Considering liquidated and ascertained damages on an agreement for lease


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For further information, please contact Matthew Williams, Partner, Fladgate LLP (mwilliams@fladgate.com)


 

It is sometimes the case that a tenant will enter into agreements for lease where the landlord is undertaking substantial works to, or even constructing, the building or estate within which the premises will be located so that grant of the lease is conditional upon completion of those works.

Liquidated and ascertained damages (LADs) clauses stipulate that a specified sum of money will be payable by one party to the other where there has been a particular breach of contract. Under contract law, if a person agrees to perform certain acts (here, the landlord’s works) for another person (the tenant), in return for a benefit (payment of rent), disputes could arise if the tenant is dissatisfied with the way the landlord performs the works. Where the landlord and tenant have entered into a contract (the agreement for lease), the law provides remedies to the wronged party who has suffered a breach of contract. The usual contractual remedy is damages. The tenant would need to prove that the landlord’s breach has caused the loss that it has suffered and the court will determine the appropriate level of damages.

LADs clauses seek to predetermine the level of damages to which the tenant will be entitled in the event of the landlord committing certain breaches of the contract by including a predetermined sum or a predetermined formula in the agreement for lease.

These clauses can be of particular benefit in the case of a landlord/tenant relationship as they bring a greater degree of certainty and are often better for preserving the commercial relationship – the “guilty” party pays the LADs and then the parties can continue performing the rest of the contract rather than facing delays as a result of a protracted damages claim. A landlord will often benefit from the inclusion of LADs as these can act as a cap on their liability.

There are two main areas where LADs clauses may be helpful to you as a tenant:

Delays in delivery or completion of the landlord’s works

If you are entering into an agreement for lease, you would usually want certainty as to when you will be able to occupy and start using the premises. For retail tenants, particular times of the year such as the run-up to Christmas may be particularly important to you from a trading perspective, and so you will want to know when the lease will commence. This should be considered at any early stage and a realistic timetable of landlord’s works should be provided so that you can factor this into your business plans. The LADs clause will be able to specify that if the landlord fails to complete by the date for completion specified in the agreement for lease (taking into account the correct operation of any extension of time clause), you will be entitled to LADs at a fixed rate for each day or week until the landlord completes the works.

Where the landlord’s works fail to meet certain targets

You may have certain requirements for your premises. The agreement for lease will set out the landlord’s obligations in respect of providing the premises to your expectations – including in respect of floor area and other specifications. Whilst it is often the case that the rent will be calculated on a pre-agreed formula in respect of floor space, you may require certain specifications depending on the nature of your occupation. The LADs clause could seek to address any failure to provide this to your satisfaction.

The most important thing to remember is that LADs must be a genuine pre-estimate of loss. So for example, if you are expecting to be able to open a retail premises in the run-up to Christmas but are delayed until January, the LADs might reflect the loss of sales that you could expect to receive in that period. If you are moving offices, the LADs could reflect the additional rent that you have to pay on your existing premises or alternative premises due to the delay.

Any tenant entering into an agreement for lease where the landlord is carrying out substantial works should consider the impact that any delay in completing those works would have on them, and discuss with their solicitor at an early stage so that these can be considered when drafting heads of terms.

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