Author Archives: Cole Young

About Cole Young

As an attorney with a degree in civil engineering, his practice focuses primarily on construction and commercial real estate transactions and litigation.

Actions Speak Louder Than (Written) Words: When Strict Compliance is not a Defense to Actual Notice in Commercial Leasing

By on October 11, 2018

The Massachusetts Superior Court (Essex) recently held that failure to strictly comply with commercial lease notice requirements did not invalidate a tenant’s email and verbal notice of its intent to terminate a lease.  Specifically, the tenant wanted to avoid triggering the automatic extension clause in the lease but did not send notice in the manner required by the lease. In SpineFrontier v Cummings (2018), the Court held that the tenant’s email and verbal notice, although not in strict compliance with the lease, sufficiently conveyed to the landlord that the tenant did not intend to renew its lease.  

The Court went on to state that setting the sufficiency of actual rather than lease-prescribed notice aside, the landlord waived its right to assert the necessity of strict compliance with the written lease language. The landlord, by its own history of action, acted as though the Tenant’s Notice was sufficient notice to terminate the lease. The Court noted:

At no point following the [email or verbal notice] did Cummings notify SpineFrontier that its notice failed to comply with the requirements of SpineFrontier’s lease…Moreover, in the several months that followed, Cummings acted as if proper notice had been provided, repeatedly attempting to strike a deal with SpineFrontier on different terms for office space…

We consistently remind commercial tenants and landlords to strictly comply with their lease obligations.  If a lease states that notice must be given in a certain way (e.g. certified mail, overnight delivery, etc), then a landlord or tenant should always follow that, even if it seems unnecessary.  The “notice” provision is often overlooked at the beginning negotiations of a lease, but tenants and landlords should take the time to make sure it is workable.  Even so, SpineFrontier v Cummings makes it clear that strict compliance does not always win the day.  

Therefore, if you are a tenant that has failed to strictly follow your lease, you should speak with a commercial real estate attorney to determine if you may still have options.  Likewise, if you are a landlord and your tenant has not strictly followed the lease, do not assume that such failure is automatically in your favor.  You too should consult with a lawyer to determine your options. 

Foreclosures, Commercial Leases and the “First in Time, First in Right Rule”

By on September 18, 2017

Imagine that your company rents space in a commercial building and just found out that your landlord stopped paying the mortgage.  The building is in foreclosure, your lease isn’t ending soon, and it doesn’t address a foreclosure.  What happens to your commercial lease if the building is sold in a foreclosure auction?

When a commercial property owner defaults on its mortgage and the lender forecloses, a tenant should determine whether its lease was entered into before the foreclosed mortgage was recorded, as tenants retain interests in leased property if a lease predates a foreclosed mortgage.  Generally, the “First in Time, First in Right Rule” recognizes agreements respecting real estate with effect given to the “first in time” agreement.  In other words, a prior recorded mortgage that predates a lease, will permit the mortgagee to foreclose on the property and terminate the tenant’s lease, irrespective of the otherwise enforceable agreement between the defaulting landlord and the tenant.  On the other hand, a lease that predates a recorded mortgage will remain in effect after foreclosure, so long as the lease itself contains no contrary provision.

While the “general rule in Massachusetts is that entry by a mortgagee in possession under a mortgage granted prior to execution of a lease ousts the tenant and terminates the lease,” the inquiry doesn’t end there.  Tenants subject to a mortgagee’s title should consider whether the mortgagee exercised rights as a landlord over the tenant subsequent to the original landlord’s default on the mortgage.  Foreclosing mortgagees may acquire and exercise the landlord’s interest under a lease through an assignment of leases and rents from the debtor and demanding rent from the lessee as the landlord.  Similarly, the mortgagee may exercise rights as landlord through an attornment provision contained in the lease or through a separate attornment agreement with the tenant.  Attornment provisions can be found commonly in commercial leases, and express the tenant’s agreement to recognize mortgagees and/or subsequent purchasers as successor landlords to the tenant.  In the event that a tenant attorns to the mortgagee or a subsequent purchaser as its new landlord, or the mortgagee exercises rights under an assignment of the lease, the tenant will remain in possession of the leased space.

Absent such an assignment or attornment, the foreclosing mortgagee may terminate subordinate leases under the doctrine of paramount title.  Once asserted, paramount title requires entry, the demand rent be paid and actual or constructive eviction.  In to terminate a lease effectively, mortgagees acting in a dual capacity as both a mortgagee and landlord, must be cautious to articulate specifically its intended role so as not to afford subordinate tenants unintended rights permitting such tenants the right to carry on in prior existing leases.

