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NY Court of Appeals Rules on Damages Clauses In Commercial Leases
In The Trustees of Columbia University in the City of New York v. D'Agostino Supermarkets, the New York Court of Appeals unanimously reaffirmed the principle that "parties are free to agree to a liquidated damages clause provided that the clause is neither unconscionable nor contrary to public policy." However, the judges split 4-3 on the issue of whether the relevant damages clause in a commercial lease was unenforceable as a matter of law because it was so grossly disproportionate to the ascertainable amount due upon full performance.
D'Agostino Supermarkets (D'Agostino) leased commercial space from The Trustees of Columbia University (Columbia). After D'Agostino failed to make certain rent payments in a timely manner, the parties agreed to terminate the original lease and enter a separate Surrender Agreement in exchange for D'Agostino's: 1) surrender of the premises; and 2) staggered payment of back rent. If D'Agostino defaulted, the Surrender Agreement required that "the aggregate amount of all Fixed Rent, additional rent or other sums and charges due and payable during the term of the Lease shall immediately thereafter come due and payable by Tenant to Landlord and [] Tenant shall no longer be entitled to be released and relieved from and against any Released Claims." After executing the Surrender Agreement, Columbia was able to relet the premises to a new tenant. D'Agostino subsequently failed to make all required payments under the Surrender Agreement, and Columbia sued for breach of that Agreement. Columbia filed a motion for summary judgment seeking more than $1 million pursuant to the damages provision in the Surrender Agreement which represented the future rent payments due under the terminated lease. D'Agostino filed a cross-motion for summary judgment in which it agreed to pay the approximately $176,000 in outstanding payments due under the Surrender Agreement and accrued interest, but argued that liquidated damages in the amount of future rent under the terminated lease are grossly disproportionate to any actual damages sustained by its breach of the Surrender Agreement. The Supreme Court denied Columbia's motion and granted D'Agostino's cross-motion. The Appellate Division, First Department affirmed, and the Court of Appeals granted leave to appeal.
On appeal, Columbia argued that the liquidated damages provision of the Surrender Agreement, which required D'Agostino to pay all the rent that would have been due under the terminated lease if D'Agostino breached the Surrender Agreement, should be enforced as written because the Surrender Agreement was a practical resolution of D'Agostino's breach of that lease. D'Agostino countered that the liquidated damages provision in the Surrender Agreement is grossly excessive.
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