Massachusetts Court Holds that Commercial Landlord May Not Recover Post-Termination Damages Under Indemnification Provision Until End of Lease TermJuly 2013 – Advisories
The Massachusetts Supreme Judicial Court recently decided, in 275 Washington Street Corp. v. Hudson River International, LLC, 465 Mass. 16 (2013), that a landlord seeking to recover post-termination rent due under an indemnification provision in a commercial lease, absent specific language in the lease allowing the landlord to recover damages prior to the end of the lease term, must await the end of the lease term to recover its damages because until that time the amount of the recoverable damages could not be determined with sufficient certainty. The decision has implications for all commercial landlords, who ought to review their lease forms to ensure that they provide sufficient and enforceable remedies in the event of an early termination of a lease occasioned by a tenant default.
The lease in 275 Washington Street provided that the “Tenant shall indemnify [the] Landlord against all loss of rent and other payments which Landlord may incur by reason of such termination [of the lease] during the remainder of the term [of the lease].” The lease did not grant the landlord the option to elect a liquidated damages remedy or other alternative remedy to compensate it for the loss of post-termination rent. On these facts, the Court applied the common law rule that a landlord suing under an indemnification provision must await the end of the lease term before it may recover its losses because “a substantial degree of uncertainty remains” until that time concerning the amount to be indemnified. For instance, the Court noted that the premises may be destroyed in a fire or a replacement tenant may default and vacate the premises before the end of the term of the original tenant’s lease. These contingencies, the Court found, cannot be eliminated until the end of the term of the lease.
The Court explicitly acknowledged, however, that the common law rule applies “only where the parties to a lease have provided a remedy of indemnification without specifying a time period when the amount is due.” Thus, a landlord may opt out of the common law rule by providing a more specific indemnification or liquidated damages remedy (or remedies) in its leases.
The case has two additional noteworthy aspects. First, the Court reaffirmed the well-settled rule in Massachusetts that, absent an express obligation created in a lease, a tenant has no obligation to pay rent that accrues after a landlord terminates the lease, even though the termination followed a tenant default. This again underscores the importance of providing express and acceptable remedies in a lease.
Second, the Court observes in a footnote that “[w]here a lease provides for both liquidated damages and indemnification, a landlord, on termination, may not collect on both remedies,” citing two of the Court’s prior decisions from 1915 and 1916. The exclusivity of liquidated damages and indemnification as remedies calls into question the enforceability of certain provisions that sometimes appear in commercial leases that might be construed to give landlords the right to receive indemnification for a certain period of time and then to elect to obtain a liquidated damages remedy to cover the balance of the term of the lease. Commercial landlords are well-advised to consult with their counsel to ensure their leases are drafted sensibly to minimize the risks associated with this exclusivity principle.
Goulston & Storrs continues to follow developments regarding the issues raised by the 275 Washington Street decision, as well as other issues important to commercial landlords that pertain to the drafting of lease provisions triggered by tenant defaults. For questions about the information contained in this advisory, please contact one of the attorneys listed below.
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This advisory should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer concerning your situation and any specific legal questions you may have.
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