Cummings Props. v. National Communications

• Decision Date: 17 July 2007
• Docket Number: SJC-09778.
• Citation: 449 Mass. 490,869 N.E.2d 617
• Parties: CUMMINGS PROPERTIES, LLC v. NATIONAL COMMUNICATIONS CORPORATION.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

869 N.E.2d 617

449 Mass. 490

CUMMINGS PROPERTIES, LLC v. NATIONAL COMMUNICATIONS CORPORATION.

SJC-09778.

Supreme Judicial Court of Massachusetts, Middlesex.

Argued May 9, 2007.

Decided July 17, 2007.

Susan F. Brand, Woburn, for the plaintiff.

Daniel Briansky, Boston, for the defendant.

Present: MARSHALL, C.J., GREANEY, IRELAND, SPINA, COWIN, & CORDY, JJ.

CORDY, J.

In this case we must determine whether an accelerated rent provision in a commercial lease constitutes an enforceable liquidated damages provision where the tenant's breach, the failure to pay rent, is deemed by the lease (and agreed by the parties) to be "significant," but where, on its face, the provision might also apply to breaches of less significance, to which its application would be disproportionate. A judge in the District Court awarded the landlord damages as calculated by the accelerated rent provision, and possession of the leased premises. The Appellate Division affirmed the judgment of possession but vacated the award of damages on the ground that our decision in Commissioner of Ins. v. Massachusetts Acc. Co., 310 Mass. 769, 39 N.E.2d 759 (1942) (Commissioner of Ins.), barred enforcement of a liquidated damages provision that, by the terms of the lease, could apply to both trivial as well as material breaches. On remand to the District Court, the judge determined and awarded the landlord its actual damages, a sum six per cent smaller than the liquidated damages award. This appeal followed. We conclude that the liquidated damages provision was enforceable and reinstate the original award of damages.

1. Background. The following facts are undisputed. On March 28, 1991, Cummings Properties, LLC (Cummings), as landlord, entered into a lease with National Communications Corporation (National), as tenant, for the premises located at 52 Cummings Park in Woburn. Both National and Cummings are sophisticated commercial entities. National paid a security deposit of $15,400 to Cummings as set forth in the lease. The term of the lease was five years, commencing on May 1, 1991, and extending to April 30, 1996. On January 25, 1996, the lease was extended for an additional five years, to April 30, 2001.¹ On March 7, 2000, the parties executed another lease extension, extending the term for the lease to March 30, 2005.² A final extension was executed on February 27, 2002, extending the term until March 30, 2006.

In section 19 of the lease, the "parties agree" that the nonpayment of rent or the failure to make other payments therein specified would be a "significant breach of the lease," and that the "payment of rent in monthly installments is for the sole benefit and convenience of [National]." Section 19 also provides that in the event of an uncured default in the payment of rent or other payments, "the entire balance of rent which is due [under the lease] shall become immediately due and payable as liquidated damages."³ Section 27 of the lease contains a severability clause that provides: "The invalidity or unenforceability of any provision of this lease shall not affect or render invalid or unenforceable any other provision hereof."

National failed to pay the monthly rent (then $16,426.36) and other charges due under the lease for the month of August, 2003. By means of a letter dated August 19, 2003, Cummings served National with a notice of rent due.⁴ When National failed to cure its default within ten days and failed to pay the rent and other charges due for September Cummings terminated the lease and, on September 29, 2003, brought a complaint for summary process in the Woburn Division of the District Court Department.

In its complaint, Cummings sought an accelerated rent payment in the amount of $525,643.52.⁵ In its answer to Cummings's complaint, National admitted to owing rent for August and September, 2003, and asserted, as affirmative defenses, that Cummings had not properly terminated National's tenancy before commencing the summary process action,⁶ and that the rent acceleration clause in the lease constituted an unenforceable penalty.⁷ The parties filed a stipulation of facts and each requested rulings of law. A bench trial was held on October 30, 2003. On December 1, 2003, the judge entered findings for Cummings and awarded it possession of the premises and damages in the amount of $525,643.52 plus interest and costs, totaling $536,760.82. National appealed to the Appellate Division of the District Court Department, which affirmed the judgment for Cummings for possession of the premises but vacated the award of damages. The Appellate Division concluded that under the terms of the lease, the acceleration of rent provision would apparently apply both to breaches of major importance, such as the failure to pay rent, and ones of minor financial importance (or of ready calculation) such as the failure to pay a property tax increase.

