McCORMICK'S

   LANDLORD/TENANT UPDATE


Enforcing Rent Acceleration Clauses
  (Posted Jan 30, 2012)

A recent decision by Nassau County District Court Judge Scott Fairgrieve reminds us that a landlord's ability to accelerate rent and to thereafter obtain a judgment for such accelerated rent is not a simple process.¹ Initially, it is well settled that a lease that provides for the payment of rent in installments may also accelerate the date upon which all rent under the lease is due by providing that the entire rent reserved for the balance of the lease term shall become immediately due and payable upon a default in the payment of rent installments.² Such lease clause is commonly referred to as an "acceleration clause". Similarly, the absence of an acceleration clause precludes the acceleration of the balance of rent due under a lease.³

However, a lease acceleration clause that is found to impose a penalty will not be enforced.⁴ The Court of Appeals in Fifty States Management Corp. v. Pioneer Auto Parks, Inc. ⁵ stated ". . . in rare cases, agreements providing for the acceleration of the entire debt upon the default of the obligor may be circumscribed or denied enforcement by utilization of equitable principles. In the vast majority of instances, however, these clauses have been enforced at law in accordance with their terms [citations omitted]. Absent some element of fraud, exploitive overreaching or unconscionable conduct on the part of the landlord to exploit a technical breach, there is no warrant, either in law or equity, for a court to refuse enforcement of the agreement of the parties . . . Generally, where a lease provides for acceleration as a result of a breach of any of its terms, however trivial or inconsequential, such a provision is likely to be considered an unconscionable penalty and will not be enforced by a court of equity." Thus, where a lease did not obligate Landlord to re-rent the demised premises after a default and to apply the rent obtained upon re-renting to the benefit of the prior tenant, a rent acceleration clause was deemed to impose a penalty and was not enforced.⁶

Assuming the Landlord properly drafts a rent acceleration clause that does not result in a penalty, how is the clause enforced? Judge Fairgrieve's recent decision reminds us that it cannot be enforced in the District Court.⁷

In Pfeiffer v. Larrea, the lease contained an enforceable acceleration clause that provided:

• The whole amount of rent is due and payable when this Lease is effective.
  Payment of rent in installments is for Tenant's convenience only. If Tenant
  defaults, Landlord may give notice to Tenant that Tenant may no longer pay
  rent in installments. The entire rent for the remaining part of the Term will
  be due and payable.

Even though the acceleration clause provided all rent was due upon signing, Judge Fairgrieve, citing to the Appellate Division decision in Ross Realty v. V & A Iron Fabricators, Inc., noted the purpose of summary proceedings is to provide a simple procedure to recover possession of leased premises and refused to enforce the acceleration clause. The Court in Ross Realty v. V&A Iron Fabricators, Inc.⁸ held that the District Court did not have jurisdiction to grant a judgment for accelerated rent because accelerated rent that results from a tenant's default "was no longer in the nature of rent, but was in the nature of contract damages" and this was not recoverable in a summary proceeding.⁹ Also citing to the Appellate Division Decision in Ross Realty, the New York City Civil Court reached the same result in 930 Fifth Avenue Corp. v. Sherman.¹⁰

This jurisdictional issue in obtaining a judgment for accelerated rent is not the only circumstance in which courts have addressed future rent obligations and, therefore, should not come as a surprise. For instance, in Ruppert House Co., Inc., v. Altmann, a settlement stipulation entered in a residential non-payment proceeding that provided that the landlord could move for the issuance of a warrant of eviction upon tenant's default in paying the judgment amount or future rent was held not enforceable.¹¹ Again, noting that summary proceedings are designed for quick resolution of housing disputes, the Court held that it was against public policy to permit a landlord to evict a residential tenant for non-payment of future rent not sought in the petition even though such obligation was agreed to by the tenant in a stipulation.

Thus, when presented with an acceleration clause that is enforceable because it does not impose a penalty, a Landlord's action to enforce the clause and obtain an award of damages should not be brought in the District Court, but instead should be brought in the Supreme Court, New York's Court of general jurisdiction.

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¹ Pfeiffer v. Larrea, 33 Misc.3d 1212(A), 2011 N.Y. Slip Op. 51909(U) (October 21, 2011).

² Fifty States Management Corp. v. Pioneer Auto Parks, Inc., 46 N.Y. 2d 573, 415 N.Y.S.2d 800 (1979); Olim Realty Corporation v. Big John's Moving, Inc., 250 A.D.2d 744, 673 N.Y.S. 2d 439 (2d Dep't 1998).

³ Beaumont Offset Corp. v. Zito; 256 A.D.2d 372, 681 N.Y.S.2d 561 (2d Dep't 1998); 210 West 29th Street Corp. v. Chohan 13 A.D.3d 613, 786 N.Y.S.2d 322 (2d Dep't 2004).

⁴ Ross Realty v. V & A Iron Fabricators, Inc. 5 Misc.3d 72, 787 N.Y.S2d 602 (App. Term 2004).

⁵ 46 N.Y. 2d at 577.;

⁶ Ross Realty v. V & A Iron Fabricators, Inc. 5 Misc.3d 72, 787 N.Y.S.2d 602 (App. Term 2004).

⁷ Pfeiffer v. Larrea 33 Misc.3d 1212(A), 2011 N.Y. Slip Op. 51909(U) (October 21, 2011).

⁸ 42 A.D.3d 246, 836 N.Y.S.2d 242 (2d Dep't 2007).

⁹ 42 A.D.3d at 249.

¹⁰ 17 Misc.3d 1126 (A), 851 N.Y.S.2d 71 (N.Y.C. Civ. Ct. 2007).

¹¹ Ruppert House Co., Inc. v. Altmann 127 Misc2d 115, 485 N.Y.S.2d 472 (N.Y.C. Civ. Ct. 1985).