Put the Brakes on Rent Acceleration Clause

Put the Brakes on Rent Acceleration Clause

If you have an accelerated rent clause in your office building or shopping center lease, the owner of the space you rent could “accelerate” the rent due if you default—making you pay the rent owed for the rest of the lease term immediately. That’s because an acceleration clause fully matures the performance due by a tenant—that is, paying monthly rent according to the lease terms—if it breaches the lease, leaving it on the hook for paying the remaining rent in one lump sum.

Tenants often argue that accelerated rent clauses aren’t enforceable. And courts have differed on whether these clauses constitute too harsh a penalty to be enforceable on tenants in default of their leases. These cases illustrate under what circumstances accelerated rent is and isn’t appropriate—and why:

Is Your Breach “Important”?

In the first case, the Supreme Judicial Court of Massachusetts ruled that the owner’s acceleration of rent after a tenant's breach was not a penalty. The lease said that if the tenant continued to default “in the payment of the security deposit, rent, taxes, or any substantial invoice for goods” after the owner had sent it a notification of default, this “significant breach of the lease” would make due the entire rent under the lease “as liquidated damages.” The tenant defaulted, and failed to fix the problem within the time specified in the lease, so the owner sued. The tenant claimed that the rent acceleration clause was an unenforceable penalty. A Massachusetts trial court ruled for the owner. After a higher court had reversed the decision, the owner appealed. On appeal, the ruling was reversed: The owner was entitled to the accelerated rent as “liquidated damages.”

That was because the Supreme Judicial Court admitted that, in earlier cases, it had found similar accelerated rent clauses to be unenforceable penalties because they would apply both to serious breaches (such as failure to pay rent) and minor breaches (such as a failure to pay a tax increase). But the court decided to follow the modern trend: If a liquidated damages clause (for example, an accelerated rent clause) applies to breaches of differing importance, the clause is presumed to “apply only to those material breaches for which it may properly be enforced.” That meant that the accelerated rent clause in the lease would apply to an important breach, such as failure to pay rent [Cummings Properties, LLC v. National Communications Corp., July 2007].

Are Damages Disproportionate?

More recently, a court ruled in favor of a tenant who abandoned its space and argued that the “steeply” accelerated rent the owner charged it was unfair. The court said that under those circumstances, the “proportion” of the accelerated rent to the owner’s damages was a key factor in whether the owner was entitled to the full rent right away. To find out whether the steeply accelerated rent in that case constituted an unenforceable penalty—and if the case applies to you—see “Recent Court Rulings: Breach-of-Lease Damages Are Invalid,” in the Current Issue and on our homepage.

Negotiate Fair Clause

Ideally, you’ll want this clause out of your lease entirely. But even a strong tenant may not be able to eliminate an acceleration clause completely. If you must include a rent acceleration clause, negotiate a fair one. But even if you’re unsuccessful at negotiating a fair acceleration clause, you still may be in luck: Courts in many states won’t fully enforce a harsh rent acceleration clause. Although courts will normally keep their hands off a lease clause that compensates the owner for legitimate losses from a tenant default, they’ll often refuse to help an owner extract a windfall or a “penalty” from a defaulting tenant. Look for a future article on negotiating fair rent acceleration clauses in the Insider.