Landlords and Lenders Could be Liable for Damages Despite "No Damages" Clause

This is another circumstance, in which a lawyer’s nifty draft of a contract clause may not always protect the client (See my blog post from December 19, 2012).  A common lease provision exculpates the landlord from damages and limits the tenant’s remedies to specific performance when the landlord unreasonably withholds consent to a sublease or alterations. However, the 2007 holding in Banc of Am. Sec. LLC v. Solow Bldg. Co. II, L.L.C. by the Appellate Division, First Dept. makes clear that this provision may be unenforceable depending on the landlord’s conduct.

In the extended fight between Moinian Group and Related Companies over 3 Columbus Circle, a creative lawyer for Moinian tried to extend this  principle to seek damages against the mortgagee which withheld consent to proposed leases while it was shopping the mortgage to Related.  The Appellate Division, First Department responded in Devash LLC v. German Am. Capital Corp. by disagreeing with the plaintiff, granting defendants’ motion to dismiss and holding the clause enforceable.  The Court also laid out the criterion for when the provision may be unenforceable by explaining that while the purpose of the provision is to limit a borrower or a tenant’s remedy to injunctive relief or declaratory judgment, the provision will not be enforced when the landlord or lender engages in an intentional wrongdoing such as conduct that is “fraudulent, malicious or prompted by the sinister intention of one acting in bad faith.”

So what type of intentional wrongdoing is the court exactly talking about?  The court said that “the type of intentional wrongdoing that could render a limitation…unenforceable is that which is unrelated to any legitimate economic self-interest.”  Thus, a lender’s intent in withholding consent because it merely wishes to maximize its options and the value of the property and the loan, does not qualify as an intentional wrongdoing that would render the clause unenforceable.  For instance, in Devash the court held that since the defendant withheld consent to the proposed leases during negotiations for a loan restructuring agreement with the plaintiff while also shopping the mortgage to a third party, was only intended to provide the lender with greater flexibility to maximize the value of the loan and obtain the benefit of an early repayment, these actions “[were] neither wrongful nor motivated solely by malice, as opposed to [the defendant’s] normal economic interest.”

However, “a pattern of refusing to either approve or disapprove proposed alterations while at the same time demanding [payment] – despite the lack of any lease provision justifying such a payment”, as was the case in the Solow decision, shows the type of conduct motivated solely by malice, with a tortious intent to inflict monetary harm and for no legitimate economic self-interest.  This would render the clause unenforceable as a matter of public policy.

It is important to note that economic self-interest is not interpreted expansively to excuse all manner of misconduct.  After all, economic self-interest is the motivation for fraud, self-dealing and breach of fiduciary duty.  Hence, the key is for the economic self-interest to be legitimate.

In sum, a provision limiting a tenant or borrower’s remedies to specific performance may be unenforceable if the landlord’s or the mortgagee’s conduct is malicious, intends to inflict harm or does not pursue a legitimate economic interest. *

*Saman Aminolsharei, a law student intern with Olshan assisted in the research and writing of this post.

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