In the rare instance that a commercial mortgage is subordinated to a lease, a lease would not be extinguished upon foreclosure of such a mortgage.  Instead, the purchaser of the commercial property would take possession subject to the tenant’s tenancy, and require the tenant to attorn to the purchaser as its new landlord, develop a new lease or vacate the premises.  

If your commercial space is sold at foreclosure, all is not lost.  The terms of your lease, along with timing of its execution in relation to the foreclosed mortgage will govern your rights and remedies as a tenant.   While it’s always a better course of action to address this issue when negotiating your lease it’s likely that you’ll retain some rights as a tenant despite a foreclosure.   In order to determine and preserve your rights under a commercial lease conclusively upon notice of a foreclosure, it’s important to consult with an experienced real estate attorney promptly.

Massachusetts Proceeds with Proposal to Impose Tax on Short-Term Rentals like Airbnb

By on June 19, 2017

As discussed in one of our previous posts , Massachusetts legislators have continued to discuss imposing a tax on short-term rental companies like Airbnb. Recently, the Massachusetts Senate decided to proceed with Governor Charlie Baker’s proposal to expand the room occupancy tax to include short-term rentals, but not without a few modifications. Back in January, Governor Baker proposed to expand hotel taxes to include users of services like Airbnb who rent out private rooms for more than five months (150 days) per year. The proposal stated that the 5.7% state tax – and up to 6% local tax – should apply to all providers of “transient accommodations.”

The Senate’s proposal, which was published in late May, adopts and expands upon Governor Baker’s initial proposal. Instead of only applying the room occupancy tax to private rooms that are rented out for more than five months per year, the Senate proposes imposing the tax on all “transient accommodations.” In contrast to Governor Baker’s proposal, which suggested encompassing long-term Airbnb providers under the definition of “hotels,” the Senate’s proposal introduces an entirely new category of housing that would be subjected to the room occupancy tax. “Transient accommodation” would encompass all “owner-occupied, tenant-occupied or non-owner occupied property . . . that is not a hotel, motel, lodging house or bed and breakfast establishment” where at least one room is rented to an occupant and all accommodations are reserved in advance. This new category of accommodation would expand the application of the room occupancy tax to all Airbnb-type services, regardless of their frequency. As a result of this proposed expansion, the state Senate’s proposal is projected to raise $18 million in 2018.

In a television ad Airbnb declared its support for the proposed rental tax in Massachusetts. Although similar ads ran last summer, the new ad reaffirms the company’s “commit[ment] to working with Massachusetts on new, common-sense home sharing rules. We want to collect and pay taxes for our hosts and protect affordable housing. Together, we can make sure all of Massachusetts benefits.” At this point it appears that at least some tax will be levied on companies like Airbnb in the very near future. The effect on hosts and customers remains unknown.  Strang Scott will continue to follow the progress of the proposed tax.

Massachusetts Commercial Lease: Maintaining and Repairing Equipment

By on April 28, 2017

It often comes as a surprise to commercial tenants that they are responsible for repairing and maintaining most of the equipment in their commercial space.  This can prove both frustrating and expensive when an outdated air conditioner breaks in the middle of summer.  To avoid these frustrations, tenants should (1) review the specific requirements in the lease, with an eye on some of the below specific applications; and (2) have a professional evaluate the life and value of each piece of equipment the tenant is required to maintain.

Servicing Exclusively the Premises

When a lease requires a tenant to repair and maintain equipment, the commercial leasing lawyers typically haggle over what specific equipment is required to be maintained.  The usual approach is to require the tenant to repair and maintain equipment that “exclusively serves” the rented space.  Meaning, the landlord is required to maintain equipment that serves the entire building (e.g. the building plumbing) but the tenant is required to maintain equipment that only serves the space (e.g. plumbing located in the tenant’s bathroom).  All buildings and all rental spaces are different, so it is imperative to negotiate, with as much detail as possible, what equipment truly “exclusively serves” the premises.  Often, as is usually the case with air conditioning and HVAC, the line between a building system and a premises-specific system is blurred. 

Air Conditioning and HVAC

Air conditioning and HVAC units are some of the more contested elements in maintenance/repairs provisions of leases.  These systems are critical because they can completely destroy a tenant’s ability to operate its business if they fail and they are often expensive.  Moreover, these systems are often tied to other systems within the building and therefore it is difficult to pinpoint who should absorb the cost.  As stated above, tenants should enlist a maintenance or engineering expert to determine (1) the life of the air conditioning and HVAC system; and (2) fully describe the interplay between the tenant’s systems and the building’s systems. 

