Daily Development for Tuesday, February 18, 2003
By: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu
LANDLORD/TENANT; LANDLORD'S REMEDIES; DAMAGES; LIQUIDATED
DAMAGES: Shopping center landlord may
enforce contract provision giving it an amount equal to the base rent for every
month a defaulting tenant's premises remains vacant and in addition can charge
a 2% per month late fee on the amounts of actual rent owed for that period.
Benderson-Wainberg, L.P. v.
Atlantic Toys, 228 F. Supp. 2d 584 (E.D. Penn. 9/17/02) (New Jersey law)
Although only a trial court decision, this happy result for
the landlord is being spread among the landlord's community and may provide the
basis for some heavy damages clauses in the next generation of leases.
Tenant defaulted and subsequently abandoned the premises in
Landlord's center. Perhaps because at
least one of the parties the parties appear to do be based in Pennsylvania
(since this is a Pennsylvania court despite the fact that we have a New Jersey
lease), the lease contained a rent acceleration provision that is generally
enforced in Pennsylvania but not many other places.
In addition to the acceleration clause, which applied on
default whether tenant remained in possession or not, the lease also had a
special provision for tenant vacancy. In
the event that the tenant vacated the premises prior to the end of the lease
the tenant was required to pay, in addition to the rent, an additional amount
of liquidated damages equal to the rent amount.
In effect, then, the tenant was liable for double rent for periods of
vacancy In addition, the lease provided that the tenant would be liable for a
late charge of two percent of the total unpaid rent amount accruing every month
that the lease was unpaid.
The landlord ultimately relet the
premises, but they were vacant for a substantial period of time. The landlord claimed rent for this period,
plus the liquidated damages equal to the rent again, plus two percent per month
on the unpaid balance for a late charge fee.
The landlord also attempted to collect attorney's fees because the lease
permitted it to collect "costs of collection.". The tenant apparently abandoned virtually
from the outset any claim for accelerated rent.
There was also some unusual juggling concerning damages for
the period of time after the premises were relet, but
let the evil of the day be sufficient.
Let's only talk for now about the damages claim for the vacancy period.
The tenant, not surprisingly, argued that the liquidated
damages provision doubling the rent was a penalty. The court noted that the party challenging a
liquidated damages clause has the burden of showing the clause to be
unreasonable. The landlord presented an
expert who testified as to the "ripple effect" of tenant vacancies -
that decreased traffic reduces percentage rent at other stores (there appeared
to be no percentage rent regarding this premises) and remaining tenants may
have "kick out" provisions that permit them to leave if other space
remains untenanted for a period of time (apparently there was no direct
evidence this happened here). The liklihood of these things happening is difficult to project
at the time any given lease is drafted.
The tenant did not challenge this testimony and presented no rebuttal
witnesses.
Of course, in addition to the fact of difficult-to-prove
damages, it is also necessary to evaluate whether the set liquidated damages
constitute a reasonable effort to approximate the damages. Here, the court apparently did not rely upon
the landlord's export, but simply stated that "the more uncertain the
damages, the greater latitude the parties should have in their estimate of
damages (citing the now famous Metlife decision (732
A.2d 493 (N.J. 1999) on late fees in mortgage defaults.) The court also cited a
1996 Maryland decision that also permitted liquidated damages equal to the rent
in a case in which it was clear that the vacancy would affect "vacancy
rate, tenant mix, customer draw, profitability, or . . . ability to relet the space."
Perhaps significantly, the Maryland case was against Kinney's Shoe
Corp., operator of stores that likely are not "anchor tenants" - as
was the case here as well. (Tenant was a
toy store operator paying $5000 per month rent. )
It is unclear whether the liquidated damages was a doubling
of all unpaid rent - including the tenant's share of CAM charges and the like,
but the editor suspects that this was not the case.
The court went on to discuss late fees, but its discussion
of this issue appears to be hopelessly muddled, beginning with the
characterization of the charges in question as "late fees" at
all. In fact, what the
court (and apparently the contracting parties) describes as a late fee
provision really appears to be a provision for default interest. It is a two percent charge exacted monthly on
the total amount of rents in default - in other words an interest rate of
24%. Monthly compounding, if permitted
(the opinion is unclear but probably would deny it) likely would push the effective
interest rate much higher.
