- Court Curtail Rent Acceleration
- January 16, 2004
- Law Firm: Blank Rome LLP - Philadelphia Office
In Pennsylvania a landlord will not be able to accelerate rent against a defaulted tenant if the lease does not contain an acceleration clause. Therefore, without an acceleration clause, the landlord's remedy will be limited to collecting rents only in installments, as they accrue -- unless the landlord terminates the lease.
If the landlord terminates because of a tenant's default, the landlord's damages are generally based on its anticipated loss for the balance of the lease term with a credit to the tenant for the fair rental value of the surrendered property.
The rights of Pennsylvania landlords were spelled out by U.S. District Judge Eduardo C. Robreno in the recent case of Onal v. BP Amoco Corp., 2003 WL 21887770 (E.D. Pa. Aug. 6, 2003). That case involved a dispute over a ground lease in which the tenant, Amoco, intended to construct a gas station and large convenience store on the rented property. Among other things, the parties disputed whether the tenant had a right to terminate the lease because of the tenant's failure to obtain required permits, the landlord's failure to provide non-disturbance agreements in acceptable form and whether the landlord had accepted the tenant's surrender of the property.
Perhaps the most significant legal issue in the case is whether the absence of an acceleration clause in a lease limits a landlord's recovery to rent and other payments that have accrued as of the time of trial. Because the site was in Bristol, Pennsylvania, Judge Robreno applied Pennsylvania law and refused to award damages, as requested by the landlord, for future rents and other charges.
"Confusing and Complex" Issues
Judge Robreno stated that in order to answer that question he had to consider 1) whether a landlord must remain out of possession in order to collect future rents, 2) whether the right to collect those rents in a lump sum depends entirely on the inclusion of an acceleration clause in the lease and 3) whether the absence of the duty of a landlord to mitigate damages under Pennsylvania law affects the landlord's right to recover that lump sum.
He concluded that the courts and the commentators have found the interplay of these issues "complex," and "confusing." Also, that courts have taken varying approaches depending on whether leases are analyzed under contract or real estate principles. For example, Judge Robreno contrasted the implied warranty of habitability in a lease which is a "creature of contract law," with the issue of whether a landlord has a duty to mitigate damages on the tenant's breach, which is based on real property law doctrines in Pennsylvania. He concluded that in Pennsylvania, generally, a landlord must elect to limit recovery to actual damages by repossession of the property; or as an alternative, it may leave the tenant in possession and charge the tenant for rent.
"This rule prevents a non-breaching lessor from obtaining the 'double recapture' that would result from a rule allowing a landlord to possess the property, and possibly reap a profit from renting or selling it, at the same time that he collects rent from a breaching tenant." From the tenant's perspective, the tenant would then not forfeit all of its rights when the landlord accelerates, but would thereafter be accorded its possessory rights on payment of the accelerated rent.
Based on Pennsylvania cases, the court held:
If a landlord remains out of possession, however, he may receive a lump sum all rents (sic) that will fall due during the unexpired term of his lease, only if the lease in question contains an acceleration clause; otherwise he may recover future rents on the property only as they become due. ... ("The acceleration is ... a guarantee to the lessor that he will receive immediately all of the monies (or other compensation) to which he is entitled under the lease without having to harass a reluctant tenant as periodical payments become due") ...
Amoco argued that the landlord had repossessed the properties and therefore, regardless of the lease provisions, it should not be able to accelerate future rent. It argued that the landlord had accepted Amoco's surrender of the property, and that its duty to pay rents was concomitantly discharged, on the theory that the landlord's actions in listing the property for rent on several occasions was tantamount to his repossessing it from Amoco. Amoco's best proof on this issue was that the landlord's attorney testified that as of the time of trial, he was assisting the landlord in efforts to lease the property to another tenant in the wake of Amoco's breach of the lease. The landlord's attempts had been unsuccessful, even though he had used four different realtors to find another tenant.
On this issue Judge Robreno found that the mere act of listing the property for rent, without actually re-letting it to a tenant, in no way interferes with Amoco's possessory rights and access to the property, and, as a matter of law, is unlikely to constitute an acceptance of Amoco's surrender. Also, those activities fall "far short of constituting clear and convincing proof that Onal accepted Amoco's surrender of the property for the simple reason that no testimony fixes Onal's alleged acceptance of surrender in time." As such, there is not sufficient evidence from which the jury could determine a date certain at which the landlord took possession of the property and thus extinguished Amoco's duty to pay him rent.