Grease Traps

A grease trap, which is a plumbing apparatus used to collect cooking grease before it enters the wastewater system, is particularly important for restaurant commercial leases.  In every restaurant lease I have negotiated, the tenant is responsible for cleaning and maintaining the grease traps.  Leases typically state that tenants must “regularly” clean and maintain their traps, but sometimes a lease will provide for specific periodic cleanings (e.g. once a month) and even specify the contractor the restaurant owner must use.  The above language is fairly standard, but one important piece that is often overlooked is the location of the actual grease trap.  While ordinarily located within the restaurant, grease traps are sometimes located in separate areas, in other adjacent units, and even outside of the premises.  As such, tenants and landlords alike should discuss and agree to how and when grease traps should be cleaned.  Otherwise, tenants will have headaches in trying to access the very thing they agreed to clean, and landlords may have other tenants angry because the grease trap equipment is interfering with their business.    I once had a client whose grease trap was located in the basement of an adjoining unit, which happened to be a merchandise showroom.  Although my client cleaned the grease trap as required, they also inadvertently dragged grease throughout the showroom, much to the frustration of the other tenant.     

Operating Expenses

The confusing crossover between all repair and maintenance issues is when repair and maintenance are covered as part of operating expenses.  In larger buildings, tenants will have to pay, in addition to rent, a portion of the landlord’s operating expenses for the building.  This portion often covers some of the building’s overall maintenance and repair costs.  As such, even if something is not a direct tenant expense, the tenant may end up covering the cost (or a portion) through the payment of operating expenses.  It is therefore imperative that tenants ensure their maintenance and repair obligations are consistent with what is covered under operating expenses.   

The above is a simplified summary of different approaches to equipment maintenance for a commercial space. 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 City of Boston. In fact, the standards in different neighborhoods in Cambridge (e.g., Kendall Square) often deviate from other neighborhoods (e.g., Harvard Square). As such, it is critical that both landlords and tenants speak with a commercial real estate attorney before executing a commercial lease.

Understanding the Limitations of Chapter 93A – Pursuing Litigation Is Not Unfair or Deceptive

By on February 26, 2017

Companies operating or conducting business in Massachusetts are aware of an all-too-familiar statute, Massachusetts General Laws Chapter 93A. This statute provides individual consumers and businesses a right to bring legal action if they are harmed by an unfair business practice. The statute eloquently, although perhaps ambiguously, states that a violation shall exist when a company commits an “unfair or deceptive act or practice, or unfair method of competition,” against another who is engaged in commerce within the Commonwealth.  Violations can cover a litany of topics, such as a company that unfairly demands more money to complete its contract obligations after having already executed the contract (Anthony’s Pier Four, Inc. v. HBC Associates, 411 Mass. 451), or where insurance providers fail to offer a fair and equitable settlement amount within the required time period (Rhodes v. AIG Domestic Claims, Inc., 461 Mass. 486), or against landlords who fail to provide habitable units to their residential tenants (Haddad v. Gonzalez, 410 Mass. 855).  Although Chapter 93A is far-reaching, it does have its limitations.

Recently, Strang Scott attorneys Cole Young and Jennifer Lynn argued to the Massachusetts Appeals Court that litigation tactics alone are not unfair or deceptive acts or practices, such that they violate Chapter 93A.  Agreeing, the Appeals Court held that demanding payment under a contract, filing suit, and continuing to litigate a claim over a disputed amount is a simple contract dispute and nothing more. Aggregate Industries ­– Northeast Region, Inc. v. Hugo Key & Sons, Inc., 90 Mass.App.Ct. 146 (2016).   Said another way, the Appeals Court held that plaintiffs should not be punished for deciding to litigate, rather than accepting a lower settlement amount.  The Appeals Court went on to hold that the unfair or deceptive practice must arise from an independent act of trade or commerce, “not tangentially from litigation concerning that conduct.” 

The precedent of this case will be far-reaching and provides security to companies and businesses who choose to file suit, as opposed to being forced into settlement for fear of committing an “unfair” act.  Because the breadth of Chapter 93A can be complicated and nuanced, potential litigants should speak with an experienced Massachusetts litigator.

Massachusetts Commercial Lease: Acceleration Clause

By on February 20, 2017

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.

 

FN1.  Cummings Properties, LLC v. National Communications Corporation, 449 Mass. 490 (2007)

FN2.  Bridge Over Troubled Waters, Inc. v. Argo Tea, Inc, 2016 WL 7238793

Attorney Fees Awards are Mandatory for Prevailing Massachusetts Subcontractors and Suppliers Under MGL c. 149, s. 29

By on January 18, 2017

In Aggregate Industries – Northeast Region, Inc. v. Hugo Key & Sons, Inc., 90 Mass.App.Ct. 146 (2016), the Massachusetts Appeals Court ruled in favor of Strang Scott’s position, reversing part of the trial court’s earlier decision. The Massachusetts Supreme Judicial Court (“SJC”) recently declined to further review the case. As such, the Appeals Court’s decision is now clear precedent on the standard for attorney fees under the Massachusetts Payment Bond Statute, G.L. c. 149, § 29 (“Section 29”).

