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Your commercial lease agreement needs a liquidated damages clause

On Behalf of | Sep 1, 2021 | Commercial Real Estate |

There’s a lot of work that you put in before you can sign your commercial lease agreement and start receiving regular payments from your tenants. For starters, you first need to design the terms of the agreement that you will have your tenants sign. There are a few reasons why including a liquidated damages clause in your lease agreement is a solid idea that could spare you a lot of grief down the road.

What it is

When a breach of contract occurs, the parties often have to engage in costly litigation, including discovery, just to come up with the total amount of damages that the breaching party owes the non-breaching party. If they had a liquidated damages clause, this probably wouldn’t be the case.

A liquidated damages clause is an agreement as to how much money either party will pay the other in the event of a breach. It is an amount that both parties agree to as a precondition to entering into the contract. If one of them breaches, the other will be able to present the contract to the court for enforcement of the agreed-upon terms.

What it can do for you

You don’t have to come up with one set amount that you will receive in case of a breach. That would be impossible to predict, and might not cover the full extent of the damage that the breach causes you. Instead, you can get creative with your agreement’s terms. Your liquidated damages clause can include things such as formulas and tables that assist in calculating the damages owed.

For example, your clause could stipulate that a tenant who breaches the lease by withdrawing early and ceasing to pay rent must pay you the remaining rent due under the lease as damages, plus any past rent due. You could also include other costs associated with the breach, such as the cost of changing the building’s locks, removing left-behind property, and so forth.

Liquidated damages are a great way to reduce the stress involved in managing a commercial property. Although not perfect, they can save you lots of time and money when dealing with the consequences of one of your tenants’ breach.