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Contract Warning: Read The Boiler Plate!

10/25/2016 | Articles & Alerts

Contracting parties are well advised to closely examine the entire contract and not just the main terms before signing. Unfortunately, many contracts unwisely rely on boiler plate language to the detriment of the contracting parties. For example, “standard” default and damages provisions are not always analyzed for consequences in the event of breach. A recent Pennsylvania appellate decision, Newman Dev. Grp. of Pottstown, LLC v. Genuardi’s Family Mkt., Inc., 98 A.3d 645 (Pa. Super. Ct. 2014), illustrates the disastrous consequences of this common failure.

Newman Development Group acquired land in Chester County to develop as a shopping center. Newman agreed to lease the main space to Genuardi’s for a twenty-year term. The signed lease was held in escrow until Newman could secure an anchor tenant (Target or Lowe’s). Once the anchor tenant was secured, however, Genuardi’s, which had been acquired by Safeway, decided to terminate the lease. Newman brought suit for anticipatory breach.

Although Newman was able to find two substitute tenants (PetSmart and Michael’s) to take over the space, these tenants would only commit to a ten-year lease. Newman’s expert testified that there was only a fifty percent chance that the substitute tenants would re-up for the second term. Newman argued that Genuardi’s was therefore responsible for paying all of the lost future rent for the second term, an amount that exceeded $10 million.

The trial court invalidated the damages provision, holding that it amounted to a penal liquidated damages provision. The appellate court reversed, sending the case back to the trial court to calculate the damages owed under the lease agreement. On remand, the trial court awarded Newman lost rent in excess of $10 million.

On appeal the second time, Genuardi’s argued that the future rent should have been discounted to present value. Although Genuardi’s recognized that the lease agreement did not provide such a discount, Genuardi’s argued that the common law imposed the discount on the contract to prevent the landlord from receiving a windfall. The Pennsylvania Superior Court disagreed, holding that the common law did not permit the discount and the contract must be enforced as written. The Superior Court acknowledged that Newman bore the duty of mitigating its damages but held that once Newman had fulfilled its obligation by leasing the space to the two substitute tenants, paying the remaining lost rent was the breaching party’s responsibility under the lease agreement. The Superior Court explained that as sophisticated parties, they were obligated to draft their agreement “with exactitude.” Since Genuardi’s could have included the discount in the default provision, Genuardi’s was held responsible for the omission.

The Newman decision reminds us that we need to scrutinize the damage provisions in our contracts with the same exatitude that we do with all the major terms of the deal. Ask yourself could I live with this provision if forced to commit anticipatory breach or does this allow for the right remedies if the other side breaches. At a minimum, if you are the tenant you want to make sure to include a discount in any provision awarding future rents to the landlord for an extended term. Sophisticated parties will take care to secure legal representation that protects them under even the worst case scenario.