On May 21, 2009, the California Court of Appeals for the 4th District upheld a liquidated damages provision in a commercial lease. In El Centro Mall, LLC v. Payless ShoeSource, Inc, defendant Payless Shoe Source, Inc. ceased operations at a shopping center owned by plaintiff El Centro Mall, LLC. Pursuant to a provision in the applicable lease, El Centro Mall, LLC charged Payless ShoeSource, Inc. over $98,000 in liquidated damages for ceasing operations before the end of its lease term. Payless refused to pay and argued that the liquidated damages provision was an unenforceable penalty under Civil Code section 1671. The trial court determined that the liquidated damages provision was not an unlawful penalty and Payless appealed that decision.
The Court of Appeals held that substantial evidence supported the trial court’s judgment and overruled the demurrer. The court ruled that according to Civil Code section 1671(b) the liquidated damages clause was presumptively enforceable and Payless had the burden to demonstrate otherwise. Even though the Court determined that Payless’s evidence may have given rise to an inference that the liquidated damages provision was arbitrary, Payless did not meet their evidentiary burden.
It is clear from the Court of Appeals decision that this opinion was based on the very specific facts before the court. That being said, this is an important ruling because validates liquidated damages (a penalty provision) in the commercial leasing context.