On July 26, 2022, the First Department issued a decision in Seymour v. Hovnanian, 2022 NY Slip Op. 04705, upholding an award of liquidated damages, explaining:
The court correctly awarded plaintiffs $318,000 in liquidated damages, plus interest, comprised of $1,000 per day for the period of November 2, 2014 to September 15, 2015. Liquidated damages constitute the compensation which, the parties have agreed, should be paid in order to satisfy any loss or injury flowing from a breach of their contract. These provisions have value in those situations where it would be difficult, if not actually impossible, to calculate the amount of actual damage. Liquidated damages will be sustained if, at the time of the contract, the amount liquidated bears a reasonable proportion to the probable loss and the amount of actual loss is incapable or difficult of precise estimation.
Whether a liquidated damages provision is an unenforceable penalty is a question of law for the court. The party seeking to avoid liquidated damages has the burden to prove that they are an unenforceable penalty. If the amount is grossly disproportionate to the probable loss, the provision is a penalty, and courts will not enforce it. In the absence of any countervailing public policy concerns, freedom of contract prevails in an arm’s length transaction between sophisticated parties.
The term grossly disproportionate in the liquidated damages context does not lend itself to a precise definition. However, Trustees of Columbia Univ. (36 NY3d 69) is instructive. There, the Court of Appeals found that the liquidated damages, which were 7½ times what plaintiff would have received if defendant had fully complied with the surrender agreement, were grossly disproportionate to the actual loss. By contrast, courts have held that liquidated damages clauses that permit a landlord to recover between two or three times the amount of the existing rent or license fee in a holdover proceeding are not grossly disproportionate to the probable loss and therefore, not a penalty.
The Hovnanians unpersuasively argue that the liquidated damages are grossly disproportionate to the rental value of the Seymours’ home. They concede that the daily rental value for the Seymours’ tenants’ apartment is $200 per day and that plaintiffs’ appraiser valued the daily rental for the Seymours’ apartment at $230 per day. Thus, the liquidated damages of $1,000 per day, which is 2.3 times the $430 daily lost rental value for the Seymours’ townhouse, is not grossly disproportionate to plaintiffs’ actual damages. As there is no countervailing public policy concern, freedom of contract prevails in this arm’s length transaction between sophisticated parties.
The Hovnanians’ remaining arguments regarding the unenforceability of the liquidated damages clause lack merit. They baselessly maintain that when the clause was triggered in November 2014, the Seymours could not have been damaged or affected by the Hovnanians’ delay in obtaining a temporary certificate of occupancy because the Seymours moved into an assisted living facility with no intent to return home. However, there is no evidence in the record to indicate that the Seymours would not have been able to return home during the period of time for which liquidated damages were awarded (from November 2, 2014 to September 15, 2015), either with part-time or full-time home care if their health required it. There is also no evidence to rebut plaintiffs’ affidavits explaining that they purposefully moved their parents to a month-to-month apartment at an assisted living facility in November 2014 with the hope and expectation that the townhouse would be made habitable for their parents’ return.
The Hovnanians also make the untenable argument that they can ignore their agreement to pay liquidated damages after the expiration of the 18-month term because the requirement to obtain a temporary certificate of occupancy was ministerial. This argument is baseless because it was the Hovnanians who proposed that the liquidated damages provision be tied to obtaining a temporary certificate of occupancy.
Moreover, the Hovanians’ argument that the Seymours incurred no damages because their tenants did not move out or withhold rent is improperly based on hindsight and is irrelevant. The law is well settled that liquidated damages are an estimate, made by the parties at the time they enter into their agreement, of the extent of the injury that would be sustained as a result of breach of the agreement. At the time that the license agreement was executed in May 2013 the parties faced many uncertainties, including the extent of the project’s disruption, whether the tenants would move out or withhold rent, and whether the tenants’ apartment could be re-rented. Consequently, when the license agreement was executed, the liquidated damages were a reasonable estimate of the potential losses.
(Internal quotations and citations omitted).