Bar divided on fairness of pro-landlord decision

A Supreme Judicial Court decision enforcing a commercial lease provision that entitled a landlord to nearly five years of rent payments after a tenant’s breach, even though the landlord quickly re-rented the premises, drew mixed reactions from the bar with some lawyers fearing it paves the way for unfair windfalls and others claiming it simply reinforces freedom-of-contract principles.

The Appeals Court voided the provision at issue in late 2022, reversing a Superior Court judgment and declaring it an invalid penalty grossly disproportionate to the reasonable estimate of damages at the time the parties entered the lease.

But the SJC reversed.

“Because we conclude that [tenant Darryl Hines] failed to meet his burden in proving that the amount provided for in the clause was an unreasonable forecast of damages at the time the lease was signed, we affirm the judgment of the Superior Court in favor of [landlord Cummings Properties],” Chief Justice Kimberly S. Budd wrote for the court.

Thomas Bhisitkul of Boston, who co-authored an amicus brief on behalf of the Real Estate Bar Association and the Abstract Club, called the ruling a “bad result,” asserting that a full rent acceleration clause like the one at issue would result in damages that are disproportionate to the landlord’s harm in almost every circumstance.

“That’s not supposed to be enforceable under liquidated damages principles in Massachusetts and other states,” he said.

However, John Pagliaro, staff attorney with the New England Legal Foundation and co-author of NELF’s amicus brief in the case, said the decision is a strong affirmation of the use of liquidated damages to ensure parties get what they freely agree to.

“It recognizes that business parties are in the best position to anticipate future contingencies in contract performance and to determine the best way to deal with them,” he said.

The 14-page decision is Cummings Properties, LLC v. Hines, Lawyers Weekly No. 10-108-23.

Full rent due

The defendant, owner of the Massachusetts Constable’s Office, moved his business to new space in Woburn when it secured a contract with the Department of Revenue in early 2016.

On April 15, 2016, MCO entered a five-year commercial lease for the premises, which was owned by plaintiff Cummings Properties.

The lease contained a liquidated damages clause allowing Cummings to terminate the lease and accelerate the rent if MCO failed to cure a payment default within 10 days.

The defendant also signed a personal guaranty, putting him on the hook for the rent and other obligations under the lease.

The DOR suspended its contract with MCO within a month of the lease signing.

The defendant immediately began to struggle to pay the rent and defaulted after Cummings refused to release MCO from the lease.

“The takeaway is that you need vigilance in any kind of contract with a clause like this. Strike the clause if you can, but if you can’t, make sure you give notice by the time that’s required, because they’re difficult to defeat.”

Cummings then initiated summary process proceedings against MCO in Woburn District Court, seeking possession of the premises and $74,000 in damages, representing rent owed for July and August 2016 plus amounts due to Cummings under the liquidated damages clause.

Several months later, about a year into MCO’s original five-year lease term, Cummings secured a four-year lease with a new tenant.

Regardless, Cummings sued the defendant in Middlesex Superior Court in 2020, seeking to enforce his obligations as guarantor of MCO’s lease.

Following a jury-waived trial, Judge Christopher K. Barry-Smith ruled that the defendant was “sufficiently sophisticated” to be held to the terms of the lease, including the rent acceleration clause, and ordered that he pay more than $82,000 in liquidated damages, pre-judgment interest and costs.

The Appeals Court reversed Barry-Smith’s decision in late 2022, emphasizing that because the acceleration clause allowed Cummings to repossess and relet the premises, a reasonable estimate of expected damages from a breach would, at the time of contract formation, have included either some accounting to MCO for any rent received from a new tenant or some discounting of the stipulated damages to reflect the likelihood of reletting.

The SJC subsequently granted Cummings leave to obtain further appellate review.

Sophisticated parties

The defendant argued before the SJC that the acceleration clause operated as an impermissible penalty.

In addressing that argument, the SJC noted that jurisdictions apply one of two tests to determine whether a liquidated damages clause is enforceable.

