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Monday, March 2, 2009

Accelerated Rent: Dead or Alive

Can businesses negotiate uncertain damages?

In tenBraak v. Waffle Shops, the Fourth Circuit Court of Appeals upheld the proposition that commercial leases could provide for the recovery of future rents even though such recovery was not available under the common law. It seemed the attitude of the court was to permit businesses to negotiate their respective default rights. After all, the actual losses to the landlord when the default takes place are very difficult to determine, and the landlord should not have to spend a lot of money litigating damages when the parties have agreed to a formula. When the Virginia Supreme Court addressed several cases involving acceleration provisions in commercial leases, they upheld by implication the principle that these clauses were enforceable. Unfortunately, no case on appeal has clearly and unequivocally found that these clauses can be enforced, even if the amount required to be paid would exceed the actual damages suffered by the Landlord.

Are acceleration damages a penalty?

In the Fairfax County Circuit Court case of Teachers Retirement Sys. v. American Title Guar., Judge Thomas S. Kenny struck down an acceleration clause as unenforceable because "it calls for damages in excess of Plaintiff's actual damages." Judge Kenny under the facts of the case deemed the acceleration sums sought to be a "potential windfall" and an "unenforceable penalty." Judge Kenny indicated that the landlord's actual damages was the difference between the amount that should have been paid by the tenant and the amount of rent actually collected if the premises is relet, plus cost associated with reletting. However, the lease was so poorly drafted that Judge Kenny declined to rewrite the lease in order to provide some amount for future losses caused by the default. Thus, the landlord received no award for future damages.

Practical Advice

Mandatory acceleration provisions or damages grossly in excess of actual losses will be problematic. The remedies portion of the Lease needs to be carefully crafted to permit the landlord several options in the event of default. If the losses will be uncertain and difficult to ascertain, then the entire lease should support the proposition that an advance stipulation of damages is needed. The Lease could contain a provision which requires an independent appraiser to set the amount of damages, whose decision would be difficult to dispute.

When attempting to obtain a judgment after default, the landlord should calculate realistic actual and projected losses. If such a calculation is not possible, it may be better to utilize Virginia Code §8.01-128 which permits a landlord to evict a tenant without losing the right to recover for any later deficiency in rent after making an effort to minimize the damages by renting to another tenant; under this statute a landlord can come back to court for later judgments as the damages accrue.

Final Advice

The above is not meant to replace legal counsel. Have a Landlord/Tenant lawyer draft or review all commercial leases. To speak to an attorney, please contact Gross & Romanick directly by calling 703-273-1400 or filling out their online form.