This error is significant, because the court then turns to Metlife for support of the 2% monthly late charge in this
case, it refers to the Metlife court's discussion of
the 5% late charge permitted in that case and refers to it as a recurring
monthly charge. In fact, in Metlife, the 5% charge was a one time charge on a late
installment - what is usually meant by a "late charge." The Metlife case
also discussed and allowed default interest -
but limited the default interest to
12.5% - five percent over the contract rate, stating that this was within the
15% that courts sometimes have tolerated for such interest. In the instant case, the 2% charge is
fifteen to eighteen percent higher than the current cost of money, and, of
course, a huge increase in return to the lender, certainly not justified by Metlife.
Further, it is unclear whether the court intends to apply
the "late charge" as liquidated damages for those periods in which
the landlord already is collecting the liquidated damages based upon the tenant's
vacancy. As a matter of principle, it
might be possible to separate the two, and permit both liquidated damages
measures, since they compensate for different things. But it would be nice if we knew what the
court was doing. At one point, the court
states: "The court finds . . . that [landlord] is not entitled to collect
late fees during the period it is also rentitled to
recover liquidated damages." That
seems clear enough - even if the rationale for the conclusion isn't
stated. But the balance of the paragraph
in which this language appears seems to discuss the question of whether the two
percent charge should be levied upon the other liquidated damages item -
the "doubled rent."
The court reads the lease as not permitting a late charge on
a liquidated damages claim, but really never discusses any rationale for its
conclusion that the two percent should not be collectible at all when the other
charge is accruing, and in fact it isn't even clear that it stands by the
conclusion in its later analysis. (It
does say later that "to the extent the liquidated damages provision in the
lease purports to be a reasonable estimate of the landlord's damages for a
tenant's breach, allowing for collection of late fee payment on top of
liquidated damages would constitute partial double recovery." Again, unfortunately, this could be read as
denying a two percent charge based upon the liquidated damages claim, rather
than based on the other rent claim and in addition to the "double
rent"
liquidated damages claim.
If we get through all of the above, we can read the case as
standing theoretically for the position that a two percent per month continuing
late charge is indeed valid as a liquidated amages
amount. The court held that the charge
is a reasonable charge to "compensate Landlord for the administrative
expense and inconvenience associated with untimely rent, including the payment
notices and additional bookkeeping, and for the loss of rental income. . .
Delinquent rent not only results in a loss of use measured as interest, but
also interrupts normal cash flow and may affect the landlord's ability to meet
its operating expenses . . . The greater the amount of late rent and the longer
the rent remains past due, the greater the adverse impact on the landlord's
business." (Citing
an Indiana case).
Comment 1: Notwithstanding the confusion in the opinion,
there is no doubt that this is a significant landlord's case, and we'll see it
cited quite a bit if it withstands an appeal. (Westlaw shows no appeal pending
at present, and the opinion came down in September of last year.)
The editor has heard that a group of landlords has formed a
foundation to clone this judge, but it is unclear exactly how they intend to
get the clones appointed to the various federal court benches. Where there's a will there's a way. And landlord's
certainly are likely to have the will.
Comment 2: The editor has always believed that liquidated
damages for the many difficult-to-prove losses that landlords suffer in tenant
abandonment cases make a lot more sense that the occasional "lottery
payoff" that we now see when the landlord finds a willing judge and jury. But
the notion that a relatively small tenant actually is likely to generate double
the rent in losses when it terminates its occupancy seems a little strong. Further, there is no hint here that the
landlord had a good faith duty to seek to relet the
premises (although it did in fact relet reasonably
promptly.) How long is an acceptable
vacancy period during which these damages can accrue?
Comment 3: Late charges are perfectly acceptable, as is
default interest. But the two concepts should be kept separate. A default interest rate of 24% has not been
found acceptable in New Jersey in the past, and approving it here seems to be
wrong.