In declaring the rent acceleration clause unenforceable, the Appellate Division relied on this court's holding in Commissioner of Ins., supra at 771, 39 N.E.2d 759, that, "where a lease contains many covenants of varying importance, and where a breach of some of them would result in a loss which could be accurately determined and would be inconsiderable in comparison with the amount required by the lease to be paid although the damage resulting from a breach of some of the other covenants would be substantial and difficult exactly to ascertain, the sum designated to be paid upon a breach of any of these covenants is a penalty and not liquidated damages." It noted, however, that Commissioner of Ins. was decided in 1942, and that numerous authorities had reached a different outcome in the intervening years.

On remand to the District Court, a hearing was scheduled to assess actual damages suffered by Cummings. On July 21, 2005, a different judge entered judgment for Cummings in the amount of $492,007.94.⁸ Cummings appealed from the judgment of the Appellate Division that the liquidated damages clause was unenforceable, and from the judge's July, 2005, award of damages to the extent it was premised on the Appellate Division's ruling. We transferred the case from the Appeals Court on our own motion.

2. Discussion. It is well settled that a contract provision clearly and reasonably establishing liquidated damages should be enforced so long as it is not so disproportionate to anticipated damages as to constitute a penalty. TAL Fin. Corp. v. CSC Consulting, Inc., 446 Mass. 422, 431, 844 N.E.2d 1085 (2006), citing Kaplan v. Gray, 215 Mass. 269, 270-273, 102 N.E. 421 (1913). If, at the time the contract was made, actual damages were difficult to ascertain and the sum agreed on by the parties as liquidated damages represents a reasonable forecast of damages expected to occur in the event of a breach, it will usually be enforced. Id. at 431-432, 844 N.E.2d 1085.

A rent acceleration clause, in which a defaulting lessee is required to pay the lessor the entire amount of the remaining rent due under the lease, may constitute an enforceable liquidated damages provision so long as it is not a penalty. See, e.g., Commissioner of Ins., supra at 771, 39 N.E.2d 759 (acceleration clause constituted penalty where clause was applicable to breach of any covenant set forth in lease, including those where damage could be accurately determined and were inconsiderable compared with amount of rent acceleration); Ganary v. Linker Realty Corp., 131 N.J.L. 317, 320, 36 A.2d 405 (1944) (enforcing rent acceleration clause in commercial lease); Fifty States Mgmt. Corp. v. Pioneer Auto Parks, Inc., 46 N.Y.2d 573, 577, 415 N.Y.S.2d 800, 389 N.E.2d 113 (1979) (rent acceleration clause in commercial lease enforceable absent showing of fraud, exploitive overreaching, or unconscionable conduct); Pierce v. Hoffstot, 211 Pa.Super. 380, 383-384, 236 A.2d 828 (1967) (upholding enforcement of rent acceleration clause, noting such clauses "have long been held valid"). See also Restatement (Second) of Property (Landlord and Tenant) § 12.1 comment k, at 394 (1977) ("parties may provide in the lease that if the tenant defaults in the payment of rent or fails in some other way to perform his obligations under the lease, the total amount of rent payable during the term of the lease shall immediately become due and payable"). While any reasonable doubt as to whether a provision constitutes a valid liquidated damages clause is to be resolved in favor of the aggrieved party, TAL Fin. Corp. v. CSC Consulting, Inc., supra at 430, 844 N.E.2d 1085, the party challenging it bears the burden of establishing that the damages to which it agreed are disproportionate to a reasonable estimate of those actual damages likely to result from a breach. Id. See XCO Int'l, Inc. v. Pacific Scientific Co., 369 F.3d 998, 1003 (7th Cir.2004) (XCO Int'l, Inc.), and cases cited; Honey Dew Assocs., Inc. v. M & K Food Corp., 241 F.3d 23, 27 (1st Cir.2001); 24 S. Williston, Contracts § 65.30, at 355-356 (4th ed.2002) (Williston).

In Commissioner of Ins., supra at 771, 39 N.E.2d 759, we held that where a liquidated damages clause establishes the same damages for breach of any provision within the contract, regardless the severity of the breach (or the difficulty of calculation), it will be struck down as a penalty even for those breaches for which it would not be disproportionate. Cummings urges us to update our jurisprudence in light of the near unanimous trend toward upholding liquidated damages clauses in agreements between sophisticated parties, and to adopt a presumption against interpreting such clauses as penalties. We agree that "[t]he rule against penalty clauses, though it lingers, has come to seem rather an anachronism, especially in cases in which commercial enterprises are on both sides of the contract." XCO Int'l, Inc., supra at 1002. See id. at 1002-1003 (collecting cases); American Multi-Cinema, Inc. v. Southroads, LLC, 119 F.Supp.2d 1190, 1206-1207 (D.Kan.20...