Relying Solely on An Indemnfication Provision

A recent Massachusetts appellate court opinion highlights the dangers of failing to include rent acceleration and liquidated damages provisions in commercial leases and relying solely upon an indemnification provision to collect post-termination damages. In 275 Washington Street Corp. v. Hudson River International, LLC, 81 Mass. App. Ct. 418 (2012), the Massachusetts Appeals Court held that a landlord seeking to collect damages from a breaching tenant under an indemnification provision in a commercial lease has to wait until 2018, 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

In 275 Washington Street Corp., 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 18 months 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. In reliance upon the lease's indemnification provision, the landlord argued that it 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. In its defense, the tenant argued that the landlord had brought the suit prematurely, since the lease term had not yet run and the amount of damages it owed under the indemnification provision was not ascertainable with reasonable certainty. The lower court agreed with the landlord and entered summary judgment in its favor. The tenant appealed. The Massachusetts Appeals Court reversed the decision of the lower court.

The Appeals Court Ruling

The appeals court noted that Massachusetts courts have long held that an indemnification provision obligating a tenant to indemnify a landlord for all losses resulting from termination of the lease, unlike a liquidated damages provision, does not provide a landlord with a right to damages for breach of a lease's covenant to pay rent. Relying on, among others, the cases of Zevitas v. Adams, 276 Mass. 307 (1931), and Gardiner v. Parsons, 224 Mass. 347 (1916), the court held that a landlord has no right to such damages under an indemnification clause until the specified indemnification period, e.g., the term of the lease, has ended. The reason for this is that liability under such an indemnity clause is “ultimately 'contingent upon events [occurring after termination], because the full amount which the lessee eventually must pay for the remainder of the term cannot be wholly ascertained until the period ends.'” Id. at 423 (quoting Gardiner, 224 Mass. at 350). 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 prior to the end of the lease term and limit the tenant's ultimate liability. Because the landlord's lease with the tenant had only an indemnification provision, the appeals court held that it was required to wait until the end of the lease term to collect its post-termination damages.

The landlord argued that it was entitled to an immediate judgment against the tenant because the premises were rented to a new tenant for the remainder of the lease term, and, as such, its damages were reasonably ascertainable. In support of this position, the landlord relied upon the case of Woodbury v. Sparrell Print, 187 Mass. 426 (1905), wherein the Massachusetts Supreme Judicial Court permitted a landlord to recover damages from a tenant under a lease's indemnification provision at the time the premises were re-leased to a third party. However, the appeals court found Woodbury inapplicable because the indemnification provision in the lease in that case, unlike here, expressly provided that the landlord was entitled to damages for the period of time that the premises remained unlet. About the Woodbury decision, the appeals court noted the following:

This holding is consistent with the general rule that indemnification damages are properly calculated at the end of the period specified in the lease 'Where the lease does not provide a specific obligation on the part of the tenant to pay damages directly resulting from the premises remaining unlet, we conclude that the indemnification period has not terminated. Put another way, where the indemnification period provided for in the lease, during which any damages may accrue, has not yet ended, damages cannot be properly assessed.

Id. at 424.

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.” Id. at 425.

Trying an 'End Run'

In an effort to “end run” the limitations of the lease's indemnification provision, the landlord noted that the lease also contained a cumulative remedies clause stating that “no remedy or election hereunder shall be deemed exclusive but shall, whenever possible, be cumulative with all other remedies at law or in equity.” The landlord argued that it was entitled to immediate post-termination damages from the tenant because this clause entitled it to damages other than those under the indemnification provision. The appeals court disagreed. The court noted that the remedies reserved to a landlord in a cumulative remedies clause are those available to the parties outside of the contract itself. In this case, however, the landlord's claims against the tenant were based upon the terms of the contract and, specifically, the indemnification provision. The cumulative remedies clause did not alter the limitations of that provision to permit the landlord to collect damages before the term of the lease had ended. The appeals court noted that:

While the literal interpretation of [the cumulative remedies provision] effectively broadens the scope of landlord remedies by making available legal remedies for breach of contract as well as equitable remedies outside the contract, it does not affect the remedies that are already written into the contract. Instead, such a cumulative remedies clause only serves to permit relief to the extent that extra-contractual remedies apply to the instant dispute, and not to provide the landlord with additional contractual remedies not contained within the contract and to which the tenant did not specifically agree.

