Massachusetts commercial lease attorney

Appeals Court Rules That Liquidate Damages Clause Is Unenforceable Where It Allowed For Recovery of Rent For Remaining Term On Top of Rent Received From New Tenant

If you enjoyed the famous Seinfeld episode where George Costanza was accused of “double dipping” his chips and dip at a family funeral, then you’ll appreciate this post. The case is Cummings Properties LLC v. Hines (Mass. Appeals Court Dec. 6, 2022) where the Appeals Court struck down a liquidated damages clause in a commercial lease which purported to allow the landlord to recover a large financial penalty even though it was able to re-lease the premises.

The case is a good example of what can happen where a party can get a bit too greedy in seeking damages in a commercial lease case. Cummings Properties, one of the largest commercial real estate firms in the Greater Boston area, has a well deserved reputation of being an overly litigious commercial landlord (in my humble opinion). I’ve dealt with them several times, and I can tell you a few stories offline. Anyways, in this case, Cummings leased office space to Darryl Hines, who owned a constable/process serving business. Hines had just secured a lucrative contract with the Mass. Dept. of Revenue and needed a larger office for the new business. The lease was for 5 years at around $16,000 annually. Unfortunately, only a month into the new lease, the DOR abruptly cancelled the contract with Hines, leaving him in severe financial distress. Hines tried to work out a resolution with Cummings but it refused to release him from the lease obligations. Hines then defaulted. A year later, Cummings was able to find a new tenant and signed a 4 year lease. Cummings sued Hines, who signed a personal guaranty, for some $82,000 in damages representing the entire balance of the 5 year lease.

The lease provided for a rather common acceleration and liquidated damage provision:

"In the event that . . . LESSEE defaults in the observance or performance of any term herein, and such default is not corrected within 10 days after written notice thereof, then LESSOR shall have the right thereafter, without demand of further notice, to declare the term of the lease ended, and/or to remove LESSEE's effects, without liability, including for trespass or conversion, and without prejudice to any other remedies.  If LESSEE defaults in the payment of any rent, and such default continues for 10 days after written notice thereof, and, because both parties agree that nonpayment of said sums is a substantial breach of the lease, and, because the payment of rent in monthly installments is for the sole benefit and convenience of LESSEE, then, in addition to any other remedies, the net present value of the entire balance of rent due herein as of the date of LESSOR's notice, using the published prime rate then in effect, shall immediately become due and payable as liquidated damages, since both parties agree that such amount is a reasonable estimate of the actual damages likely to result from such breach."

There has been a fair share of litigation in the last several decades over the enforceability of liquidated damage penalty clauses. These clauses are generally enforceable as long as it is not so disproportionate to anticipated damages as to constitute a penalty. Courts will generally enforce these clauses if (1) at the time the agreement was made, potential damages were difficult to determine, and (2) the clause was a reasonable forecast of damages expected to occur in the event of a breach. Massachusetts used to have a “second look” rule where judges could consider the state of events at the time of the breach, however, the SJC stopped that practice in 1999 in favor of a “single look” approach which only accounts for the circumstances present at contract formation.

The fatal problem for Cummings in this case was that its liquidated damage provision permitted it to have its cake and eat it too. That is, it allowed Cummings to re-lease the premises, collect rent from the new tenant without credit or offset to Hines, then on top of that, pursue all of the rent owed by Hines through the end of the 5 year term. This is akin to the “double dipping” perpetrated by said George Costanza in Seinfeld. The Appeals Court ruled that the clause allowed for such double dipping and was therefore an unfair penalty.

So what are the take-aways from this case? The obvious one for commercial landlords is don’t be a pig and chase a small business owner for tens of thousands of dollars over and above what you received in new lease funds. As far as drafting these clauses, it’s a tough one because so far humans have been unable to accurately predict future outcomes. I would say that your liquidated damage clause should have some type of caveat that the tenant will get credit for any rent received from a new tenant and be liable for the differential in rent through the end of the term. Hopefully that would work.


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 protected] 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 [email protected] for a lease review.


Richard D. Vetstein, Esq.Richard D. Vetstein, Esq. is an experienced Massachusetts real estate attorney. For more information, please contact him at 508-620-5352 or [email protected].