Acceleration clause: One of the most common, if not standard, clauses in a commercial lease

The acceleration clause in a commercial lease, that is the ability of the landlord to collect the balance of the rent due from the tenant upon the tenants default, and subsequent failure to cure, is one of the most common, if not standard, clauses in a commercial lease. The Court of Appeals just recently weighed in on acceleration clauses. In 172 Van Duzer Realty Corp., v. Globe Alumni Student Assistance Association, Inc., 2014 N.Y. LEXIS 3439, 2014 NY Slip Op 08872 (2014) the Court reviewed an acceleration clause and left the distinct impression that not all acceleration clauses are created equal. In Van Duzer, several months after executing a lease extension, for nine years, the tenant/defendant vacated the premises and ceased paying rent. The landlord/plaintiff commenced an action to recover possession and for past due rent. The Civil Court awarded the landlord possession of the premises and a zero dollar money judgment. Thirteen months later the landlord commenced this action for arrears and damages equal to the remaining rent owed on the lease as liquidated damages, under the acceleration clause in the lease. The Supreme Court granted the landlord summary judgment and a judgment was entered against the tenant in the amount of $1,488,604.66, the amount due for the balance of the lease less money the landlord received for a short term lease of the premises, after a determination by Special Referee. The First Department affirmed the trial court and the defendant appealed to the Court of Appeals. The Court of Appeals determined that the defendants were entitled to a hearing to determine if the damages due as a result of the acceleration clause constituted a penalty. After making it clear that a landlord does not have a duty to mitigate its damages, the court explained that the burden to prove a liquidated damages clause is a penalty is on the party seeking to avoid paying liquidated damages. The court agreed with the tenant/defendant that an acceleration clause "is subject to judicial scrutiny based on a challenge that it is nothing more than a means by which to exact a penalty otherwise proscribed by law." Put another way, if the liquidated damages which become due as a result of the acceleration clause are "grossly disproportionate to the amount of actual damages" the liquidated damages may be deemed a penalty, a violation of public policy, and therefore unenforceable. The defendant's contention that, because the acceleration clause allows the landlord to have possession and collect all future rent, the landlord is getting a windfall and provides the owner with more than if the tenant did not breach the lease. The court ordered the Supreme Court to allow the defendant an opportunity to demonstrate that, if enforced, the liquidated damages clause would be an unenforceable penalty to the tenant. Steven Glassberg is the founder of Glassberg & Associates, LLC, New York, N.Y. and Port Washington, N.Y.