(2013) Over the last decade several major developments in Massachusetts commercial lease law were introduced. Several decisions made by the Supreme Judicial Court over the past decade or so have significantly impacted the law, with important implications for landlords, tenants and legal practitioners.
Commercial Landlord’s Post-Termination Indemnity
275 Washington Street Corp. v. Hudson River International, LLC, 465 Mass. 16 (2013).
In this case, a commercial lease for a dental practice included a provision which stated: “Tenant shall indemnify Landlord against all loss and other payments which Landlord may incur by reason of such termination during the remainder of the term.” The lease contained no other remedies for damages following early termination by landlord for tenant’s breach. The tenant ceased operations and then essentially permanently vacated the premises after the second year of a 12-year lease. The landlord terminated the lease by re-entering the premises. Approximately two years after termination, the landlord was able to re-let the premises beyond the original expiration date, but for a lower rent amount. The court considered three primary questions on appeal:
i. Whether the indemnification clause, in the absence of specific language, allowed the landlord to recover, before the end of the lease term, the present value of lost future rent if the landlord re-lets the property to another tenant for the duration of the lease; and
ii. if, in the absence of a specific provision, the common law, as a breach of contract, allows a landlord to recover damages for the present value of lost future rent after the termination of the lease; and
iii. whether the liability of the guarantor in this case could exceed the liability of the tenant.
The court answered “No” for each of these questions. In doing so, it reiterated the long-held rule that, in the case of an early termination, a tenant is obligated to pay rent and other damages that arose prior to termination, but is not liable for any rent arising after termination unless specifically provided in the lease. With respect to the indemnity provision, the court held, also following prior common law, that, unless stated otherwise in the lease, a landlord cannot recover post-termination damages under an indemnity provision until the end of the lease term. The fact that the premises has sooner been re-let does not create an exception to this rule. The court went on to recognize that a commercial lease is a contract and not a conveyance of property; however, notwithstanding this determination, commercial landlords are not entitled to “benefit of the bargain” remedies for damages arising after termination in the absence of express language.
Commercial landlords should, in all cases, specifically provide for recovery of post-termination rent in their leases, or damages will be limited to those arising prior to termination. Instead of a general indemnity provision for these future rent, they should include a clause for the ongoing payment of rent following termination (as if no termination had occurred) and/or (preferably as an alternative at landlord’s option) a rent acceleration/liquidated damages provision.
Commercial Landlord’s Duty to Repair Unsafe Conditions
Bishop v TES Realty Trust, 459 Mass. 9 (2011).
This case involved a personal injury claim brought against a landlord arising from the landlord’s failure to properly repair the roof of a commercial structure. The tenant in this case occupied the entire structure, and the landlord had no duty under the lease or at common law to repair the roof. The court found that the plaintiff could nevertheless proceed against the landlord pursuant to G.L. c. 186 §19, which was previously believed to apply only to certain residential leases.
This statute places a duty on a landlord to repair unsafe conditions, and states as follows: “A landlord or lessor of any real estate except an owner-occupied two or three-family dwelling shall, within a reasonable time following receipt of a written notice from a tenant forwarded by registered or certified mail of an unsafe condition, not caused by the tenant, his invitee, or anyone occupying through or under the tenant, exercise reasonable care to correct the unsafe condition described in said notice except that such notice need not be given for unsafe conditions in that portion of the premises not under control of the tenant. The tenant or any person rightfully on said premises injured as a result of the failure to correct said unsafe condition within a reasonable time shall have a right of action in tort against the landlord or lessor for damages. Any waiver of this provision in any lease or other rental agreement shall be void and unenforceable. The notice requirement of this section shall be satisfied by a notice from a board of health or other code enforcement agency to a landlord or lessor of residential premises not exempted by the provisions of this section of a violation of the state sanitary code or other applicable by-laws, ordinances, rules or regulations.”
Based on the court’s holding in this case, it is important that commercial landlord’s be aware that:
i. The duty under G.L. c. 186 §19 applies to all commercial leases, even those fully occupied by a single tenant.
ii. The duty applies even to repair items that are the obligation of a tenant.
iii. This duty cannot be waived by the provisions of the lease.
iv. The fact that a tenant fails to repair a condition that it is obligated to repair does not, for purposes of the statute, mean that the tenant “caused” the unsafe condition.
v. If a landlord repairs an unsafe condition that was the repair obligation of the tenant, the landlord may still bill the tenant for the cost of repair.
Landlord’s Responsible for Natural Accumulations of Snow and Ice
Papadopoulas v Target Corporation, 457 Mass. 368 (2010).
Under the long-standing so-called “Massachusetts Rule” a property owner did not violate its standard of reasonable care, and thus would not be negligent, by failing to remove natural accumulations of snow and ice.In Papadopoulas, the plaintiff was injured when he slipped and fell on a patch of ice at the Liberty Tree Mall in Danvers, in front of a Target department store. In its decision, the court abolished the long-standing rule which distinguished between natural and unnatural accumulations of snow and ice. The court’s ruling adopted the “Connecticut Rule” which applies the same duty of reasonable care that applies to other hazards (for lawful visitors) to all accumulations of snow and ice, whether natural or otherwise.This holding affects both residential and commercial property owners and applies retroactively. Whether snow and ice removal efforts are reasonable is determined in light of the expense to the property owner and the “probability and seriousness of the foreseeable harm to others.” The duty of the property owner to remove snow will depend on the amount of foot traffic expected on the property and the expense and burden of removing the snow and ice. What constitutes reasonable care will vary among types of properties. In light of this decision, landlords/property owners should recognize the need for potentially greater diligence in removing natural accumulations if snow and ice.
