Commercial landlord/tenant matters do not often reach the Court of Appeals.
However, in December 2014, the Court of Appeals issued a decision addressing the enforceability of a rent acceleration clause in a commercial lease where the landlord obtained possession of the demised premises after tenant defaulted in paying rent and abandoned the premises. Landlord/tenant practitioners should be aware of this significant decision.[i]
Landord, 172 Duzer Realty Corp., entered into a one year commercial lease with tenant Globe Alumni Student Assistance Association, Inc. under which the premises was used as a dormitory by Globe Institute of Technology. Before the end of the initial term, landlord and tenant extended the term for a nine-year period and Globe Institute of Technology signed a guarantee. Shortly after executing the extension, tenant defaulted under the lease and landlord served a notice to cure. Tenant failed to cure, vacated the premises, and stopped paying rent as of February 2008. Landlord terminated the lease as of March 28, 2008, on notice to tenant, and commenced an action to recover possession and past due rent. In August 2008, the Civil Court awarded landlord possession of the premises but did not award a money judgment.
In September 2009, landlord commenced a Supreme Court action to recover rent arrears and the future remaining rent under the lease. As explained by the Court of Appeals, landlord “thereafter moved for summary judgment based on an acceleration clause in the leasehold agreement which provides that upon the tenant’s default the landowner may terminate the lease, repossess the premises, and ‘shall be entitled to recover, as liquidated damages a sum of money equal to the total of . . .the balance of the rent for the remainder of the term. . . .’ The provision also states that ‘[i]n the event of Lease termination Tenant shall continue to be obligated to pay rent and additional rent for the entire Term as though th[e] Lease had not been terminated.’” Defendants opposed summary judgment, alleging that under Fifty States Management Corp. v. Pioneer Auto Parks, Inc.,[ii] landlord could not collect under the acceleration clause once it terminated the lease and took possession of the premises. The Supreme Court granted summary judgment and referred the matter to a referee to calculate damages. Judgment was entered in favor of landlord for $1,488,604.66, comprised of rent remaining due under the lease reduced by an amount landlord collected during a two and one-half year period it was able to re-let the premises. The Appellate Division affirmed.
In affirming, the Court of Appeals rejected tenant’s reliance on Fifty States Management Corp., holding that, despite retaking possession of the premises, landlord was permitted to seek “damages in accordance with the acceleration clause after terminating the lease, once defendants defaulted and breached their leasehold obligations to maintain the property and pay rent.” The Court of Appeals also rejected tenant’s claim that the acceleration clause amounted to an unenforceable penalty. The Court held that the acceleration clause was enforceable and not a penalty because defendants “committed material breaches of the lease by ceasing all rental payments as of February 2008 and simultaneously abandoning the premises.” CitingHoly Properties Ltd., L.P. v. Kenneth Cole Productions, Inc.,[iii] the Court also briefly addressed and rejected defendants’ claim that landlord had an obligation to mitigate its damages.
The Court of Appeals did, however, remit the matter to Supreme Court for further proceedings to determine whether the undiscounted accelerated rent was disproportionate to landlord’s actual loses, “notwithstanding that the landowner had possession, and no obligation to mitigate.” The Court was persuaded by defendants’ argument that the damages measured by the accelerated rent were disproportionate to landlord’s actual damages because landlord had possession and immediately collected all rent due for the balance of the lease in one lump sum. The Court seemed to credit the argument that because landlord obtained possession of the premises, the accelerated rent should have been discounted to present-day value. The Court held that “Defendants should have had the opportunity to present evidence that the undiscounted accelerated rent amount is disproportionate to [landlord’s] actual damages . . .”
While acceleration clauses are not common and are often heavily negotiated, this decision serves to caution to both tenants and guarantors that upon a material default under a commercial lease, they may be liable for significant damages in the amount of accelerated rent due for the balance of the term of the lease.