February 13, 2015
Parties enter into commercial leases with the hope and expectation of the completion of the lease term, in full, without problems. Constructing a thorough and well-crafted lease agreement, however, involves establishing the outcomes that will happen when that problem-free outcome does not come to pass. Many commercial leases contain rent acceleration clauses, which require a defaulting tenant to pay all the rent that is owed under the remainder of the lease. Whether these clauses pass legal scrutiny depends on the specific facts of the arrangement.
In a recent case from New York, that state’s highest court addressed a tenant’s default on a nine-year lease only a few months into its duration. A school called Globe Institute of Technology was operating a dormitory at a New York City property leased from 172 Van Duzer Realty Corp. After receiving a notice of violations from the city’s Environmental Control Board, the landlord sent a tenant a demand to fix the property sufficiently to correct the violations. Instead of performing the maintenance, the tenant simply stopped paying rent and evacuated the premises.
The landlord took multiple legal actions. First, the landlord obtained a court judgment terminating the lease and granting the landlord the right of possession. Subsequently, the landlord sought a judgment awarding it the money it was owed under the rent acceleration clause of the lease agreement, which totaled nearly $1.5 million.
The tenant contested this action by arguing that the landlord could not obtain payment under the rent acceleration clause of the agreement after the landlord had already terminated the lease and re-acquired possession of the property. The court concluded that the clause was not necessarily an unenforceable penalty. The court sent the case back to the trial court to determine if the clause in Globe’s lease constituted liquidated damages, which is legal and enforceable, or a penalty, which contradicts public policy and is illegal.
In New Jersey, rent acceleration clauses are generally enforceable. Rent acceleration as a remedy must be explicitly spelled out in the lease to be enforceable. Some landlords and tenants may choose to negotiate alternatives to a rent acceleration clause. One alternative simply declares that the landlord has the option of continuing to collect rent and other charges as they come due, while also assuming possession of the property and attempting to re-rent the space. If the landlord successfully obtains a new tenant, the defaulting tenant owes only the difference between what it would have owed and the rent paid by the new tenant. Of course, if the landlord were to acquire a new tenant who paid a rental rate higher than the amount the defaulting tenant was paying, the defaulting tenant would not be able to benefit from that additional rent.
Commercial leases involve an expectation of success, but they also involve provisions for what must happen if a default occurs. For advice and representation in negotiating and drafting a commercial lease agreement that adequately protects your business’ interests, talk to the real estate attorneys at Samuel C. Berger, P.C. Our New Jersey real estate attorneys can help guide you through the process to achieve an agreement that works for you. Reach us online or call (201) 587-1500 or (212) 380-8117 to schedule an initial consultation.
More Articles:
Landlord Wins on Security Deposit, Loses Rent and Damages Claims in Appellate Division, New York & New Jersey Real Estate Lawyer Blog, Oct. 10, 2014
Dealing With Your Tenant’s Property Abandoned Within Your Rental Space, New York & New Jersey Real Estate Lawyer Blog, July 15, 2014