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Finding Uncertainty in Certain Damage Provisions
For years, careful landlords and tenants have used liquidated damages as a means to avoid the uncertainty of events beyond their control. If the tenant held over beyond its term, or the landlord breached the tenant's exclusive, liquidated damages were considered a dependable remedy to avoid costly and time-consuming litigation. Unfortunately, what seems certain to lease drafters is anything but certain when presented in court. A recent decision from the U.S. District Court for the Middle District of Georgia underscores that point.
In Big Lots Stores v. Gray Highway Partners, 2006 WL 692347 (M.D. Ga. 2006), the landlord entered into a lease with Big Lots that contained a restrictive covenant prohibiting it from leasing to any 'competing business,' including any 'dollar store operation.' Within a year, the landlord leased space in the center to a Dollar General store. Not surprisingly, Big Lots quickly filed suit, seeking to enforce the provision of its lease that permitted it to 'pay in lieu of Fixed Minimum Rent … monthly rental equal to the lesser of two and one-half percent of Gross Sales for such month.'
On a motion for summary judgment, Big Lots' vice president testified that its liquidated damages provision was 'based upon usual and customary standards in the retail shopping industry [including those] recommended by the International Council of Shopping Centers.' Unconvinced, the district court held that the clause was a penalty and not liquidated damages and referred the matter to trial to determine the amount of actual damages. This is probably not the outcome Big Lots expected when it inserted the liquidated damages clause into its lease.
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