By Geoff Howell and Khanh T. Vo
Panagakos v. Collins
956 N.E.2d 226 (Mass. App. 2011)
The recent Massachusetts Appeals Court decision Panagakos v Collins, 986 N.E.2d 226 (Mass. App. 2011) carves out a significant exception to the common law rule that a commercial landlord must mitigate damages following the termination of a tenant’s lease for default. In Panagakos, the landlord of a commercial property sued its former tenant’s guarantor following the tenant’s default in rent payments. The landlord sought to recover the amount due on the remaining term of lease in accordance with the rent acceleration clause contained in the lease. The Panagakos court held that no mitigation is required where the damages are determined pursuant to an enforceable liquidated damages provision in the lease.
The plaintiff, Michael Panagakos, leased a parcel of land to McWal, Inc., an affiliate of defendant guarantor Walter Collins, to operate his restaurant business under the tradename TK O’Malley’s. McWal failed to make the monthly payment for March 2007. Panagakos initiated a summary process action against McWal in April 2007. Collins decided to sell the restaurant and, after workout discussions with Panagakos, both parties agreed to allow assignment of the remaining three and a half year lease with the condition that McWal remain current on the rental payments until the assignment could be made. Michael Bartlett, a prospective buyer, expressed his interest in purchasing the restaurant with the condition that Panagakos repair the premise or extend the lease term to 25 years. Panagakos refused both proposals and Bartlett decided not to purchase the restaurant. Shortly after, McWal defaulted on the rent payment again. On June 20, 2007, the parties executed an agreement for judgment in the summary process action. The terms of the judgment entitled Panagakos to recover amounts owed on the remainder of the lease and held McWal liable for any future damages that may accrue subsequent to the judgment. After McWal vacated the property on June 25, 2007, Panagakos was unable to find a new tenant and incurred damages including loss of rental income and maintenance expenses. In assessing the damages, the judge held Panagakos could only hold McWal liable for future damages if he made reasonable efforts to mitigate those damages by maintaining the premise and provide sufficient leasing terms to attract prospective tenants. The judge found that Panagakos failed to mitigate the damages because it did not accept Bartlett’s lease terms and, consequently, the court limited the damages award to the amount that would have been incurred had Panagakos leased the premise to Bartlett.
The issue on review was whether mitigation of damages is required where an accelerated rent clause contained in the lease is enforceable as liquidated damages. The court commenced its analysis by reviewing the holding in Cummings Properties, LLC v. National Communications Corp., 449 Mass. 490 , 494 (2007), which states that an acceleration clause is an enforceable liquidated damage provision under a commercial lease as long as it is not so inconsistent with the expected damages as to constitute a penalty. The party challenging the provision would have the burden of showing that the “accelerated rental figure constitutes a penalty by reason of its disproportionality to a reasonable estimate of actual damages.” Id. at 494. The Panagakos court next reviewed the holding of NPS, LLC v. Minihane, 886 N.E.2d 670, 675 (Mass. 2008) in which the Supreme Judicial Court upheld a liquidated damages provision in a seat license agreement at Gilette Stadium. The NPS court addressed, for the first time under Massachusetts contracts law, whether mitigation of damages is relevant in the context of an enforceable liquidated damages provision. The SJC looked to other jurisdictions in reasoning that parties to a contract willingly exchange the opportunity to determine actual damages after a breach (including the possibility of mitigation) when they agree to a liquidated damages provision for the certainty of result afforded by a liquidated damages provision. The court noted that, in such situations, taking mitigation obligations into consideration would defeat the purpose of the liquidated damages provision. The NPS court concluded, therefore, that no consideration of mitigation is appropriate with respect to an enforceable liquidated damages provision. Reading Cummings and NPS together, the Panakagos court concluded that the trial court had erred in considering failure to mitigate in assessing the damages where, here, an acceleration clause is enforceable as liquidated damages. The trial court decision on damages was vacated and the case was remanded for further proceedings consistent with the opinion. In light of Panakagos, landlords and tenants in commercial lease negotiations may want to carefully read the liquidated damages remedies clauses in the lease and consider whether adjustments are necessary.