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■ El Centro Mall, LLC v. Payless Shoesource, Inc. , No. G040038

Defendant Payless ShoeSource, Inc. (Payless) ceased operations at a shopping center owned by plaintiff El Centro Mall, LLC (ECM) before the end of its lease term.  Per a lease provision, ECM charged Payless liquidated damages of 10 cents per square foot of leased space for each day Payless did not operate, totaling $98,010.  Payless refused to pay, alleging the liquidated damages provision in the lease was an unenforceable penalty under Civil Code section 1671.[1]

                        Payless contends the trial court erred when it determined the provision did not constitute an unlawful penalty.  Payless contends the evidence demonstrates the liquidated damages provision was arbitrarily applied to the tenants at ECM’s shopping center and therefore could not be a reasonable estimate of potential damages at the time the lease was signed.  ECM asserts its evidence demonstrates the liquidated damages clause was intended to reimburse ECM for the loss in synergy, goodwill, and patronage the shopping center and other tenants would lose if Payless ceased operation. 

                        We conclude substantial evidence supports the trial court’s judgment.  Under section 1671, subdivision (b), the liquidated damages clause was presumptively enforceable and Payless had the burden to demonstrate otherwise.  Although Payless’s evidence may have given rise to an inference the clause was arbitrary, this evidence was not conclusive, and was countered by expert testimony introduced by ECM.  Accordingly, we affirm.

I

Factual and Procedural Background

                        In 1990, Payless entered into a written commercial lease with ECM’s predecessor-in-interest to lease 3,300 square feet of retail space in a shopping center for a term of ten years, commencing on January 1, 1991, and ending on December 31, 2000 (lease).  In 2000, ECM’s predecessor-in-interest and Payless executed a “Lease Amendment/Extension Agreement” (amendment), extending the lease for five years, commencing January 1, 2001, and expiring December 31, 2005.  ECM purchased the shopping center, assuming the lessor’s rights under the agreement. 

                        Under the lease terms, as amended, the base monthly rent for the period of January 1, 2005, through December 31, 2005, was $4,950.  In addition to the base monthly rent, Payless also agreed to pay ECM “Percentage Rental” on a monthly basis, in a sum equal to Payless’s gross sales times six percent, minus the aggregate amount of the minimum annual rent.  Payless’s rental obligations further include “Additional Rent,” which includes all other costs or charges required under the lease, such as common area maintenance (CAM), costs, and taxes. 

                        The lease also contains a covenant of “Continuous Operation.”  Section 17.1 provides that Payless will continuously operate and conduct business on the premises: “Tenant covenants and agrees that, continuously and uninterruptedly . . . it will operate and conduct within the premises the business which it is permitted to operate and conduct . . . .”  Section 17.2 sets Payless’s required hours of operation:  “Tenant agrees that commencing with the opening for business by Tenant in the premises and for the remainder of the term of this Lease, Tenant shall be open for business daily from 10:00 A.M. to 9:00 P.M., Monday through Friday, 10:00 A.M. to 6:00 P.M. Saturday, 12:00 noon to 5:00 P.M. Sunday . . . .”

                        Section 17.3 provides that if Payless fails to operate within the lease terms, including failing to stay open for business, the lessor, five days after the first breach, “shall be entitled to collect (in addition to the minimum annual rent, Percentage Rental and Additional Rent) an additional charge at the daily rate of Ten Cents ($0.10) per square foot of the Floor Area of the premises or One Hundred Dollars ($100.00), whichever is greater, for each and every day or partial day the Tenant fails to commence to do or to carry on business as herein provided, such additional charge is a liquidated sum representing the minimum damages which Landlord is deemed to have suffered, including damages as a result of Landlord’s failure to receive Percentage Rental, if any, under this Lease is without prejudice to Landlord’s right to claim and prove a greater sum of damages . . . .” 

                        Payless closed its business operations from March 4, 2005 to December 31, 2005.  On March 29, 2005, ECM sent Payless a letter, notifying Payless of its default and Payless’s contractual obligation to stay open for business.  ECM also notified Payless of its obligation to pay the additional charge.  Payless continued to pay the required base monthly rent, CAM charges, and taxes during this time period, but did not pay the liquidated damage amount called for by section 17.3 of the lease.  Due to lagging sales, Payless had not paid any percentage rental since 1999, and ECM did not assert Payless owed any percentage rental for the period during which Payless discontinued business operations. 

                        The parties stipulated that in lieu of trial with live testimony, the trial court could decide the case pursuant to a noticed briefing schedule with written evidence.  The parties stipulated to a number of facts, including alternative calculations of the damages owed depending on whether the trial court enforced the liquidated damages provision.  The trial court ruled in ECM’s favor, finding Payless did not overcome the presumption of validity with respect to the liquidated damages clause in the parties’ lease agreement.  The trial court awarded ECM damages of $90,226.80, based on the parties’ agreed calculation of $98,000 in liquidated damages ($330 per day times 279 days), less a $7,783.20 credit owed Payless after a reconciliation of CAM charges and real property taxes for the 2005 lease term. 

■ Held:

Trial court judgment that the liquidated damages provision in a lease did not constitute an unlawful penalty is affirmed where the liquidated damages clause was presumptively enforceable under Civil Code sec. 167 and defendant had the burden to demonstrate otherwise, which it could not do as evidence that the clause was arbitrary was not conclusive and was countered by expert testimony introduced by plaintiff.
El Centro Mall v. Payless Shoesource -G040038-4/21/09 CA4/3
El Centro Mall v. Payless Shoesource -G040038-4/21/09 CA4/3-PDF

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