If you have some experience with contracts, you’ve likely heard the phrase “liquidated damages.” While this term might sound mysterious to many people, the concept is relatively easy to understand. Liquidated damages are basically an agreed-upon amount of money that a party to a contract will be required to pay in the event that the party breaches the contract.

Use of a liquidated damages provision can be effective at avoiding costly disputes over how much financial harm was caused by a breach of contract. However, these provisions are not always enforceable and should be crafted with care.

What’s the Problem?

The crux of a liquidated damages provision is that it is to be used in a situation where you can’t easily determine what “actual damages” would be caused by the breach. So, to avoid the difficult exercise of proving actual financial harm, the parties will stipulate to an amount that they think is reasonable.

For example, let’s say that a shopping center rents a space to a tenant to operate a business. The lease requires the tenant to be open for business every day. The parties understand that, if one tenant in the shopping center “goes dark” and is not operating, the shopping center as a whole will be less vibrant, have less customer traffic, and be less profitable. The parties also understand, however, that – if one business in the center violates the agreement by not continuously operating – it will be very difficult to establish exactly how much money was lost by the shopping center. Therefore, the parties agree to an amount of liquidated damages that will be imposed in the event that a tenant stops operating, so that the center is not required to provide evidence of its actual financial damages (which may be impossible to calculate).

The trick with liquidated damages provisions is that their enforceability is often subject to debate. If the liquidated damages are not reasonable, then a court may deem them to be an unenforceable “penalty.” As stated by North Carolina courts: “A stipulated sum is for liquidated damages only (1) where the damages which the parties might reasonably anticipate are difficult to ascertain because of their indefiniteness or uncertainty and (2) where the amount stipulated is either a reasonable estimate of the damages which would probably be caused by a breach or is reasonably proportionate to the damages which have actually been caused by the breach.”

Notably, in the context of the shopping center lease described above, a North Carolina appeals court recently upheld a liquidated damages provision that required the tenant to pay double rent for each day that its business was not operating. The tenant did not show that the amount was unreasonable, according to the court. But what if the provision called for triple rent? Quadruple rent? Perhaps the outcome would have been different.

Use These Provisions Carefully

Liquidated damages provisions appear in a variety of contexts, addressing issues that range from delays on construction projects to buyers backing out of real estate deals. These provisions can be very useful. But before inserting a liquidated damages provision in a contract, significant thought should be given to whether the provision is necessary and reasonable. If a party could easily determine its actual financial losses in the event of a breach, liquidated damages are probably inappropriate. Furthermore, the amount of liquidated damages should be carefully developed on a case-by-case basis. Otherwise, a seemingly favorable liquidated damages provision may wind up being the subject of litigation – and ultimately may not be enforceable.

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About the Author

Elliot Fus

Elliot has practiced law for over 20 years and is a member of the Federal, North Carolina and Forsyth County bar associations. He is an experienced litigator with major case experience in state and federal courts and in private arbitrations. Elliot also has a broad range of experience with landlord-tenant law and has assisted many of North Carolina’s premier shopping centers.

 

Imagine that you are a landlord and your tenant vacates the leased property in the middle of the lease period and stops paying rent.  You might assume that you have an iron-clad legal case against the tenant for breaching the lease.  However, if an allegation of “constructive eviction” arises, things might not be so simple.

Constructive eviction is a concept which means that, when the premises are intolerably bad due to the fault of the landlord, the tenant will be allowed to vacate without being responsible for breaking the lease.  In other words, the conditions are so bad that the landlord is effectively forcing the tenant to leave.  Or stated another way, the landlord is “evicting” the tenant by failing to provide decent premises, even if the landlord has not actually asked for the tenant to vacate (and, in fact, wants to the tenant to stay).