Since Amoco had failed to sustain its burden of proving that Onal accepted surrender of the property by taking possession, the court then had to determine whether he could recover all past and future rents in a lump sum even though the lease did not contain an acceleration clause. It held:
The fact that the lease in question does not contain an acceleration clause is dispositive of the issue. As noted above, absent an acceleration clause, a Pennsylvania landlord, provided that he remains out of possession, may collect rents only in installments as they accrue. ... Therefore, Onal is entitled to collect only those rents and other payments that had accrued under the lease as of the time of trial. Because the jury awarded those amounts and no future rents, the verdict must be affirmed.
The landlord argued that because Pennsylvania law imposes no duty to mitigate his damages under the case of Stonehedge Square Ltd. Partnership v. Movie Merchants, Inc., 715 A. 2d 1082 (Pa. 1998), he is entitled to collect all rents up front, despite the lack of an acceleration clause. Judge Robreno rejected that argument and found that the no-mitigation rule relieves the landlord only of the duty to seek a replacement tenant. But that rule does not abrogate the long standing Pennsylvania rule that prohibits double recovery or the rule that requires the presence of an acceleration clause in the lease to recover future rents in one lump sum.
This case emphasizes the importance to landlords of including acceleration clauses in their leases. If landlords do not use those clauses, apparently Pennsylvania courts will require landlords to sue defaulting tenants every month, or every few months if they elect to accrue a few defaulted payments -- unless those landlords terminate the lease and sue for damages. That expense of successive legal actions and inconvenience will have to be incurred even when the tenant has made clear that it will not make any more payments under a lease. A landlord may be forced under those circumstances to follow that procedure for the remaining years of a lease.
Apparently, when it comes to leases, a Pennsylvania court will not honor the concept of an anticipatory breach which is relied upon in other contractual contexts. The general rule, where a party breaches a continuing obligation under a contract, is that damages for an anticipatory breach should be measured by the value of the contract to the end of the term. Generally, the lump sum will be calculated by determining the present value of the anticipated future payments. For example, what would happen if a borrower stops making required payments under a note or a mortgage that does not have an acceleration clause? Or, suppose a buyer stops making payments under an installment agreement?
If these defaulting debtors do not intend to make any more payments, it seems likely that Pennsylvania courts will require them to pay damages in a lump sum representing future payments. Under the Onal case, that is not a convenience that Pennsylvania landlords will have available to them against defaulting tenants unless they take back the property, or the lease contains an acceleration clause.
One of the issues, which the court did not have to discuss, was how damages would be calculated if the landlord had accepted surrender of the property and terminated the lease. However, language in a footnote may disturb some landlords because some may read it to limit the right of the landlord to collect full damages under these circumstances. That footnote (FN9) provides:
Stonehedge does not purport to disturb the principle that a landlord must choose between taking possession of the property and collecting future rents. Indeed, a landlord's choice between possession with the right to collect actual damages and the right to collect rents on the property remains firmly in place under the non-mitigation rule. The landlord must select among (1) terminating the tenant's lease by accepting the tenant's surrender of the premises and therefore discharging the tenant of its obligation to pay rent, see Stonehedge Square Ltd. P'Ship v. Movie Merchants, Inc., 454 Pa. Super 468, 685 A.2d 1019, 1023 (Pa. Super. 1996) (discussing effect of surrender). (2) allowing the premises to remain vacant and continuing to collect rent from the breaching tenant for the remainder of the lease term, cf. e.g., Pierce, 236 A.2d at 830, and (3) accelerating the rent if the lease so provides, taking possession and re-letting the premises, with a credit to the tenant in the amount of rent paid by the replacement tenant. See e.g. H. A. Steen Indus., Inc. v. Richer Communications, Inc., 226 Pa. Super. 219, 314 A.2d 319 (Pa. Super 1973). (emphasis supplied).
A reasonable reading of item (1) of this footnote would be that while the termination of the tenant's lease could discharge the tenant from its continued obligation to pay rent, it does not discharge the tenant from its obligation to pay damages based on its anticipated loss of rent for the balance of the leased term -- with or without an acceleration clause.