Court Backs Acceleration Clauses
By Christopher R. Vaccaro
Special to Banker & Tradesman

The Massachusetts Supreme Judicial Court overruled the Appeals Court in Cummings Properties, LLC v. Hines last Sep­tember, and upheld the validity of a rent accel­eration clause in a com­mercial lease.

Rent acceleration clauses allow landlords to demand that evicted tenants immediately pay as liquidated damages all remaining un­paid rent through the end of the lease term, even if the lease term expires years after the tenant’s default. The defaulting tenant’s lia­bility is not offset by the rental value of the vacated premises or by rents paid by re­placement tenants.

Many landlords refrain from adding these clauses in their leases, and sophisticated tenants generally refuse to accept them. However, Cummings Properties, which often rents to smaller tenants, includes rent acceleration clauses in its standard lease form. Cummings is not shy about enforcing the clause against defaulting tenants, as Darryl Hines recently learned.

Hines founded Massachusetts Consta­ble’s Office Inc. (MCO), a civil process ser­vice firm that earned a reputation for using questionable tactics to serve process and make arrests. In 2016, MCO secured a con­tract with the Massachusetts Department of Revenue, and signed a five-year lease with Cummings for space in Woburn. Hines per­sonally guarantied the lease, which in­cluded a rent acceleration clause.

Less than a month into the lease, the De­partment of Revenue suspended its contract with MCO, and MCO defaulted on the lease. Cummings evicted MCO, and a year later signed a four-year lease with a new tenant for the space formerly occupied by MCO.

$69K Judgement

Despite securing the replacement tenant, Cummings sued Hines under the lease guar­anty for the entire accelerated rent through the end of the five-year term of MCO’s ter­minated lease. A Superior Court judge up­held the rent acceleration clause, and found that Hines had sufficient sophistication to understand the consequences of his per­sonal guaranty. It entered judgment against Hines for $69,000, the balance of the accel­erated rent owed after deducting prior pay­ments made by MCO.

The Appeals Court reversed that judgment. It noted that rent acceleration clauses may be enforceable as liquidated damages provisions if they are not punitive. In the case of Cum­mings’s lease, the acceleration clause al­lowed Cummings to evict the tenant, relet the premises to a new tenant, collect rent from that tenant, and still claim accelerated rent from MCO without deducting rent received from the new tenant. The Appeals Court ruled that the clause bore no reasonable rela­tionship to Cummings’s expected damages, rendering it an unenforceable penalty.

The Supreme Judicial Court granted Cummings’s application for further appel­late review. The SJC first considered whether the rent acceleration clause was enforceable as a liquidated damages clause. The SJC noted that liquidated damages clauses are generally enforceable, if they are not so disproportionate to anticipated damages that they constitute a penalty.

When Massachusetts courts consider whether to enforce liquidated damages clauses, they analyze the circumstances at the time the contract was entered into, with­out considering other circumstances that may arise later by the time of the breach.

Court’s ‘Single Look’ Approach

Under this “single look” approach, rent acceleration clauses are enforceable if the actual damages from a breach were difficult to ascertain when the lease was signed, and the accelerated rent is a “reasonable fore­cast” of damages expected to result from a breach. Courts are not required to consider rents that landlords might collect from re­placement tenants after breaches occur.

The SJC noted that Hines had the burden of proving facts that would render the clause unenforceable, and that he failed to meet that burden. According to the SJC, Hines did not present evidence supporting his claim that Cummings’s anticipated damages upon de­fault were ascertainable when Hines signed his guaranty. Hines also failed to show that the rent acceleration clause was an unrea­sonable forecast of the damages that Cum­mings might sustain if MCO breached the lease. The SJC found that the rent accelera­tion clause was not an unenforceable penalty.

The SJC also rejected Hines’s argument that he should be relieved from the burdens of the rent acceleration clause because he was not a sophisticated party. The SJC noted that Hines’s level of sophistication was a question of fact, not law, which the superior court properly determined based on Hines’s business experience. Therefore, the rent acceleration clause was enforce­able against Hines. The SJC affirmed the su­perior court’s $69,000 judgment against him.

The SJC’s decision may encourage other commercial landlords to add rent accelera­tion clauses to their leases. Tenants should be on the lookout for these clauses, and should be wary about entering into leases with landlords who utilize them.

Download the article as seen in  Banker & Tradesman on June 26, 2023. Learn more about Christopher R. Vaccaro.

