It’s the Law

Judicial Updates Regarding Term Fees and Premises Liability

by Gary S. Rubenstein, Schulman, Leroy & Bennett, P.C.

Tennessee’s Court of Appeals recently rendered a couple of decisions relating to early termination fees and premises liability. In the case of Tennessee Homes v. Dalton L. Welch et al., the Court of Appeals in Nashville reviewed contract law and the proper damages to be assessed as early termination fees. Everyone will recall that the definition of a contract is “an enforceable promise.”

In this case, the Court opined that to recover on a breach of contract claim, there must be an enforceable contract, non-performance by a party amounting to a breach of the contract, and damages caused by that breach of contract. The breach of contract must be material and not slight. In order for a breach to relieve the non-breaching party of its obligations, the breach must be material. If the breach was slight or minor, but not substantial, the non-breaching party is not relieved of the duty of performance, although there may be a recovery for damages for the breach. As you all know from the many trials you have participated in, whether a party has fulfilled its duties or is in breach is a question of fact. This is why many cases are tried in our General Sessions Courts. This case is also a reminder that a landlord’s records are extremely important and serve as vital evidence and proof before the judge.

In the case referred to above, the Court of Appeals reminded us that an early termination fee is considered to be a liquidated damage clause. The term “liquidated damages” is defined as a sum agreed upon by the parties to the rental agreement to be paid as compensation for damages suffered by one party in the event the other breaches the contract. In order to be enforced, an early termination clause for liquidated damage must be a reasonable estimate of the potential damages to be suffered. Liquidated damages are used when it is difficult to measure the actual damages to be suffered by the parties entering into the contract. If we assume that the liquidated damage provision bears a reasonable relationship to the amount of actual damages likely to be suffered in the event of breach of lease, then the Court will uphold this clause. Remember, an early termination fee is used to compensate the landlord for the costs of marketing and leasing activities to obtain a substitute resident.

The Court of Appeals ruled that a party may not elect between its right to recover liquidated damages versus actual damages suffered. If a landlord elects the remedy of early termination, additional damages for the same breach cannot be sought. The Court of Appeals concluded that the early termination fee is meant to compensate the landlord for lost rent, and therefore future lost rent is not recoverable because of the breach of lease. In the particular case, the Court ruled that the landlord was entitled to the early termination fee but could not recover for future lost rent. The landlord could certainly recover unpaid past due rent, and