Liquidated Damages Clause OK Despite Not Listing Specific Amount

What Happened: A medical lab claimed that the provision in its lease providing for liquidated damages of “net present value of the entire balance of rent due herein as of the date of [landlord’s] notice, using the published prime rate then in effect” was too open-ended to be enforceable. But the Massachusetts court disagreed and ordered the lab to pay the landlord $1.854 million in liquidated damages for defaulting on the lease. The tenant appealed.

Decision: The appeals court upheld the lower court’s ruling that the liquidated damages clause was enforceable.

Reasoning: Liquidated damages clauses stipulating a fixed amount of damages that a landlord or tenant must pay in the event of a breach are generally enforceable if:

• Actual damages flowing from a breach were difficult to ascertain at the time the lease was made; and
• The sum agreed on as liquidated damages is a “reasonable forecast” of damages that would be expected in the event the breach were to occur.

The court found that the liquidated damages clause in this case met both criteria. Even though it didn’t state a specific dollar value, the $1.85 million turned out to be “neither grossly disproportionate to actual damages” nor “unconscionably excessive,” the court concluded.  

• Cummings Properties, LLC v. Calloway Laboratories, Inc., March 2019