CUMMINGS PROPERTIES, LLC v. FRANCOIS & ASSOCIATES, LLC
Jonathan D. H. Lamb and Joseph P. Mingolla for the plaintiff.
George R. Suslak for the defendant.
KARSTETTER, J. Landlord Cummings Properties, LLC ("Cummings") sought possession and liquidated damages from its tenant, Francois & Associates, LLC ("Francois"), pursuant to the terms of a commercial lease and following Francois's failure to pay rent. After a bench trial, the court awarded possession to Cummings but no damages. We vacate that portion of the judgment that did not award damages.
Facts. The trial judge entered written findings of fact and rulings of law. In pertinent part, she found that in June, 2010, the parties executed a commercial lease for a suite located at 500 Cummings Park in Woburn, Massachusetts (the "premises"). At the end of the first three-year term of the lease in July, 2013, the term extended for five years automatically by operation of the lease. Successive five-year terms would automatically extend the lease unless either party served written notice of its option not to extend the lease. The lease provided that "[t]he time for serving such written notice shall be not more than twelve months or less than six months prior to the expiration of the then current lease term." The lease further provided that "[t]ime [was] of the essence." The lease also provided that "[n]o oral, facsimile or electronic notice shall have any force or effect."
By application of the lease terms, in 2013, the lease extended automatically to July 14, 2018. In order for it not to have extended automatically for a successive five-year term to July, 2023, either Cummings or Francois was required to provide written notice to the other between July 14, 2017 and January 14, 2018. Neither party provided written notice during the requisite time period to the other. On April 18, 2018, Francois sent an e-mail that it would not be renewing the lease at the premises. Cummings replied the following day that the lease had already extended automatically because no written notice had been provided to the contrary. The trial judge's amended findings of fact (entered after Cummings filed a postjudgment motion pursuant to Mass. R. Civ. P. 59) included a finding that Francois's "April 2018 notice to [Cummings] was untimely by at least three months."
Francois paid rent through July, 2018 then returned the keys to the premises to Cummings that same month. According to the summary process complaint,
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Francois failed to pay rent for August and September, 2018. [Note 1] The tenant's consequences for a breach of the lease included rent acceleration through the end of the lease and collection of that amount as liquidated damages discounted to the net present value using the published prime rate then in effect, which Cummings calculated to be $44,220.08. [Note 2] Francois failed to cure the default, see note 1, supra, and Cummings filed the instant summary process action to recover possession and liquidated damages as called for in the lease.
Analysis. The breach. The tenant has the burden to prove that it fulfilled the termination option requirements in a lease. Patriot Power, LLC v. New Rounder, LLC, 91 Mass. App. Ct. 175 (2017). This is particularly true "where the condition for avoiding the contractual obligation actually requires an affirmative act by the party seeking to end the obligation." Id. at 179. Strict compliance with the terms of the lease having to do with notice is of particular importance where the parties agree that "time is of the essence." Such a clause "means that contractual deadlines will be strictly enforced." Owen v. Kessler, 56 Mass. App. Ct. 466, 467 (2002). "Under Massachusetts law, parties will be held to the deadlines they have imposed upon themselves when they agree in writing that time is to be of the essence." Id. at 469.
Francois did not fulfill the termination option requirements in either the time or the form required. [Note 3] Not giving timely notice of termination was what automatically
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extended the lease; it was not a breach of the lease to give the notice "late." [Note 4]
The damages. A liquidated damages provision in a lease is enforceable as a reasonable estimate of damages as viewed by the parties at the time the lease was executed. Cummings Props., LLC v. National Communications Corp., 449 Mass. 490 (2007). "It is well settled that a contract provision clearly and reasonably establishing liquidated damages should be enforced so long as it is not so disproportionate to anticipated damages as to constitute a penalty." Id. at 494. The test for enforceability of such a provision is whether, at the time the contract is formed, (i) actual damages flowing from a breach were difficult to ascertain, and (ii) the sum agreed on by the parties as liquidated damages represents a reasonable forecast of damages expected to occur in the event of a breach. Id. See also NPS, LLC v. Minihane, 451 Mass. 417, 420 (2008).
The liquidated damages provision that was held to be enforceable in Cummings Props., LLC v. National Communications Corp. is very similar to section 20 of the parties' lease in this case. In section 19 of that lease, the parties agreed that the nonpayment of rent "would be a 'significant breach of the lease,' and that the 'payment of rent in monthly installments is for the sole benefit and convenience of [National].'" Cummings Props., LLC, supra at 491. Section 19 of that lease also provided that "in the event of an uncured default in the payment of rent . . ., 'the entire balance of rent which is due [under the lease] shall become immediately due and payable as liquidated damages.'" Id. The difference in section 20 of the Cummings/Francois lease is that the liquidated damages provision reduced the actual sum of the balance of the rent payments by applying a net present value calculation.
