Not So Fast! Enforcing Accelerated Rent Clauses in Commercial Lease Agreements
| Citation | Vol. 25 No. 3 Pg. 0018 |
| Pages | 0018 |
| Publication year | 2019 |
GBJ | The Lega
Not So Fast! Enforcing Accelerated Rent Clauses in Commercial Lease Agreements
This article explains the three key criteria for enforcing accelerated rent provisions in commercial leases, as well as the method for calculating accelerated rent, and offers practical tips for drafting accelerated rent provisions governed by Georgia law.
BY BRIAN P. WATT AND ALEXANDRA “ALLIE” APPLE
The typical commercial lease agreement affords the landlord a plethora of remedies when a tenant defaults. One commonly included remedy allows the landlord to accelerate future rent payments for the remainder of the lease term as damages for the tenant's breach. Lease provisions providing this type of remedy are known as accelerated rent provisions. While these provisions are common in commercial leases, the language used (or not used) in the provisions often runs afoul of Georgia's strict criteria for enforcement.
Accelerated Rent Provisions Generally
As a threshold matter, acceleration of rent due to tenant default must be a remedy expressly provided for in the lease; if the lease does not contain a clause allowing for the collection of future-accruing rent, the landlord is typically entitled to collect rent from the tenant only as rent becomes due for the remainder of the term, plus whatever other damages might have accrued at the time of the tenant's default.[1] Moreover, in the absence of an accelerated rent provision or language expressly permitting the recovery of rent that accrues after a tenant is dispossessed, an eviction of the tenant usually terminates the lease and cuts off the landlord's right to collect rent after the eviction is carried out.[2] As with most contract terms, however, merely having an accelerated rent provision in the lease does not guarantee the landlord's recovery under such a provision.
In Georgia, accelerated rent provisions are scrutinized by the courts as liquidated damages provisions.[3] Under a typical liquidated damages clause, the contracting parties agree on a specific amount of damages to be recovered by the non-breaching party upon the other's breach of the contract. [4] Accelerated rent provisions in commercial leases essentially do the same thing: the parties to the lease agree on a sum of money (or a formula for arriving at a sum of money) to be payable to the landlord as damages upon an event of default by the tenant.
Georgia courts utilize a strict three-part test to determine whether an accelerated rent provision is valid as a liquidated damages provision or invalid as an unenforceable penalty.[5] "First, the injury caused by the breach must be difficult or impossible of accurate estimation; second, the parties must intend to provide for damages rather than for a penalty; and, third, the sum stipulated must be a reasonable pre-estimate of the probable loss."[6] The enforceability of accelerated rent provisions is a question of law for the court.[7] If the clause at issue fails to meet any one of the three parts of the test, then the accelerated rent provision will be found unenforceable and invalid.[8] Because of Georgia's strict interpretation of accelerated rent provisions, it is critical that both tenants and landlords alike pay close attention to the language of these clauses during the lease drafting process.
Because of Georgia's strict interpretation of accelerated rent provisions, it is critical that both tenants and landlords alike pay close attention to the language of these clauses during the lease drafting process.
This article explains the three key criteria for enforcing accelerated rent provisions in commercial leases, as well as the method for calculating accelerated rent. Based on this three-pronged analysis, this article also offers practical tips for drafting accelerated rent provisions governed by Georgia law.
Criteria for Enforcing Accelerated Rent Provisions
As set forth by the Supreme Court of Georgia in Southeastern Land Fund, Inc. v. Real Estate World, Inc., [9] a liquidated damages provision will be enforced if the following three factors are satisfied: (1) the injury caused by the breach is difficult or impossible to accurately determine at the time of contracting; (2) the parties intend to provide for damages rather than a penalty; and (3) the sum is a reasonable preestimate of the probable loss. An accelerated rent provision that meets all three criteria will be upheld as a valid and enforceable liquidated damages clause.[10] "If these requirements are not met, then the accelerated rent provision 'fails as a penalty'" and will likely be found by a Georgia court to be unenforceable.[11]
The injury caused by the tenant's breach of the lease must be difficult or impossible of accurate estimation at the time of contracting.
The first prong of Georgia's test for enforcing accelerated rent provisions-that is, that the damages must be difficult or impossible to estimate when the lease is executed-is usually fairly easy to satisfy.
Although the amount of damage for a breach of the lease is easily stated in theory, and easily applied when damages are sought at the end of the lease term, a concrete estimation of damage is not always easily made when the action seeks to collect immediate lump sum damages in the form of accelerated rent on a lease breached with a substantial amount of time remaining in the term.[12]
The measure of accelerated rent damages, or "the difference between what the tenant would have had to pay in rent for the balance of the term, and the fair rental value of the premises for the balance of the term,"[13] may be difficult to estimate accurately.
Because calculating the damages owed under an accelerated rent provision depends on a determination of the fair market value of the balance of the lease term, this calculation "may require a difficult assessment of future market conditions to calculate the future rental value of the premises, and the probability of reletting for the full remaining term."[14] Although the outcome may vary depending on the length of the remaining lease term and the facts of the situation, calculating accelerated rent owed under such a provision is typically difficult or impossible of accurate estimation.[15] This is especially true because the relevant point in time to determine the enforceability of an accelerated rent provision is the time of execution of the lease.[16] The speculative nature of prospectively calculating accelerated rent damages will likely result in a finding of enforceability under the first prong of Georgia's test.
The parties intend to provide for damages rather than for a penalty.
If the parties intend the accelerated rent provision to act as a penalty or punitive deterrent, then the provision will be found unenforceable and the landlord's recovery of future rent will be prohibit-ed.[17] In Jones v. Clark, the Court of Appeals of Georgia concluded that an accelerated rent provision was unenforceable, in part because the "lease does not refer to th[e] provision as one for liquidated damages, nor does it otherwise manifest an intent to treat it as a provision for liquidated damages."[18] Similarly, if the lease explicitly states the accelerated rent damages provided for in the lease are not liquidated damages, then a court is more likely to find the accelerated rent provision to be a penalty, and therefore invalid.[19]
Many accelerated rent provisions explicitly state that the contemplated damages are "liquidated damages" and/or "are not a penalty." Courts have relied on such descriptors as indicative of the contracting parties' intent to treat accelerated rent as liquidated damages.[20] However, such references in and of themselves do not ensure the enforceability of the provision under Georgia law.[21] Courts may instead look beyond the language used in the lease to determine whether the parties intended to provide for liquidated damages or a penalty.[22] Furthermore, courts will take into account the actual result of computing such damages.[23] If awarding the accelerated rent damages would result in a windfall to the landlord, then courts will likely find the...
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