Real Estate Damages Clauses in Commercial Leases Might Not Hold Up in Court

Sometimes, even when both parties agree to the terms of a commercial lease, they can find themselves surprised later when a dispute goes to court. This is certainly the case with damages clauses in commercial leases, because such clauses are sometimes voided by the court!

This can happen because, way back in the 1970s, the State of California adopted a policy of presumptive validity for liquidated damages clauses in commercial real estate contracts. In other words, if one party challenges the provision and shows it to be unreasonably punitive, the entire clause can be voided and damages cannot be collected as expected.

Back in 1997, a contract dispute erupted over the fee charged by a lender in response to a borrower’s violation of the contract. The lender imposed a fee equal to six months’ worth of interest, because the borrower was late making a single payment. In the resulting case of Ridgley v. Topa Thrift and Loan Association, the Court found that this fee was an unreasonable attempt to anticipate damages from default. The borrower did not have to pay the fee, and, of course, the lender lost time and money fighting the issue in court.

The important lesson here is that the Court invalidated the damages clause, even though both parties had agreed to the clause when they originally signed the contract. Sometimes, a real estate contract is not completely airtight if a plaintiff can successfully argue that the damages clause, or some other provision, is unreasonable or draconian in nature.

All real estate contracts, including commercial leases, must include a clause outlining the actions to be taken if one party defaults on the lease. However, as the above example perfectly demonstrates, especially for commercial leases, which are often complex and written in terms that have specific, specialized meaning, it’s important to seek the guidance of an experienced real estate attorney before signing such a contract. Otherwise you cannot be completely sure of how well it will hold up in court later, should a problem arise.

For more information on commercial leases and other real estate contracts, call our real estate attorneys. We will be happy to consult with you on specific or general issues related to your real estate needs. By seeking expert input before drafting or signing a legal agreement, you can prevent many potential problems before they occur.

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