Liquidated damages in true leases: applicable law
Uniform Commercial Code Section 2-A-504 is the applicable law regarding liquidated damages in a lease agreement. Section 2-A-504(1) provides that: “Damages payable by either party for default . . . including . . . loss or damage to lessor’s residual interest, may be liquidated in the lease agreement but only at an amount or by a formula that is reasonable in light of the then anticipated harm caused by the default . . . .”
As an exemplar, the Official Comment to Section 2-A-504 (the Official Comment) provides a commonly accepted formula used in leasing practice to liquidate the lessor’s damages for breach or early termination: the sum of (1) lease payments past due, plus (2) accelerated future lease payments, plus (3) the lessor’s estimated residual interest, determined ex ante, less (4) the net proceeds of disposition (whether by sale or re-lease) of the leased goods.
The Official Comment recognizes that stipulated loss schedules are common and that whether such a formula is enforceable will be determined in the context of each case by applying a standard of reasonableness in light of the harm anticipated when the formula was agreed to between the parties, i.e., at the inception of the lease transaction. Lessees that contest the reasonableness of a liquidated damages formula for the most part attempt to analyze the reasonableness of the formula ex post, which is directly contradicted by the plain language of the statute’s direction to assess the “then anticipated harm.”