Daily Development for
Thursday, March 6, 1997

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

LANDLORD/TENANT; TENANT'S REMEDIES; RENT REDUCTION: Where landlord drafts provision giving tenant substantially reduced rent upon landlord's breach of anti-compete clause, clause will not operate as a penalty even if reduction in rent is out of proportion to tenant's actual damages.

Tenant leased space in a shopping center for three renewable five year terms. The lease provided for a fixed rent of $6500 per month, but stipulated that if another tenant in the center sold women's wear in large or half sizes, the tenant could opt to pay a percentage rent. During the second five year term, another tenant in the center did commence selling the target items, and the tenant immediately commenced paying the percentage rent, which reduced the rental obligation to $1760 per month.

The landlord took the position that the reduction in rent operated unfairly against the landlord in that it was a penalty - out of proportion to any damages the tenant actually suffered as a consequence of the landlord's actions. A magistrate and trial court both found for the tenant, and the appeals court affirmed.

Interestingly, however, the court elected not to evaluate the clause as a liquidated damages provision. Instead, it confronted the issue more directly, and held that such a clause would not operate as a penalty where it appeared in a lease instrument drafted by the landlord.

Comment 1: Many readers, who frequently see small shopping center tenants pushed around by overreaching landlords, would see reason to cheer in this case. They would conclude that the landlord got no worse than what shopping center landlords generally deserve. But is the reasoning of this decision good law or good policy?

Implicitly, the court stated that the clause might have created a penalty had the landlord not drafted lease or if it had operated in favor of the landlord, rather than the tenant. Although the editor does not necessarily disagree that the clause here should have been enforced, the editor would contest both bases used by the court for rejecting the penalty analysis.

First, it seems inappropriate to make a determination that a clause does or does not act as a penalty on the basis of who drafts it? If a party is being compensated for a breach in amounts more than ordinary contract law allows, the court should strike down the penalty. The whole idea of the anti-penalty policy is that parties should not be permitted to contract for economically inefficient remedies, even if they expressly intend to do so. This reasoning would seem to hold true even if one party actually drafts the contract.

The editor has concerns also about the notion that the party who "drafts" a contract actually dictates the terms of the contract. Clearly no landlord in its right mind voluntarily includes a provision such as that at issue into its leases. The clause was there not because it served the interest of the landlord, but because it served the interest of the tenant. What difference does it make who actually put pen to paper to form the words? The clause was the tenant's clause. The very presence of the clause suggests that the tenant had bargaining power. If the clause was somehow ambiguous or misleading, perhaps it would be relevant that the landlord was in control of its phrasing. But the battle here was over substantive terms of the lease, not the wording. Clearly the tenant's concerns dictated the insertion of this clause in the lease.

Comment 2: The court also suggests that the clause should not be viewed as a penalty because it operates in favor of a tenant, not a landlord. The editor might be shocked that parties with the decision making power of an appellate court can be guilty of such blatant stereotyping of contracting roles if only the editor had not seen it many times before. Because such typecasting of landlords and tenants is in fact quite common, the editor is not shocked, but still is troubled.

For a private enterprise system to operate effectively, parties must have confidence that the courts will not "second guess" the economic arrangements into which they have entered except in very limited circumstances. Landlords are entitled to the same consideration as tenants in having their contracts enforced. The inference to be drawn from the court's approach here is that landlords are entitled to less justice because the court feels that they already have economic power. The court persisted in that position in this case in the face of relatively clear indications that the tenant in question did have bargaining power - the clause in question is the best evidence.

Comment 3: Here, of course, the court permitted the provision to stand. The editor agrees, but likely would have argued based upon the notion that this clause was not a damages clause at all, but an available option agreed upon by both parties. The landlord had the right to take certain actions and, if it did, the tenant had the right to alter the rent terms in response. There is no need to view the landlord's actions as a breach, and no need to view the tenant's actions as obtaining a remedy for a breach. There is no indication that the breach actually prohibited the type of conduct the landlord engaged in here, or that the tenant had any traditional contract remedy - damages or specific performance - as an available response.

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