Untenable Conditions

Under North Carolina law, constructive eviction occurs when a landlord “breaches a duty under the lease which renders the premises untenable.”  Although the North Carolina courts have not defined the term “untenable,” presumably this term means that the premises are in such a condition that no tenant could reasonably be expected to stay there.  Exactly what conditions constitute constructive eviction are usually subject to debate.  Problems such as persistent building code violations, serious ongoing roof leaks, electrical problems or other safety hazards might provide a strong argument for constructive eviction.  Other problems (such as a bad odor, noise issues, etc.) may provide a less compelling argument, depending on the circumstances.

Importantly, if a tenant claims constructive eviction, the tenant must show that it “abandoned the premises within a reasonable time” because of the condition of the premises.  If a tenant stays in the premises for a long time, an argument of constructive eviction is unlikely to succeed.  After all, if a tenant actually stays in purportedly intolerable premises for many months before finally vacating, it seems hard to say that the tenant “had to” leave.

An allegation of constructive eviction can radically change the dynamics of a landlord-tenant case.  Whereas a tenant might usually owe the landlord money for prematurely vacating the premises, a tenant arguing constructive eviction can assert that the landlord was the party that breached the lease and seek money in court from the landlord for damages such as moving expenses and lost profits associated with being “forced” to move.

Important Considerations

The merits of a constructive eviction allegation will depend on the facts of each case.  Parties in a dispute about constructive eviction should consider, among other things:

• Does the case involve a residential or commercial lease? The expectations for what is intolerable may differ.  For instance, having no hot water for an extended period of time may be seriously problematic for a home, but only a minor nuisance for an office that rarely uses hot water.
• What are the terms of the Lease? Particularly in landlord-friendly commercial leases, the landlord’s obligations to the tenant may be extremely limited.
• Did the tenant timely abandon the premises? There is no set duration for what constitutes a “reasonable” time.  Sometimes, it may be infeasible for a tenant to immediately vacate when intolerable conditions arise.  However, the more time it takes to vacate, the less likely a constructive eviction argument will succeed.
• Did the tenant sign anything confirming that the premises were indeed satisfactory? In commercial leases, tenants are sometimes required to sign “estoppel” certificates to confirm that they are satisfied with the premises.  Once an estoppel is signed, the tenant may not be able to “change its tune” later and say that the premises were defective.
• Are there facts that show that the tenant really left the premises for reasons other than the condition of the premises? A business that has failed because of its own bad management or poor business model may attempt to use constructive eviction as an excuse to stop operating without incurring liability for a broken lease.  In a lawsuit, the landlord may want to explore relevant facts through “discovery” techniques such as document requests and depositions.

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About the Author

Elliot Fus

Elliot has a broad range of experience with landlord-tenant law and has assisted many of North Carolina’s premier shopping centers in matters ranging from routine collection issues to complex jury trials.

Owning a business is exciting at times, frustrating at others, but always demanding.  There are so many decisions to make on a daily basis, and often, as a business owner, you not only have to make the decisions, but must also roll up your sleeves to make those decisions bear fruit.  One decision you should make early as a business owner is determining who will be your trusted advisors to guide you through the legal and accounting issues your business will encounter.  Selecting a professional to assist you with legal and accounting decisions is vital to launching and maintaining a viable enterprise, because decisions made early in the formation of a business can have far reaching consequences down the road.

In my practice, I often see clients who chose to handle matters without engaging attorneys and accountants early in the process, and later failed to recognize issues as they arose during the day-to-day operations of the business. Those decisions can cost business owners far more money down the road than hiring the appropriate professionals in the beginning, and can have a significant effect on the ultimate success or failure of the business.  I have found those mistakes fall into seven basic categories. This is Pitfall number 6 of 7 common pitfalls I see businesses owners make. Over the next few weeks, I will be sharing all 7 of these pitfalls and proven ways to prevent them.

