Watch Out for Self-Extending Leases – Acts Can Satisfy Notice Provision

by George Georgountzos

A lease functions as the basis of the contractual agreement between the landlord and tenant, outlining the parties’ obligations to each other. When disputes arise, parties, counsel and courts look to the lease as the starting point in determining what the parties agreed to and whether there has been a breach. Peculiar or extraordinary provisions in leases are generally upheld where both parties are sophisticated and understand the expectations from the outset.

The standard lease of a well-known major commercial landlord north of Boston includes specific provisions about notice of termination. Cummings Properties’ leases include an automatic five-year extension clause if a tenant does not provide notice to terminate in writing at least six months prior to the expiration of the lease. Their standard lease includes a liquidated damages provision equal to the amount of the outstanding rent owed should a tenant be in default. Additionally, Cummings Properties’ leases include a rent acceleration clause that allows the landlord to pursue the liquidated damage provision even if another tenant has rented the space. Since the 2007 Massachusetts Supreme Judicial Court decision in Cummings Properties v. National Communication Corp., such peculiar provisions have been upheld as valid and enforceable where the landlord and tenant are both sophisticated entities and the liquidated damages are not deemed punitive. This ruling has allowed landlords to enforce such provisions against tenants even if the economic cost is harsh, so long as the purpose of the acceleration clause is not to punish the defaulted tenant.

After a jury waived trial last month, the Superior Court addressed some of the unique provisions in the standard Cummings Properties’ lease, particularly the notice to terminate, which requires written notice. In this new case, there were emails between the tenant and Cummings indicating the tenants had outgrown their space and needed to find another location closer to Boston. While the email communications did not formally “terminate” the lease, they stated the tenant was looking to find new space after their lease expired. In fact, Cummings representatives showed them alternative sites to lease. Cummings was no doubt aware the tenant had decided it could not stay in the same location. Nonetheless, after the expiration of the lease and after the tenant vacated the rented space, Cummings sent a demand for the next month’s rent under the automatic five-year extended term and threatened to accelerate the rent due under the five-year term – a total of $1.73 million. The Superior Court held Cummings was on notice of the tenant’s desire to terminate because Cummings was aware of the tenant’s need for an alternative location and even showed them Cummings Properties’ spaces to satisfy their desire to move. Therefore, Cummings was on notice even though they did not receive a specific written notice to terminate. The Court also held the five-year acceleration (all $1.73 million sought) was punitive and not enforceable.

This case shows that even when landlords draft leases with specific provisions outlining how to terminate their lease, a court may find the landlord was given notice by their actions even when a tenant does not follow the lease’s termination provisions. Showing a tenant alternative sites and interacting with them after learning of their intent to vacate – in a manner that acknowledges their decision to terminate – can be held as notice. To avoid any question about notice, communications reduced to writing after the passage of notice dates and actions should resolve any ambiguity.