Importantly, the enforceability of a liquidated damages clause is determined by considering the circumstances as of the contract formation date, not at the time the breach occurs. A "second look" at the actual damages after the contract has been breached is not one of those circumstances to be considered. Minihane, supra at 420. See Cummings Props., LLC, supra at 496. In concluding that the liquidated damages provision in that lease was enforceable, the Court reasoned that at the time the parties entered into the lease, they could not have foreseen when a breach for nonpayment of rent would occur, what the commercial rental market would be at the time of that breach, or what the cost of finding another tenant and the length of time the property might remain vacant would be. Cummings Props., LLC, supra. The
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same holds true in this case. [Note 5]
If a liquidated damages clause is a penalty, that is, if the damages to which a party agreed at the outset of the lease were disproportionate to a reasonable estimate of actual damages likely to result from a breach, the clause would be unenforceable. There was scant evidence, however, that when Francois and Cummings entered into the lease that actual damages for a nonpayment of rent were readily calculable as a sum certain or that the liquidated damages provision to which they agreed was disproportionate to a reasonable estimate of Cummings's likely damages for such a breach. [Note 6]
The portion of the judgment awarding no damages is vacated, and the case is returned to the trial court for an assessment of damages hearing.
So ordered.
FOOTNOTES
[Note 1] The trial judge's original findings of fact are silent with respect to the August, 2018 rent, though the nonpayment of August and September, 2018 rent was alleged in, and the basis of, the summary process complaint. Francois did not deny this allegation in its answer to the complaint. Moreover, there was uncontroverted evidence at trial that: 1) Francois had failed to pay rent for August, September, and October of 2018; 2) Cummings issued a notice of rent due to Francois; and 3) Francois failed to cure the rental default, resulting in the initiation of the summary process action. The trial judge originally found that there was "no allegation of nonpayment of rent or any other breach other than failure to comply with the notice provision." After a postjudgment motion to amend the judgment, the trial judge found that Cummings had filed a notice to quit for failure to pay rent in August, 2018 and also that "[t]his is a summary process action for failure to pay rent."
[Note 2] Section 20 of the lease provided:
"If LESSEE defaults in the payment of any rent, and such default continues for 10 days after written notice thereof, and, because both parties agree that nonpayment of said sums is a substantial breach of this lease, and, because the payment of rent in monthly installments is for the sole benefit and convenience of LESSEE, then, in addition to any other remedies, the net present value of the entire balance of rent due herein as of the date of LESSOR's notice, using the published prime rate then in effect, shall immediately become due and payable as liquidated damages, since both parties agree that such amount is a reasonable estimate of the actual damages likely to result from such breach."
[Note 3] With respect to the lease's requirement that the termination notice be by a form other than e-mail, we are cognizant of the reasoning in SpineFrontier, Inc. v. Cummings Props., LLC, No. 18-P-1010 (Mass. App. Ct. Sept. 23, 2019) (unpublished Rule 1:28 decision), that the timely delivery of an e-mail by the tenant to Cummings, receipt of which Cummings had clearly acknowledged, did not result in a material violation of the terms of the lease. See also Computune, Inc. v. Tocio, 44 Mass. App. Ct. 489, 493 (1998), quoting Gerson Realty Inc. v. Casaly, 2 Mass. App. Ct. 875 (1974) ("The function of a requirement that notice be transmitted by registered mail is to provide a means of resolving disputes as to the fact of delivery of the notice.").
[Note 4] Even after amendment of her findings to include the finding that there had been a breach of the rent obligation, the trial judge concluded that the defendant "breached the lease by failing to give timely notice" and that "the imposition of the liquidated damages clause [was] nevertheless an improper penalty under the unique circumstances of this case."
[Note 5] Indeed, the trial judge appears to have acknowledged as much in her rulings of law: "This court acknowledges that like the value of luxury football tickets addressed in Minihane, commercial rental market vacancy rates fluctuate which makes properties more or less marketable depending on the economy and other factors which can be difficult to predict." She also cites these factors (the lack of foreseeability of a breach, of the rental marketplace, and of the cost of vacancy and finding a new tenant) as set forth in Cummings Props., LLC v. National Communications Corp., but applied them to the "notice breach" to conclude that the liquidated damages provision was unenforceable.
[Note 6] There was questioning of a witness for Cummings regarding periods of time that Cummings has had properties vacant, but the judge's findings were that "Cummings could not articulate a typical vacancy period . . . [b]ut did admit that the present vacancy rate is at an all time low and that 100 percent occupancy has never occurred."