“This is very bad news,” thought Jim Buttermilk, CEO of Low Kelvin Ice Cream, makers of “the iciest ice cream on earth.” He had just received notice that Low Kelvin’s landlord, All Smiles Property Investors, had terminated its commercial lease for the property, where Low Kelvin’s cryogenic ice cream tasting bar was located, and commenced a summary process action based on alleged non-payment of rent. This was more than a little surprising as Low Kelvin had paid all amounts due. As Jim looked into the matter, it became apparent that All Smiles was basing the termination on Low Kelvin’s inadvertent late payment of certain real estate taxes, a breach of the lease but one which Low Kelvin had cured months earlier.
The lease contained a default provision allowing All Smiles to terminate the tenancy if Low Kelvin defaulted in the payment of any rent for 10 days after written notice. Low Kelvin had always paid its rent on time. Under the lease, Low Kelvin was to pay, in addition to base rent, its proportionate share of real estate taxes on the property. The payment of additional rent was due within 30 days after written notice from the landlord as to the amount of the taxes. For more than three years, Low Kelvin received no such notice and made no additional rent payments. Then, on March 5, All Smiles had delivered a notice seeking payment of $30,000 for real estate taxes within 30 days, i.e., by April 4. Low Kelvin intended to comply, but due to a clerical error (its accountant entered the due date as April 8 rather than April 4), the payment was made four days late.
All Smiles now relies on that late payment of additional rent as the basis for terminating the lease and evicting Low Kelvin. However, Massachusetts law arguably provides Low Kelvin with a good defense because either: (1) Any breach of the Lease resulting from failure to pay real estate taxes was insignificant and Low Kelvin acted in good faith at all times, or (2) Even if Low Kelvin’s breach in failing to pay real estate taxes was not insignificant, equitable considerations, including the fact that the parties continued good faith negotiations concerning the amount and method of payment of the real estate taxes until after the deadline for payment, together with the established rule disfavoring forfeiture, require a court to deny All Smiles possession of the premises.
The breach was insignificant.
Low Kelvin can argue that the breach was insignificant and cannot form the basis for eviction/forfeiture, and the default provision of the Lease is unenforceable to the extent it would allow termination for such a breach. Not all breaches of commercial leases justify termination and eviction. This is true even when the lease contains a default provision which, on its face, allows termination and eviction. In DiBella v. Fiumara, 63 Mass. App. Ct. 640 (2005), the Appeals Court identified three classes of breach of commercial leases, each of which must be treated differently. According to the Court,
General rules governing breaches of a lease and default clauses. Before discussing the trial judge’s findings in more detail, we turn to the general rules governing the right of a landlord to terminate a lease for breaches by a tenant.
a. Material breaches. In the absence of a clause similar to paragraph 17 (hereafter called a default clause), a landlord may only terminate a lease if the tenant commits a material breach, defined in our cases as a breach of an “essential and inducing feature of the contract [ ].”…. See Restatement (Second) of Property (Landlord & Tenant) § 13.1 (1977). Thus, where the breach is material, it is unnecessary to discuss a default clause, even if contained in a lease or license; the landlord or licensor may terminate even without such a clause….
b. Insignificant breaches. If the breach is insignificant or accidental, even if there is a default clause, our courts will not allow termination. See, e.g., Mactier v. Osborn, 146 Mass. 399, 402, 15 N.E. 641 (1888) (accidental breach of an obligation to insure); Judkins v. Charette, 255 Mass. 76, 82–83, 151 N.E. 81 (1926) (accidental failure to pay rent on time); Kaplan v. Flynn, 255 Mass. 127, 129–131, 150 N.E. 872 (1926) (failure to paint); Howard D. Johnson Co. v. Madigan, 361 Mass. 454, 457–459, 280 N.E.2d 689 (1972) (failure to submit gross sales figures, and when such figures were finally produced, failure to have them signed by a responsible financial officer of lessee). See also Restatement (Second) of Property (Landlord & Tenant) § 13.1 Reporter’s note 9, at 507.
c. Breaches that are neither material nor insignificant. Where the lease contains a default clause, but the breach, while not insignificant, is also not material (that is, it is not a breach of an “essential and inducing feature” of the agreement, … the default clause will in most cases be controlling….
Id. at 643-45. See also Maniff v. Town of Saugus, 85 Mass. App. Ct. 1118, 2014 WL 1758213, *2 (5/5/14) (unpublished Rule 1:28 decision) (“Where a breach is so immaterial that it is insignificant or accidental, the breach may not serve as grounds for termination, regardless of whether the contract contains a default clause…. Where a breach is immaterial but not insignificant, the default clause will generally control, unless strong equitable considerations do not support or permit termination.” (Internal quotation marks omitted)).
