Cummings Properties, LLC v. National Communications Corp.

Supreme Judicial Court of Massachusetts · Contracts

ContractsLiquidated damagesCommercial leasesliquidated damagespenaltyrent accelerationcommercial leasesophisticated parties

Facts

Cummings leased commercial premises to National under a long-term lease that provided in section 19 that if National defaulted in paying rent or certain other sums and failed to cure after written notice, the entire balance of rent would become immediately due as liquidated damages. The parties, both sophisticated commercial entities, agreed in the lease that nonpayment of rent was a significant breach and that monthly rent payments were for National's convenience. National failed to pay August 2003 rent and related charges, did not cure within ten days, and also failed to pay September rent. Cummings terminated the lease and sought accelerated rent equal to the remaining thirty-two months of rent.

Issue

Whether the lease's accelerated rent provision was an enforceable liquidated damages clause when the tenant's actual breach was nonpayment of rent, even though the lease language might also reach other breaches of lesser significance. More specifically, the court had to decide whether its earlier rule invalidating clauses that apply to breaches of varying importance should control in this commercial lease between sophisticated parties.

Rule

A contract provision clearly and reasonably establishing liquidated damages is enforceable unless it is so disproportionate to anticipated damages as to constitute a penalty. If, at the time of contracting, actual damages were difficult to ascertain and the agreed sum was a reasonable forecast of expected damages, the provision will usually be enforced. In a commercial agreement between sophisticated parties containing a liquidated damages provision applicable to multiple covenants, the provision may be presumed to apply only to those material breaches for which it may properly be enforced, and the party challenging the clause bears the burden of showing disproportionality.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Granite Harbor Realty leased warehouse space in Cleveland, Ohio to Blue Mesa Distribution, Inc. for eight years. Both companies were represented by counsel, and the lease provided that if Blue Mesa failed to pay rent and did not cure after written notice, all remaining rent would become immediately due as liquidated damages; after three years, Blue Mesa stopped paying and challenged the clause.

Which is the strongest argument that the acceleration clause is enforceable?

Explanation. The majority enforced an accelerated-rent clause where, at the time of contracting, damages from nonpayment were difficult to ascertain and the stipulated amount was a reasonable forecast of anticipated damages. The focus is on ex ante difficulty and reasonable forecasting, not merely the label used, not impossibility of later calculation, and not a hindsight comparison alone. (Derived from Cummings Properties, LLC v. National Communications Corp. (n.d.).)