Liquidated Damages Clause Is an Unenforceable Penalty

What Happened: The COVID-19 pandemic forced the owner of an iconic cinema in Minneapolis to shut down and default on its lease with six years left in the term. The landlord sued for liquidated damages of $1.8 million, including $364,212 in unpaid rent and $1,444,258 representing the present value of future rent payments. The operative lease language was the clause allowing the landlord to:

obtain as liquidated damages arising out of [Tenant’s] breach or termination the maximum amount allowed by any such statute or rule of law which may govern the proceedings in which such damages are to be proved whether or not such amount be greater, equal to, or less than the amount of the excess of the then present worth of the Rent and all other charges reserved herein over the then present worth of the fair market rents and all other charges referred to above.

The lower court awarded the landlord the $1.8 million in liquidated damages it was seeking. The tenant appealed.

Ruling: The Minnesota appeals court held that the liquidated damages clause was an unenforceable penalty and reversed the ruling.

Reasoning: As in most states, liquidated damages clauses are allowed in commercial leases under Minnesota law if:

• The actual damages resulting from a breach can’t be ascertained or measured by the ordinary rules; and
• The liquidated damages amount isn’t “manifestly disproportionate” to the actual damages sustained.

The court concluded that the liquidated damages clause in this case satisfied neither condition. The landlord’s damages were ascertainable. “It is not difficult to identify and measure the rent payments that a tenant does not pay to a landlord,” the court explained. In fact, the landlord did just that in calculating how much accelerated rent the tenant owed. The liquidated damages amount was also unreasonable since it didn’t account for the landlord’s duty to mitigate its damages and just assumed that it would be unable to relet the premises if the tenant defaulted. As a result, the clause amounted to an unenforceable penalty.

• Lagoon Partners, LLC v. Silver Cinemas Acquisition Co., 2023 Minn. App. LEXIS 456, 2023 WL 8534599