Rent Acceleration Clauses Potentially Enforceable
Cummings Properties v National Communications, 449 Mass. 490 (2007).
In Cummings, the lease for office space provided that if the tenant defaulted in its obligation, “the entire balance of rent which is due hereunder shall become immediately due and payable as liquidated damages.” It had been generally accepted, perhaps in part erroneously based on long-standing precedent in MA, that such provisions providing for full acceleration of rent upon default of a commercial lease are per se not enforceable as an unconscionable penalty.
Commissioner of Insurance v. Massachusetts Accident Company, 310 Mass. 769 (1942).
In Cummings, the tenant defaulted in its obligation to pay rent, and the landlord terminated the lease. The court allowed the landlord to accelerate and recover damages for 32 months’ worth of future rent following the termination. The court further gave no regard as to whether landlord’s failure to mitigate damages should impact these liquidated damages. The SJC reiterated this position again a year later in a case involving the default of a licensee for luxury box seats at Gillette Stadium. NPS, LLC v. Paul Minihane, 451 Mass. 417 (2008). The rule in evaluating rent acceleration clauses in leases is apparently currently the same as for any other liquidated damages provision:
i. At the time of contracting the actual damages from a breach must be difficult to ascertain, and
ii. The sum agreed as liquidated damages must be a reasonable forecast of damages expected to occur from breach.
It is important to note that the court stated in Cummings and in NPS, LLC, that the defendants did not provide sufficient evidence to show that the second requirement of the rule had not been met. Given the nature of commercial leases, it would seem that, in many instances, the tenant may still reasonably seek to attack the enforceability of an acceleration provision based on the second prong of the above rule.
This decision has created uncertainty and been a surprise for many real estate lawyers. Lawyers on both sides should be cautious. Tenants should be very wary in allowing full rent acceleration clauses, and landlords should consider being conservative in the damages allowed in liquidated damages provisions. From a landlord’s perspective, it might be prudent to limit the options for liquidated damages to either (i) a sum equal to a limited future rent period which reflects the potential time necessary to re-let the space, such as 1-2 years, or (ii) to the net present value of the difference in the future rent payments under the lease to the market rent. It is also always wise for a landlord to preserve the option for actual damages for lost rent that accrue, after a termination, until the space is re-let.
The Dependent Covenant Rule
Wesson v. Leone Enterprises, Inc., 437 Mass. 708, (2002).
Prior to the Wesson decision, Massachusetts followed the rule of ‘independent covenants’ with respect to commercial leases (not applicable to residential leases). If a landlord breached the lease, absent language in the lease to the contrary, a tenant could not terminate the lease or withhold rent. Termination was only an option in the case of constructive eviction. If the landlord breached an obligation, the tenant’s recourse was essentially to sue separately for damages while continuing to pay rent. In Wesson, a tenant engaged in the business of high-tech printing experienced continuing roof leaks in its space. The tenant complained several times of the leaks, and they were addressed by the landlord with what the court termed “shoddy and unsuccessful” results. The court held that the tenant was entitled to terminate the lease and vacate the premises prior to the expiration of the lease and that it was entitled to recover relocation costs. In doing this, the court abandoned the independent covenants rule and adopted the rule of mutually dependant covenants set forth in a portion of the Restatement (Second) of Property §7.1 (1977):
“Except to the extent the parties to a lease validly agree otherwise, if the landlord fails to perform a valid promise contained in the lease to do, or to refrain from doing, something . . . and as a consequence thereof, the tenant is deprived of a significant inducement to the making of the lease, and if the landlord does not perform his promise within a reasonable period of time after being requested to do so, the tenant may (1) terminate the lease…..It is important to note that the holding apparently allows parties to a lease to agree not to follow this rule. The parties to a lease should therefore recognize the implications of a provision in a commercial lease similar to the following:
“LANDLORD AND TENANT AGREE THAT THE OBLIGATIONS OF LANDLORD UNDER THIS LEASE, OTHER THAN THOSE FOR THE DELIVERY OF A LEASEHOLD INTEREST TO TENANT, ARE INDEPENDENT COVENANTS FROM TENANT’s OBLIGATION TO PAY RENT HEREUNDER AND TO CONTINUE IN ITS OCCUPANCY OF THE LEASED PREMISES FOR THE TERM OF THE LEASE. TENANT SHALL NOT BE ENTITLED TO TERMINATE THIS LEASE OR WITHHOLD OR ABATE RENT FOR ANY BREACH OR DEFAULT HEREUNDER EXCEPT IN THE CASE OF A CONSTRUCTIVE EVICTION.”
Also, the court did not adopt the rule of the restatement in its entirety, which would have allowed for a tenant to withhold rent as an alternative to termination. Currently, a tenant to a commercial lease in MA does not clearly have the right to withhold rent and continue under the lease, in the case of a breach by landlord, unless otherwise stated in the lease.