It has now been more than three years since the Massachusetts
Supreme Judicial Court published its decision in Cummings
Properties, LLC v. National Communications Corporation, 449
Mass. 490 (2007), in which it enforced a liquidated damages
provision that called for an acceleration of all future rents in a
commercial lease. The decision sent shockwaves throughout the
Massachusetts bar, and the real estate bar in particular, as it had
been almost universally assumed that acceleration of rent clauses
were highly unfair and ultimately unenforceable.
As opposed to a promissory note situation, in which acceleration
upon default makes perfect sense, given the fact that the maker of
the note actually has received the funds, why should a tenant be
required to pay all future rents upon default, given that the
tenant simply receives an entitlement to lease space as opposed to
actual funds? And especially given that the landlord is no doubt
evicting the tenant and taking back the space upon the default, why
should the tenant be required to pay all future rents for space
that it can no longer use?
The Cummings result is equivalent to requiring a
defaulting party under a real estate purchase and sale agreement to
forfeit 100 percent of the purchase price, if the liquidated damage
clause so specified, as opposed to the typical 5 percent or 10
percent - clearly an unfair result.
To this day, real estate practitioners in Massachusetts are
still shaking their heads about the Cummings ruling. So
where do we stand three years later?
There has been a dearth of case law interpreting or applying
Cummings. We know that the SJC relied upon
Cummings in NPS, LLC v. Minihane, 451 Mass. 417
(2008), in which it ruled, in a case including a license for luxury
seats, that there is no mitigation of damages defense to a valid
liquidated damages provision. Cummings has also been cited
in other liquidated damages cases, see, e.g., Eastern Floor
Services, Inc. v. RBC Industries, Inc., 2008 Mass. App. Unpub.
LEXIS 555 and Edlow v. RBW, LLC, 2010 U.S. Dist. LEXIS
50519, but again, these cases were not in the context of a
commercial lease and acceleration of future rents.
So where are the court decisions applying Cummings in
the context of commercial leases and acceleration of future rents?
Remarkably, there are no published cases in this context. Informal
discussions with members of the real estate bar would suggest that
Cummings may provide valuable leverage to landlords both
in terms of deterring defaults and in post-default settlement
negotiations. Yet when it comes down to actually litigating an
acceleration of rents clause, the absence of any reported decisions
over the past three years might suggest a degree of gunshyness on
the part of landlords and their counsel to actually litigate an
acceleration of rents clause to final judgment.
And that may well be explained by the continued recognition on
the part of landlords and their counsel, even three years after
Cummings, that an acceleration of rents clause is
ultimately unfair. Indeed, some members of the real estate bar are
advising their landlord-clients against uniform invocation of
acceleration clauses, out of concern that, notwithstanding
Cummings, such clauses are ultimately difficult to enforce
in court. These attorneys are advising their landlord clients to
craft more reasonable liquidated damages clauses, calling for one
year's rent, or alternatively calling for acceleration of future
rents only to the extent that the rent rate exceeds market
Under Cummings, a liquidated damages provision will be
enforced if two criteria are satisfied: first, that at the time of
contracting, the actual damages flowing from the breach were
difficult to ascertain, and second, that the liquidated damages
represents a "reasonable forecast of damages expected to occur in
the event of a breach." 449 Mass. at 494. The two-part test
articulated in Cummings should properly give
a landlord pause and should not be the deathknell to a
tenant, even though the burden of proof rests with the tenant.
Under Cummings, the tenant has the burden of showing that
the liquidated damages clause is a "penalty, [citations omitted]
that is, that the amount it agreed to pay was disproportionate to
any reasonable estimate of likely damages at the time the lease was
executed." 449 Mass. at 497.
In Krasne v. Tedeschi and Grasso, 436 Mass. 103 (2002),
the SJC recognized that a landlord has a duty to mitigate damages
following termination of a lease. Notwithstanding the NPS, LLC
v. Minihane decision, the landlord's history in mitigating
damages for a past default no doubt is a factor in determining what
damages could reasonably be forecast in the event of a breach.
Accordingly, proper representation of the tenant in defense of a
claim for accelerated future rents requires a presentation of
evidence that the damages that reasonably might be anticipated
following a breach would be substantially less than an acceleration
of all future rents. What has been the landlord's track record in
the past in re-letting commercial premises following a default? If
space is typically re-let within 6-12 months, why should a
landlord, even in a declining market, expect to receive 10 years of
accelerated rent when a default occurs in year one? This is all
fair game for discovery, and all fair game for cross-examination of
the landlord by tenant's counsel.
Thus, tenant's counsel should attempt to negotiate an
acceleration of rents provision out of a lease, but if that is not
doable, there is opportunity to successfully litigate against the
enforceability of such a clause should there be a subsequent
default. Landlord's counsel, in turn, should be circumspect about
shooting for the moon in pursuing a claim for accelerated rents,
and indeed, consider crafting a more limited liquidated damages
clause to begin with.
Lawrence G. Green is co-chair of the Business
Litigation Department of Burns & Levinson LLP of Boston. He has
litigated numerous cases involving commercial leases. He thanks
Michael K. Sugrue, an associate of Burns & Levinson, for his
assistance with case research cited in this article.