Importance of Carefully Drafting Commercial Leases

Two recent decisions by the Massachusetts Appeals Court highlight the importance of carefully drafting commercial leases.  In Panagakos v.  Collins, 80 Mass. App. Ct. 697, (2011), the Court held that a commercial landlord’s purported failure to mitigate was not relevant in determining damages payable by tenant and its guarantor after termination of the lease for tenant’s default.  The case involved a long term lease for a restaurant.  The restaurant failed. Tenant attempted to market its leasehold interest and obtain a new restaurant user, but the purchaser sought substantial repairs by Landlord to the parking lot, roof and HVAC system. Landlord, not surprisingly, declined.  Upon termination of the lease for nonpayment of rent landlord demanded damages from tenant and its guarantor under an acceleration clause which rendered the rent for the balance of the term immediately due and payable.  The trial court found that landlord was under an affirmative duty to make reasonable efforts to mitigate future damages. Finding that landlord had failed to act reasonably to mitigate, the trial court awarded only partial damages to the landlord.

The Appeals Court reversed the trial court, finding, significantly, that “the presence of a default/acceleration clause, such as the one contained in the lease, makes irrelevant the issues of mitigation of damages, because an acceleration clause is an enforceable liquidated damages provision.  In essence, inclusion of a liquidated damages/acceleration clause obviates the issue of mitigation of damages.  The Court noted that the parties “exchange[d] the opportunity to determine actual damages after a breach, including possible mitigation, for the peace of mind and certainty of result afforded by a liquidated damages clause.”

Another recent decision of the Appeals Court, 275 Washington Street Corp. v. Hudson River International, 81 Mass. App. Ct. 418 (2012), held that a landlord could not recover damages from a breaching tenant for the difference between rent payable by a new tenant and rent that would have been payable by the breaching tenant until the original expiration date of the lease.  The Court based its ruling on a simple indemnification clause contained in the lease which, upon tenant’s default, indemnified landlord “against all loss of rents and other payments which Landlord may incur by reason of such termination during the remainder of the term.”  The problem for landlord was that the lease lacked a rent acceleration clause and other specific remedies customary and typical in commercial lease arrangements.  Relying on long dormant case law from 1906, 1931, and 1934, the Court denied recovery under the indemnity clause reasoning that liability is ultimately “contingent upon events thereafter occurring, because the full amount of which the lessee eventually must pay for the remainder of the term cannot be wholly ascertained until the period ends.”  The clear take-away from this case is that simple or abbreviated lease forms contain a wealth of dangers for the unwary.