Id. at 426.

As a result of the appeals court's holding in 275 Washington Street Corp., the plaintiff landlord is required to wait until 2018 before it can determine, and obtain a judgment against the tenant for, its post-termination damages. The appeals court recognized the difficulties in this ruling:

We are cognizant of the concerns raised by this long-established rule barring recovery until the end of the original lease, given the possible intervention of factors, presently unknown, that make the determination of damages uncertain at present. 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, given the present state of the law and the specific terms of the contract to which parties of equal bargaining power agreed, we are constrained, nonetheless, to deny recovery to the landlord under the indemnification clause of this lease.

Id. at 425.

One justice of the appeals court, Marc Kantrowitz, wrote a brief concurring opinion. Kantrowitz was concerned that the court rested its decision on a number of cases which were “ancient” and “were all written prior to leases even being considered contracts, with the memory of Boston's devastating Great Fire of 1872 perhaps still etched in memory.” Id. at 428. Kantrowitz suggested that, in the modern world, a landlord's posttermination damages can, in fact, be determined to a reasonable degree of certainty once the property is re-let to a new tenant. He further noted that, “Forcing the landlord to wait until 2018 to determine damages involves a possibility, if not an overwhelming probability, that the tenant corporation could be dissolved or declared bankrupt, leaving the landlord at a complete loss vis-'-vis the defaulting tenant.” Id. at 429. As a result, Kantrowitz argued that “the time might be ripe for the Supreme Judicial Court to revisit and reevaluate cases written scores of years ago.” Id.

Conclusion

The Massachusetts Appeals Court's ruling in 275 Washington Street Corp. is an important reminder to those preparing commercial leases to include rent acceleration and liquidated damages provisions in these agreements. These kinds of provisions are enforceable in Massachusetts and many other states. Their absence could substantially delay, or even deny, a landlord's ability to collect post-termination damages from a defaulting tenant.

Stephen Bazarian is a Senior Counsel resident in the Boston office of Seyfarth Shaw LLP. His practice is focused in the area of commercial litigation and includes the representation of commercial property owners in landlord-tenant disputes.

A recent Massachusetts appellate court opinion highlights the dangers of failing to include rent acceleration and liquidated damages provisions in commercial leases and relying solely upon an indemnification provision to collect post-termination damages. In 275 Washington Street Corp. v. Hudson River International, LLC , 81 Mass. App. Ct. 418 (2012), the Massachusetts Appeals Court held that a landlord seeking to collect damages from a breaching tenant under an indemnification provision in a commercial lease has to wait until 2018, 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

In 275 Washington Street Corp., 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 18 months 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. In reliance upon the lease's indemnification provision, the landlord argued that it 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. In its defense, the tenant argued that the landlord had brought the suit prematurely, since the lease term had not yet run and the amount of damages it owed under the indemnification provision was not ascertainable with reasonable certainty. The lower court agreed with the landlord and entered summary judgment in its favor. The tenant appealed. The Massachusetts Appeals Court reversed the decision of the lower court.

The Appeals Court Ruling

The appeals court noted that Massachusetts courts have long held that an indemnification provision obligating a tenant to indemnify a landlord for all losses resulting from termination of the lease, unlike a liquidated damages provision, does not provide a landlord with a right to damages for breach of a lease's covenant to pay rent. Relying on, among others, the cases of Zevitas v. Adams , 276 Mass. 307 (1931), and Gardiner v. Parsons , 224 Mass. 347 (1916), the court held that a landlord has no right to such damages under an indemnification clause until the specified indemnification period, e.g. , the term of the lease, has ended. The reason for this is that liability under such an indemnity clause is “ultimately 'contingent upon events [occurring after termination], because the full amount which the lessee eventually must pay for the remainder of the term cannot be wholly ascertained until the period ends.'” Id. at 423 (quoting Gardiner, 224 Mass. at 350). 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 prior to the end of the lease term and limit the tenant's ultimate liability. Because the landlord's lease with the tenant had only an indemnification provision, the appeals court held that it was required to wait until the end of the lease term to collect its post-termination damages.

