The SJC recently affirmed the Massachusetts Appeals Court’s ruling that a commercial landlord whose tenant broke a 12 year lease after only two years has to wait until the lease term expires before collecting damages.
In 275 Washington Street Corp. v. Hudson River International, LLC, the landlord and tenant entered into a 12 year lease for commercial space. The lease required the tenant to occupy and use the premises for a dental office and to pay the landlord monthly rent. The lease contained an indemnity provision which provided that “[t]enant shall indemnify Landlord against all loss of rent and other payments which Landlord may incur by reason of such termination during the remainder of the term.”
After one year the tenant closed its dental office and moved out of the premises but continued making payments for an additional year. At which point the tenant notified the landlord that it would be making no further rental payments and that it would not resume occupation of the premises. The landlord subsequently re-entered the premises and signed a new ten year lease for the premises with a replacement tenant at a lower rent than was agreed on under the original lease.
In 2008 the landlord filed suit against the tenant and sought to recover all damages arising from the breach. The landlord subsequently prevailed on a motion for summary judgment as to liability. Prior to trial the parties stipulated to a judgment but the defendants reserved their right to appeal.
On appeal, the Appeals Court held that the bright line rule remains that a landlord must wait to collect damages until the end of the original lease term. While the Appeals Court affirmed the finding of liability in favor of the landlord, it vacated the judgment assessing damages and remanded to the trial court to calculate the damages as of the time the landlord recovered possession of the premises.
On subsequent appeal to the Supreme Judicial Court, the SJC held that it is well settled that when a landlord terminates a lease following the default of a tenant, the tenant is obligated to pay the rent due prior to the termination but has no duty to pay any rent that accrues after the termination unless the lease expressly provides.
The landlord’s argument regarding the indemnification clause in the lease also failed because the SJC said an indemnification clause only reimburses a landlord for actual losses and the precise amount of those losses would not be known until the end of the period specified in the lease. The landlord argued the damages could be calculated because it had obtained a replacement tenant.
The SJC ruling underscores the importance of incorporating a clause in a commercial lease which explicitly describes the landlord’s remedies in the event of a default. The decision makes clear that the law will not change to accommodate a landlord that failed to include a rent acceleration clause in its lease. To protect against a default landlords should insist on a rent acceleration clause to be part of the remedy provided for in the lease. Otherwise, as in 275 Washington St, the landlord will have to wait until the end of the lease to collect damages.