Lighthouse Property Tax fight Settled Against Hull
By Christopher R. Vaccaro
Special to Banker & Tradesman

Graves Ledge is a 10-acre rock formation at the edge of Boston Har­bor, miles from the mainland. A lighthouse there has guided ships entering Boston Har­bor since 1905. The United States owned and operated Graves Ledge and the lighthouse until it sold them to David Waller in 2013 for almost $1 mil­lion.

Waller acquired ownership of Graves Ledge and the lighthouse through a limited liability company, and recorded a deed with the Suffolk County Registry of Deeds. The deed describes Graves Ledge as “the outermost island in the Boston Harbor Na­tional Recreation Area, in Suffolk County, Massachusetts Bay.” The U.S. Coast Guard reserved the right to operate navigational aids on Graves Ledge, and the deed re­quires the new owner to preserve historic buildings. Waller is currently renovating the lighthouse and related structures.

After the purchase, Waller received a real estate tax bill from the Town of Hull, located in Plymouth County. Waller con­tested Hull’s jurisdiction in the land court. The court offered the municipalities of Boston, Winthrop and Nahant opportuni­ties to assert jurisdiction over Graves Ledge, but they hastily renounced any claim to it, probably hoping to avoid re­sponsibility for providing municipal ser­vices to the remote ledge. Last month, after a trial involving scores of documents and expert testimony from surveyors, the court ruled that Graves Ledge lies outside of Hull’s municipal boundaries.

Early Colonial Records Consulted

The land court’s decision relied on his­torical records for the Boston Harbor Is­lands and Hull. In 1641, the Massachusetts  Bay Colony established a fishing commu­nity known as “Nantascot” on the penin­sula and neighboring islands today known as Hull. The town was originally part of Suffolk County. Colonial records show that the Brewster Islands, a small archipelago north of Hull’s peninsula, had been awarded to Hull by 1662. Seventeenth cen­tury maps of Boston Harbor show the Brewster Islands as enclosed shapes, and Graves Ledge as a series of x’s northeast of the Brewster Islands.

Hull was annexed to Plymouth County in 1803. Decades later, the Massachusetts leg­islature created a commission to determine the seaward boundaries of coastal munici­palities. The commission issued a report in 1884 setting the marine boundaries of towns in Norfolk and Plymouth Counties, and showed Graves Ledge and the Brews­ter Islands outside of Hull’s boundaries.

What Counts as an Island?

In 1892, the Massachusetts Supreme Ju­dicial Court considered Hull’s marine boundary and the 1884 report in Russ v. Boston, where the city of Boston attempted to assess taxes on one of the Brewster Is­lands. The SJC ruled that although the re­port concluded that the island was located north of Hull’s marine boundary, the island itself remained part of Hull because of the seventeenth century colonial grant.

During the 20th century, numerous maps and documents were produced by private parties and government agencies regarding coastal municipalities near Boston Harbor. Many of these showed Graves Ledge within Plymouth County, but some showed it in Suffolk County. Because of these inconsis­tencies, the court focused on the seven­teenth century colonial grants involving the Brewster Islands.

The court observed that colonial maps and later maps labeled Graves Ledge sepa­rately from the Brewster Islands, and that no documents from colonial times in­cluded Graves Ledge in the Brewster Is­lands. The court cited Hull’s own records, which only mentioned four islands among the Brewster Islands, none of which was Graves Ledge. These records also de­scribed a “meadow” located on the north­ernmost Brewster Island. There are no meadows on rocky and barren Graves Ledge, which lies well north of the vege­tated Brewster Islands.

The court noted that Graves Ledge ap­parently was not considered an island dur­ing colonial times. Early maps do not label Graves Ledge as an island, and show it as a series of X’s, while showing the Brewster Islands as enclosed shapes designated as islands. The court also discussed Graves Ledge’s remoteness from the Brewster Is­lands, its uninhabitability before the light­house was built, and its location beyond the traditional outer boundary of Boston Harber running between Nahant and the Hull peninsula. Given these findings, the court ruled that Graves Ledge was outside of Hull’s corporate boundaries.

As to Boston, Winthrop and Nahant re­nouncing claims to Graves Ledge, the court speculated on whether it is possible for land within the boundaries of Massachu­setts to be outside the boundaries of all cit­ies and towns. The court declined to an­swer that question, because its rejection of Hull’s claim to Graves Ledge disposed of the case at hand. If the question arises later, the city of Boston may end up as a re­luctant party to its resolution.

Download the article as seen in  Banker & Tradesman on June 26, 2023. Learn more about Christopher R. Vaccaro.

