Case Highlights Importance of Rent Acceleration Clause In Commercial Leases
In a decision underscoring the importance of careful commercial lease drafting, the Massachusetts Supreme Judicial Court has ruled that a commercial landlord must wait out a 12 year lease term to recover unpaid rent from a tenant who abandoned the premises in year 2 of the lease. We lawyers call this a Pyrrhic victory: “a victory offset by staggering losses.” The case is 275 Washington Street Corp. vs. Hudson River Int’l, LLC (SJC-11217).
Practice Pointer: This case is an important reminder for all residential and commercial landlords to have their leases reviewed to ensure that they can recover all available lost rental damages. Contact me at email@example.com for a lease review.
Facts: Dental Practice Goes South Quickly
The landlord and tenant, a dental practice, entered into a 12-year lease beginning in 2006 for medical office space located at 221-227 Washington Street in downtown Boston. Barely a year later, the dental practice went under and closed. In May 2008, the dentist told the landlord that he would not be making any further lease payments.
Fortunately, the landlord found a new tenant. A new 10 year lease was signed, covering the remainder of the dentist’s term, but at a lower rent. The landlord sued the dentist for the rent differential — some $1 Million Dollars.
Standard Indemnification Clause
The lease contained a standard default indemnification clause found in many older standard lease forms:
The LESSEE shall indemnify the LESSOR against all loss of rent and other payments which the LESSOR may incur by reason of such termination during the residue of the term. If the LESSEE shall default, after reasonable notice thereof, in the observance or performance of any conditions or covenant on LESSEE’s part to be observed or performed under or by virtue of any of the provisions in any article of this lease, the LESSOR, without being under any obligation to do so and without thereby waiving such default, may remedy such default for the account and at the expense of the LESSEE.
Common Law Rule: Put It In The Lease
The SJC pointed out long standing Massachusetts common law “where the contract is a commercial lease, our common law does not provide ‘benefit of the bargain’ damages in the event of termination of the lease following a breach. Once a landlord terminates a lease, the tenant is no longer obligated to pay the rent, and, unless the lease otherwise so provides, the landlord is not entitled to posttermination damages.” This may be contrary to common understanding, but it’s the reason why lawyers have developed rent acceleration and liquidated damages provisions for commercial leases.
Despite the urging of the Real Estate Bar Association, which filed a friend-of-the-court brief, the SJC saw no need to alter the harsh common law simply because this particular landlord’s lease failed to provide a proper rent acceleration clause. Justice Gants didn’t mince his words in cautioning commercial landlords to use proper lease provisions:
A landlord left without an adequate remedy following breach of the lease by a tenant has only itself to blame for entering into a lease that fails to provide such a remedy. We shall not disrupt the settled expectations of leasing parties in order to protect a landlord from the consequences of failing to insist on an adequate remedy in the negotiation of a commercial lease. Nor shall we invite uncertainty as to the availability and scope of a landlord’s remedy for “benefit of the bargain” damages where the contours of such a remedy are not delineated in the lease but left to be determined under the common law.
Solution: Rent Acceleration/Liquidated Damages Clause
The lease in this case appears to be of an older variety and did not contain a rent acceleration/liquidated damage clause. Such a clause provides that upon a rent default, all unpaid rent is due through the end of the lease term as liquidated damages. All commercial leases should contain this type of rent acceleration clause, and I would also recommend a provision enabling the landlord to recoup the cost of expensive tenant build outs where a tenant has defaulted early in the lease term. Contact me at firstname.lastname@example.org for a lease review.