Rent Abatement Clause Was Enforceable

A lease required the owner to make 11 alterations to a new tenant's space. The lease also had a rent abatement clause that said that if the owner didn't substantially complete the alterations by Jan. 1, 1999, and the tenant was in the space, the tenant would get an “abatement of one-half day's rent for each day's delay in substantially completing one or more of nine of the 11 items.” And the tenant would get an abatement of “a full day's rent for each day's delay in substantially completing” an important fire alarm and communications system. The tenant moved into the space and started paying rent in June 1999. The owner didn't install the fire alarm and communication system until May 9, 2000. So the tenant sued the owner for a refund of its rent. The owner argued that the rent abatement clause was an unenforceable penalty.

New York's highest court ruled that the rent abatement clause was an enforceable liquidation of damages, not an unenforceable penalty. So the tenant was entitled to a rent refund. The owner tried to prove that the rent abatement clause was an unenforceable penalty because it provided “a club” over the owner's head to make sure that it made the alterations. But the court noted that liquidated damages don't become a penalty merely because they encourage a party to comply with its lease obligations, as long as the liquidated damages are “not grossly out of scale with foreseeable losses.” Here, the rent abatement clause wasn't grossly out of scale with the tenant's foreseeable losses because it “was keyed to the number of days of [the owner's] non-performance, and varied from a half-day to a day depending upon the importance of the item of work not completed,” said the court.

• Bates Advertising USA, Inc. v. 498 Seventh, LLC: No. 62, 2006 NY Slip Op 3640 (N.Y. Ct. App. 5/11/06).