Owner's Violation Results in Tenant's Award of Liquidated Damages

An owner bought two buildings with bank #1 and bank #2 as tenants. Bank #2 wanted to lease the space occupied by bank #1. Bank #2 and the owner signed an agreement in November 2000 that contained the owner's warranty that bank #1's lease would expire on Oct. 31, 2004, without any right to renew the lease. The agreement also said that if the owner caused a “material breach” of the agreement, the tenant would be entitled to $250,000 in liquidated damages, as its sole remedy.

Bank #1's lease had a 15-year term with four renewal options, each for five years. In June 1999, bank #1 sent the owner a letter saying that it wanted to exercise its third renewal option for five years, even though the time to exercise the option had expired. The owner accepted the exercise of the renewal option. By accepting bank #1's late exercise of the third option, the owner kept the fourth renewal option in effect. So bank #1 exercised its fourth five-year option so that it could remain in its space until Oct. 31, 2009. Bank #2 sued the owner for violating its agreement and demanded $250,000 plus other damages.

A Michigan appeals court ruled that bank #2 was entitled only to $250,000. The court said that the owner's failure to deliver bank #1's space to bank #2 on Oct. 31, 2004, amounted to a material breach under the agreement. The court noted that the lease said that the liquidated damages clause wouldn't apply if bank #1 didn't vacate its space after its lease expired on Oct. 31, 2004. But this exception didn't apply here, said the court, because bank #1 didn't fail to vacate its space after its lease expired; rather, bank #1's lease hadn't expired because bank #1 renewed it. Because the liquidated damages clause said that the tenant's sole remedy was $250,000 if the owner caused a material breach of the agreement, bank #2 wasn't entitled to any other damages [Flagstar Bank v. Harbor Northwestern - 30800].