Massachusetts’ top Court just decided a case that commercial landlords will not want to miss.  If your lease doesn’t call out how to measure damages after a tenant defaults, you may have to wait until the end of the original lease term to recover. 

275 Washington Street Corp.  v Hudson River International

465 Mass 16 (2013) SJC

Facts – A commercial tenant, a dentist took space under a written lease with a twelve year term. The tenant abandoned the premises one year into the term and two years into the term, the landlord terminated the lease. About one year later, the landlord signed a lease with a new tenant for a lower rent than paid by the dentist but carrying on beyond the dentist’s lease term. 

Old common law rules provide that when a landlord terminates a lease, no more rent is owed going forward.  The landlord may suffer damages but they cannot be categorized as lost rent. 

In this case, the lease was silent on how and when to measure the landlord’s damages.  The dentist agreed in the lease to “indemnify” the landlord for losses related to the breach. 

The landlord sued the tenant soon after re-letting the premises.  Everyone agreed on the measure of damages for back rent. 

 Issue 1 When a tenant is terminated before the term of its lease expires, and the lease is silent on the way to measure the landlord’s losses for lost future rents, must the parties wait until the end of the original term to quantify the landlord’s damage?

Holding 1 Yes, wait until the end of the term, and then determine post-termination damages.

Reasons – Too many uncertainties can move the damage number – re-letting for more or less rent, fire destroying the premises, or the default of a subsequent tenant.  Commercial landlords should negotiate into their leases specific outcomes for early termination damages – either through liquidated damages clauses or some negotiated present value of the future rent figure or rent acceleration. 

Issue 2 Does the tenant’s agreement to indemnify the landlord identify damages measurable before the end of the term?

Holding 2 No, due to the same uncertainties.

Reasons – Upon termination, no more rent is due.   Damages may be recoverable for losses the landlord incurs as a result of the termination but they can be measured only at the end of the term – unless the negotiated lease calls out a way to measure damages for early termination.