Unlike Massachusetts residential leases, under which a landlord is required by law to mitigate its damages, commercial lease provisions are more flexible and often contain a so-called “acceleration clause.” An acceleration clause, in its most basic form, addresses whether a landlord may accelerate rent (i.e. demand all of the rent that is remaining due under the lease) if a tenant breaches the lease before the end of the term. Generally speaking, commercial leases deal with acceleration in one of three ways: (1) the lease is silent about acceleration; (2) the landlord can demand the full rent immediately upon the tenant’s default; or (3) the landlord can demand the full rent immediately upon the tenant’s default and demand that the tenant continues to pay the ongoing obligations under the lease. Practically speaking, it is very rare that a lease is completely silent. Thus, for purposes of this article, we will assume that the lease contains some form of an acceleration clause.
Savvy tenants typically try to limit the landlord’s ability to accelerate rent. Often, tenants will try to (1) negotiate longer cure periods (i.e. have a longer time period during which the tenant can remedy the default); (2) limit the landlord’s options to either (i) demanding full rent upon default or (ii) requiring the tenant to meet ongoing obligations; and/or (3) ask that the acceleration of rent is offset once the landlord secures a new tenant (i.e. the landlord must try to mitigate its damages). Assuming the landlord is willing to make some of these concessions, landlords will want their own limitations: (1) landlords are generally not going to allow a cure period beyond thirty days; (2) if the landlord elects to take a one-time payment in lieu of ongoing rent payments, the landlord may require more money for the security deposit and/or require a personal guarantee; and (3) the landlord may allow an offset (i.e. the landlord gives the tenant a “credit” once the landlord secures a new tenant), but that offset usually factors in the landlord’s costs in doing so, like broker commissions, attorney fees, etc.
Tenants have argued that acceleration clauses effectively allow landlords to “double-dip” their purported damages. Said another way, a tenant may argue that it is unfair for a landlord to receive accelerated rent from the tenant and receive rent from a new tenant (assuming the landlord is able to obtain a new tenant). Massachusetts courts, however, have continued to uphold acceleration clauses on the basis that accelerated rent is a valid form of “liquidated damages.”
In a seminal case on this topic, the Massachusetts Supreme Judicial Court (“SJC”) in Cummings Properties, LLC v. National Communications Corporation1 held that the acceleration clause at issue was a valid against the tenant. In that case, the landlord asserted that it was entitled to accelerated rent on the remainder of the lease (more than two years) for and thus the landlord was entitled to more than $500,000. Citing relevant cases from Massachusetts and other jurisdictions, the SJC agreed. Subsequently, other tenants have fought unsuccessfully to void such provisions, making the argument that acceleration clauses effectively allow landlords to “double-dip” if they then find a suitable replacement tenant. This argument was summarily dismissed in a recent federal court decision, Bridge Over Troubled Waters, Inc. v. Argo Tea, Inc.2, applying Massachusetts law. Like the SJC in Cummings Properties, the Court in Argo ruled that the acceleration clause was enforceable as liquidated damages.
The above is a general summary of acceleration clause approaches in commercial leases. Each situation is different, and often different locations will have differing “standards” for how leases are structure. For example, in the Boston area, the standard provisions for commercial leases in Cambridge often differ from those in the South Boston. In fact, the standards in different neighborhoods in Cambridge (e.g., Kendall Square) often deviate from other neighborhoods (e.g., Central Square). Moreover, acceleration clauses tend to vary depending upon whether the space is for a restaurant, laboratory, retail, office or warehouse). As such, it is critical that both landlords and tenants speak with a commercial real estate attorney before executing a commercial lease.