SJC AWARDS COMMERCIAL LANDLORD HUGE WIN
Massachusetts commercial landlords may have a lot more bargaining power (and potential deterrence) when it comes to tenants breaching a commercial lease following a Massachusetts Supreme Judicial Court ruling where the court held that a landlord was due an entire lease term worth of rent, even though the premises had been re-rented to a subsequent tenant. Yes, you read that correctly and why we think our commercial clients should know about this case.
In Cummings Properties, LLC v. Hines, 492 Mass. 867, 868 (2023), Cummings Properties, LLC (“Cummings Properties”) entered into a five-year commercial lease agreement with Massachusetts Constable’s Office, Inc. (“MCO”). As is typical with many commercial lease agreements, Mr. Hines signed as a personal guarantor. The lease agreement included a liquidated damages provision which provided that should MCO fail to pay rent in full ($1,364.50) by the first day of each month and be unable to cure said breach within the ten (10) day grace period thereafter, Cummings Properties could terminate the lease and seek immediate payment of the entire balance due for the remainder of the five-year lease term.
Just weeks after signing the commercial lease agreement, MCO lost a government contract that it had secured with the Department of Revenue. Consequently, MCO was unable to tender rental payments beginning the second month of the lease term. In response, Cummings Properties terminated the tenancy (after the 10-day cure period) and regained possession of the premises via summary process eviction proceedings.
Despite being able to re-rent the unit to a subsequent tenant a year later, Cummings Properties filed a second action in Superior Court seeking enforcement of the liquidated damages provision against Mr. Hines personally as guarantor under the lease. Specifically, Cummings Properties demanded that Mr. Hines pay them the remaining balance owed under the five-year lease term, which totaled $68,650.24. The Superior Court upheld the liquidated damages provision and determined that Mr. Hines was “sufficiently sophisticated” and understood the consequences of personally guaranteeing MCO’s financial obligations under the commercial lease agreement. On appeal, the Appeals Court reversed the Superior Court decision because Cummings Properties was able to mitigate its damages by re-renting the premises to a subsequent tenant.
Under Massachusetts Law, the court applies one of two tests to determine whether or not a liquidated damages provision is enforceable.
The first test is known as the “single look” approach whereby the court analyzes the circumstances of the Parties at the time the lease agreement was signed. Whereas under the “second look” approach, the court considers the state of affairs at the time the contract was breached. Here, the SJC opted to apply the “single look” approach because it is based on freedom of contract and, “most accurately matches the expectations of the parties.” Thus, in order to render the liquidated damages provision unenforceable, MCO had the burden to prove that: (1) the damages resulting from the breach of the lease agreement were not reasonably foreseeable at the time the contract was signed; and (2) the damages negotiated in the lease agreement are disproportionate to the damages that the landlord would actually suffer in the event of a breach.
Judge Budd agreed with the trial court that…
there was no way to predict when a breach might occur, whether or when a new tenant would be secured, what the new rent might be, and what costs Cummings [the Landlord] would incur in the meantime.
Also, because the liquidated damages provision, “represents the agreed-on rental value of the property at the time of the breach” the court determined that the landlord’s damages for nonpayment of rent were reasonably ascertainable. Similarly, the court also rejected MCO’s argument that the rent collected after the premises were re-rented should reduce the liquidated damages amount awarded to Cummings Properties. Therefore, the Massachusetts Supreme Judicial Court ultimately held that the liquidated damages provision was enforceable, regardless if the landlord was able to re-rent the premises.
It is unclear how this decision will impact residential evictions. While most lease agreements do contain some form of a liquidated damages provision, there is also typically language that ensures a landlord’s cause of action ceases after the apartment has been re-rented. More importantly, residential landlords have a legal obligation to mitigate his/her damages and actively market the apartment for rent upon the breach of a tenant. In short, it is unlikely that a residential landlord is able to “double dip” and collect long term from both the breaching tenant as well as the replacement tenant.
If your association has questions about lease language or clauses, please contact Dillon Brown.