Appeals Court docket Guidelines That Liquidate Damages Clause Is Unenforceable The place It Allowed For Restoration of Lease For Remaining Time period On Prime of Lease Acquired From New Tenant
Should you loved the well-known Seinfeld episode the place George Costanza was accused of “double dipping” his chips and dip at a household funeral, then you definitely’ll recognize this submit. The case is Cummings Properties LLC v. Hines (Mass. Appeals Court docket Dec. 6, 2022) the place the Appeals Court docket struck down a liquidated damages clause in a business lease which purported to permit the owner to get well a big monetary penalty despite the fact that it was capable of re-lease the premises.
The case is an effective instance of what can occur the place a celebration can get a bit too grasping in looking for damages in a business lease case. Cummings Properties, one of many largest business actual property companies within the Larger Boston space, has a effectively deserved repute of being a very litigious business landlord (in my humble opinion). I’ve handled them a number of instances, and I can let you know a couple of tales offline. Anyhow, on this case, Cummings leased workplace area to Darryl Hines, who owned a constable/course of serving enterprise. Hines had simply secured a profitable contract with the Mass. Dept. of Income and wanted a bigger workplace for the brand new enterprise. The lease was for five years at round $16,000 yearly. Sadly, solely a month into the brand new lease, the DOR abruptly cancelled the contract with Hines, leaving him in extreme monetary misery. Hines tried to work out a decision with Cummings nevertheless it refused to launch him from the lease obligations. Hines then defaulted. A 12 months later, Cummings was capable of finding a brand new tenant and signed a 4 12 months lease. Cummings sued Hines, who signed a private warranty, for some $82,000 in damages representing your complete steadiness of the 5 12 months lease.
The lease supplied for a somewhat frequent acceleration and liquidated injury provision:
"Within the occasion that . . . LESSEE defaults within the observance or efficiency of any time period herein, and such default will not be corrected inside 10 days after written discover thereof, then LESSOR shall have the proper thereafter, with out demand of additional discover, to declare the time period of the lease ended, and/or to take away LESSEE's results, with out legal responsibility, together with for trespass or conversion, and with out prejudice to another treatments. If LESSEE defaults within the cost of any hire, and such default continues for 10 days after written discover thereof, and, as a result of each events agree that nonpayment of stated sums is a considerable breach of the lease, and, as a result of the cost of hire in month-to-month installments is for the only profit and comfort of LESSEE, then, along with another treatments, the web current worth of your complete steadiness of hire due herein as of the date of LESSOR's discover, utilizing the printed prime fee then in impact, shall instantly turn out to be due and payable as liquidated damages, since each events agree that such quantity is an inexpensive estimate of the particular damages prone to end result from such breach."
There was a justifiable share of litigation within the final a number of many years over the enforceability of liquidated injury penalty clauses. These clauses are typically enforceable so long as it’s not so disproportionate to anticipated damages as to represent a penalty. Courts will typically implement these clauses if (1) on the time the settlement was made, potential damages had been troublesome to find out, and (2) the clause was an inexpensive forecast of damages anticipated to happen within the occasion of a breach. Massachusetts used to have a “re-assessment” rule the place judges might think about the state of occasions on the time of the breach, nonetheless, the SJC stopped that observe in 1999 in favor of a “single look” strategy which solely accounts for the circumstances current at contract formation.
The deadly drawback for Cummings on this case was that its liquidated injury provision permitted it to have its cake and eat it too. That’s, it allowed Cummings to re-lease the premises, gather hire from the brand new tenant with out credit score or offset to Hines, then on high of that, pursue the entire hire owed by Hines via the tip of the 5 12 months time period. That is akin to the “double dipping” perpetrated by stated George Costanza in Seinfeld. The Appeals Court docket dominated that the clause allowed for such double dipping and was due to this fact an unfair penalty.
So what are the take-aways from this case? The plain one for business landlords is don’t be a pig and chase a small enterprise proprietor for tens of 1000’s of {dollars} over and above what you acquired in new lease funds. So far as drafting these clauses, it’s a tricky one as a result of to date people have been unable to precisely predict future outcomes. I might say that your liquidated injury clause ought to have some kind of caveat that the tenant will get credit score for any hire acquired from a brand new tenant and be answerable for the differential in hire via the tip of the time period. Hopefully that will work.
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