The Case of the Abandoned Lease

An interesting opinion came down from the Massachusetts Appeals Court last month that merits discussion.  In 275 Washington Street Corp. v. Hudson River Int’l, LLC, 81 Mass. App. Ct. 418 (2012), the Court held that the damages owed to a landlord from a tenant’s default under the indemnity provisions of the lease could not be calculated until the term of the lease expired.

The facts are as follows:  The tenant entered into a twelve-year lease with the landlord.  The lease included an indemnity clause which required the tenant, upon tenant’s default, to indemnify the landlord against “all loss of rent and other payments which Landlord may incur by reason of such termination during the remainder of the term.”  A year into the lease, the tenant abandoned the premises. The landlord took possession and relet the premises to another tenant at a lower rent than the original lease.  The landlord sought damages from the tenant and its guarantor.

The Court focused its ruling on the Massachusetts principle that “recovery under an indemnity clause of a lease cannot be had until the specified term of the lease has ended.”  The reasoning underlying this legal tenet is that such liability is contingent on events that have yet to occur.  For example, the rule contemplates takings under eminent domain, destruction by fire or other casualty, and other events that would serve to terminate the lease as a matter of law or contract and that support the delaying of the assessment of damages until the end of the lease period.

Since the guarantor follows the duties and responsibilities of the tenant, both tenant and guarantor could not be required to pay damages until the expiration of the lease term in 2018.  Although the Court was sympathetic to the landlord, it held that “the tenant’s view is consistent with the present state of Massachusetts law and is one with which we are constrained to agree.”

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