Commercial Division Blog

Posted: December 19, 2014 / Categories Commercial, Damages, Real Property

Lease Acceleration Clause Not Per Se Unenforceable as Penalty

On December 18, 2014, the Court of Appeals issued a decision in 172 Van Duzer Realty Corp. v. Globe Alumni Student Assistance Association, Inc., 2014 NY Slip Op. 08872, holding that a lease's acceleration clause was not per se unenforceable as a penalty.

The issue before the Court of Appeals in 172 Van Duzer Realty Corp. involved "a dispute over future rental payments sought under an acceleration clause from an out-of-possession tenant after termination of the leasehold agreement." The Court of Appeals rejected the argument that a lease provision that required a tenant that was ejected from the premises for breaching the lease nonetheless to pay all unpaid rent to the end of the lease term was not per se invalid. The court explained:

[The] defendants claim that [the plaintiff] is barred from collecting unpaid future rents pursuant to the acceleration clause because under this Court's decision in Fifty States Management Corp v Pioneer Auto Parks, Inc. (46 NY2d 573 [1979]), a landowner cannot claim accelerated rental payments when the landlord terminates the lease and retakes possession. Defendants' reliance on Fifty States is misplaced because the acceleration clause in that case was intended to secure the tenant's obligation to pay rent in the context of an ongoing leasehold, and the clause set the damages for a breach of that obligation. The Court concluded that a lease term providing for accelerated rent upon a tenant's default in rent payment, as a condition of the tenant's continued possession of the property, is enforceable absent a claim of fraud, exploitative overreaching or unconscionable conduct. Here, defendants do not argue that they want to be put back in possession. Moreover, [the plaintiff] sought damages in accordance with the acceleration clause after terminating the lease, once defendants defaulted and breached their leasehold obligations to maintain the property and pay rent. Thus, unlike the landowner in Fifty States, [the plaintiff] is not seeking to deploy the acceleration clause in the course of a continuing leasehold for purposes of ensuring the tenant's compliance with a material provision of the lease.

Nor can defendants challenge the validity of the acceleration clause based on this Court's recognition in Fifty States that, where a lease provides for acceleration as a result of a breach of any of its terms, however trivial or inconsequential, such a provision is likely to be considered an unconscionable penalty and will not be enforced by a court of equity. That rule addresses, in part, the inequities of damages disproportionate to the losses incurred as a result of a tenant's collateral or minor breach. That rule continues in force, but is inapplicable to defendants, who committed material breaches of the lease by ceasing all rental payments as of February 2008 and simultaneously abandoning the premises.

To the extent defendants suggest that a landowner should be subject to a duty to mitigate, we previously rejected this argument in Holy Properties Ltd., L.P. v Kenneth Cole. In that case the Court stated that once a tenant abandons the property prior to expiration of the lease, a landlord was within its rights under New York law to do nothing and collect the full rent due under the lease. The Court adhered to this established approach, and stated that parties in business transactions depend on the certainty of settled rules, in real property more than any other area of the law, where established precedents are not lightly to be set aside. We see no reason to reverse course in defendants' case. In particular where, as in Holy Properties, the parties here freely agreed to bind defendants to pay rent after termination of the landlord-tenant relationship.

(Internal quotations and citations omitted). The court went on to hold that while the acceleration clause at issue was not per se unenforceable as a penalty, the trial court should have allowed the parties an opportunity to make a factual record on that question and remanded the matter for the purpose.