The landlord argued that it was entitled to an immediate judgment against the tenant because the premises were rented to a new tenant for the remainder of the lease term, and, as such, its damages were reasonably ascertainable. In support of this position, the landlord relied upon the case of Woodbury v. Sparrell Print , 187 Mass. 426 (1905), wherein the Massachusetts Supreme Judicial Court permitted a landlord to recover damages from a tenant under a lease's indemnification provision at the time the premises were re-leased to a third party. However, the appeals court found Woodbury inapplicable because the indemnification provision in the lease in that case, unlike here, expressly provided that the landlord was entitled to damages for the period of time that the premises remained unlet. About the Woodbury decision, the appeals court noted the following:

This holding is consistent with the general rule that indemnification damages are properly calculated at the end of the period specified in the lease 'Where the lease does not provide a specific obligation on the part of the tenant to pay damages directly resulting from the premises remaining unlet, we conclude that the indemnification period has not terminated. Put another way, where the indemnification period provided for in the lease, during which any damages may accrue, has not yet ended, damages cannot be properly assessed.

Id. at 424.

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.” Id. at 425.

Trying an 'End Run'

In an effort to “end run” the limitations of the lease's indemnification provision, the landlord noted that the lease also contained a cumulative remedies clause stating that “no remedy or election hereunder shall be deemed exclusive but shall, whenever possible, be cumulative with all other remedies at law or in equity.” The landlord argued that it was entitled to immediate post-termination damages from the tenant because this clause entitled it to damages other than those under the indemnification provision. The appeals court disagreed. The court noted that the remedies reserved to a landlord in a cumulative remedies clause are those available to the parties outside of the contract itself. In this case, however, the landlord's claims against the tenant were based upon the terms of the contract and, specifically, the indemnification provision. The cumulative remedies clause did not alter the limitations of that provision to permit the landlord to collect damages before the term of the lease had ended. The appeals court noted that:

While the literal interpretation of [the cumulative remedies provision] effectively broadens the scope of landlord remedies by making available legal remedies for breach of contract as well as equitable remedies outside the contract, it does not affect the remedies that are already written into the contract. Instead, such a cumulative remedies clause only serves to permit relief to the extent that extra-contractual remedies apply to the instant dispute, and not to provide the landlord with additional contractual remedies not contained within the contract and to which the tenant did not specifically agree.

Id. at 426.

As a result of the appeals court's holding in 275 Washington Street Corp., the plaintiff landlord is required to wait until 2018 before it can determine, and obtain a judgment against the tenant for, its post-termination damages. The appeals court recognized the difficulties in this ruling:

We are cognizant of the concerns raised by this long-established rule barring recovery until the end of the original lease, given the possible intervention of factors, presently unknown, that make the determination of damages uncertain at present. 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, given the present state of the law and the specific terms of the contract to which parties of equal bargaining power agreed, we are constrained, nonetheless, to deny recovery to the landlord under the indemnification clause of this lease.

Id. at 425.

One justice of the appeals court, Marc Kantrowitz, wrote a brief concurring opinion. Kantrowitz was concerned that the court rested its decision on a number of cases which were “ancient” and “were all written prior to leases even being considered contracts, with the memory of Boston's devastating Great Fire of 1872 perhaps still etched in memory.” Id. at 428. Kantrowitz suggested that, in the modern world, a landlord's posttermination damages can, in fact, be determined to a reasonable degree of certainty once the property is re-let to a new tenant. He further noted that, “Forcing the landlord to wait until 2018 to determine damages involves a possibility, if not an overwhelming probability, that the tenant corporation could be dissolved or declared bankrupt, leaving the landlord at a complete loss vis-'-vis the defaulting tenant.” Id. at 429. As a result, Kantrowitz argued that “the time might be ripe for the Supreme Judicial Court to revisit and reevaluate cases written scores of years ago.” Id.

Conclusion

The Massachusetts Appeals Court's ruling in 275 Washington Street Corp. is an important reminder to those preparing commercial leases to include rent acceleration and liquidated damages provisions in these agreements. These kinds of provisions are enforceable in Massachusetts and many other states. Their absence could substantially delay, or even deny, a landlord's ability to collect post-termination damages from a defaulting tenant.

Stephen Bazarian is a Senior Counsel resident in the Boston office of Seyfarth Shaw LLP. His practice is focused in the area of commercial litigation and includes the representation of commercial property owners in landlord-tenant disputes.