Massachusetts Appeals Court Voids Liquidated Damages Provision In Commercial Lease As Against Public Policy

The Massachusetts Appeals Court recently issued a significant opinion in Cummings Properties, LLC v. Darryl C. Hines, Case No. 21-P-1153, a decision that has widespread application to commercial leases throughout the state. The court found that the acceleration clause in the parties’ commercial lease was unenforceable based on public policy considerations because it allowed the landlord to collect unpaid rent from the original tenant while also collecting rent from a new tenant during original tenant’s lease term.

In Cummings, defendant Hines was the guarantor of a five-year lease between his company Massachusetts Constable's Office, Inc. (MCO) and plaintiff Cummings Properties, LLC (Cummings). The lease contained an acceleration clause whereby if MCO defaulted on the monthly rent payment, Cummings could end the lease and regain possession of the premises and MCO would have to pay the balance of rent owed for the full term of the lease.

Two months into the lease, MCO defaulted and Cummings regained possession of the premises. Approximately one year after the lease between MCO and Cummings began, Cummings relet the property to a new tenant for a four-year term and began collecting rent from that tenant. Cummings then sued Hines, as guarantor for MCO’s lease, for the rent payment that was still owed on the original five-year lease term, even though it was also collecting rent from its new tenant. The trial court awarded damages to Cummings for the amount owed under the five-year lease, finding that the acceleration clause was an enforceable liquidated damages provision.

Hines appealed, arguing that the acceleration clause constituted an unenforceable penalty because it was not a reasonable forecast of damages expected to occur in the event of a breach. The Appeals Court agreed with Hines and vacated the damages award, finding that Cummings was only entitled to its actual damages.

The central fact in the Appeals Court’s analysis was that the acceleration clause did not take into account rent Cummings would receive from reletting the premises during the term of the original lease. Generally, a liquidated damages provision will be held unenforceable if it is grossly disproportionate to a reasonable estimate of actual damages made at the time the lease was signed. The Appeals Court held that because the lease allowed Cummings to regain possession of and relet the premises, then at the time the lease was signed, a reasonable estimate of expected damage should have included some accounting to MCO for rent received from a new tenant or a discount of the stipulated damages to account for the likelihood of reletting the property.

Typically, an acceleration clause would relieve a landlord of the obligation to mitigate damages in the event a tenant defaults. Based on the Cummings decision, however, a landlord who declines to undertake mitigation efforts in reliance on an acceleration clause will be doing so at the risk that the acceleration clause is deemed unenforceable.

If you are a party to or are considering a commercial lease with a liquidated damages provision, the team here at Rose Law Partners LLP can help you evaluate whether your provision will be enforceable and assess and minimize the litigation risk of your lease terms.