Commercial Real Estate Inv., L.C. v. Comcast of Utah II, Inc.

Decision Date10 August 2012
Docket NumberNo. 20090847.,20090847.
PartiesCOMMERCIAL REAL ESTATE INVESTMENT, L.C., Plaintiff and Appellee, v. COMCAST OF UTAH II, INC., Defendant and Appellant.
CourtUtah Supreme Court

OPINION TEXT STARTS HERE

Richard W. Jones, Keith M. Backman, Ogden, for plaintiff.

Anthony C. Kaye, Matthew L. Moncur, Salt Lake City, for defendant.

Justice DURHAM, opinion of the Court:

INTRODUCTION

¶ 1 Comcast of Utah II, Inc. (Comcast) appeals from the district court's grant of partial summary judgment in favor of Commercial Real Estate Investment, L.C. (CRE). The district court awarded CRE approximately $1.7 million in liquidated damages, plus approximately $2 million in interest, based on Comcast's breach of contract. On appeal, Comcast challenges the enforceability of the liquidated damages clause in its contract with CRE. The parties dispute what law governs review of the enforceability of liquidated damages clauses. We hold that liquidated damages clauses are not subject to heightened judicial scrutiny, but instead are treated like any other contractual provision. We reject Comcast's argument that the liquidated damages clause in this contract is unconscionable and further conclude that CRE did not breach its duty to mitigate its damages. We accordingly affirm.

BACKGROUND

¶ 2 This recitation of facts is based on the district court's undisputed findings of fact for purposes of summary judgment. In 1995, TCI Cablevision of Utah (TCI) approached CRE about “developing a large commercial building where TCI could operate its northern Utah cable television business.” TCI proposed to locate a suitable site and design a building to meet its specific needs. CRE would purchase the site and construct the building to TCI's specifications. TCI further proposed to enter into a long-term lease for the building.

¶ 3 TCI identified a suitable site in Riverdale, Utah. The site was located in a commercial/industrial subdivision that was largely undeveloped. CRE agreed with the proposed site. CRE anticipated that this new building might drive additional development in the subdivision, and consequently acquired another lot adjacent to the TCI lot. But “CRE did not express its intentions regarding adjacent development to TCI.”

¶ 4 TCI's agent prepared the lease and delivered it to CRE. The lease as drafted by TCI's agent contained blanks for the rental amounts and the term of the lease. CRE approved the lease as presented: “The only additions [to the lease] were that the rental amounts and the term had been added. In all other respects, the final lease contained the same provisions as TCI's draft lease.”

¶ 5 The lease contained the following provisions regarding the tenant's duties to continuously operate the building:

9.01 Tenant's Business Operations. Tenant covenants to operate all of the Building continuously during the entire term of this Lease with due diligence and efficiency unless prevented from doing so by causes beyond Tenant's control. Tenant shall keep on the Building at all times sufficient personnel to service the usual and ordinary demands and requirements of its customers. Tenant shall conduct its business on the Building during the regular customary days and hours for such type of business in the city or trade area in which the Building is located.

9.02 Liquidated Damages. As liquidated damages for the failure of Tenant to comply with the terms of this Article and in addition to all other remedies Landlord may have hereunder, Landlord shall have the right, at its option, to collect not only the minimum and additional rent herein provided, but added rent at the rate of one-thirtieth (1/30th) of the minimum monthly rent set forth in Article 4 for each and every day that Tenant shall fails [ sic ] to conduct its business as required herein.

The lease further specified that CRE had a duty to “exercise its reasonable best faith efforts to mitigate its damages, if any, arising from” a violation of the above provisions.

¶ 6 The parties signed the lease agreement in July 1995. TCI thereafter took possession and began operating its business from the building. On July 17, 2001, however, TCI ceased operations at the building and vacated the premises. In 2002, Comcast acquired TCI and succeeded to TCI's interest in the property and to its obligations under the terms of the lease. Sometime thereafter, “Comcast listed the building with a realtor in an effort to locate a replacement tenant.” “CRE referred any inquiries regarding the property to Comcast's real estate agent, but CRE made no other efforts to find a substitute tenant.” A substitute tenant took possession of the property on February 22, 2006.

