Seller Beware: An Executed Offer to Purchase Property May be Enforceable

Don’t Be a Scrooge: The Appeals Court Finds that Acceleration Clause in Commercial Lease Constitutes Unenforceable Penalty

A commercial landlord’s ability to accelerate rent as liquidated damages following a tenant’s default under the lease may be hindered by the Appeals Court’s recent decision in Cummings Properties, LLC v. Hines, 102 Mass. App. Ct. 28 (2022). The Court held that the acceleration clause at issue in this particular case allowed the landlord to (i) release the property, (ii) collect rent from the new tenant, and (iii) pursue all of the rent owed by the defaulting tenant for the entire term of the lease.

This case serves as a cautionary tale to commercial landlords as acceleration clauses could be found to be unenforceable where the landlord relets the premises and recovery of remaining rent would constitute an enforceable penalty.

In this case, the Defendant, Darryl Hines, was a personal guarantor for a lease his company, Massachusetts Constable’s Office, Inc. (“MCO”), entered into with the Plaintiff, Cummings Properties, LLC (“Landlord”), a large commercial real estate landlord, for office space in Woburn (“Premises”) for a period of five (5) years, and the base rent was $16,374 annually (“Lease”). The Lease included a provision in the event of default, which allowed the Landlord to “both terminate the lease and accelerate the rent.” The provision reads as follows:

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 or 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.

Less than a month into the Lease, MCO’s client suspended its contract, putting MCO into “financial straits” and unable to pay its rent to the Landlord. Thereafter, the Landlord defaulted MCO and commenced a summary process action. The summary process action was resolved through an Agreement for Judgment, which “provided that judgment would enter for [Landlord] on both possession and damages, that MCO would waive all rights of appeal, and that an execution would issue immediately.” As such, the Landlord regained possession of the Premises and was awarded $74,076.24 in damages.

Following the conclusion of the summary process action, the Landlord relet the Premises to a new tenant. Nonetheless, more than three (3) years after the conclusion of the summary process action, and at least three (3) years after it relet the Premises, the Landlord commenced an action in Superior Court against Hines, as the guarantor, “seeking to recover all of the rent due under the remainder of the five-year term.” The Superior Court held that the acceleration clause in the Lease was an “enforceable liquidated damages provision because the stipulated sum was a reasonable estimate of [Landlord’s] anticipated damages.” The Appeals Court, however, disagreed and reversed.

In its decision, the Appeals Court opined that the determination as to whether a rent acceleration clause is an enforceable liquidated damages provision hinges on whether it constitutes a penalty. “It has long been the rule in Massachusetts that a contract provision that clearly and reasonably establishes liquidated damages should be enforced, so long as it is not so disproportionate to anticipated damages as to constitute a penalty.” TAL Fin. Corp. v. CSC Consulting, Inc., 446 Mass. 422, 431 (2006). The Court also noted that a liquidated damages provision will generally be enforced if (i) damages are difficult to determine at the time of contract formation, and (ii) the provision reflects a reasonable forecast of damages.

Here, however, the Appeals Court held that the award of liquidated damages under the acceleration clause cannot stand because it allows the Landlord “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 during the term of the original lease.” The Appeals Court specifically held that “[a] provision such as this bears no reasonable relationship to expected damages and is thus unenforceable as a penalty” because “the landlord may not keep both the accelerated rent and rent received from renting to a new tenant.” Restatement (Second) of Property, § 12.1, n. 10 (1977). The key to the Appeals Court decision, however, was that the Landlord relet the Premises, and a landlord cannot collect liquidated damages equal to the balance of rent for the lease term and rent from a new tenant.

This case serves as a cautionary tale to commercial landlords as acceleration clauses could be found to be unenforceable where the landlord relets the premises and recovery of remaining rent would constitute an enforceable penalty.

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Meghan E. Hall