Accelerating Rent After Tenant's Breach Not a Penalty

Facts: A commercial lease said that if the tenant continued to default “in the payment of the security deposit, rent, taxes, or any substantial invoice for goods” after the owner had sent it a notification of default, this “significant breach of the lease” would make due the entire rent under the lease “as liquidated damages.”

The tenant defaulted, and failed to fix the problem within the time specified in the lease, so the owner sued. The tenant claimed that the rent acceleration clause was an unenforceable penalty. A Massachusetts trial court ruled for the owner. After a higher court had reversed the decision, the owner appealed.

Decision: The Supreme Judicial Court of Massachusetts reversed the appeals court's decision and ruled that the owner was entitled to the accelerated rent as “liquidated damages.”

Reasoning: The Supreme Judicial Court admitted that, in earlier cases, it had found similar accelerated rent clauses to be unenforceable penalties because they would apply both to serious breaches (such as failure to pay rent) and minor breaches (such as a failure to pay a tax increase). But the court decided to follow the modern trend: If a liquidated damages clause (for example, an accelerated rent clause) applies to breaches of differing importance, the clause is presumed to “apply only to those material breaches for which it may properly be enforced.” That meant that the accelerated rent clause in the lease would apply to an important breach, such as failure to pay rent.

• Cummings Properties, LLC v. National Communications Corp., July 2007.

Editor's Note: A liquidated damages clause is an amount of damages the parties agree to pay in the event of a breach. These damages are usually enforced if actual damages were difficult to determine when the contract was made, and the agreed-upon amount is a reasonable estimate of the damages likely to occur from a breach. If actual damages could be accurately determined and are much smaller than the liquidated damages called for in the lease, courts are more likely to find that the liquidated damages clause is an unenforceable penalty.