District Court Allows Discrimination Suit to Proceed
By Christopher R. Vaccaro
Special to Banker & Tradesman

Last month the U.S. District Court of Massachusetts fired a warning shot to­ward tenant-screening firms, in Louis v. Saf­eRent Solutions LLC.

Mary Louis and Mon­ica Douglas are self-de­scribed Black women. They both hold Sec­tion 8 housing vouchers guaranteeing most of their rent payments. Louis applied to Metropolitan Management Group LLC for an apartment at Granada Highlands in Mal­den. Douglas applied to a different prop­erty manager for an apartment at Millside at Heritage Park in Canton. Their applica­tions were forwarded to SafeRent Solu­tions LLC, a Texas-based firm offering ten­ant-screening services to landlords and real estate professionals nationwide.

SafeRent applies a proprietary algorithm to rental applications, using credit histo­ries, bankruptcy records, past due ac­counts, payment performance and eviction histories. The algorithm generates a “Saf­eRent Score” that is intended to assess the likelihood of an applicant’s lease default. The SafeRent Score disregards the benefits of tenant housing vouchers.

Metropolitan rejected Louis’s applica­tion based on her SafeRent Score. Louis challenged the rejection, offering employ­ment and landlord references, but without success. Douglas’s application was initially rejected because her SafeRent Score re­flected credit history and landlord-tenant problems, but it was later accepted after she appealed with assistance from a hous­ing advocacy group.

Louis and Douglas filed a putative class action lawsuit in federal court against Saf­eRent and Metropolitan for violations of federal and state antidiscrimination laws. They alleged that SafeRent’s algorithm gen­erated lower scores for Blacks, Hispanics and voucher-holders, who often have less income and poorer credit histories, result­ing in denials of rental housing applica­tions based on race and use of vouchers. They also sued SafeRent for unfair and de­ceptive practices in violation of Massachu­setts General Laws Chapter 93A. Commu­nity Action Agency of Somerville Inc. (CAA), which provides housing services to underprivileged individuals, joined the suit as a plaintiff.

SafeRent and Metropolitan moved to dis­miss the lawsuit, arguing that Louis and CAA lacked standing, and that the plain­tiffs failed to state actionable claims against them. Defendants often file  mo­tions to dismiss early in litigation, but the tactic rarely succeeds, because judges hearing those motions must assume, for purposes of the motion, that the plaintiffs’ factual allegations – but not legal conclu­sions – are true.

Court Finds Disparate Impacts

Federal and state laws prohibit discrimi­nation in the sale and rental of housing be­cause of race, color, religion, sex, familial status, and national origin. Massachusetts law also prohibits discrimination against voucher holders. The court easily found that Louis had standing to file suit, because she alleged that the defendants’ actions caused her application to be wrongfully de­nied, requiring her to accept costlier but less desirable housing in a neighborhood with a higher crime rate. The case for CAA’s standing was trickier because CAA itself was not denied housing by the defen­dants. Nonetheless, the court ruled that CAA had standing because SafeRent’s prac­tices, if found to illegally discriminate, im­paired CAA’s efforts to fulfill its mission of locating housing for its clients.

SafeRent also argued that antidiscrimi­nation laws do not apply to it in this case, because SafeRent is not a landlord and it does not ultimately decide whether to ac­cept or deny rental housing applications. The court disagreed, noting that SafeRent’s screening service influences housing deci­sions and, according to the plaintiffs’ com­plaint, causes prohibited discrimination.

The court next discussed disparate im­pact claims under anti-discrimination laws. Such claims are actionable under federal and Massachusetts law, when directed at practices that have disproportionately ad­verse effects on protected classes, without legitimate rationales. The court summa­rized the plaintiffs’ allegations that SafeR­ent’s reliance on credit history is misplaced, has a disparate negative impact on Blacks, Hispanics and voucher-holders, and limits their housing opportunities. The court ruled that these allegations were sufficient for the plaintiffs to proceed with their hous­ing discrimination claims against the defen­dants. However, the court dismissed the plaintiffs’ Chapter 93A claims, ruling that their allegations did not suggest that SafeR­ent’s conduct was egregious enough to sup­port a claim under that statute.

The court denied the defendants’ mo­tions to dismiss the housing discrimination claims, but there is no certainty that judg­ment will someday be entered against Saf­eRent and Metropolitan. There remains much work to do. The plaintiffs must prove that SafeRent’s algorithm employs data with little relevance to whether applicants are worthy tenants, causing impermissible discriminatory impacts. SafeRent and Met­ropolitan will strive to prove that SafeR­ent’s algorithm reliably and fairly predicts whether applicants are likely to default, without significant adverse impacts on pro­tected minorities.