Under the first test, the “single look” approach, the court considers the circumstances at the time of contract formation. Under the alternate test, the “second look” approach, the court considers the circumstances at the time of the breach.

Though the “second look” approach allows for an after-the-fact adjudgment to avoid a windfall for the non-breaching party, Budd said, the SJC has long favored the “single look” approach, which she described as most accurately matching the expectations of the parties in negotiating a liquidated damages provision.

“By assigning a specific value to a contract breach ahead of time, a liquidated damages clause has the potential to promote certainty, resolve disputes efficiently, and, notwithstanding the instant case, avoid litigation,” she said.

Applying that approach, the SJC found that the defendant — who asserted that Cummings, as a high-volume commercial landlord, was likely to relet the premises on default and that any damages from a default thus would not have been difficult to ascertain at the time of contract formation — failed to present evidence at trial to support such assertions, as was needed to show the provision was a penalty.

The SJC similarly rejected the defendant’s contention that the sum nonetheless should be decreased by the amount Cummings collected by reletting the space.

“This position does not comport with our case law,” Budd said. “We remain convinced that where a contract is unambiguous and freely entered into, it is preferable for parties to bargain with one another as they see fit, rather than to have courts step in to decide whether and how to restructure a contract because certain contingencies were not accounted for by one of the parties.”

The defendant also failed to convince the court that he was not a sophisticated party and thus the clause should not be enforceable against him.

“In addition to MCO, where he held a number of officer positions simultaneously and had up to ten employees, [the defendant] also ran a company that provided tax preparation services,” Budd said. “Further, MCO’s move to Woburn was the result of [the defendant] having negotiated a contract for MCO to provide services to the DOR.”

Accordingly, the court concluded, the provision was enforceable under the circumstances.

Mixed reactions

Cummings issued a statement saying it was pleased that the SJC reaffirmed the preference for parties to bargain freely in advance, setting their own consequences for potential breach of a commercial agreement.

“In so doing, the court correctly ruled that the critical time for evaluating liquidated damages is at contract formation, in keeping with the parties’ knowledge and expectations at that time,” the company said. “By rejecting an approach that would allow courts to rewrite agreements long after the fact, the SJC upheld the parties’ ability to elect the reliability of a pre-estimated amount and avoid the time, expense and uncertainty of waiting years to attempt to litigate ‘actual’ damages.”

But the defendant’s attorney, Joseph B. Simons of Boston, said the ruling amounts to an unfair result that permits a landlord to recoup a full five-year lease worth of damages and perhaps a lease of any length upon the renter’s signature, even if the renter attempts to terminate as soon as he finishes signing.

That was the situation here, Simon said, noting that his client’s financial situation changed after signing the lease but before he even took possession of the premises.

“He sought to get out, [but] the landlord would not allow it and eventually went after [him] for the full remaining lease,” Simon emphasized. “We are looking into all potential options, including a motion for rehearing at the Supreme Judicial Court.”

Burlington business litigator Joseph P. Calandrelli, who handles commercial landlord-tenant disputes, said the ruling should prompt a renewed focus on the liquidated damages provision during leasing negotiations.

“When sophisticated parties to a commercial real estate deal agree in advance that the tenant will owe the full rent due in the event of a breach, courts in Massachusetts will enforce those agreements as written even if the ultimate result is a windfall for the landlord,” he said. “Commercial tenants are well advised to negotiate a provision that includes a mandatory set-off for replacement rent to avoid such a scenario.”

Daniel J. Dwyer of Boston said the case serves as a reminder to tenants’ attorneys that while the huge damages in the case seem facially unconscionable, that question requires detailed evidence to prove.

“You could go with an expert or probe the evidence the commercial landlord possesses as to the history of its occupancy rates generally to fill vacancies, or you could do both,” he said.

He also said the ruling has broader implications, since liquidated damages can apply in numerous contexts, including season tickets and hotel contracts.

“The takeaway is that you need vigilance in any kind of contract with a clause like this,” he said. “Strike the clause if you can, but if you can’t, make sure you give notice by the time that’s required, because they’re difficult to defeat.”