By Annabelle Hentz, Law Clerk

The Supreme Judicial Court of Massachusetts recently upheld a Superior Court’s ruling that rent acceleration clauses are enforceable by commercial landlords against defaulting commercial tenants. Rent acceleration clauses allow for unpaid rent to constitute liquidated damages when a tenant defaults—regardless of the amount of unpaid lapsed time.

Case Background
Recently, a commercial landlord sought enforcement of a rent acceleration clause in a lease between the property owner and the tenant. The tenant, who defaulted one month after signing the lease, would owe $69,000 under the lease guaranty for the entire accelerated rent through the five-year term of the terminated lease.

Initially, the Superior Court ruled in favor of the landlord, finding that the tenant had sufficient sophistication to understand the terms of the lease—including the tenant’s personal guaranty. The Superior Court entered a judgment against the tenant for the aforementioned $69,000—the balance of accelerated rent owed after deducting prior payments made by the tenant.

The Appeals Court reversed that judgment, considering the circumstances around the eviction. It determined that factors such as the landlord successfully evicting the tenant, reletting the premises to a new tenant, and collecting rent from the new tenant should be evaluated before determining whether the clause has a reasonable relationship to the landlord’s expected damages. Here, the Appeals Court ruled that the clause bore no reasonable relationship to the landlord’s expected damages, making the penalty unenforceable.

The Supreme Judicial Court granted the landlord’s application for further appellate review. The SJC considered the anticipated damages and the amount constituting liquidated damages—finding the acceleration clause to be enforceable as a liquidated damages clause. The SJC also used a ‘single look’ approach, completely contradicting the Appeals Court’s analysis.

‘Single Look’ Approach
Under the ‘single look’ approach, rent acceleration clauses are enforceable if the actual damages from a breach were difficult to work out when the lease was signed, and the accelerated rent is a reasonable forecast of damages resulting from the tenant’s default. Unlike the Appeals Court’s reasoning, the SJC held courts are not required to consider rents that landlords might collect from replacement tenants.

Takeaways
There may be an influx of commercial landlords adding these clauses, and there is heightened importance when considering the tenants, their business experience, and if they would be found “sophisticated.” Tenants, especially those with business experience, should be on the lookout for these clauses and wary of landlords who utilize them. For commercial landlords, this adds a level of security in a case where the tenant unexpectedly defaults.