Is a “Liquidated Damages Clause” Enforceable in NYC?

In some contracts, including NYC commercial leases, a clause will be included that is generally called a “liquidated damages” clause. A liquidated damages clause is agreed to in advance by the parties to a commercial lease and identifies a specific amount of money that will be owed by one party to the other if the lease is breached. Alternatively, the liquidated damages clauses will provide a mathematical formula that establishes the amount due if there is a breach. This is a standard method used in commercial leases where punitive damages are imposed for breach by the lessee using a formula based on the monthly rent and the number of months remaining in the lease. An example provision might read as follows: “Lessee shall owe three months rent to Lessor, as liquidated damages, if the Lessee breaches this Lease during the final year of the Term of the Lease.”

Liquidated damages are supposed to be an ESTIMATE of the damages that the non-breaching party would sustain in the event of a breach. The general rationale for using a liquidated damage clause is to avoid the parties engaging in a brutal litigation fight over the damages that would be owed if a breach occurred. Liquidated damages clauses can comprehensively entitle one party to such damages for ANY breach. Or, such clauses can be narrower, allowing such damages for specified and limited breaches of the lease.

If you are contemplating entering an NYC commercial lease, you should seek the legal advice and counsel of a trusted New York commercial lease attorney. These proposed lease provisions must be analyzed and evaluated.

Under New York law, liquidated damages clauses may or may not be enforceable. New York does not enforce contract provisions deemed “penalties.” The general purpose of contract law is to compensate parties if there is a breach, not punish them. Further, contract law is focused on voluntary compliance with contract terms. If enforced, penalties tend to coerce compliance with contract terms. If a New York court deemed a liquidated damages clause a disguised penalty clause, then the court will not enforce this clause. The court will require the non-breaching party to prove actual damages.

A liquidated damages clause will be deemed enforceable under the following conditions:

  • Where the amount identified as liquidated damages is reasonable and rational
  • Concerning an estimate of the actual damages that a party reasonably anticipates will be suffered if there is a breach.
  • Made at the time that the contract or lease was entered into

When courts evaluate whether a liquidated damages clause is a disguised penalty, the court will inquire into the factual question of whether an estimate was made when the lease was signed. If no such estimate was made, then there is a higher probability that a court will deem the liquidated damages to be arbitrary and unenforceable.

Contact Wright Law Firm NYC Today

Call the experienced New York commercial lease and real estate attorneys at Wright Law Firm NYC for more information. We provide top-tier commercial real estate legal and legal services for the NYC business community. To schedule a consultation, contact our office by e-mail or call us at (212) 619-1500.

o schedule a consultation, please get in touch with our office by e-mail or call us at (212) 619-1500.