¶ 7 TCI (and subsequently Comcast) paid all rent due under the lease since July 1995, but have refused to pay any liquidated damages pursuant to Article 9 of the lease. Not counting interest, liquidated damages from July 17, 2001, to February 22, 2006, total $1,711,990.66.

¶ 8 In July 2004, CRE sued Comcast for breach of contract and attorney fees. Both parties filed motions for partial summary judgment as to the enforceability of the liquidated damages provision. The parties strongly disagreed as to which case law the district court should apply to determine the clause's validity. CRE argued that enforceability depended only on whether the clause is unconscion-able. Comcast countered that enforceability should be determined under section 339 of the first Restatement of Contracts. Both parties supported their respective positions with extensive case law.

¶ 9 The district court granted CRE's motion for partial summary judgment. The district court first held that our decision in Reliance Insurance Co. v. Utah Department of Transportation, 858 P.2d 1363 (Utah 1993), adopted the Restatement test for reviewing liquidated damages clauses. The two-part Restatement test requires determining (1) whether the amount of liquidated damages was a “reasonable forecast” of actual damages and (2) whether actual damages were “incapable or very difficult of accurate estimation.” Restatement of Contracts § 339 (1932). Applying the Restatement test, the district court held that the clause was enforceable.

¶ 10 On the first part of the Restatement test, the district court noted that its “deciding factor” was that “the amount of damages varied depending on the length of time the building was unoccupied.” Because the lease “specified damages proportional to the length of the breach,” the district court reasoned, it could not “find that Comcast has met its burden of establishing that the liquidated damages were not a reasonable forecast of actual damages.”

¶ 11 On the second part, the district court noted that “the parties have offered [it] little guidance on this issue.” The court determined that “the issue of unconscionability bears relevance” to this evaluation. As the court found none of the hallmarks of unconscionability to be present, it declined to “reallocate the assumption of the risk that was bargained for between the parties.” The court concluded that “Comcast cannot establish that either element of [the Restatement test] is not met, nor can Comcast prove that the agreement is unconscionable,” and thus granted CRE's motion for partial summary judgment.

¶ 12 The district court also rejected Comcast's argument that CRE had failed to mitigate its damages. The district court first noted that it was “undisputed that CRE did nothing to assist in finding a new tenant other than refer inquiries to Comcast's agent.” The court then refused to “speculate as to what CRE could have or should have done to secure another tenant or whether any other tenant would satisfy the requirement of occupancy.”

¶ 13 Comcast timely appealed the district court's order. We have jurisdiction under section 78A–3–102(3)(j) of the Utah Code.

STANDARD OF REVIEW

¶ 14 Summary judgment is appropriate when the record shows that “there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” Utah R. Civ. P. 56(c). We review the district court's decision to grant summary judgment for correctness, granting no deference to the district court.” Alliant Techsystems, Inc. v. Salt Lake Cnty. Bd. of Equalization, 2012 UT 4, ¶ 17, 270 P.3d 441 (alteration omitted) (internal quotation marks omitted). We may affirm a district court's entry of summary judgment if it is sustainable on any legal ground or theory apparent on the record.” Haik v. Sandy City, 2011 UT 26, ¶ 10, 254 P.3d 171 (internal quotation marks omitted).

ANALYSIS

¶ 15 Comcast challenges two aspects of the district court's grant of partial summary judgment in favor of CRE. First, Comcast argues that the district court erred in evaluating the enforceability of the liquidated damages provision. Second, Comcast contends that the district court erred in not considering CRE's alleged failure to mitigate its damages stemming from Comcast's breach. We consider each of these arguments in turn.

I. ENFORCEABILITY OF LIQUIDATED DAMAGES PROVISION

¶ 16 On appeal, the parties disagree as to which case law the district court should have applied to determine the validity of the liquidated damages clause. Comcast challenges the district court's decision in three respects: (1) the clause is a penalty on its face and therefore unenforceable, (2) the district court misapplied the Restatement test, and (3) this court should adopt the test laid out in section 356 of the Restatement (Second) of Contracts.

¶ 17 In response, CRE raises three primary arguments in support of the district court's decision: (1) Comcast did not satisfy its burden of proof to overcome the presumption that the clause was enforceable; (2) the district court correctly applied the Restatement test; and (3) Utah law is unclear regarding the appropriate test for liquidated damages, and this court should clarify that liquidated damages should be evaluated only for unconscionability. We agree with CRE's third...

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