In the December 5, 2022 opinion (Cummings Properties, LLC v. Darryl C. Hines, No. 21-P-1153), the Massachusetts Appeals Court considered whether a commercial landlord can collect accelerated rent upon a tenant default, specifically when the landlord is also collecting rent from a new tenant for the same premises. Surprising many commercial real estate professionals, the Court found that the generally accepted principal which allows “[landlords] to retake possession of the premises, relet it and collect rent from the new tenant, and recover all the remaining rent owed by [defaulting tenant], without having to account for the rent received from the new tenant during the term of the original lease” is “unreasonably and grossly disproportionate to the real damages from a breach.”
The facts of this case were uncontested – Massachusetts Constable’s Office, Inc. (“MCO”) entered into a 5-year lease (the “Lease”) with Cummings Properties, LLC (“Landlord”), which lease was guaranteed by Darryl Hines. MCO defaulted on its rent payment during the second month of the 5-year lease term. The Lease included the following remedies provision, which allowed for Landlord to “both terminate the lease and accelerate the rent” upon MCO’s default:
The Appeals Court noted that the turning factor in determining the enforceability of a liquidated damages provision is whether or not the remedy constitutes a penalty. In the case at hand, the Court held that awarding the liquidated damages to Landlord would amount to a penalty, as Landlord would be permitted to “retake possession of the premises, relet it and collect rent from the new tenant, and recover all the remaining rent owed by MCO, without having to account for the rent received from the new tenant”. In essence, the Court was unwilling to permit Landlord to ‘double-dip’ and recoup the benefit of the liquidated damages in addition to collecting rent under its new lease. The Court held that Landlord was only entitled to its actual damages, not liquidated damages.
Commercial landlords should consider updating the rent acceleration clauses in their leases in order to ensure that the liquidated damages provisions are not “out of proportion to any reasonable approximation of anticipated harm”. If such liquidated damages provisions are found to be out of proportion based on this standard, there is a chance the remedy will be found unenforceable.
The Real Estate Practice Group at Partridge Snow & Hahn is fully updated on the issues and available to answer your questions.
