Daily Development for Tuesday, February 2, 2010
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Husch Blackwell Sanders
Kansas City, Missouri

LANDLORD/TENANT; LANDLORD’S REMEDIES; LIQUIDATED DAMAGES: “LATE OPENING CHARGE;  A late-opening charge in a commercial lease is not an unenforceable penalty where the actual damages to the landlord are difficult to ascertain, the charge is reasonable with respect to the potential injuries, and the charge is applied on a daily basis rather than in a single lump sum.  CPMI, Inc. v. Kolaj, 885 N.Y.S.2d 496 (N.Y. App. Div. 2009) (Michigan Law)

Defendant tenant ("Tenant") entered into two commercial leases (the "Leases") with plaintiff managing agent ("Managing Agent"), which Leases were to be construed in accordance with the laws of the State of Michigan.  The Leases imposed a "late-opening charge" on Tenant in the event that the restaurant that was to be operated at the leased premises was not opened within 120 days after execution of the Leases.  For each day after the expiration of this 120-day period that the restaurant was not opened, Tenant was obligated to pay Managing Agent 1/360 of the annual rent. 

Tenant did not open the restaurant until 6 months after the expiration of the 120-day period and, as a result, Managing Agent demanded a late-opening charge of $40,869.39 from Tenant.  Tenant failed to pay this charge and ultimately vacated the leased premises prior to the expiration of the Leases. 

Managing Agent brought an action against Tenant for breach of the Leases.  The lower court found in favor of the Managing Agent and awarded Managing Agent damages for unpaid rent and the late-opening charge.  Tenant appealed the decision of the lower court on the grounds that the late-opening charge was an unenforceable penalty, but the appellate court affirmed.

Michigan law provides that a liquidated damages clause is appropriate where actual damages are difficult to ascertain, and such a clause is not an unenforceable penalty if "the amount stipulated is reasonable with relation to the possible injury suffered" and "is not unconscionable or excessive."  The appellate court found that the potential injuries to Managing Agent as a result of the delay - including "dark space" in the retail complex of which the leased premises were a part, maintenance problems and diminished traffic, sales, reputation, value and leasing, mortgage refinancing and sale opportunities with respect to the retail complex - were difficult to quantify so a liquidated damages clause was appropriate.  The appellate court held that the late-opening charge was reasonable in relation to these possible injuries and was not excessive given that it was applied on a daily basis rather than as a single lump sum.  Therefore, the late-opening charge was not an unenforceable pe
nalty and Tenant was obligated to pay Managing Agent the stipulated amount.
Comment: Not every “double rent” liquidated damages clause is upheld.  The landlord’s lawyers did a pretty good job of detailing how injurious the tenant’s failure to open his pizza restaurant would be to the landlord’s business operations.  The tenant didn’t show up, apparently, with much firepower to resist.  But the special feature to note was the court’s acceptance of the notion that the day to day nature of the charge made it less onerous.  Hmmmm. 

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