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2016 Mitigating Risk: Key Litigation Developments

Real Estate >> How Best to Ensure Enforceability of Rent Acceleration Clauses

April 5, 2016

A New York commercial landlord’s ability to enforce lease provisions that provide for the acceleration of a tenant’s future rent obligation in the event of breach came under scrutiny recently in the decision by New York’s highest court, the Court of Appeals, in Van Duzer Realty v. Globe Alumni Student Assistance.

New York law imposes no duty on commercial landlords to mitigate damages. That is, landlords have no obligation to re-let premises previously leased by defaulting tenants. Landlords, however, cannot collect from tenants more than what was bargained for at the time a lease was signed. Thus, a commercial landlord must make sure that any damages measured by the accelerated rent are not disproportionate to its actual damages.

The Court of Appeals in Van Duzer found that a lease provision that gave the landlord both possession of the premises during the term of the lease and the right to immediately recover all rents due under the lease (without calculating for net present value) was akin to “double-dipping” because it gave the landlord the ability to collect rent from a defaulting tenant and a future tenant for the same period.

The court was persuaded by the argument that the damages measured by the accelerated rent could be disproportionate to the landlord’s actual damages because the landlord had possession and immediately collected all rent due for the balance of the lease in one lump sum. According to the court, the rent acceleration provision contained in the lease, which gave the landlord both possession and a lump sum payment, allowed for the landlord to receive more than the compensation it would have received had there been full performance of the lease. The court, therefore, ruled that the case had to be sent back to the trial court so that the tenant could submit evidence demonstrating that the damages sought by the landlord were disproportionate to what was bargained for under the lease.

Takeaway

  • To help ensure enforceability and to prevent an acceleration clause from being deemed an unenforceable penalty, landlords should make sure that the clause provides for recovery of only the net present value of any future rent.
  • Landlords should consider discounting future rent against current fair market rental value for the premises.
  • In addition, landlords should consider crediting a tenant for any amount of rent collected by the landlord from a replacement tenant over and above the amount the defaulting tenant was paying during the period of the defaulting tenant’s lease term.

Author(s)

JESSE B. SCHNEIDER
Partner
212.468.4854
jschneider@dglaw.com
Litigation