In other words, and as is commonly understood of these arrangements, the Surrender Agreement constituted a new contract between the parties that terminated the lease and all prospective obligations flowing from the tenancy (see Holy Props. v Cole Prods., 87 NY2d 130, 133-134 [1995]; 52 CJS Landlord & Tenant § 206; 74A NY Jur2d Landlord and Tenant § 939; 49 Am Jur 2d Landlord and Tenant § 606). This new contract also included a liquidated damages provision.[3] Liquidated damages are "an estimate, made by the parties at the time they enter into their agreement, of the extent of the injury that would be sustained as a result of breach of the agreement" (Truck Rent-A-Ctr. v Puritan Farms 2nd, 41 NY2d 420, 424 [1977]). "A liquidated damage provision has its basis in the principle of just compensation for loss" (id., citing Restatement of Contracts § 339, and Comment thereon). "Liquidated damages that constitute a penalty, however, violate public policy, and are unenforceable. A provision which requires damages `grossly disproportionate to the amount of actual damages provides for [a] penalty and is unenforceable'" (Van Duzer, 24 NY3d at 536 [citation omitted], quoting Truck Rent-A-Ctr., 41 NY2d at 424).
Defendant, as the party seeking to avoid payment of liquidated damages, has the burden of establishing that the damages for breach of the Surrender Agreement were disproportionate to the foreseeable losses and "in fact, a penalty" (see JMD Holding Corp. v Congress Fin. Corp., 4 NY3d 373, 380 [2005]). Defendant met that burden.
The question here distills to whether the liquidated damages provision in the Surrender Agreement is so disproportionate to the anticipated harm to plaintiff from defendant's failure to timely pay the monthly installments that the provision constitutes a penalty. The damages provision effectively reinstated defendant's future rent liabilities under the terminated lease, to the tune of $1,020,125.15, plus interest and other prospective taxes and costs due under the lease, even though those damages did not flow from a breach of the Surrender Agreement. Those damages were 7½ times what plaintiff would have received, if defendant had fully complied with the Surrender Agreement. Plaintiff cannot enforce a non-existent lease under the guise of damages for a breach of a separate contract.[4]
To be clear, when the lease was in effect, plaintiff could have exercised its rights as the landowner and proceeded against defendant for violating the leasehold terms (see Van Duzer, 24 NY3d at 534-535). Instead, plaintiff negotiated with defendant to terminate the lease in exchange for a set amount of money and surrender of the premises. That contract freed plaintiff from its lessor obligations. Critically, contrary to the dissent's assertion that plaintiff "received nothing in exchange" (dissenting op at 5), it allowed plaintiff to immediately reenter and relet the premises without the need for litigation, which is exactly what it did.
When defendant breached the Surrender Agreement, plaintiff was entitled to proceed under that contract and demand damages for the breach, including the amount past due and acceleration of the remaining installment payments. However, plaintiff could not seek a payment grossly disproportionate to the amount past due plus interest (see Bi-Econ. Mkt., Inc. v Harleysville Ins. Co. of N.Y., 10 NY3d 187, 193 [2008] [recognizing that for "agreements to pay"—i.e., "contracts for money only"—the only recoverable damage for breach is interest"]; Scavenger, Inc. v GT Interactive Software Corp., 289 AD2d 58, 58-59, 734 N.Y.S.2d 141, 142 [1st Dept 2001] ["(W)here the breach of contract was a failure to pay money, plaintiff should be limited to a recovery of the contract amounts plus appropriate interest] [citation omitted]; Cotheal v Talmage, 9 NY [5 Seld] 551, 554 [1854] ["Where there is a contract to pay money, the damages for its breach are fixed and liquidated by law, and require no liquidation by the parties"]; 36 NY Jur 2d, Damages § 173 [stating that liquidated damages clauses in contracts for the payment of money are typically inappropriate because "for the nonpayment of money, the law awards interest as damages"]). By any measure the more than one million dollars plus interest demanded here is disproportionate to the $175,751.73 unpaid under the Surrender Agreement (see e.g. TY Bldrs. II, Inc. v 55 Day Spa, Inc., 167 AD3d 679, 681 [2d Dept 2018] [holding that a late fee that would accrue on 27 days for a total of $1,350 was equal to, in effect, a 79% penalty for that month and thus unenforceable as against the public policy expressed by Penal Law § 190.40]; Clean Air Options, LLC v Humanscale Corp., 142 AD3d 923, 924 [1st Dept 2016] ["The late fee, which according to the parties' calculations results in an annual interest rate of 78%, is unreasonable and confiscatory in nature, and thus unenforceable" (internal quotation marks omitted)] [citation omitted]; Sandra's Jewel Box v 401 Hotel, 273 AD2d 1, 3 [1st Dept 2000] [holding that a set-off of $15,000 exceeded the base amount due ($1,800 per month for five months), amounted to a 365% per annum penalty, and was unenforceable]; Pyramid Ctrs. & Co. v Kinney Shoe Corp., 244 AD2d 625, 627 [3d Dept 1997] [holding that a liquidated damages clause providing for double the fixed minimum rent upon surrender of the property was "not to provide just compensation but, rather to secure performance by the compulsion of the very disproportion"(internal quotation marks omitted)] [citation omitted]; 943 Lexington Ave. v Niarchos, 83 Misc2d 803, 804 [App Term, 1st Dept, 1975] [holding that a rent surcharge of 60% per annum, was "unreasonable and confiscatory in nature and therefore unenforceable"] [citation omitted]).
A simple hypothetical further illustrates the penalizing nature of the liquidated damages provision here. According to plaintiff's interpretation of the Surrender Agreement, if defendant timely made all but the final monthly surrender payment of $15,977.43, defendant's breach would render it liable for $1,029,969.54 plus interest and additional costs. Defendant would be liable for the total amount remaining due under the terminated lease, and defendant would be forced to pay that amount, rather than the final installment, without having had the benefit of the premises which it had surrendered to plaintiff. There is but one way to refer to this outcome: an unenforceable penalty.
Our decision in Van Duzer is instructive. In that appeal, the defendants maintained that the landowner's acceleration of prospective rent was disproportionate to the landowner's actual damages where the landowner terminated the lease and relet the premises after the tenant vacated. Without deciding whether the amount sought was a penalty, we held that the defendants were entitled to a hearing to present evidence that the undiscounted accelerated rent was disproportionate to the landowner's actual losses, and thus constituted unenforceable liquidated damages. As we explained,
"arguably the ability to obtain all future rent due in one lump sum, undiscounted to present-day value, and also enjoy uninterrupted possession of the property provides the landowner with more than the compensation attendant to the losses from the breach—even though such compensation is the recognized purpose of a liquidated damages provision" (Van Duzer, 24 NY3d at 536-537).
The facts in this appeal present an even more obvious case of an unenforceable penalty. In Van Duzer, the landowner proceeded under the lease for damages flowing directly from the tenant's abandonment of the premises and noncompliance with the lease terms. Again, the payment plan in the Surrender Agreement here reflects the parties' negotiated damages for the breach of the lease, not the Surrender Agreement. The subsequent failure to pay installments on time is a breach of the Surrender Agreement, and a breach that is properly compensated by an award of the outstanding settlement payments plus interest.
The dissent maintains that the Surrender Agreement is best understood as a "settlement agreement" (dissenting op at 3). Why this would matter is unclear considering that a settlement agreement, like any other agreement, cannot be enforced if it violates public policy, including our state's rejection of penalties as damages (see 1420 Concourse Corp. v Cruz, 135 AD2d 371, 372 [1st Dept 1987] ["(W)here the parties, both represented by counsel, have freely entered into a stipulation of settlement in open court, such stipulation will generally be enforced unless public policy is affronted"]; see e.g. SMD Capital Group LLC v EPR Capital LLC, 45 AD3d 314, 314 [1st Dept 2007] [applying the test to determine the enforceability of a liquidated damages clause in a settlement agreement related to defendant's failure to produce the required books and records at the closing of a real estate transaction as required under a settlement agreement]; Quaker Oats Co v Reilly, 274 AD2d 565, 566 [2d Dept 2000] [holding liquidated damages provision in settlement agreement regarding a mortgage foreclosure was unenforceable as grossly disproportionate and noting that "it is irrelevant that the plaintiff might have recovered much more had it continued with (the settled action)]).
