A lease agreement contains numerous landlord remedies for tenant defaults. One seemingly lucrative remedy is the right to accelerate the rent payments due during the balance of the lease term and recover these future rents as damages for the default. This is known as an accelerated rent provision. Any landlord entering into a lease likely expects to be able to enforce this lease term against the tenant. But did you know that your lease acceleration clause may not be enforceable in Georgia? These clauses will not be enforced unless they contain key language accounting for future market conditions.
Limitations on Accelerated Rent Clauses
In Georgia, rent acceleration clauses are viewed by courts as liquidated damages provisions.[1] Unlike actual damages, liquidated damages is defined as the damages whose amount the parties to a lease, or other contract, decide upon during the formation of a contract in case of a default. Generally, liquidated damages are enforceable unless they are seen as a penalty.
Georgia courts apply a three-part test to determine whether an accelerated rent clause acts as an unenforceable penalty:
1. First, the injury caused by the breach must be difficult or impossible of accurate
estimation;
2. Second, the parties must intend to provide for damages rather than for a penalty;
3. And third, the sum stipulated must be a reasonable pre-estimate of the probable
loss.[2]
(Lack of) Enforceability
Generally, a rent acceleration clause passes the first and second parts of the test. As to the first part, courts recognize it is difficult to ascertain the damages for a tenant default when the amount of rent that would be received by re-letting the premises for the balance of the term is unknown. And a lease simply stating that the acceleration of rent constitutes liquidated damages, and is not a penalty, is likely sufficient to satisfy the second part.
The difficulty of enforcing accelerated rent clauses lies with the third part of the test. A Georgia court will deem a provision unenforceable if (1) it allows the landlord to collect the entire future rent without reducing the future rent to present value or if (2) it does not deduct the future rental value of the premises during the remaining term of the lease from the present value of the future rent.[3] Stated another way, an accelerated rent provision must: (1) reduce the accelerated future rent to present value and (2) deduct from the present value of the accelerated future rent the present value of the reasonable rental value for the premises for the remainder of the lease term.
This is an extremely difficult standard to meet as it essentially requires the landlord to predict the future. Thus, the more years that remain under the lease term, the greater the difficulty a landlord will have in enforcing an accelerated rent provision.[4] And, even if an accelerated rent provision is drafted properly, proving to a court the amount of accelerated rent due will likely require expert testimony.[5]
Despite these difficulties, there are good reasons to include an accelerated rent lease provision. Please contact us if you are a landlord who needs assistance carefully drafting an accelerated rent provision in your lease, or if you need a legal opinion on the enforceability of an existing accelerated rent provision. Downs Law can help you navigate this sticky and confusing terrain.
—————— [1] See, e.g., Peterson v. P.C. Towers, L.P., 426 S.E.2d 243, 245. [2] Southeastern Land Fund, Inc. v. Real Estate World, Inc., 237 Ga. 227 (1976). [3] See Mullis v. Shaheen, 456 S.E.2d 764, 765; see also Peterson. [4] See Nobles v. Jiffy Mkt. Food Store Corp., 260 Ga. App. 18, 21 (declining to enforce an accelerated rent provision seeking 18 years of unaccrued rent as “neither the lease nor any evidence cited to this court attempted to determine whether these up-front payments would bear any reasonable relationship to [landlord]’s actual future damages, and it is difficult to infer such a relationship given the lengthy lease period”). [5] See Cherry Farms, LLC v. Saulat Enters., 2009 U.S. Dist. LEXIS 78843 (S.D. Ga. Sept. 2, 2009).