Rent Abatement Clauses: Tenants Should Speak Softly, But Draft a 'Club'

'Liquidated damages constitute the compensation which the parties have agreed must be paid in satisfaction of the loss or injury which will flow from a breach of contract.' (Wirth & Hamid Fair Booking, Inc. v. Wirth, 265 N.Y. 214, 223 (1934)). In determining whether liquidated damages constitute a penalty, courts have historically focused on three areas of inquiry: 1) the intention of the parties (United States v. Bethlehem Steel Co., 205 U.S. 105, 119 (1907)); 2) the ability of the parties to ascertain in advance damages flowing from a future breach (Ward v. Hudson River Bldg. Co., 125 N.Y. 230, 235 (1891)); and 3) the reasonableness of the amount stipulated (Wise v. United States, 249 U.S. 361, 365-367 (1919)). Although the intention of the parties was once considered a fundamental area of inquiry, this has been abandoned in modern case law. More recently, liquidated damages clauses have been upheld if the amount of damages can be considered a reasonable measure of the probable loss that a party would incur, and if it would be very difficult, or impossible, to determine the actual loss in the event of a breach. (Truck Rent-A-Center v Puritan Farms 2nd, 41 N.Y.2d 420 (1977)). A rent abatement clause providing for an amount that is 'plainly or grossly disproportionate to the probable loss' will be treated as a penalty and will not be enforced because 'public policy is firmly set against the imposition of penalties or forfeitures for which there is no statutory authority.' (Id. at 424). Additionally, courts review the provision as of the date of the contract, not as of the time of the breach. (Walter E. Heller & Co. v. American Flyers Airline Corp., 459 F. 2d 896, 898 (2d. Cir. 1972)).