Plaintiff unpersuasively argues and the dissent agrees that affirmance here would disincentivize landowners from entering surrender agreements and deprive tenants of the benefit afforded by such arrangements. Plaintiff chose to terminate the lease in exchange for a fixed amount paid in installments and reentry on the premises for purposes of entering a new lease with another tenant. The award of outstanding payments therefore allowed plaintiff to realize the benefit of its bargain under the Surrender Agreement and put the property to its highest and best use. This approach encourages surrender agreements as providing a benefit to all parties—the tenant is released from future liability and the landowner regains the premises and the opportunity to relet on its own account. In contrast, the dissent's approach would disincentivize tenants from negotiating a mutually agreeable surrender because the tenant would remain on the hook for back rent, future rent and other contractual damages without the benefit of enjoyment of the premises.
Plaintiff's real argument is that it did not receive six payments on time, but that was the risk that it accepted by entering the Surrender Agreement. A party's default is a risk common to all contracts, without unique effect in the context of a surrender of premises. And the existence of that risk does not and cannot justify exaction of a penalty.
Finally, plaintiff is not entitled to an evidentiary hearing to determine plaintiff's actual damages and the extent to which those damages were ascertainable at the time that the parties signed the Surrender Agreement.[5] Plaintiff's reliance on Van Duzer is misplaced. We remitted in Van Duzer to afford the breaching tenant an opportunity to present evidence in support of their contention that the undiscounted acceleration of all future rents constituted an unlawful penalty (24 NY3d at 532). In contrast, and notwithstanding the dissent's suggestion, Supreme Court here already completed the task that compelled remittal in Van Duzer, i.e., the determination that the liquidated damages provision was a penalty because plaintiff's damages were ascertainable and the liquidated damages were grossly disproportionate to the cost of breaching the Surrender Agreement.
Under our well-established rules of contract, the Surrender Agreement's liquidated damages provision does not fairly compensate plaintiff for defendant's delayed installment payments. The provision calls for a sum more than sevenfold the amount due if defendant had complied fully with the Surrender Agreement. We cannot enforce such an obviously and grossly disproportionate award without offending our State's public policy against "the imposition of penalties or forfeitures for which there is no statutory authority" (Truck Rent-A-Ctr., 41 NY2d at 424, citing City of Rye v Public Serv. Mut. Ins. Co., 34 NY2d 470, 472-473 [1974]). Accordingly, there was no error in rejecting plaintiff's liquidated damages provision.
......
[1] Plaintiff notes that the amount of prospective rent demanded in the complaint was an inadvertent error that plaintiff corrected in its summary judgment motion.
[2] Defendant filed an amended answer and asserted a counterclaim for unjust enrichment based on plaintiff's reletting of the demised premises during the lease term.
[3] The dissent asserts that the parties have chosen the "ill-fitting" "label" of liquidated damages to describe the Surrender Agreement's damages clause (dissenting op at 7). The dissent stands alone in this view; in addition to the parties, all of the justices who have addressed the issue have treated this provision as a liquidated damages clause. Rightly so, because the provision sets forth the estimated compensation for a possible future breach.
[4] The dissent attempts to create discord where none exists by stating that we reach our decision by casting aside principles of contract law (dissenting op at 4). But no one disputes that "[f]reedom of contract prevails in an arm's length transaction between sophisticated parties . . ., and in the absence of countervailing public policy concerns there is no reason to relieve them of the consequences of their bargain'" (159 MP Corp. v Redbridge Bedford, LLC, 33 NY3d 353, 359 [2019], quoting Oppenheimer & Co. v Oppenheim, Appel, Dixon & Co., 86 NY2d 685, 695 [1995]). The dissent simply ignores that "[w]e have deemed a contractual provision to be unenforceable where the public policy in favor of freedom of contract is overridden by another weighty and countervailing public policy" (id. at 360), including a liquidated damages provision grossly disproportionate to the amount of actual damages (see Van Duzer, 24 NY3d at 536).
[5] While negotiating the Surrender Agreement, plaintiff was actively courting new tenants and has conceded that it did not suffer a differential in rent as a consequence of reletting shortly after defendant's surrender."
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