The case arose over materials and services that a subcontractor / material supplier provided to a general contractor for use on a public construction project in Salem, Massachusetts. The general contractor refused to pay in full, so the subcontractor brought suit against it and the payment bond surety. The trial court awarded damages to the subcontractor for the value of certain services provided but refused to include an award of attorneys’ fees. The trial court incorrectly held that Section 29, which provides for mandatory attorneys’ fees awards to prevailing subcontractors and material suppliers, was inapplicable.

On appeal, the plaintiff argued, through counsel (Cole Young and Jennifer Lynn, at Strang Scott), that Section 29 is a remedial statute with a clear purpose of protecting unpaid subcontractors and material suppliers on state-owned projects.  Said another way, an attorneys’ fee award is mandatory for prevailing claimants and is not within the court’s discretion. The statutory purpose is clearly to level the playing field where general contractors could otherwise hold back payment to deserving subcontractors and material suppliers, using litigation costs as leverage to deter them from filing suit. Now they have greater incentive to make those payments when they become due, or face greater consequences.

The precedent of this case will be far-reaching and will benefit Massachusetts suppliers and subcontractors for years to come.  To learn more about securing payment on construction projects, contact an experienced Massachusetts construction attorney.

Massachusetts Commercial Lease: Unenforceable Indemnification Provisions

By on October 21, 2016

I will concede that discussing indemnification provisions in commercial leases is not the most riveting topic. However, this is a critical issue for landlords and tenants alike. Nearly every commercial lease I have reviewed, from small transactions (e.g. a boutique Boston restaurant) to larger, complex transactions (e.g. a state-of-the-art laboratory facility in Cambridge), has a provision discussing how and when a tenant or landlord must indemnify the other party. In layman’s terms, “indemnification” simply means that one party promises to pay the cost for possible future damages or claims. We discussed indemnification in the context of construction subcontracts and construction management contracts in our previous articles.  

In the commercial leasing context, leases often state that the tenant will indemnify the landlord for any claims, injuries or damages that occur on the leased property. They will often go further and require that the tenant indemnify the landlord even for the landlord’s own actions, inactions or negligence. While these provisions seemingly offer landlords protection, landlords should proceed with caution: some of these provisions are completely unenforceable in Massachusetts.

Massachusetts General Laws Chapter 186, Section 15 states:

Any provision of a lease or other rental agreement relating to real property whereby a lessee or tenant enters into a covenant, agreement or contract, by the use of any words whatsoever, the effect of which is to indemnify the lessor or landlord or hold the lessor or landlord harmless, or preclude or exonerate the lessor or landlord from any or all liability to the lessee or tenant, or to any other person, for any injury, loss, damage or liability arising from any omission, fault, negligence or other misconduct of the lessor or landlord on or about the leased or rented premises or on or about any elevators, stairways, hallways or other appurtenance used in connection therewith, shall be deemed to be against public policy and void.

Both Massachusetts and Federal Courts have held that the above statute applies equally to residential leases and commercial leases. The statute does not, however, preclude a landlord from requiring a tenant to obtain insurance protecting against the landlord’s own negligence. So what does this mean? In short, it means that commercial landlords cannot force tenants to indemnify or hold landlords harmless from the landlords’ wrongful actions. It does not prevent, however, landlords from requiring tenants to carry insurance to protect from such liability. As an example, imagine that a customer walking into a restaurant trips and falls in an entranceway. If the lease has language stating that the tenant has to indemnify the landlord from any injuries on the property, including those caused by the landlord, then the tenant would have to cover the customer’s injuries. Under Massachusetts law, however, such provisions are unenforceable and so the landlord may not escape liability (say, for example, the customer tripped because the landlord failed to fix the doorway). To protect against this liability, the landlord can obtain its own insurance and/or require the tenant to obtain insurance protecting the landlord.

The above is meant only as a brief summary. If you are a commercial tenant or landlord and have questions about your lease, you should contact a commercial real estate lawyer.

Massachusetts Noncompete Reform Legislation Fails

By on August 1, 2016

As a follow up to our recent post on the subject, the Massachusetts legislature failed to enact reform to noncompete agreements by the July 31, 2016 legislative deadline, despite both the House and the Senate passing versions of the bill. The primary point of disagreement between the two legislative houses concerned the “garden leave” provision that would require employers to compensate employees during the restrictive period. State legislators involved in the negotiations reported that the House wanted employers and employees to negotiate the monetary value of the “garden leave” clause when the agreement was initially signed, while the Senate wanted employees to be able to negotiate when leaving the employer in order to provide greater bargaining power to the employees. Although noncompete reform will not happen this year, legislators will likely revive the bill in the next session.