Commercial Leasing in Massachusetts: SJC Confirms Enforceability of Accelerated Rent as Liquidated Damages

On September 25, 2023, the Massachusetts Supreme Judicial Court issued an important decision that affects commercial landlords’ ability to accelerate rent as liquidated damages after a Lessee’s default in Cummings Properties, LLC vs. Darryl C. Hines, No. SJC-13406 (Sept. 25, 2023). The Court affirmed the trial court’s award of damages, reversing an earlier decision of the Appeals Court in Cummings Properties, LLC vs. Darryl C. Hines, No. 21-P-1153 (Dec. 5, 2022).¹

The case arose out of a commercial lease in Woburn, Massachusetts. The Lessee (not a party to this action) was a process server who leased space from the Lessor (who “owns over 11 million square feet of commercial real estate in Woburn,” according to the decision) in order to be close to its new client, the Massachusetts Department of Revenue.

The lease provided that, if the Lessee defaulted on the payment of rent and failed to cure said default within 10 days, the Lessor could terminate the lease and accelerate the rent:

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.

The Defendant, who was the Lessee’s principal, signed the lease and a personal guaranty, by which he agreed to “personally and unconditionally guarantee [] the prompt payment of rent by LESSEE and the performance by LESSEE of all financial and nonfinancial obligations arising out of ... this lease.”

Less than a month into the lease, the Department of Revenue terminated its contract with the Lessee. The Defendant “contacted Cummings to explore his options with regard to the lease” but was not permitted to terminate the lease. The following month, the Lessee defaulted on the payment of rent and the Lessor provided notice that failure to cure within 10 days “shall result in the automatic termination of the lease without further notice,” along with eviction, and liquidated damages owed to Lessor in the amount of $74,076.24 (a purportedly net present value discount of the amount due over the remainder of the lease). 

The Lessee did not pay, and the Lessor initiated summary process in the District Court, which was resolved by an agreement for judgment. The Judgment was thereafter entered in the Lessor’s favor, awarding possession and the full $74,076.24 in damages. Approximately one year into the original five-year term with the Lessee, the Lessor relet the property to a new tenant. The Lessor thereafter brought suit against the Defendant in Superior Court to recover the rent due under the remainder of the term with the Lessee.

The Superior Court judge held that the acceleration clause was enforceable as liquidated damages, reflecting a reasonable estimate of the Lessor’s anticipated damages and entered judgment in the Lessor’s favor, awarding $82,143.01, which comprises damages, prejudgment interest, and costs.

The Appeals Court reversed the Superior Court, holding that the liquidated-damages provision failed because its failure to “include[] either some accounting to [Lessee] for any rent received from a new tenant or some discounting of the stipulated damages to reflect the likelihood of reletting” resulted in an unreasonable estimate of actual damages. The Appeals Court also found significant that the lessor actually relet the property, which essentially mooted any question of duty to mitigate under similar circumstances and that any impracticalities of reducing a liquidated damages amount to reflect mitigation was “outweighed by the strong public policy against terms fixing liquidated damages that are out of proportion to any reasonable approximation of anticipated harm.”

The Supreme Judicial Court reversed the Appeals Court and affirmed the Superior Court judgment. In its opinion, the Supreme Judicial Court confirmed that Massachusetts courts should test the enforceability of a liquidated damages clause by analyzing the circumstances at the time of contract formation — the so-called “single look” approach — as opposed to using a “second look” approach that “allows for an after-the-fact adjustment to avoid a windfall for the party not committing the breach[.]” Under the single-look approach, the Court explained, 
a liquidated damages clause will be enforced if (1) the actual damages resulting from a breach were difficult to ascertain at the time the contract was signed; and (2) the sum agreed on as liquidated damages represents a “reasonable forecast of damages expected to occur in the event of a breach.”

Slip. Op. at 7-8 (quoting NPS, LLC v. Minihane, 451 Mass. 417, 420 (2008). The Lessee, as the party challenging the liquidated damages clause, bore the burden to disprove either prong and failed to do so. On whether damages were reasonably ascertainable, the Court acknowledged the Lessee’s argument that the Lessor, as “a high-volume commercial landlord, was likely to relet the premises,” but found that the Lessee had failed to present evidence in support of that argument. This allows that a tenant could, at least theoretically, offer evidence to show that damages are reasonably ascertainable at the time of contract formation but provides little guidance as to what that evidence might be.

On reasonableness, the Court quickly rejected the Appeals Court’s view that a liquidated damages provision must consider future rents collected from a new tenant to be enforceable, because a provision that requires a tenant to pay no more than it would have paid under the lease had it performed necessarily bears a reasonable relationship to the anticipated actual damages resulting from a breach. The Court also held that parties are free to negotiate these provisions as they see fit and that courts will not “step in to decide whether and how to restructure a contract because certain contingencies were not accounted for by one of the parties.”

Finally, the Court affirmed the Superior Court’s holding that the Lessee was a sufficiently sophisticated party to have a liquidated damages provision enforced against him, finding no clear error in the trial court’s determination (and noting that the question is a factual, not legal, one).

^[1] The Appeals Court decision was addressed in an earlier alert.