The Supreme Judicial Court of Massachusetts recently held in Cummings Properties, LLC vs Darryl C. Hines, 492 Mass. 867 (2023) that a tenant of a commercial lease was liable for the entire outstanding rent under the lease, equivalent to approximately five years’ worth of rent, even though the landlord was able to re-lease the premises to a replacement tenant within one year after the original tenant vacated the premises.  

This decision resulted in a substantial windfall to the landlord, allowing the landlord to essentially double collect rent for the same space for four years.  The court concluded that based on the terms of the lease and Massachusetts laws pertaining to liquidated damage provisions, the terms of the lease allowed the landlord to keep this windfall.  In reaching this conclusion, the Massachusetts Supreme Judicial Court reversed the Appeals Court decision, which had held that the liquidated damage provision was an unenforceable penalty. 

In Cummings, the tenant signed a five-year office lease.  After only one month into the lease term, the tenant stopped paying rent following the unexpected loss of a lucrative business contract.  The lease provided that if the tenant failed to pay the rent due, then the landlord had the right to terminate the lease, in which case, “the entire balance of rent due…immediately [would] become due and payable as liquidated damages, since both parties agree that such amount is a reasonable estimate of the actual damages likely to result from such breach.”  Consequently, the landlord terminated the lease, recovered possession of the premises, and sued for the rent due for the remaining balance of the term.   

In holding for the landlord, the Court explained that a liquidated damages provision is enforceable if “(1) the actual damages resulting from a breach were difficult to ascertain at the time the contract was signed, and (2) the sum agreed on as liquidated damages represents a ‘reasonable forecast of damages expected to occur in the event of a breach.’”  

The Appeals Court and the Supreme Judicial Court both agreed that the first prong was satisfied.  Specifically, both Courts accepted the trial court’s finding that, “there was no way to predict when a breach might occur, whether or when a new tenant would be secured, what the new rent might be, and what costs [the landlord] would incur in the meantime.”  In a footnote to its opinion, the Supreme Judicial Court noted landlord’s testimony that multiple units in the same office building had been empty for as long as twelve years.

The Courts, however, disagreed on the second prong.  The Appeals Court explained that “Liquidated damages that are ‘grossly disproportionate to a reasonable estimate of actual damages’ made at the time of contract formation” are invalid on grounds of public policy….The acceleration clause permits [the landlord] to retake possession of the premises, relet it and collect rent from the new tenant, and recover all the remaining rent owed by [the original tenant], without having to account for the rent received from the new tenant during the term of the original lease.  A provision such as this bears no reasonable relationship to expected damages and is thus unenforceable as a penalty.” (emphasis in the original).  The Supreme Judicial Court disagreed, stating that, “Contrary to the holding of the Appeals Court, we never have required that the amount of a liquidated damages clause take into account any future rents collected from a new tenant to be enforceable.”  The Court further explained that the parties had the opportunity to consider mitigation factors before agreeing to the specified liquidated damages set forth in the lease.  The Court concluded that to consider mitigation after a breach, as opposed to the time the contract was made, would undermine the purpose of the liquidated damages provision.

The Massachusetts Supreme Judicial Court’s decision is notable because it contrasts with the view of most other state courts and laws nationwide.  For instance, in California, a landlord that terminates a lease for a tenant default must offset the future rent the landlord could recover by the amount that “the [tenant] proves could be reasonably avoided” (see Section 1951.2 of the California Civil Code).  In other words, the landlord can only recover the future rent minus whatever amount the landlord is reasonably expected to recover by reletting the premises to another tenant.  Under California law, the tenant in the Massachusetts case would have only been liable for approximately 1 year of rent (plus some other damages incurred by the landlord in reletting the premises) instead of the 5 years of rent that the landlord was permitted to recover.

Based on this decision, landlords – at least in Massachusetts – should carefully draft their leases to include liquidated damage provisions similar to the one used in the Cummings lease.  On the other hand, tenants should revise such provisions to require their landlords to reduce any award for future rent by the amount of rent that is reasonably expected to be recovered by the landlord from re-leasing their premises.