Liquidated Damages - if a penalty - unenforceable

Mass Appeals Court denies liquidated Damages

Case name = Mittas Early Learning LLC v MDC Properties

FACTS

Parties & Premises

• Landlord /developer
• Tenant /child care franchisor
• Premises Tyngsboro to be built pursuant to a Lease agreement.

Developer promised to build a child care center by a deadline in the lease (within 180 days of getting a building permit).  Developer missed the date by two years.

Amendment #1 to Lease – increased rent and set a new deadline to get a temporary certificate of occupancy. Amendment said the terms of the Amendment were “null & void” if new deadline was not met. It wasn’t.

Tenant sent notice under the lease of HVAC and maintenance issues for the landlord to complete. Lease provided tenant could recoup actual damages and liquidated damages ($500/day) for landlord’s failure to complete.

Amendment #2 to Lease – required Landlord  to repair and maintain the HVAC and confirmed all other terms and conditions of the Lease. HVAC was not fixed for 3 more years.

• Lawsuit

Tenant claimed it should get free rent due to Amendment #1 being void - since its terms were not met. Judge ruled that Amendment #2 revived it and undid the voiding from Amendment #1.

Tenant v Landlord under Lease – judge found landlord breached the lease and the covenant of quiet enjoyment by failing to fix the HVAC. Awarded Tenant $25,000 actual damages, refused to enforce the $500/day liquidated damages.

ISSUE 1

Was liquidated damage unenforceable as a penalty

HOLDING 1

Not enforceable              

REASONS

Liquidated damages $/day must be negotiated with some eye to actual losses. Pure penalty provisions are prohibited.

ISSUE 2

Impact of Lease amendments

HOLDING 2

Voiding of lease by 1st amendment unvoided by 2^nd.

REASONS

2^nd Amendment entered into after the Landlord missed its obligations from the 1^st Amendment, confirmed all lease terms