Massachusetts Appeals Court Rules On Recovery of Posttermination Damages Under Lease Indemnity Provision

A recent Massachusetts appellate court opinion has held that a landlord seeking to collect damages from a breaching tenant under an indemnification clause in a commercial lease has to wait until the date on which the lease would have expired if the tenant had not breached the lease to recover damages for the difference between the rent payable by a new tenant and the rent that would have been payable by the breaching tenant.  The case is entitled 275 Washington Street Corp. v. Hudson River International, LLC, 81 Mass. App. Ct. 418 (2012).

In this case, the plaintiff landlord leased certain property in Boston to the defendant tenant for use as a dental office in 2006.  The term of the lease was from 2006-2018.  The lease contained an indemnity clause providing that, upon default, the tenant was obligated to indemnify the landlord “against all loss of rent and other payments which Landlord may incur by reason of such termination during the remainder of the term.”  The lease did not contain rent acceleration or liquidated damages provisions.

Only a year after entering into the lease, the tenant defaulted.  The landlord terminated the lease and took possession of the premises.  It was able to re-let the premises to a third party for the balance of the term of the tenant’s lease but at lower rental price.  Thereafter, the landlord sued the tenant and the guarantor of the lease.  The lower court held that the landlord was entitled to recover unpaid back rent (amounts due prior to termination) and future rent equal to the difference between the amount the tenant was supposed to pay and that which was being paid by the new third party tenant.

On appeal, the Massachusetts Appeals Court reversed the decision of the lower court.  The Appeals Court ruled that recovery under an indemnity clause in a lease cannot be had until the specified term of the lease has ended.  Indemnity clauses require a tenant to indemnify a landlord for losses resulting from termination.  According to the Appeals Court, the actual damages that a landlord will suffer as a result of a tenant’s breach cannot be “wholly ascertained” until the lease term ends.  Prior to that time, contingencies such as the taking of the property by eminent domain, destruction by fire, and the like could terminate the lease as a matter of law and limit the tenant’s ultimate liability. As a result, the Appeals Court held that, “the bright-line rule remains that a landlord [seeking recovery under an indemnification provision] must wait to collect damages until the end of the original lease term, the very point at which damages may be wholly ascertained.” 

As a result of this holding, the plaintiff landlord will be required to wait until 2018 before it can determine, and obtain a judgment against the tenant for, its posttermination damages.  The Appeals Court recognized the difficulties in this ruling:  “We also recognize the possibility that this rule, which forces this landlord to wait until 2018 to determine posttermination damages, may in effect make it impossible for the landlord to recover its true damages from this corporate tenant or guarantor, because of the protections afforded by legal processes, such as dissolution or bankruptcy.”  However, the court believed that, given the state of the law and the fact that both parties had voluntarily entered into the lease containing the indemnity clause, it was powerless to rule otherwise.

This ruling highlights the importance of the inclusion of rent acceleration and liquidated damages provisions in commercial leases.  These kinds of provisions are enforceable in Massachusetts and Seyfarth Shaw typically counsels its clients to include them in their leases.  Indeed, Seyfarth typically advises clients to utilize lease forms which allow a landlord to terminate the lease upon default and recover damages for lost future rents, among other things, in the amount of the difference between the present value of the rent reserved for the remainder of the term, less the current FMV of the premises for such remainder.  Seyfarth Shaw also counsels its clients to include in their leases a provision which allows a landlord to terminate the tenant’s right of possession only and continue to collect rent while seeking to re-lease the space.  However, this provision is not typically exercised as commercial landlords tend to prefer to terminate the lease and obtain the best recovery possible at that time.