Saturday, July 28, 2007

Acceleration Clause Upheld For Lease Default

The Massachusetts Supreme Judicial Court allowed a commercial landlord to enforce a liquidated damages clause against a tenant for non-payment of rent in Cummings Properties, LLC vs. National Communications Corporation (SJC Docket 09778. July 17, 2007).

The tenant had argued that the liquidated damages clause was unenforceable under Commissioner of Insurance v. Massachusetts Acc Co., 310 Mass. 769 (1942). That case barred enforcement of a liquidated damages provision that, by the terms of the lease, could apply to both trivial as well as material breaches.

A contract provision that clearly and reasonably establishing liquidated damages should be enforced so long as it is not so disproportionate to anticipated damages as to constitute a penalty. If, at the time the contract was made, actual damages were difficult to ascertain and the sum agreed on by the parties as liquidated damages represents a reasonable forecast of damages expected to occur in the event of a breach, it will usually be enforced. TAL Fin. Corp. v. CSC Consulting, Inc., 446 Mass. 422 (2006).

A rent acceleration clause, in which a defaulting lessee is required to pay the lessor the entire amount of the remaining rent due under the lease, may constitute an enforceable liquidated damages provision so long as it is not a penalty.

The SJC modified "their holding in Commissioner of Ins. to the extent that in the case of a commercial agreement between sophisticated parties containing a liquidated damages provision applicable to breaches of multiple covenants, it may be presumed that the parties intended the provision to apply only to those material breaches for which it may properly be enforced. This modification is consistent with the goal of resolving disputes "efficiently by making it unnecessary to wait until actual damages from a breach are proved" and helps to eliminate uncertainty and costly litigation. Kelly v. Marx, 428 Mass. 877, 881 (1999). It is also consistent with the intention of the parties in the present case as expressed in the language they agreed to in the liquidated damages and severability clauses of the lease."

Monday, July 23, 2007

Trustee of Nominee Trust Not Liable Under Lead Paint Suit

The Massachusetts Appeals Court ruled in the case of BELLEMARE vs. CLERMONT that the trustee of a nominee trust is not an "owner" of the property under the Childhood Lead Poisoning Prevention and Control Law (MGL c. 111 s. 189A et seq.).

Under a nominee trust in Massachusetts, the trustee may only act at the direction of the beneficiaries of the trust. The trustee has no independent authority. The trustee is better thought of as an agent of the beneficiary of the trust. As an agent, the trustee holds bare legal title.

In 1993, the legislature added the definition of "owner" to the Section 189A:

“Owner”, any person who alone or jointly or severally with others (i) has legal title to any premises; (ii) has charge or control of any premises as an agent who has authority to expend money for compliance with the state sanitary code, executor, administrator, trustee or guardian of the estate or the holder of legal title; (iii) is an estate or trust of which such premises is a part, or the grantor or beneficiary of such an estate or trust; or (iv) is the association of unit owners of a condominium or cooperative, which shall be considered an owner solely with respect to common areas and exterior surfaces and fixtures of such condominium or cooperative; provided, however, that the term “owner” shall not include a secured lender except to the extent provided in section one hundred and ninety-seven D.

Prior to 1993, there was no definition of owner in the statute. The plaintiffs were harmed prior to 1993.

Even though the current version of the statute would indicate that a trustee of a nominee trust could be held liable, the Court held that the definition of "owner" should "not be read out of context and employed to impose liability on one who is effectively an agent for a principal; who possesses "only the barest incidents of ownership," Morrison v. Lennett, 415 Mass. at 861; and who neither controls the property nor benefits from its ownership." The Court rejected a literal reading of the statute because it produces an absurd result.

The plaintiff should have filed suit against the trustee and the beneficiary of the trust. The trustee would be dismissed from the suit, but could be compelled to reveal the identity of the benficiary of the trust.

Sunday, July 15, 2007

Bad Boy Guaranty

Bruce Falby wrote an article in Real Estate Finance and Investment on the case of Blue Hills Office Park LLC v. J.P. Morgan Chase Bank, as Trustee for the Registered Holders of Credit Suisse First Boston Mortgage Securities Corp., Commercial Mortgage Pass-Through Certificates, Series 1999-C1, and CSFB 1999­C1 Royall Street, LLC.

Don't Mess With the Collateral: A Cautionary Tale

The significance of the case is that the court enforced a "bad boy" non-recourse carve-out guaranty against principals of a borrower.

Full guaranty of real estate loans is rare these days. However, lenders do generally require a bad-boy guaranty from principals of the borrower. The guaranty will trigger full recourse against the borrower and its principals in cases of fraud, misapplication of funds, transfers of the mortgaged property or other egregious behavior. Sometimes the guaranty will be limited to the amount of damages, rather than a full guaranty of the debt.

In the Blue Hills case, the borrower settled a zoning dispute with a neighboring property. The principals pocketed the $2 million cash settlement, rather than depositing the settlement into the borrower's account. With the zoning dispute settled, the neighboring property owner was able to complete its property. The single tenant of the borrower's property did not renew its lease and moved into the neighboring property. With no tenant and no rent payments, the borrower stopped making payments on its mortgage loan and the lender foreclosed.

The lender was not happy to find out that the principals pocketed the $2 million rather than making it available to the borrower to pay the mortgage loan.

The court found that under the language of the loan documents the $2 million settlement for the zoning dispute was part of the collateral for the mortgage loan. Therefore, the borrower and principals transferred a portion of the collateral in violation of the loan documents. As drafted, the bad boy guaranty made the principals liable for the full amount of the debt in the case of an unauthorized transfer of any portion of the collateral. Therefore the principals were liable for the $17.5 million loss of the lender.

This case is the first I have seen that enforced a bad bay guaranty. It should be no surprise that it was found to be enforceable. The case also makes it clear that the collateral for a mortgage loan can be more than just the real estate, in this case, a lawsuit affecting the property.

By messing with the collateral, the principals turned their $2 million windfall into a $17.5 million loss.

Monday, July 2, 2007

Boston's Historic Ames Building Will Become Boutique Hotel

The Ames Building on the corner of Court Street and the Washington Mall has changed hands to another owner who will try to convert it to a hotel: Boston's Historic Ames Building Will Become Boutique Hotel. Previously, O'Callaghan Hotels was trying to convert the property into a hotel.

The Ames building stands out because of its masonry construction. Take a look at the enormous columns at the base of the building. Those are load-bearing supports. The Ames Building was built prior to wider-spread use of structural steel in building construction. All of that thick stone on the exterior is carrying the weight of the building.