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The NY Court of Appeals Provides Important Guidance for Lease Surrender Agreements
At a time when the COVID-19 crisis is causing an unprecedented number of lease defaults, the recent Court of Appeals decision, The Trustees of Columbia University v D'Agostino Supermarkets, Inc., 2020 NY Slip Op 06937, 2020 WL 6875988 (2020), provides both guidance and warnings to attorneys asked to negotiate and litigate leasehold surrender agreements.
On one hand, the case reaffirms long established hornbook law that a contractual liquidated damage provision will be considered an unenforceable penalty which violates public policy when it requires damages grossly disproportionate to the actual damages. On the other hand, the 4 to 3 split between the majority decision, written by Judge Rivera, and the strong dissent written by Chief Judge DiFiore demonstrates: a) the primacy some of members of the Court place on freedom of contract in arm's length transactions between sophisticated parties; and b) the complexities of settlements where landlords are regaining possession with uncertainty of whether the premises will be re-rented and whether the new tenant will ultimately pay its rent.
Ultimately, as explained below, the case demonstrates that landlords entering into leasehold surrender agreements with defaulting tenants, must resist the temptation to seek draconian penalties as a vehicle to compel payment of any settlement.
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