Successful Techniques For Negotiating Acceleration Of Rent Provisions In Commercial Leases
BY TODD GOLDBERG, SPECIAL TO BANKER & TRADESMAN
While I have read many articles over the past year that analyze recent Massachusetts Supreme Court and appeals court cases, where both courts have held that accelerated rent is a valid and enforceable form of liquidated damages, none of them have really dealt with the practical issue confronting those of us who are negotiating leases on behalf of commercial real estate landlords: What do you do—what can you do—if a tenant simply refuses to agree to acceleration of rents as a landlord remedy following a tenant default?
Before discussing alternative clauses, it is important to review principal forms of monetary remedies available for commercial real estate leasing as a framework for understanding the competing landlord and tenant interests associated with each type of remedy.
Generally, there are three types of financial remedies found in commercial real estate leases. First, is the recovery of rent pursuant to an indemnification clause – the landlord sues the tenant for installments of rent as they become due or waits and sues the tenant for all the rent (plus any contract interest, costs of collection and late fee charges) at the end of the term (less preferable).
The landlord must go to court every few months to collect the rent and charges that would have become due but for the tenant default. This type of remedy offers little incentive for a tenant not to default, since the tenant is paying the same rent it would have otherwise had to, plus contracted default charges and collection costs.
The second possible remedy involves two concepts. Holding the tenant liable for the difference between what the tenant owed for the balance of the lease term and either what the landlord receives upon re-letting for the balance of the lease term, or the landlord’s determination of a fair and reasonable estimate of the rental value of the premises for the balance of the lease term. In using either of these concepts, it is also important to consider re-letting costs, such as brokerage fees and build out. A third remedy is accelerated rent, which requires the tenant to immediately pay for the entire rent amount due for the rest of the lease term.
A Fair And Reasonable Approach
In each case, experienced lease negotiators understand the need to substantially revise the standard boilerplate acceleration of rents clause found in many commercial real estate leases to adopt a more reasonable and fair approach when it comes to accelerated rents. Tenants (including tenants with significant bargaining strength) have been receptive to the inclusion of an acceleration of rents clause when it is structured utilizing one or more of the following approaches:
Hybrid indemnification/acceleration of rents – A twist on the typical indemnification of rent remedy. Rather than requiring the landlord to sue every few months for unpaid rents, the indemnification remedy is modified to permit the landlord to accelerate rents for some agreed upon period of time (i.e. landlord is permitted to accelerate rents for up to one year at a time). Tenants have a difficult time objecting to this approach, since it is essentially a spruced-up version of the tenant-preferred indemnification remedy.
Acceleration of rents following failure of tenant to pay indemnification damages – An acceleration of rents clause is added as a backstop to the indemnification of rents clause. If the tenant fails to timely pay unpaid rents under an indemnification clause on anywhere from one to three occasions, then landlord is permitted to fully accelerate rents. This approach creates an incentive for tenants to comply with the indemnification of rents clause. The tenant thus controls whether an acceleration of rents clause kicks in.
Permit reduction of amount of accelerated rent to present value – A tenant may be more amenable to an acceleration of rents clause when certain real-time adjustments to the amount of accelerated rent are made. Acceleration of rents clauses often discount the accelerated rent to present value to reflect the current value of future accelerated rent payments. That reduction is often expressed in terms of an interest rate. The tenant will request a higher discount rate and the landlord will request a lower discount rate.
Permit reduction of amount of accelerated rent – By either rent received from re-letting, or an estimate of the fair market rental value of the premises. Under this approach, the amount of accelerated rent is reduced by sums either collected from a replacement tenant, or by an estimate of the fair market rental value of the premises; in either case, for the balance of the lease term.
Todd Goldberg is a partner and member of the executive committee at Bernkopf Goodman LLP specializing in commercial real estate acquisition, disposition, development, finance and leasing.