Low Kelvin’s breach of the lease was its accidental failure to pay real estate taxes for only four days after the date set in the notice of default. Low Kelvin can argue that this is not a significant breach. A material breach is a breach of an “essential and inducing feature of the contract.” DiBella, 63 Mass. App. Ct. at 644. Factors considered in determining whether a breach is material include, “(a) the extent to which the injured party will be deprived of the benefit which he reasonably expected; (b) the extent to which the injured party can be adequately compensated for the part of that benefit of which he will be deprived; (c) the extent to which the party failing to perform or to offer to perform will suffer forfeiture; (d) the likelihood that the party failing to perform or to offer to perform will cure his failure, taking account of all the circumstances including any reasonable assurances; (e) the extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing.” Id., quoting Restatement (second) of Contracts, §241 (1981). Those factors weigh heavily against materiality of Low Kelvin’s accidental, temporary and now cured breach.
In cases where a failure to pay rent was inadvertent, Massachusetts courts have held that the breach was insignificant and that leases could not be terminated on that basis. The Court in DiBella cited Judkins v. Charette, 255 Mass. 76, 82-83 (1926), for the proposition that “accidental failure to pay rent on time is an insignificant breach.” Moreover, the United States District Court for the District of Massachusetts, in Banco do Brasil, S.A. v. 275 Washington Street Corp., 750 F.Supp.2d 279 (D. Mass. 2010), states, “the ‘accidental failure to pay rent on time’ is such an insignificant or accidental breach that it will not support the termination of a lease.” Id. at 292. The Court further stated, “Massachusetts joins with nearly all courts [which] hold that, regardless of the language of the lease, to justify forfeiture, the breach must be “material,” “serious,” or [“]substantial”… Forfeiture for a trivial or immaterial breach of a commercial lease should not be enforced.” Id. (Internal quotation marks omitted). As Low Kelvin’s breach was accidental and insignificant, termination of its lease would be improper, regardless of what is set forth in the lease’s default provision.
Even if a court were to conclude that the late payment of real estate taxes by Low Kelvin was not insignificant, Low Kelvin can argue that equitable considerations still require denial of All Smiles’ claim to possession of the premises. In DiBella, the Court noted that even when a breach is not insignificant, and the default clause would otherwise apply, a court must consider whether equity and fairness require that the Lease not be terminated. The Court stated,
Even if a default clause would otherwise be effective, our courts “do not look with favor upon penalties and forfeitures.” Judkins v. Charette, 255 Mass. at 83, 151 N.E. 81. See Howard D. Johnson Co. v. Madigan, 361 Mass. at 456, 280 N.E.2d 689. … Thus, even when there is a default clause, “[e]quitable considerations, … if present, may entitle the tenant to relief against the forfeiture of his lease for a mere failure to perform his promise.” Restatement (Second) of Property (Landlord & Tenant) § 13.1 comment j.
63 Mass. App. Ct. at 645-46. In JonJame Realty Trust v. Ryan, the Court explained,
we point out that “[e]ven if a default clause would otherwise be effective, our courts ‘do not look with favor upon penalties and forfeitures.’ “ Id., quoting Judkins v. Charette, 255 Mass. 76, 83, 151 N.E. 81 (1926). “Thus, even when there is a default clause, ‘[e]quitable considerations … if present, may entitle the tenant to relief against the forfeiture of [its] lease for a mere failure to perform [its] promise.’ ” Id. at 646, 151 N.E. 81, quoting Restatement (Second) of Property (Landlord & Tenant) § 13.1 comment j (1977). Among such considerations are “the extent to which the injured party will be deprived of benefit, whether that party will suffer loss, and the extent to which the party failing to perform will suffer forfeiture.” Id. at 646 n. 7, 151 N.E. 81. A court will “look to whether ‘on the whole it is just and right’ that relief from forfeiture of the lease should be granted,” id., quoting Lundin v. Schoeffer, 167 Mass. 465, 469, 45 N.E. 933 (1897), and “will also consider whether the injured party can be adequately compensated, or has changed its position.” Id.
2011 Mass. App. Div. 16, 2011 WL 1346922, *2 (2/7/11).
Low Kelvin can argue that in its case, the equities weigh strongly against the termination of the lease. Notably, the Court in Banco do Brasil refused to enforce a lease termination provision where the breach at issue was the tenant’s accidental non-payment of rent, which it later cured, causing no harm to the landlord. Here, Low Kelvin’s late payment of the real estate taxes was accidental. Moreover, Low Kelvin fully cured the breach by its payment of the full amount due on April 18. In addition, the lessor, All Smiles, would suffer no loss if the lease were allowed to continue. It has been fully compensated and has not changed its position. Conversely, a termination of the lease would impose a serious forfeiture on Low Kelvin, as it will lose its place of business and its investment therein.
Accordingly, in light of the fact that Low Kelvin paid all amounts due, that its alleged late payment was accidental, that Low Kelvin acted in good faith, and that the lessor failed to even notify Low Kelvin that real estate taxes were owed for more than three years, a Massachusetts court is likely to conclude that “‘on the whole it is just and right’ that relief from forfeiture of the lease should be granted.” DiBella, 63 Mass. App. Ct. at 646 n.7.