their lease takes them, rather than to undertake unnecessarily protective penalty analysis, citing cases in Kansas, New York, the 7th Circuit, which in turn listed other jurisdictions following such an approach.
The trial court already had awarded damages based upon the landlord mitigation duty that in fact amounted almost to the award that would be made by the liquidated damages computation - only 6% short. This appeal was about that 6%, but of course it was much more about the ability of a landlord to insert such an in terrorrum clause in the lease, where the world falls in on the tenant if it tries to get tough on the lease payments.
Comment 1: Although the publishers of the excellent Commecial Lease Law Insider describe this case as maverick, there certainly have been a number of cases upholding commercial lease acceleration clauses of this type over the years. In fact, the editor was moved to do a state by state summary of the cases recently in the Randolph Edition of Friedman on Leases. They are set forth in a lengthy footnote 162 in Section 5.3 of the latest version of the Treatise.
Some of these cases prohibit landlord from both collecting accelerated rent and retaking possession of the premises. Others require that if the landlord does retake possession, landlord must pay over to tenant any proceeds received from such reletting. The Massachusetts court does not appear to deal with either of these variations. The landlord was permitted to terminate the tenants possession and to collect accelerated rent. It apparently did collect some rent during the balance of the term (reflected in the alternate judgment by the trial court based upon mitigation principles), but was not required to pay over these proceeds by the court. At the end of the opinion, however, the court says that the tenant did not properly raise certain mitigation arguments, and therefore it cannot be said that a future Massachusetts court will not require the landlord to disgorge later earned rents.
Comment 2: As the editor has commented before, these kinds of provisions certainly tilt the scales in favor of the landlord, even if the landlord does have to pay back collected rent later. The landlord gets the money up front, and the tenant must chase the landlord to get money in the future. The real advantage to the landlord is that it gets an immediate judgment for the whole rent without waiting to see whether it will be able to relet. As mentioned, this is such a significant threat to the tenant that it certainly will deter the tenant from attempting to play too much hardball with the rent. See the editor=E2=80=99s discussion in the DD for 7/3/96, Aurora Business Park Associates v. Albert 548 N.W.2d 153 (Iowa 1996) and the DD for 01/23/04, Onal v. BP Amoco Corp., 2003 WL 21887770 (E.D. Pa. 2003).
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