A recent decision by the Massachusetts Court of Appeals serves as a cautionary tale for landlords and a powerful reminder that remedies clauses in leases must be carefully crafted to retain a landlord’s ability to immediately recover for loss of future rents in the event of a tenant default.

Background

In 275 Washington Street Corp. v. Hudson River International, LLC, 963 N.E. 2d 785 (Mass. App. Ct. 2012), landlord and tenant entered into a twelve year lease, commencing in April of 2006, for commercial space in downtown Boston. By May of 2008, the tenant had closed its business operations at the leased premises, ceased paying base rent and addititional rent and delivered written notice to the landlord that it did not intend to return to the leased premises or make any additional payments under the lease. The landlord promptly filed suit alleging breach of contract and seeking damages for unpaid rent and other charges up to the date of the complaint as well as for “all of the damages resulting from [the tenant’s and guarantor’s] breaches of Lease and Guaranty.” The landlord also entered into a ten-year lease with a replacement tenant, which covered the remainder of the term of the original lease, but was for a lower rental amount.

Specific Lease Provisions at Issue

The sole provisions in the lease relating to landlord’s remedies in the event of a tenant default were (i) an indemnity clause, which required the tenant to indemnify the landlord, upon default by the tenant, “against all loss of rent and other payments which landlord may incur by reason of such termination during the remainder of the term”, and (ii) a cumulative remedies clause stating that “[n]o remedy or election hereunder shall be deemed exclusive but shall, whenever possible, be cumulative with all other remedies at law or in equity.”

Decisions

A Superior Court justice ruled that the tenant was liable to the landlord for breach of the lease and that the landlord could immediately recover rent and other costs owed up to the termination of the lease as well as loss of future rents. The court recognized that in Massachusetts, a landlord could not typically recover losses under an indemnification clause until after the expiration date of the original lease, but found an exception to this general rule where the landlord has re-let the leased premises to a replacement tenant.

The Court of Appeals reversed the lower court’s decision and held that in the absence of specific remedies language in the lease, such as a rent acceleration or liquidated damages clause, recovery under an indemnity provision like the one in the subject lease cannot be had until the date on which the original lease term would have expired but for the tenant’s breach. The court reasoned that because of the possibility of certain contingencies, such as a taking of the property by eminent domain or a casualty, that would have served to terminate the lease, it is not until the expiration of the original term that the landlord’s actual damages could be wholly attained.

The Court of Appeals also refuted the landlord’s contention that notwithstanding the indemnification provision in the lease, the landlord was entitled to immediately recover damages incurred for the balance of the original lease term based on the cumulative remedies provision referenced above. The Court held that while the cumulative remedies clause broadened the scope of landlord’s remedies by making available legal remedies for breach of contract as well as equitable remedies outside of the contract, it did not affect the remedies that are already written into the lease.

[NOTE: Further appellate review of this case has been granted.]

Practical Implications and Take-Away

The Court recognized that its decision in this case could, in effect, make it impossible for the landlord to recover its full damages because of the likelihood that the tenant could be dissolved or declared bankrupt prior to the expiration of the original lease term. In light of this practical effect, both the majority opinion and the concurring opinion counsel that the landlord in this case could have avoided its current predicament by including in its lease other remedies to ensure immediate recovery of loss of future rents.

The take-away for owners of real estate is that commercial leases need to be carefully drafted by counsel having substantial experience in the commercial leasing area in order to help avoid devastating results like the one in this case.