Difference Between Liquidated Damages, Breach of Contract Penalty

Question: Our daughter attends ASU, and we personally guaranteed a one-year lease for her Tempe condominium. The lease expiration date is May 31. Our daughter, however, moved out of the Tempe condominium one month early at the end of April to live with us until she goes to Europe for three months. My daughter’s friend is going to ASU summer school, and she immediately signed a new lease for the same rent and moved into the Tempe condominium on May 1. My daughter’s lease provides for damages in the amount of a 60-day rent payment for early termination of the lease by the tenant. We received a letter today from the landlord’s property manager that we owe 60 days of rent. Although our daughter moved out one month early, do we have to pay this 60-day rent payment, even though the landlord found a new tenant immediately?

Answer: The question is whether the 60-day rent payment is liquidated damages or a penalty. A penalty cannot be enforced for breach of a lease or other contract. A liquidated damages provision in a lease or other contract can be enforced. The liquidated damages provision must be a reasonable estimate by the parties, at the time that the lease or other contract is signed, of the damages because of the breach. Therefore, the 60-day rent payment for early termination may be enforceable. A judge, however, may limit the landlord’s claim to the 30 days rent that was remaining on your daughter’s lease.

Note: A good example of the difference between liquidated damages and a penalty is earnest money in the Arizona residential standard purchase contract. On this purchase contract the seller and buyer agree that, if the buyer defaults, the earnest money, e.g., $10,000, will be forfeited to the seller (as liquidated damages) without the seller having to show any damages. This purchase contract also provides that, if the seller accepts the $10,000 earnest money, the seller cannot claim more damages, e.g., additional $20,000 in damages later when the home finally sells, but sells for a $20,000 lower sale price.