Late Rental Payments Not Always a Basis for Termination of a Commercial Lease

In the current economic landscape, landlords are once again encountering more and more tenants who fail to timely pay their rent.  This failure to timely pay rent can place a landlord’s investment in jeopardy as most landlords rely on these rental/lease payments to payoff mortgages and other debts on the property.  While the failure to timely pay rent has been construed as a material breach of a commercial lease, thus allowing a landlord to terminate the lease and evict the tenant, a recent unpublished Massachusetts Appellate Court decision has provided tenants with a reprieve from eviction so long as the rental/lease payments are eventually made.

In Varano v. PDJM Land Tr., LLC, 103 Mass. App. Ct. 1127 (2024), a North End restaurant was habitually late with its lease payments and the landlord sought to terminate the lease agreement and evict the tenant.  These lease payments were at times weeks late, but usually only days late.  For its analysis, the Appellate Court sought to determine whether these late payments were a material breach of the commercial lease.  The Appellate Court relied upon the test found in DiBella v. Fiumara, 63 Mass. App. Ct. 640 (2005) to determine whether the breach was material and allowed termination of the commercial lease agreement.  In DiBella, the Court set forth several factors to consider when determining whether a material breach has occurred. Those factors are: the extent to which the injured party will be deprived of benefit; whether that party will suffer loss; the extent to which the party failing to perform will suffer forfeiture; whether “on the whole it is just and right” that relief from forfeiture of the lease should be granted; and whether the injured party can be adequately compensated, or has changed its position.  Id. at n 7.  Unique in Varano was evidence introduced at trial that showed the landlord did not need the lease payments to pay a mortgage on the property or would otherwise be in jeopardy of losing title to the property due to the unpaid rent.

The Appellate Court in Varano agreed with the trial judge that the DiBella factors weighed in the tenant’s favor and against a finding of materiality and significance.  The Appellate Court agreed with the trial court that through the lease’s late charge provision, the landlord could adequately compensate itself for the part of the benefit of which it may have been deprived by the tenant.  Of importance, the trial court found the only loss to the landlord for the late payments was the time-value of money.  In addition, the Appellate Court found that if the tenancy were terminated, the tenant would suffer a severe forfeiture that was disproportionate to the lease violations.  Specifically, the tenant would lose approximately $500,000 in premises improvements he made.  As the judge further found, “summary eviction of Nico from its prime location on Hanover Street would erode the branding and diner good will it has developed over the course of its 14-year history at this venue … [and] could well put this restaurant out of business altogether.” Thus, the potential impact of such a forfeiture threatened the tenant’s very existence, far exceeded the gravity of the tenant’s lease violations, and “militat[ed] strongly against treating such breaches as sufficiently significant to justify eviction.”  As for the third DiBella factor, the likelihood that the tenant would cure his performance failures, the judge found that “the scale tilts slightly in favor of Varano and against PDJM.” Although late rent payments were recurring practices and there was evidence that the tenant continued to make late payments intermittently even after the notice to quit, at the time of trial, the judge was unaware of any lease violations that required a cure.  Finally, nothing in the tenant’s behavior “fail[ed] to comport with standards of good faith and fair dealing.”

The Appellate Court concluded that while the persistent late payment of rent by a tenant could amount to a material breach of a lease even after factoring in equitable considerations, in the circumstances of this case, the judge was not required to find a material breach by the tenant.

While the landlord in Varano was in a secure financial position that led the courts to prevent the termination of the lease, not all landlords are in such an admirable spot.  Landlords need to make sure that if their investment is contingent on timely lease payments by their tenants that they are able to sufficiently document their financial position so that a court does not presume otherwise and allow a tenant to pay as they wish, so long as they pay.  As more and more tenants attempt to delay lease payments due to their own precarious financial situation, landlords need to be prepared to act before their own investment is threatened.