Massachusetts landlords should reconsider the remedies clauses in their leases, after the Supreme Judicial Court decided 275 Washington Street Corp. v. Hudson River International, LLC in April, requiring a landlord to wait until the end of the lease term before collecting damages from a tenant.
This case involved a 12-year lease to a dental office, commencing in 2006 and expiring in 2018. The lease allowed the landlord to terminate the lease upon a tenant default, with the tenant responsible for all delinquent rent up to the termination. The lease included an indemnification clause, requiring the tenant to indemnify the landlord against all lost rent and other payments which the landlord “may incur by reason of such termination during the remainder of the term.” The lease did not give the landlord a right to liquidated damages or any other remedies for loss of post-termination rent.
The tenant abandoned its premises and stopped paying rent after one year. The landlord terminated the lease in 2008, and relet the premises in 2010 to a new tenant for a 10-year term at less rent. The landlord sued the tenant for breach of contract. The trial court entered a money judgment for the landlord, equal to the sum of the delinquent rent prior to termination in 2008, the lost rent from termination until 2010 (when the new tenant took possession), the rent differential between the breached lease and the new lease, plus interest and attorney’s fees, all totaling nearly $1.1 million. The SJC took up the case on appeal.
The SJC confirmed the Massachusetts rule that when a landlord terminates a lease after a tenant default, the tenant must pay rent up to the termination date, but not beyond, unless the lease provides otherwise. Because of this rule, most leases specify additional remedies for landlords, such as liquidated damages and indemnification, so landlords can recover lost rents that would have accrued after termination. Discussing liquidated damages, the SJC cited Cummings Properties, LLC v. National Communications Corp, a 2007 decision where the SJC upheld a rent acceleration clause requiring a defaulting tenant to pay rent for the entire remaining term.
‘Benefit Of Its Bargain’
The lease in 275 Washington Street Corp. provided for indemnification, but not liquidated damages. The SJC noted that indemnification limits landlords’ recovery to actual losses from early lease termination, which are uncertain until the end of the lease term. Therefore, according to the SJC, landlords cannot recover under indemnification clauses before the originally scheduled lease expiration date.
The landlord implored the SJC to award traditional contract damages, so the landlord could realize “the benefit of its bargain.” The landlord sought damages equal to the excess of the rent under the old lease for the remainder of the term, over the rent under the new lease for such period. The SJC declined, ruling that adopting the landlord’s theory for leases would be an unwarranted departure from established precedent. The SJC held that the landlord must wait until the originally scheduled lease expiration date in 2018 to calculate its damages, and then try to collect from defendants who may be judgment-proof by then. As a small consolation, the SJC affirmed a $37,000 judgment for the landlord for unpaid rent that accrued before the 2008 lease termination.
Under this decision, landlords cannot recover traditional contract damages for lost post-termination rents, unless the lease specifically provides that remedy. Accordingly, landlords should make sure their leases allow liquidated damages for post-termination rent losses. A typical liquidated damages clause requires defaulting tenants to promptly pay the landlord the excess of the post-termination rents, over the fair rental value of the premises through the lease expiration date. Without this, a landlord may have to wait helplessly for years before seeking post-termination damages.
Christopher R. Vaccaro is an attorney in Stoneham. Email: cvacccaro@verizon.net