While the parties gather data for their experts, SafeRent might want to revisit its methodology.

Download the article as seen in  Banker & Tradesman on June 26, 2023. Learn more about Christopher R. Vaccaro.

Shrewsbury Tenant Argued “Frustration of Purpose” Doctrine
By Christopher R. Vaccaro
Special to Banker & Tradesman

Many disrup­tions from the COVID pan­demic are now behind us, but litigation related to those disruptions continues to work its way through Massachu­setts courts.

Last month, the Appeals Court decided Inland Commercial Real Estate Services, LLC v. ASA EWC, LLC, involving a commer­cial tenant’s failure to pay rent. The tenant signed a 10-year lease in 2016, to operate a “European Wax Center” in Shrewsbury. Three years later, in March 2020, Gov. Char­lie Baker issued COVID-19 Order No. 13, re­quiring non-essential businesses, including the wax center, to close. The tenant com­plied with the order and did not reopen until July 2020, after the governor issued a new order ending the shutdown.

After the tenant failed to pay rent and water charges for March through Septem­ber 2020, the landlord sent it a notice to quit, claiming over $55,000 in delinquent rent, some of which accrued during the three-month shutdown period. The tenant made a partial payment, but did not bring the rent current. The landlord terminated the lease and filed suit in superior court to evict the tenant.

In contesting the eviction, the tenant ar­gued that it should not have to pay rent for the three-month period when the COVID shutdown order prohibited it from doing business. The tenant supported this argu­ment with the often-invoked, but rarely suc­cessful, frustration of purpose doctrine.

The Supreme Judicial Court summarized the frustration of purpose doctrine in a 1991 decision, as follows: “Where, after a con­tract is made, a party’s principal purpose is substantially frustrated without his fault by the occurrence of an event the non-occur­rence of which was a basic assumption on which the contract was made, his remaining duties to render performance are dis­charged, unless the language or the circum­stances indicate the contrary.” When con­sidering this defense, courts look at whether unforeseen circumstances effec­tively negated the value of the contract to the party who invoked the defense.

Unforeseen Circumstances Can Negate Contracts

In the case of the Shrewsbury wax cen­ter, the Superior Court judge rejected the tenant’s frustration of purpose defense, and entered judgment awarding the landlord possession of the leased premises and $86,841 in damages. The tenant appealed, and the Appeals Court offered a useful anal­ysis of the doctrine, before affirming the Su­perior Court’s judgment.

The Appeals Court noted that the frustra­tion of purpose doctrine excuses a party from performing its contractual obligations “where unanticipated supervening events require it.” For the doctrine to apply, the purpose that is frustrated must be so intrin­sic to the reason for the contract, that the contract makes little sense without it. Courts are generally reluctant to apply the doctrine, preferring instead to preserve the certainty of contracts.

The Appeals Court also noted that most courts decline to apply the doctrine to tem­porary business closures caused by govern­ment shutdown orders. When evaluating frustration of purpose defenses in govern­ment shutdown cases, courts consider the duration of the forced closures, the length of the lease term, how far into the lease term the closure occurred, whether tenants could reopen after restrictions were lifted, whether tenants remained in possession of the prem­ises during the shutdown and whether ten­ants could use their premises for purposes not barred by the shutdown order.

Temporary Shutdown Not a Dealbreaker

Taking these factors into account, the Ap­peals Court found the tenant’s frustration of purpose argument unpersuasive. It noted that the tenant did not show that its tempo­rary closure substantially frustrated the pur­pose of the lease. The tenant was already three years into its lease when the shutdown occurred, the three-month shutdown was relatively short compared to the 10-year lease term, the tenant remained in posses­sion of the premises during the shutdown and could sell goods from the premises, and the tenant was able to resume its business after the shutdown was lifted.

The Appeals Court also rejected the ten­ant’s argument that a temporary frustration of purpose should excuse the tenant from paying rent during the shutdown period. The court found that the doctrine provides relief to parties who see the anticipated benefits of their bargains destroyed by un­foreseen events, not merely interrupted on a temporary basis.

The Appeals Court went on to state that even if the doctrine were available on a temporary basis, the tenant’s obligation to pay rent during the shutdown period would only be suspended, not discharged alto­gether. The court affirmed the Superior Court’s judgment.

This decision shows that the tenants who invoke the frustration of purpose doctrine to avoid rent payments will most likely be frustrated by unfavorable court rulings.

