Massachusetts highest court upholds the enforcement of a liquidated damages provision in a commercial lease reversing the Appeals Court. This decision is good news for commercial landlords.

Summary of Cummings Properties, LLC v. Hines, 2023 WL 6202474 (Mass. 2023):
This case revolves around the enforcement of a liquidated damages provision in a commercial lease between Cummings Properties, LLC (“Cummings”) and Massachusetts Constable’s Office, Inc. (“MCO”). Darryl Hines, the founder, sole officer, and director of MCO, signed as a guarantor for MCO, personally guaranteeing the rent and obligations under the lease. The lease included a provision stating that if MCO failed to pay rent, Cummings could terminate the lease after a 10-day grace period and demand the “entire balance of rent” as liquidated damages, with both parties agreeing that this amount represented a reasonable estimate of actual damages.   MCO failed to pay rent two months into the lease, leading to Cummings initiating summary process proceedings, and MCO eventually vacated the premises. Cummings then relet the property to a new tenant one year later, with a 4-year lease. Cummings sued Hines to enforce his obligations as a guarantor, and the trial judge found the liquidated damages provision enforceable, awarding Cummings approximately $69,000. However, the Appeals Court reversed this decision, arguing that the provision was unenforceable as it did not account for Cummings reletting the premises and mitigating the breach.   The Supreme Judicial Court (“SJC”) reversed the Appeals Court’s decision and upheld the trial judge’s ruling regarding the enforceability of the liquidated damages provision. Massachusetts courts follow the “single look” approach to assess such clauses, considering the circumstances at the time of contract formation. Under this approach, a liquidated damages clause is enforceable if (1) actual damages were challenging to determine when the contract was signed and (2) the agreed-upon sum reasonably forecasts the expected damages from a breach.   The SJC found that Hines failed to provide evidence supporting his claim that Cummings would relet the premises on default, making damages difficult to ascertain. Additionally, since the liquidated damages clause represented the agreed-upon rental value and decreased over the lease term, it was a reasonable anticipation of damages. The clause did not need to account for future rents from a new tenant to be enforceable.   Furthermore, a liquidated damages provision negotiated between sophisticated parties is presumed valid. Hines, although not highly sophisticated, had experience in starting businesses, negotiating contracts, and dealing with legal matters, making him sufficiently sophisticated to be bound by the contract terms. As Hines could not prove the unenforceability of the liquidated damages provision, the SJC upheld the trial court’s judgment in favor of Cummings.  This case is good news for Commercial Landlords and a cautionary notice to Commercial Tenants. Both should review their leases for the scope of damages that may be available if a Tenant defaults on their obligations.
Robert R. Berluti, Matthew Dunn, Chris Davidson and Chris Worthy at Berluti Mclaughlin & Kutchin LLP are available to assist in reviewing your leases.