 

Pitfall # 6 – Failure to Understand Personal Guarantees

Often a business may not be creditworthy on its own, and lenders and trade vendors will seek a personal guaranty from an owner, officer, manager or affiliate of a company. It is important to understand the type of guaranty an individual or affiliate of the business is being asked to execute. Most business owners think they will only be liable after all resources of the company have been exhausted when they sign a personal guaranty. They are surprised to learn that today most commercial guaranty agreements are unconditional, unlimited guaranties of payment. Generally, that means the guarantor is also primarily liable for the debt and can be looked to for payment of the debt without the lender first seeking collection from the company or its assets. Close attention should be paid to any request to execute a personal guaranty.

Also, many trade vendors include a personal guaranty provision at the end of their business contracts. Accordingly, many times owners end up signing a guaranty, without fully understanding the import of what they are signing. All business owners should be looking for personal guaranty provisions contained within a contract and looking for a separate signature line when signing vendor contracts. If a business owner is unsure of what the vendor is asking for in the contract, he or she can always ask to have the document reviewed by an attorney before signing.

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About the Author

Ashley Rusher

Ashley focuses her practice on Outside General Counsel Services and Business Bankruptcy and Creditor’s Rights Practice Areas. She is an effective, results-driven advocate for her clients.  Her background of 30 years in business bankruptcies, distressed debt workouts, problem loan recovery, and real estate title and commercial litigation provides her with a solid foundation of general business, accounting and legal skills.

Owning a business is exciting at times, frustrating at others, but always demanding.  There are so many decisions to make on a daily basis, and often, as a business owner, you not only have to make the decisions, but must also roll up your sleeves to make those decisions bear fruit.  One decision you should make early as a business owner is determining who will be your trusted advisors to guide you through the legal and accounting issues your business will encounter.  Selecting a professional to assist you with legal and accounting decisions is vital to launching and maintaining a viable enterprise, because decisions made early in the formation of a business can have far reaching consequences down the road.

In my practice, I often see clients who chose to handle matters without engaging attorneys and accountants early in the process, and later failed to recognize issues as they arose during the day-to-day operations of the business. Those decisions can cost business owners far more money down the road than hiring the appropriate professionals in the beginning, and can have a significant effect on the ultimate success or failure of the business.  I have found those mistakes fall into seven basic categories. This is Pitfall number 5 of 7 common pitfalls I see businesses owners make. Over the next few weeks, I will be sharing all 7 of these pitfalls and proven ways to prevent them.

 

Pitfall # 5 – Failure to Protect Intellectual Property

Types of Intellectual Property — what is intellectual property? Most companies have heard of patents, copyrights and trademarks, but seldom recognize the need to protect certain aspects of the business which safeguard unauthorized use of this type of property by others. Patents protect ideas, concepts, systems, or mechanisms which are novel and unique. Specially licensed attorneys practice patent laws, and the regulations for filing patent applications and maintaining patents require their special attention. Copyrights protect creative expression fixed in a tangible medium. Examples of copyrighted materials are written works, music, and video. Trademarks protect designs, phrases or words which brand a product, service or business. Registration of copyrights and trademarks can provided added protection for a business. Any business that creates a brand, creates an idea or publishes a creative expression should consult with an intellectual property attorney to determine if their idea should be protected from unauthorized use by third parties.

Trade secrets are certain commercial information about a business which is not disclosed to the public, such as a customer list, the McDonald’s secret sauce recipe, or a business plan which must be maintained in secrecy for the success of the company. Contracts with trade vendors, employees, consultants, and anyone else invited into a business and given access to trade secrets should contain special provisions to protect the integrity of a company’s trade secrets.

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About the Author

Ashley Rusher

Ashley focuses her practice on Outside General Counsel Services and Business Bankruptcy and Creditor’s Rights Practice Areas. She is an effective, results-driven advocate for her clients.  Her background of 30 years in business bankruptcies, distressed debt workouts, problem loan recovery, and real estate title and commercial litigation provides her with a solid foundation of general business, accounting and legal skills.