A tenant defaulted on a commercial lease two months after entering into a five-year lease. As is frequently the case in commercial leases, the document required the tenant to pay the rent for the entire lease term as liquidated damages. In this case, the landlord relet the premises less than one year after the tenant defaulted. The landlord sued for the entire five years’ rent. The trial court agreed and issued a judgment for the total amount saying that the accelerated rent clause was an enforceable liquidated damages provision. On appeal, that judgment was reversed. The appeals court ordered the lower court to reduce the judgment to an amount equal to the actual damages.
WHY THIS IS IMPORTANT... Practically every commercial lease has this liquidated damages clause in it. It is enforceable if the potential damages were difficult to determine when the agreement was made, and the clause was a reasonable forecast of damage expected to occur from a breach. The court said that because the acceleration clause allowed the landlord to retake possession, relet the property, collect rent from the new tenant and recover all the remaining rent owed by the old tenant without having to account for the rent received from the new tenant, it was an unenforceable penalty. Although it did not specifically say it, it is likely that if the clause allowed the tenant to deduct the rent from the new tenant or had some percentage provision depending on the duration of the default, it might have been upheld.