It is not uncommon for a commercial lease in New York to contain a “rent acceleration clause,” which can provide expedited relief for a landlord after the termination of the lease due to the tenant’s uncured default. While not part of the Real Estate Board of New York standard form of lease, such provisions are becoming more commonplace. Recently, however, New York courts have begun to scrutinize the enforceability, scope and effect of such clauses.
Given this trend towards greater scrutiny, parties negotiating commercial leases should consider avoiding provisions that permit the landlord to "double-dip" in the event of a tenant breach, and should focus on accurately and reasonably compensating the landlord for the actual damages caused by the tenant’s default.
In a recent article for Law360, Real Estate Partner Eric Sherman and Associate Meghan Hill examined the limits of rent acceleration clauses in commercial leases under New York law, and recommended procedural safeguards that landlords and tenants may wish to consider in the negotiating process.
Rent Acceleration Clauses in Commercial Leases
"Commercial leases routinely provide that the termination of a lease after the tenant’s default entitles the landlord to bring suit for rent due and owing as it becomes due — meaning that the landlord must sue each month for collection of rents," Sherman and Hill explained. "By contrast, a rent acceleration clause in a lease creates a mechanism for a landlord to collect once for all the monthly rent payments remaining under the full term of the lease."
A typical rent acceleration clause provides as follows:
In the event of Tenant’s default, Landlord shall be entitled to recover from Tenant, as and for liquidated damages, and not as penalty, an amount equal to the difference between (i) the Base Rent which otherwise would have accrued for the balance of the Term, and (ii) the fair market rental value of the Premises at the time, all of which shall immediately be due and payable by Tenant to Landlord. In determining the fair market rental value of the Premises, the rental realized by a re-letting after the termination of the Lease shall be deemed prima facie evidence of the rental value.
General Enforceability - and Limitations - of Rent Acceleration Clauses
Courts in New York have made clear that rent acceleration is not simply a tool for the collection of rent under the lease. Rather, "acceleration must be viewed as a form of recouping damages after the breach of the lease by the defaulting tenant. This limitation arises from the broader rule that, upon termination of the lease (which is generally a precondition to triggering an accelerated rent clause), a landlord is no longer entitled to enforce the tenant’s obligation to pay rent," Sherman and Hill wrote.
Recommended Practice Tips
Because courts recognize the potential for exacting an (unenforceable) penalty on a tenant, landlords and tenants should incorporate that consideration into lease negotiations. Sherman and Hill recommend that landlords seeking to insert rent acceleration clauses consider including provisions crediting the tenant in the event the landlord re-let the premises.
Additionally, tenants may improve their bargaining position by seeking a discount of the total amount paid upon acceleration, keyed to the fair market value of the rental at the time of breach, or by discounting the rental by some percentage depending on the geographic market of the premises.