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.