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Duane Reade v. TPK of NJ Development Corp.

A-6704-03T5 (N.J. Super. App. Div. 2006) (Unpublished)

LEASES; LIQUIDATED DAMAGES — A liquidated damage provision within a lease addressing delays in delivery of possession will be upheld when delay damages can not be calculated with certainty and when the provision is the agreement of sophisticated commercial contracting parties.

A developer leased a parcel of land on which it intended to construct a shopping center to be sublet to individual tenants. One tenant, a pharmacy, entered into a sublease with the developer calling for annual rent and payment of common area maintenance and tax charges. A sublease provision entitled “Delivery of Possession” gave the tenant a credit against its rent should the premises not be delivered to the pharmacy by a stated date by reason of delays not solely due to the pharmacy’s acts or omissions. Under the title “force majeure,” the sublease also afforded an extension of the time within which a party was required to perform if timely performance was prevented by several enumerated events.

The pharmacy took possession of the premises 590 days after the stated delivery date. It then filed a complaint seeking a judgment declaring the rent abatement clause enforceable and establishing the amount of rent to be credited as a result of the delay in the delivery of the premises. The developer filed a counterclaim seeking immediate payment of unabated rent and the dismissal of the complaint on the grounds that the rent abatement provision constituted an unenforceable penalty. The lower court ultimately determined that the “Delivery of Possession” lease provision was an enforceable liquidated damages clause, but that the pharmacy was responsible for 185 days of the 590 day delay because of an untimely delivery of plans to the developer for interior fit-up work. The lower court also determined that two events identified by the developer were covered by the “Force Majeure” clause, and so awarded the developer extensions of 67 and 51 days respectively. The total credit awarded to the developer amounted to 303 days and the rent abatement awarded to the pharmacy was therefore 287 days. On appeal, the pharmacy challenged the lower court’s determination that it was solely responsible for 185 days of delay, and that two particular events constituted force majeure. The developer appealed the lower court’s determination that the rent abatement clause was enforceable, that the pharmacy’s responsibility for delay was limited to 185 days, and argued that the force majeure period extension, as calculated by the lower court, was insufficient.

The Appellate Division affirmed the lower court’s conclusion that the rent abatement clause was a valid liquidated damage clause, stating that both contracting parties were sophisticated in negotiating and executing a commercial contract with such a clause. It also held that the pharmacy produced testimonial evidence showing that its delay damages were difficult to quantify, arguably necessitating a liquidated damage mechanism for such circumstances. The Court, however, reversed the lower court’s judgment that the pharmacy was responsible for 185 days delay, indicating that the developer failed to complete the common areas until after the pharmacy took possession, and that this sole developer obligation and delay was unrelated to any delay by the pharmacy in delivering plans. At best, concurrent causes existed for the delay in delivery, and as such would not excuse a tenant from enjoying the rent abatement.

The Appellate Court further affirmed the lower court’s findings of fact and holding of law as substantially credible with respect to the two delay periods. It found that one resulted from the municipality’s action and the other because of a judicial injunction in a separate litigation affecting the developer, were the result of a governmental restriction, regulation or control under the “force majeure” provision.

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