On August 19, 2014, the Pennsylvania Superior Court affirmed a
trial court's decision not to reduce accelerated damages
awarded to a landlord to present value, thereby strengthening the
landlord's position with respect to acceleration clauses in an
already landlord-friendly state. The case, Newman Development
Group of Pottstown, LLC v. Genuardi's Family Market, Inc. and
Safeway, Inc., provides an important lesson for commercial
tenants: Be sure to discuss a provision in the lease that
explicitly requires acceleration damages to be reduced to present
value upon a breach by a tenant.
Rent acceleration clauses may provide that the accelerated rent
will be reduced to "present value" by discounting the
aggregate amount by a percentage. The point is that the value of
the dollar paid at the time of the breach is worth more than the
value of the dollar paid in the future.
In Newman, the landlord and tenant, both of whom are
sophisticated parties and were represented by attorneys, negotiated
two important aspects to the lease: (1) contingencies of
performance over a 20-year term and (2) consequences of breaches of
the agreed upon terms. Under the lease, the damage calculation for
breach by the tenant included sums for future rents. The lease also
provided for the rate of interest the tenant was obligated to pay
to the landlord on sums owed as a result of the tenant's
breach. However, the lease did not explicitly require that those
sums be reduced to present value.
The tenant argued that the reduction to present value was already
implied in the lease pursuant to Pennsylvania law, thus it was not
necessary to draft the explicit present value language into the
lease.
The Superior Court disagreed:
"To the extent it was intended to be consideration in the
calculation of damages for breach, a discount rate would have been
so stated in the lease."
In other words, there was nothing in the lease that suggested that
the parties intended for a reduction to present value of future
damages, nor does Pennsylvania law mandate such a reduction.
The important take away is that parties should not assume that
future rent will be reduced to present value. Instead, parties must
remember to negotiate those terms explicitly into the lease
agreement. Otherwise, courts under Pennsylvania law will not permit
a reduction to present value to be implicitly read into what is,
otherwise, an unambiguous lease agreement.
The Tenant has filed a Petition for Allowance of Appeal to the
Pennsylvania Supreme Court. We are monitoring the case as the
matter moves through the appeal process.
This article is presented for informational purposes only and is not intended to constitute legal advice.