On September 25, 2023, the Massachusetts Supreme Judicial Court (SJC) issued its decision in Cummings Properties, LLC v. Hines, reversing the decision of the Appeals Court and holding that a liquidated damages clause in a commercial lease was enforceable against the guarantor of the lease even where the landlord had relet the premises and was collecting rent from its new tenant.
As we previously outlined, on December 5, 2022 the Massachusetts Appeals Court (Appeals Court) determined that the liquidated damages clause in the parties’ lease constituted an unenforceable penalty because it permitted the landlord to keep both accelerated rent and the rent received from reletting the premises without a credit to the original tenant. The SJC’s decision specifically overrules the Appeals Court's December decision.
In its decision, the SJC reaffirmed the enforceability of liquidated damages clauses in the commercial context “even where the enforcement of the contract appears to produce harsh results.” The SJC also analyzed prior case law, noting that “a contract provision that clearly and reasonably establishes liquidated damages should be enforced, so long as it is not so disproportionate to anticipated damages as to constitute a penalty.”
The SJC further reinforced the courts’ use of the so-called single-look approach when evaluating liquidated damages clauses because the assignment of a specific value to a breach of a parties’ contract “has the potential to promote certainty, resolve disputes efficiently, and . . . avoid litigation.” Under the single-look approach, a liquidated damages clause will be enforced if: (i) the actual damages resulting from a breach were difficult to ascertain at the time the contract was signed; and (ii) the sum agreed on as liquidated damages represents a reasonable forecast of damages expected to occur in the event of a breach.
Several jurisdictions also analyze liquidated damages clauses using the second-look approach. Under the second-look approach, courts consider the circumstances at the time of the breach “by assessing the reasonableness . . . against the actual damages resulting from the breach.” Accordingly, for commercial landlords outside of Massachusetts, it is important to determine whether their jurisdiction has adopted the single-look approach or the second-look approach, as it may have a significant effect on the enforceability of a liquidated damages clause.
In determining whether the parties’ lease complied with the first prong of the first-look approach, the SJC found that the trial judge properly concluded that the landlord’s damages would be difficult to ascertain because “there was no way to predict when a breach might occur, whether or when a new tenant would be secured, what the new rent might be and what costs [the landlord] would incur in the meantime.”
In analyzing the second prong, the SJC held that the amount of liquidated damages represented the agreed-to rental value of the property at the breach and decreased during the term of the lease, and thus, was a reasonable anticipation of damages that the landlord would suffer as a result of the tenant’s breach.
The SJC also specifically rejected the Appeals Court’s holding that the amount of a liquidated damages clause must take into account future rents collected by a landlord from a new tenant. Importantly, the SJC held that because the liquidated damages clause satisfied the first-look approach, and therefore did not constitute a penalty, it was enforceable regardless of when or whether the landlord relet the premises.