Tag Archives: Leases
December 2, 2008

Tenant Allowance and Build-Out Obligations When a Tenant Files for Bankruptcy

Sutherland published a timely legal alert on what a landlord can do with a tenant allowance and tenant build-out obligations when a tenant goes bankrupt: Obtaining Relief From Tenant Allowance and Build-Out Obligations When a Tenant Files for Bankruptcy.

The alert points out that lease provisions that allow the landlord to stop completion or funding upon the tenant filing bankruptcy are largely unenforceable as ipso facto provisions under section 365(e).

The alert notes two cases which came down with different results on tenant accommodations.

In re Postle Enterprises, Inc., 48 B.R. 721, 724 (Bankr. D. Ariz. 1985) found an improvement allowance to be a financial accommodation under 11 U.S.C. § 365(c)(2),(e)(2)(B). Therefore allowing the landlord to limit its exposure.

In re United Press International, Inc., 55 B.R. 63, 66 (Bankr. D. D.C. 1985), that court found a landlord’s build-out of a tenant’s premises to a tenant’s specifications did not rise above “an ordinary lease” and as such was not a financial accommodation.

Thanks to James B. Jordan, David J. Rabinowitz and Garland L. Reid of Sutherland for putting together an alert on a topic that is on the mind of landlords.

Disclaimers

October 2, 2007

Housing Authority Has Stronger Powers to Evict For Criminal Behavior of Tenants

In Boston Housing Authority v. Garcia (SJC-09753) (August 17, 2007), the Massachusetts Supreme Judicial Court clarified the position after United States Supreme Court’s ruling in Department of Hous. & Urban Dev. v. Rucker, 535 U.S. 125, 130 (2002).

Rucker provided that Federal housing law, 42 U.S.C. § 1437d (1)(6) (2000), “unambiguously” requires lease terms “that vest local public housing authorities with the discretion to evict tenants for the drug-related activity of household members and guests whether or not the tenant knew, or should have known, about the activity.”

In the Garcia case, a Housing Court judge ruled “that the innocent tenant defense was no longer available under Massachusetts law to Doris Garcia, a BHA tenant, in light of the Rucker decision, and declined to admit evidence that she could not have foreseen or prevented the criminal conduct of two of her sons. ” The SJC agreed with the “Housing Court judge that Federal housing law preempts Massachusetts law that would otherwise permit a public housing tenant to defeat a lease termination based on the acts of a household member, by establishing that he or she could not have foreseen or prevented the misconduct.”

“The stated public housing policy of the United States is to “promote the goal of providing decent and affordable housing for all citizens through the efforts and encouragement of Federal, State, and local governments, and by the independent and collective actions of private citizens, organizations, and the private sector.” 42 U.S.C. § 1437 (a)(4) (2000). Consistent with this policy, Congress enacted the Anti-Drug Abuse Act of 1988, with the objective of reducing drug-related crime in public housing and ensuring “public and other federally assisted low- income housing that is decent, safe, and free from illegal drugs.” Rucker, supra at 134, quoting 42 U.S.C. § 11901 (1) (1994). Specifically, Congress (through 42 U.S.C. § 1437d [1][6], and HUD (through its implementing regulations) have required that housing authorities use clauses in their leases that permit the termination of a tenant’s lease for crimes committed by household members, even where a tenant had no knowledge of and was not at fault for a household member’s criminal activity.(12) As the Rucker Court noted, the lodging of such discretionary authority with the housing authorities is integral to the accomplishment of the congressional objective because “[s]trict liability maximizes deterrence and eases enforcement difficulties.” Rucker, supra, citing Pacific Mut. Life Ins. Co. v. Haslip, 499 U.S. 1, 14 (1991).(13)”

“With respect to the application of the requirement of cause in this case, the lease signed by Garcia permits eviction for the drug-related criminal activity of household members regardless of the tenant’s knowledge or ability to prevent the conduct. The judge found that Garcia’s sons were members of Garcia’s household at the time each engaged in drug-related criminal activity prohibited by the terms of the lease. Consequently, the judge found that Garcia had violated her lease.”

July 28, 2007

Acceleration Clause Upheld For Lease Default

The Massachusetts Supreme Judicial Court allowed a commercial landlord to enforce a liquidated damages clause against a tenant for non-payment of rent in Cummings Properties, LLC vs. National Communications Corporation (SJC Docket 09778. July 17, 2007).

The tenant had argued that the liquidated damages clause was unenforceable under Commissioner of Insurance v. Massachusetts Acc Co., 310 Mass. 769 (1942). That case barred enforcement of a liquidated damages provision that, by the terms of the lease, could apply to both trivial as well as material breaches.

A contract provision that clearly and reasonably establishing liquidated damages should be enforced so long as it is not so disproportionate to anticipated damages as to constitute a penalty. If, at the time the contract was made, actual damages were difficult to ascertain and the sum agreed on by the parties as liquidated damages represents a reasonable forecast of damages expected to occur in the event of a breach, it will usually be enforced. TAL Fin. Corp. v. CSC Consulting, Inc., 446 Mass. 422 (2006).

A rent acceleration clause, in which a defaulting lessee is required to pay the lessor the entire amount of the remaining rent due under the lease, may constitute an enforceable liquidated damages provision so long as it is not a penalty.

The SJC modified “their holding in Commissioner of Ins. to the extent that in the case of a commercial agreement between sophisticated parties containing a liquidated damages provision applicable to breaches of multiple covenants, it may be presumed that the parties intended the provision to apply only to those material breaches for which it may properly be enforced. This modification is consistent with the goal of resolving disputes “efficiently by making it unnecessary to wait until actual damages from a breach are proved” and helps to eliminate uncertainty and costly litigation. Kelly v. Marx, 428 Mass. 877, 881 (1999). It is also consistent with the intention of the parties in the present case as expressed in the language they agreed to in the liquidated damages and severability clauses of the lease.”