“Acceleration Clauses in Commercial Lease Agreements: Getting Your Future Lease Payments Paid” by John L. Waite III
Can a commercial landlord sue for lease payments upon a tenant’s default when those payments are not actually due? The answer is maybe. As a general matter, landlords have more freedom under Missouri law when negotiating the terms of a commercial lease agreement with prospective tenants versus residential landlords. Furthermore, so long as both the landlord and tenant are sophisticated parties,Missouri courts will likely uphold any provision that is negotiated in good faith between the parties. One limitation is where a provision may act as a penalty against the tenant for breaching the term(s) of a lease agreement. In other words, if the provision provides a financial windfall to the landlord as opposed to an attempt to compensate the landlord for the damages caused by the tenant’s default, then Missouri courts are unlikely to enforce such a provision. One provision that falls somewhere in the middle and which are becoming more common in commercial lease agreements is the Acceleration Clause. This provision allows a landlord to accelerate all future lease payments upon a tenant’s default and demand immediate payment. However, Missouri courts have yet to recognize or enforce such a provision. Currently, Missouri law recognizes three options available to a landlord upon a tenant’s default. First, the landlord may remain out of possession and sue to recover the rent as it becomes due. Second, the landlord can give notice to the tenant of its decision to resume possession and re-let the property in an effort to mitigate the damages caused by tenant’s default, but reserving landlord’s right to sue for unpaid rent as it becomes due. Finally, the landlord may reenter and resume possession of the property and close the term of the agreement thereby terminating the tenant’s rights to possession.
While these rights are recognized under Missouri common-law, there is no reason to assume they preclude a landlord and tenant from negotiating other, additional remedies. Under Missouri contract law, and as briefly touched upon above, so long as a provision is not akin to a penalty against a defaulting party and instead attempts to compensate the nondefaulting party for damages suffered, then the provision should be enforceable. In many instances it is difficult, if not impossible, to predict the damages caused by another’s default. In the case of commercial leases, which tend to include long durations and complicated terms/obligations, it is difficult to predict the costs associated with a tenant’s default. And in those cases where the tenant abandon’s the property or is unable to make the appropriate lease payment, it is no easier to calculate the time and effort it will take to re-let the property or compensate a landlord for expenses incurred as a result of the vacant property. The term “liquidated damages” is used to define those provisions where parties attempt to predict these costs and place a monetary value to a party’s default. In essence “liquidating” the unknown costs to a current dollar amount, thereby removing the potential damages from unknown to known.
An acceleration clause is just such a provision whereby the landlord is unable to predict with certainty the damages they may suffer if tenant abandons the property or otherwise defaults under the terms of the lease agreement. Two types of acceleration clauses have been identified in other jurisdictions. The first type is considered the “most genuine” of clauses and neither causes a termination of the lease nor hinders the tenant’s right to occupy the property so long as the tenant pays the accelerated rent to the landlord. The other type includes both an acceleration of the undue lease payment and termination of the lease agreement. In a case decided by the Iowa Supreme Court, an acceleration clause was upheld after the Court found that it was (i) based upon the uncertainty as to the actual amount of damages resulting from a breach of the lease, (ii) the amount of liquidated damages were reasonable, (iii) the clause placed the landlord in a position that it would have occupied had the tenant performed the entire lease, and (iv) the landlord had a duty to mitigate the damages. Another factor, considered by other jurisdictions when upholding an acceleration clause, is where the future stream of lease payments are discounted to a present value to account for the time-value of money.
In short, an acceleration clause that is properly drafted may be enforceable in Missouri. However, until such time as this issue is actually ruled upon by aMissouri court, landlords are encouraged to follow general principles of contract law when drafting such a provision. With appropriate forethought and consideration of the specific factors involved with a particular commercial lease agreement, there is no reason that a landlord should not be allowed to contract for an acceleration clause so long as the clause is in essence a liquidated damage provision and not a penalty as defined under Missouri law.