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D.H.M. Industries Inc. v. Central Port Warehouses Inc.

Decided: May 4, 1973.


Collester, Leonard and Halpern. Collester, P.J.A.D. (dissenting).

Per Curiam

[127 NJSuper Page 501] The instant case is one in a series of suits stemming from a lease entered into between plaintiff and Central Port Warehouses, Inc. (Central) on February 4, 1969. In brief, the relevant terms of the lease required plaintiff to erect a 500,000 square foot warehouse in Elizabeth, New Jersey, to be leased to Central for a 20 year term commencing on the date plaintiff notified Central that a Certificate of Occupancy had been issued. The rental for the term was $10,500,000, payable in equal monthly installments of $43,750. Central posted as security the sum of $126,525. Subsequent to the making of the lease, but prior to occupancy, Central with plaintiff's consent assigned its rights under the lease to Corbin-Bay Realty Corp. (Corbin-Bay). Corbin-Bay subleased to appellant D.H. Overmyer, Inc. (Overmyer), who

in turn agreed to indemnify and hold Central and Corbin-Bay harmless from liability to plaintiff under the lease.

Without detailing the issues tried in the various law suits between the parties, it will suffice to say that Overmyer was held to have wrongfully refused to take possession when the building was completed. Ultimately, the instant suit was brought by plaintiff to recover for the wrongful anticipatory breach.

Judgment was entered for plaintiff against Central and Corbin-Bay for $126,525, the amount of security deposit, which the court found to be liquidated damages under the terms of the lease. It also entered judgment for Central and Corbin-Bay against Overmyer, on its indemnity agreement, for $131,250. No appeal is taken from the latter judgment, but Overmyer appeals from the judgment for plaintiff against Central and Corbin-Bay for $126,525. We will not pass upon Overmyer's standing to appeal the judgment in question, because we prefer to dispose of the appeal on the merits since the judgments are interrelated.

The narrow issue on appeal is whether the court erred in holding that the sum of $126,525 had been agreed upon as liquidated damages. Overmyer contends it was a penalty, and that plaintiff's damages "are greatly less than the security deposit retained."

The lease provisions which relate to a breach by the tenant and its effect upon the security deposits are:

Anything to the contrary contained herein notwithstanding, it is specifically understood and agreed by and between the Lessor and Lessee, that, in the event this Lease shall terminate pursuant to the provisions of Paragraph 23 hereof, or in the event Lessor shall elect to re-enter the premises pursuant to the provisions of said paragraph, then and in either of such events, upon five (5) days' notice in writing by certified mail, return receipt requested, addressed to Lessee, Lessor shall retain all of the unapplied hereinabove referred to security together with accrued interest [Emphasis added]. (Par. 4(c)).

Terminate this Lease on three days' notice to Lessee, in which event Lessee agrees to immediately surrender possession of said premises and to pay Lessor all damages Lessee may incur by reason of

Lessee's default, including the cost of recovering possession of said premises and including the worth at the time of such termination of the excess, if any, of the amount of rent and charges equivalent to the rent reserved in this Lease for the remainder of the stated term over the then reasonable rental value of said premises for the remainder of said term [Emphasis added]. (Par. 23(c)).

We are mindful of the fact that this is a large commercial lease entered into by knowledgeable businessmen after arms length negotiations from positions of bargaining equality. In ascertaining whether the security deposit provision in the lease was intended to serve as liquidated damages in the event of a breach by the tenant, we must determine (1) the intent of the parties; (2) if a breach occurred would the extent of damage be difficult to evaluate; and (3) whether the amount posted as security represented a good faith effort to estimate in advance the foreseeable and probable loss which might ensue from a breach. Barr and Sons, Inc. v. Cherry Hill Center, Inc., 90 N.J. Super. 358 (App. Div. 1966); Westmount Country Club v. Kameny, 82 N.J. Super. 200 (App. Div. 1964); In re Plywood Company of Pennsylvania, 425 F. 2d 151 (3 Cir. 1970); 49 Am. Jur. 2d, Landlord and Tenant, § 1055 (1970); McCormick on Damages, § 146-153 (1935). The modern tendency of the courts has been to look with favor upon provisions in agreements which fix specified amounts as damages in the event of a breach, preferring to consider them as liquidated damage clauses rather than penalties. 22 Am. Jur. 2d, Damages, § 214, p. 301 (1965); Williston, Contracts, 3d ed. § 214. As indicated in Priebe & Sons v. United States, 332 U.S. 407, 68 S. Ct. 123, 92 L. Ed. 32, 109 Ct. Cl. 870 (1947)

Today the law does not look with disfavor upon 'liquidated damages' provisions in contracts. When they are fair and reasonable attempts to fix just compensation for anticipated loss caused by breach of contract, they are enforced. (citations omitted) They serve a particularly useful function when damages are uncertain in nature or amount or are unmeasurable, as is the case in many ...

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