Client Alert: Cummings Properties, LLC v. Hines
Commercial landlords are breathing a collective sigh of relief following yesterday’s release of Cummings Properties, LLC v. Hines, a major decision from the Massachusetts Supreme Judicial Court (SJC) on the validity of acceleration clauses in commercial leases. Acceleration clauses are a form of liquidated damages in which a defaulting tenant will be liable for the entire rental amount due over the remaining life of the lease.
The facts of the case are straightforward. Tenant signs lease. Tenant fails to make payments on the lease. Landlord sues for breach of the lease. Following a trial, the trial court judge held the acceleration provision was an enforceable liquidated damages provision.
On appeal, the Appeals Court reversed the trial court’s decision. The Appeals Court determined the clause constituted a penalty because it did not account for monies received by the landlord from new tenants. According to the Appeals Court, the potential for a double recovery rendered the clause unenforceable.
The SJC rejected the Appeals Court’s reasoning. The Court explained the enforceability of a liquidated damages clause depends on whether, at the time of the contract, the damages represent a reasonable estimate of the actual damages likely to result from a breach. The analysis does not require mathematical certainty. Otherwise, liquidated damages would not be necessary in the first place. Rather, courts should honor the agreed-upon language so long as it “is not so disproportionate to anticipated damages as to constitute a penalty.”
Writing for the unanimous Court, Chief Justice Budd also emphasized the bedrock freedom of contract principles underpinning the decision: “We remain convinced that where a contract is unambiguous and freely entered into, it is preferable for parties to bargain with one another as they see fit, rather than to have courts step in to decide whether and how to restructure a contract because certain contingencies were not accounted for by one of the parties.”
The Cummings decision serves as an important reminder that courts will hold parties to their bargains and to exercise care when drafting, negotiating and signing contracts. Landlords, tenants and others should consult with their counsel to examine the liquidated damages provisions in their leases and other contracts.
David Blumberg may be reached by email at firstname.lastname@example.org or by phone at 617.790.3418.
Robert Stetson may be reached by email at email@example.com or by phone at 617.790.3423.