Owner Can't Collect Late Fees After Lease Was Terminated

Facts: An owner and a staffing agency tenant signed a three-year lease for office space. Under the lease terms, the owner could charge a $25-per-day late-rent fee. The owner later sued the tenant for breach of the lease, and the tenant abandoned the space before the end of the lease term. The owner exercised its right to terminate the lease and enter the space. The owner asked the court for a judgment in its favor without a trial. The court granted the request and awarded the owner $32,766.11, which was calculated by adding the unpaid monthly rent plus late fees through the termination of the lease, in addition to past-due water and sewer bills. The tenant appealed.

Decision: The court upheld the decision in favor of the owner as to the issue of liability; it reversed the award of damages.

Reasoning: On appeal, the tenant didn't challenge the court's decision that it was liable for paying $5,816.11 for unpaid rent and late fees due before the owner terminated the lease. Rather, it disputed the validity of the “liquidated damages” provision of the lease, and in the alternative, if the provision was found to be valid by the court, the amount calculated under that provision.

The court pointed out that, “generally, money damages awarded in a breach of contract action are designed to place the aggrieved party in the same position it would have been in had the contract not been violated.” A damage award for breach of a commercial lease is limited to only those damages arising from the breach that could not, by reasonable effort on the owner's part without undue risk or expense, have been averted or reduced. And tenants are potentially liable for rent coming due under the agreement as long as the property remains unrented. “An owner's right to future rent is not unfettered, however, as owners in commercial leases owe a duty to mitigate their damages caused by a breaching tenant,” the court stressed.

In lieu of actual damages, parties to a contract may agree to liquidated damages—an amount that both parties agree is a “reasonable estimation of actual damages to be recovered by one party if the other party breaches.” Liquidated damages clauses in contracts are enforceable if they meet various conditions; otherwise, they are unenforceable as penalties for nonperformance, the court noted. First, the amount of actual damages must be uncertain and difficult to prove. Second, the amount of stipulated—that is, mutually agreed upon by the owner and tenant—damages must be reasonable and proportionate to the contract as a whole. Third, the parties' intent to stipulate to damages must be clear and unambiguous.

Here, when the tenant defaulted, the owner exercised the default clause in the lease, which provided: “If Tenant shall default Landlord may enter upon the premises and terminate this Lease, in which event the obligations of Tenant hereunder shall cease without prejudice, however, to the right of Landlord to recover from Tenant as liquidated damages, a sum equal to any deficiency between the then rental value of the premises for the unexpired portion of the term and the rent provided for that period discounted at four (4) percent per annum to present net worth.”

The trial court did not calculate damages according to the terms of the clause. The owner and tenant agreed that $5,816.11 was properly awarded for unpaid rent and late fees before the lease was terminated. But because the owner had no right to collect late fees after the lease was terminated in January 2009, the trial court erred in awarding $12,750 for late fees after that date.

The liquidated damages clause is a valid provision only if, through no fault of the owner, the property remained unrented during the term of the lease, said the court. The clause is invalid as a penalty, however, if the property was re-rented by the owner during the term of the lease (in which case the damages should be reduced by the mitigation afforded by re-renting), or if it is found that the owner made no effort whatsoever to “avert or reduce” the damage by re-renting, the court determined. The court sent the case back to the trial court to determine what amount, if any, was owed to the owner as a result of the breach.

• Carter v. CPR Staffing, Inc., December 2010