Liquidated Damages Clause Was Enforceable

An advertising firm's lease required the owner to make some improvements to the exterior and interior of the building before the tenant moved in, and others by various deadlines after the tenant moved in. The lease also required the owner to give the tenant liquidated damages—that is, a set amount of damages in lieu of actual damages—in the form of a rent abatement if the owner failed to complete the improvements by the deadlines. The amount of these damages would vary depending on the importance of the incomplete improvements. When the owner failed to make certain improvements by the deadlines, the tenant sued the owner and asked the court to enforce the liquidated damages clause. The owner argued that the liquidated damages clause was an “unenforceable penalty” and asked the trial court to dismiss the case, which it did. The tenant appealed.

A New York appeals court ruled that the liquidated damages clause was enforceable. It said that both parties were sophisticated businesses that made every “reasonable effort to provide for reasonable compensation” if the owner didn't complete the improvements by the deadlines. It also said that a liquidated damages clause like the one in the lease was appropriate because the exact amount of damages the tenant suffered from the owner's failure to complete the improvements by the deadlines was impossible to quantify. The appeals court reinstated the case and sent it back to the trial court for further proceedings [Bates Advertising USA, Inc. v. 498 Seventh, LLC].