Massachusetts SJC Rules Liquidated Damages Clauses Enforceable

By John A. Murphy, Esq.

The Supreme Judicial Court, the Commonwealth of Massachusetts’ highest court recently held in Cummings Properties, LLC v. National Communications, Corp., 449 Mass. 490, (2007) that an accelerated rent provision in a commercial lease was an acceptable remedy for a landlord, upon the tenant’s material breach of the lease, and constituted an enforceable liquidated damages clause.

Background

The tenant, National Communications Corp. (“Tenant”) and the landlord, Cummings Properties LLC (“Landlord”) entered into a commercial lease for an office building in Woburn, MA (the “Lease”). A section of the Lease called for accelerated rent as liquidated damages to be awarded to the Landlord (in addition to Landlord’s right to retake possession of the premises) if the Tenant committed a “significant” breach of the Lease i.e. default in the payment of the security deposit, rent, taxes or other specific charges outlined in the Lease.

The Tenant failed to make two (2) consecutive months of rent payments and the Landlord terminated the Lease and brought an eviction action against the Tenant seeking possession of the premises and accelerated rent in the amount of $525,643.52 (32 months remaining on the Lease multiplied by the monthly rent of $16,426.36).

After the eviction trial in the District Court the Landlord was awarded possession of the premises and damages in the amount of $525,643.52 plus interest and costs; however the District Court Appellate Division overturned the Court’s decision as to the award of damages and remanded the matter to the District Court for a hearing to assess actual damages suffered by the Landlord. The Landlord appealed from the judgment of the Appellate Division and the Supreme Judicial Court transferred the case from the Appeals Court on its own motion.

Discussion

The Tenant in the Cummings Properties, LLC case argued based upon the Court’s earlier decision in Commissioner of Ins. v. Massachusetts Acc. Co., 310 Mass. 769 (1942) that as a matter of law the liquidated damages clause in the commercial lease agreement between the Tenant and Landlord was an unenforceable penalty. However, for over ninety years Massachusetts courts have been enforcing liquidated damages clauses in other forms of contracts, finding the clause not to be a penalty, when the clause was clear and reasonable and was not disproportionate to the damages anticipated by the contracting parties. See Kaplan v. Gray, 215 Mass. 269, 270-273 (1913).

In Cummings Properties, LLC the Court reevaluated its earlier decision in Commissioner of Ins. as it related to liquidated damages clauses in the commercial lease context addressing several facts in the present case which prompted the Cummings Properties, LLC Court to modify their holding in Commissioner of Ins.: 1) the liquidated damages clause represented a reasonable forecast of damages (remaining rent due under the Lease) and was not an arbitrary amount; 2) the amount of liquidated damages was not disproportionate or unreasonable compensation to the Landlord for the Tenant’s breach (failure to pay rent); 3) only material, “significant” and specified lease breaches and not minor breaches triggered the liquidated damages clause; and 4) sophisticated commercial parties were on both sides of the Lease.

The Cummings Properties, LLC Court noted that Courts in other jurisdictions, including New York, New Jersey and Pennsylvania have enforced liquidated damages clauses in commercial leases in the form of accelerated rent provisions for many years and cited several of these decisions in its present decision. The Court also cited the Restatement (Second) of Property (Landlord and Tenant) which states that accelerated rent provisions are an acceptable remedy for landlords when the tenant defaults in the payment of rent.

The Tenant in Cummings Properties, LLC finally argued to the Court that enforcing the liquidated damages provision in this particular case would be unjust and inequitable because the Landlord did not attempt to mitigate its damages. However, the Court refused to address this issue because it found that the Tenant did not plead this claim in the District Court eviction action as an affirmative defense and therefore did not preserve this issue for appellate review. Thus, it remains unclear from the Court’s decisions whether the failure to mitigate damages (by the party enforcing the liquidated damages clause) will ever affect the enforceability of a liquidated damages clause. Massachusetts courts have found that under certain circumstances a landlord has a common-law duty to mitigate damages caused by a tenant’s breach of the lease. See Krasne v. Tedeschi and Grasso, 436 Mass. 103, 109 (2002)

Conclusion

Liquidated damages clauses in commercial leases, where they apply to material breaches of the lease, are now an acceptable remedy for landlords (or tenants) if the clause(s) is found to be a reasonable forecast of damages expected to occur in the event of a breach of the lease and will be enforced by Massachusetts courts.