The Cummings Properties decision and acceleration of rent clauses three years later

Issue August 2010 By Lawrence G. Green

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 value.

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.