“A landlord left without an adequate remedy following breach of the lease by a tenant has only itself to blame for entering into a lease that fails to provide such a remedy.” 275 West Washington Street Corp. v. Hudson River Intern., LLC, 987 N.E.2d 194 (2013).
The case: 275 Washington Street Corp. v. Hudson River International, 987 N.E.2d 194 (Mass. 2013).
Issues: lessor’s attempt to recover accelerated damages after a tenant default and after termination of the lease pursuant to a lease indemnity clause.
Facts:
– 12 year lease for operation for a Boston dental office (term 2006-2018);
– tenant abandons premises in 2007 and stops paying rent in 2008 – less than 2 years into term;
– lease contains indemnification provision which allows landlord to recover all damages resulting from tenant’s lease breach;
– 2008: landlord terminates the lease and files breach of contract suit seeking money damages for lost rents through 2018;
– 2010: landlord relets to new tenant for term that goes beyond 2018 (the original lease expiration year);
– current tenant is paying much less than defendant was under the breached lease;
– Trial court and Appeals Court rulings: Trial court grants landlord’s summary judgment motion and enters judgment in landlord’s favor for over $1,000,000 (damage elements: (i) pretermination rent, (ii) lost rents through 2010 reletting, (iii) rent differential through lease conclusion)). Appeals court reverses and requests further appellate review from the Mass. Superior Court.
Supreme Judicial Court holding: Trial court reversed. Landlord can’t recover post-termination damages pursuant to indemnity clause until end of lease term (2018).
Why?: Landlord made the mistake of terminating the lease (as opposed to terminating possession). This foreclosed landlord’s ability to recover any post-termination damages. Where a landlord terminates a lease following a tenant default, the tenant has no further rental obligations after termination unless the lease says otherwise. Hudson River, 987 N.E.2d at 198 citing Restatement (Second) of Property, Landlord and Tenant, s. 12.1, comment g, at 389 (1977). The Court also held that under common law principles, the lease’s indemnification clause only allowed the landlord to recover damages at the lease’s conclusion “because the precise amount of those losses cannot be ascertained until the end of the [term].” Hudson River, at 199-200.
The Court further held that commercial lease parties are free to specify what damages are due and when in the event of a premature lease breach. However, since the Hudson River lease was silent on damage specifics, the Court followed the common law rule that indemnification damages don’t “come due” until the end of the lease term. Id. at 200.
Take-aways: The landlord’s nearly $1.1M judgment is now reduced to less than $40K (the pre-termination amount owed by the tenant). Ouch. The termination of lease vs. termination of possession dichotomy is a bit cryptic but clearly important as almost all commercial leases reference both options.
Hudson River illustrates in stark relief that if a landlord terminates a lease (as opposed to terminating the tenant’s right to possession), it runs the risk of having its future damages barred. The lesson for landlords is clear: the lease should contain clear acceleration or liquidated damages language permitting the landlord to recover future rents if the tenant prematurely breaches the lease. Otherwise, the landlord could have its damages cut off at the date of lease termination, or, like the Hudson River plaintiff, have to wait several years to recover damages.
My guess is that in 2018 when the lease is set to expire, the corporate tenant/defendant will be dissolved, non-existent and judgment-proof.
