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Real Estate Litigation

Massachusetts High Court Considers Modernizing State Lease Law

By Lawrence P. Heffernan, John T. Ronayne, Danielle Andrews Long, and Kendra L. Berardi – May 20, 2013


In many jurisdictions, a lease is a contract—nothing more, nothing less, and certainly nothing different. In jurisdictions that follow this rule (such as Kansas, Nebraska, and Colorado), the breach of a lease is identical to the breach of a contract, and the same remedies are available. Under Connecticut common law, “[a] lease is nothing more than a contract.” Rokalor, Inc. v. Conn. Eating Enters., Inc., 558 A.2d 265, 268 (Conn. App. Ct.1989). Contract principles apply to a landlord’s damages where a tenant breaches a lease in Hawaii, New York, North Carolina, Vermont, and Washington, D.C.


These jurisdictions have recognized that leases, like all other contracts, are an exchange of promises and have held that there is no reason to distinguish the covenant to pay rent from other covenants. In these jurisdictions, a landlord is permitted “benefit of the bargain” damages when a tenant breaches the lease and abandons the property.


However, in Massachusetts, a landlord has only two options in the event of a breach by the tenant: (1) allow the lease to remain in effect and recover unpaid rent as it comes due, or (2) terminate the lease, regain possession of the leased premises, and forfeit the right to rent or damages for the period after termination. When a landlord chooses to terminate the lease and recover possession, it cannot collect damages from the breaching tenant unless the lease contained a specific provision allowing it to do so. The landlord’s inability to collect benefit-of-the-bargain damages upon a tenant’s breach encourages landlords to leave otherwise viable properties vacant while suing for unpaid rent. It also discourages landlords from attempting to mitigate damages when a tenant abandons a property, thereby ensuring that the defaulting tenant will be liable for the full amount of unpaid rent.


Massachusetts’s variance from other jurisdictions arises from the old view that leases are conveyances of a property interest rather than contracts. In recent years, however, the Massachusetts Supreme Judicial Court has begun treating leases as contracts in specific circumstances where the application of contract law makes more sense. A case currently under advisement at the court may finally bring Massachusetts lease law in line with more modern jurisdictions.


On January 7, 2013, the Supreme Judicial Court heard argument in 275 Washington Street Corp., Trustee v. Hudson River International LLC, No. 11217. The case arises from a 12-year commercial lease under which 275 Washington Street, LLC, leased certain premises located at 221–227 Washington Street in downtown Boston to Hudson River International LLC d/b/a Vital Dent for use as a dental office. The lease provided that the tenant would pay monthly rent as well as a share of operating costs and taxes. The lease also provided that (1) in the event of default, the landlord had the right to reenter and take possession of the premises and terminate the lease without prejudice to remedies for rent arrearages and (2) the tenant would indemnify the landlord against loss of rent during the remainder of the lease term. The lease also contained a cumulative remedies provision that stated that any remedy elected under the lease shall, whenever possible, be cumulative with all other remedies at law or in equity. However, the lease did not contain any provision entitling the landlord to benefit-of-the-bargain damages.


Vital Dent took possession of the premises but closed its business about a year later and removed its equipment. The tenant paid rent for a period of time after it vacated the premises, but it eventually stopped paying rent. The landlord subsequently terminated the lease by reentering and taking possession of the premises. The premises remained vacant for 27 months, after which the landlord re-leased the premises to a new tenant at a lower monthly rent. In May 2008, the landlord brought an action in Superior Court seeking damages, including unpaid and future rents for breach of the commercial lease. The defendants, the tenants and its guarantor, moved to dismiss the claims for damages arising after the landlord’s reentry of the premises and termination of the lease. The motion was denied.


The landlord next moved for partial summary judgment. The defendants did not contest liability for unpaid rent due before the landlord terminated the lease but cross-moved for summary judgment on the rest of the landlord’s claims for post-termination damages. During the pendency of the motions for summary judgment, the court was informed that a replacement tenant had been found and a new lease had been signed. The Superior Court allowed the landlord’s motion for partial summary judgment and denied the defendants’ motion for partial summary judgment, holding that the landlord was entitled to recover damages for loss of rents and costs once it obtained a new tenant for the premises. The Superior Court eventually entered judgment against the defendants in the total amount of $1,092,653.36, which included the present value of future damages—that is, the difference between what Vital Dent would have paid and what the new tenant was going to pay.


The defendants appealed the judgment, and the Appeals Court affirmed the finding of liability in favor of the landlord but vacated the judgment assessing damages and remanded the case for calculation of damages due for unpaid rent at the time the landlord terminated the lease. The Appeals Court held that the lease’s indemnification provision required the landlord to wait until the term of the lease would have expired to calculate those damages. The Supreme Judicial Court then granted further appellate review with oral argument heard in January. A decision is expected before summer.


In recent years, the Supreme Judicial Court has moved incrementally toward accepting the proposition that many lease issues should be resolved under modern contract law rather than older principles governing estates and land. When a tenant breaches a lease, it is inequitable to force landlords to choose between waiting until the natural termination of the lease to gain possession and recover unpaid rent, on the one hand, and terminating the lease to regain possession and forfeiting the right to future losses, on the other. This approach is also unfavorable to tenants in that it excuses the landlord from an obligation to mitigate its damages, an obligation that would be imposed on landlords if the lease were treated as a contract. The current state of Massachusetts law also encourages prolonged vacancies to the detriment of adjacent properties as well as the lease property and permits landlords to lock tenants into economically unproductive situations.


There is no longer any credible reason why the parties to a lease should be forced to choose the lesser of two evils provided by the current applicable common law. The denial of contract-based damages to an injured landlord upon termination of a lease is a consequence of an outdated doctrine. Arguably, the time has come to bring Massachusetts in line with other jurisdictions and allow a landlord to recover exactly what it expected to receive—rent.


Keywords: real estate litigation, benefit of the bargain, contract law, property interest, rent, 275 Washington Street Corp., Trustee v. Hudson River International LLC

 

Lawrence P. Heffernan and John T. Ronayne are attorneys with the Boston, Massachusetts, office of Robinson & Cole LLP. Danielle Andrews Long is an attorney with Robinson & Cole, in the Boston office, and is the cochair of the Young Lawyers Subcommittee of the Real Estate Litigation Committee. Kendra L. Berardi is an attorney with Robinson & Cole, in the Boston office, and is an assistant editor of the Real Estate Litigation Committee newsletter.

 

Note: Robinson & Cole filed a brief with the Supreme Judicial Court in the case on behalf of the Massachusetts Real Estate Bar Association and the Abstract Club.


 
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