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Wall Street Station, Inc. v. Schmidt

A-2903-03T1 (N.J. Super. App. Div. 2005) (Unpublished)

CONTRACTS; BREACH; CONDITIONS PRECEDENT—Even though failure of a condition precedent would normally relieve a party from performing its duties, a contracting party is not excused when the condition fails as a result of that party’s own inactivity or lack of diligence.

A restaurant was offered for sale. A buyer executed an agreement to sublease the restaurant’s premises and for a sale of its assets. The agreement had a liquidated damages clause and provided that it would become null and void if: 1) the buyer failed to obtain a liquor license, and/or 2) the seller could not offer a sublease that would extend beyond a certain date. When the buyer failed to appear at the stipulated closing, the seller sued for liquidated damages, unpaid rent, and attorney’s fees. The seller essentially claimed that the buyer “breached certain provisions of [the] agreement for the sale of assets and ... sublease agreement.”

The lower court granted partial summary judgment to the seller and also awarded it attorneys’ fees and liquidated damages; the buyer appealed from this decision. The Appellate Division held that although “the failure of the fulfillment of [the] condition precedent” of obtaining a liquor license would normally excuse the buyer’s performance, the buyer’s failure to obtain that license was the result of its “own inactivity or lack of diligence.” Thus, the buyer was not excused from performing its duties and was therefore in breach when it failed to do so. The seller was consequently entitled to liquidated damages as provided by the terms of the contract.

As to the validity of the liquidated damages clause, the Court held that, “[a] liquidated damages provision in a commercial contract between sophisticated parties is presumptively reasonable,” but where a property seller has not suffered any harm, it “will not ordinarily be permitted to retain a deposit as liquidated damages even where the parties have so agreed.” Here, the seller had suffered financial harm from the delay in its ability to find another buyer.

Finally, the Court held that the lower court incorrectly awarded attorneys’ fees to the seller since its attorney neglected to distinguish between the services it rendered in connection with the seller’s search for relief allowed by the lease agreement as contrasted with services that had nothing to do with that search.

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