Download the article as seen in  Banker & Tradesman on June 26, 2023. Learn more about Christopher R. Vaccaro.

Decision Will Affect Mass. Property Liens
By Christopher R. Vaccaro
Special to Banker & Tradesman

Last month, the U.S. Supreme Court ruled in Tyler v. Hennepin County, Minnesota that a Minnesota county acted improperly when it seized a one-bed­room condominium for delinquent property taxes, sold the condo­minium for more than the amount owed, and then refused to remit the surplus to the elderly owner. The ruling is likely to af­fect the enforcement of property tax liens in Massachusetts.

Geraldine Tyler lived alone in her Min­neapolis condominium. In 2010, her family persuaded her to move into a senior com­munity where she would be safer, but they neglected to keep her safe from the Hen­nepin County tax collector. Real estate taxes on her condominium went unpaid.

Under Minnesota law, after property taxes become one year delinquent, they accrue costly interest and penalties, and the county obtains a judgment transferring limited title to the state. If the taxpayer fails to redeem the property by paying the delinquent taxes, interest, and penalties within three years, the state secures abso­lute title to the property. The state may keep the property for public use or sell it to a private party. Surplus proceeds from private sales belong to the county, to be shared with the town and school district. Taxpayers have no right to surpluses.

By 2015, unpaid taxes on Tyler’s condo­minium exceeded $2,000 and had accrued $13,000 in interest and penalties. The county seized the condominium, sold it for $40,000, and kept the $25,000 surplus rep­resenting the value of Tyler’s equity.

Tyler challenged the county’s retention of the surplus in federal court, claiming that the county violated the Fifth Amend­ment of the U.S. Constitution, which pro­hibits governmental takings of private property without just compensation, and the Eighth Amendment of the Constitu­tion, which prohibits governments from imposing excessive fines. The district court dismissed her suit, and the appeals court upheld the dismissal. The Supreme Court agreed to hear Tyler’s case.

Citing the Magna Carta and the Fifth Amendment of the Constitution, the Su­preme Court’s nine justices unanimously agreed that the county’s retention of the $25,000 surplus violated Tyler’s Fifth Amendment rights. Two justices went fur­ther in a concurring opinion, labeling the county’s action as an imposition of an ex­cessive fine in violation of the Eighth Amendment. The other justices declined to rule on the Eighth Amendment issue, believing that the Fifth Amendment gave Tyler sufficient grounds to prevail.

Parallels to Bay State Foreclosure Rules

Massachusetts’s tax foreclosure proce­dure is similar to Minnesota’s. The Massa­chusetts statute provides that if delinquent real estate taxes are not paid within 14 days after the municipality’s demand, the tax collector may proceed to take the land for the municipality. Delinquent taxes ini­tially accrue interest at 14 percent per year. If the taxes are not paid within 14 days after the collector notifies the tax­payer of its intention to do so, the collec­tor may take the property and record a no­tice at the local registry of deeds.

After the taking, the interest rate on the delinquent taxes jumps to 16 percent per year. The collector does not need a court order to effect the taking. After the taking, taxpayers have a right to redeem the prop­erty by paying the taxes and interest, and taxpayers usually continue to possess the property, until their right of redemption is foreclosed.

To foreclose the taxpayer’s right of re­demption, the municipality must file a foreclosure action in Land Court. The tax­payer’s right of redemption continues until the Land Court enters a final foreclosure judgment. If the taxpayer fails to redeem before the judgment, the municipality gains full value of the real estate, and the taxpayer retains nothing and forfeits the value of its equity. The statute lets taxpay­ers petition the Land Court to vacate the foreclosure judgment for up to one year after its entry, but judges have discretion to grant or deny such petitions.

The situation in Massachusetts is exac­erbated when municipalities deal with pri­vate investors such as Tallage LLC, which uses subsidiaries to acquire tax titles and then foreclose on taxpayers’ rights of re­demption. Registry of Deeds and Land Court records reveal that Tallage routinely purchases tax titles, secures foreclosure judgments from the Land Court, and sells the foreclosed properties in private sales for more than the amount of the delin­quent taxes. The Tyler decision may end this questionable practice, which some have called “equity theft.”

In light of the Supreme Court’s Tyler de­cision, Massachusetts’s tax lien foreclo­sure procedures are difficult to defend. If the Massachusetts legislature does not change them, state or federal courts prob­ably will.

Download the article as seen in  Banker & Tradesman on June 26, 2023. Learn more about Christopher R. Vaccaro.