We would like to ensure that you are still receiving content that you find useful – please confirm that you would like to continue to receive ILO newsletters.
26 June 2018
The Supreme Court recently analysed the differences between compensatory and punitive penalty clauses in lease agreements and established the requirements for the latter to be valid.(1) The court also ruled that a punitive penalty clause's amount cannot be reduced simply because the lessor enters into a new lease agreement immediately after recovering possession of the commercial premises.
The Supreme Court's decision concerned a 10-year commercial premises lease agreement which two companies had entered into in June 2005.
The contract established that if the lessee unjustifiably terminated the contract prematurely, it would have to pay the lessor according to the penalty clause included therein, which called for payment of:
An amount equivalent to twenty five per cent (25%) of the outstanding rent amounts prior to June 1, 2010 and forty per cent (40%) of the outstanding rent amounts from such date until the contract's termination, all of the foregoing without prejudice to the Lessor's entitlement to claim the outstanding rent and compensation for the damages that such an early termination may have caused it.
As a result of the lessee's non-payment of the rent, the lessor filed an eviction suit and, after following the appropriate procedure, recovered possession of the commercial premises on 8 October 2012. Immediately thereafter, the lessor:
The Cuenca First-Instance Court Number 1 dismissed the suit on the grounds that the application of a penalty clause should be limited to the time during which the commercial premises remain unleased, a situation which did not occur in the case in question.
The Cuenca Appellate Court subsequently confirmed the first-instance decision and added that:
The Supreme Court's decision divided the analysis of the cassation appeal filed by the lessor in two.
Regulatory and case law framework
To decide the issue in question, the Supreme Court first established the regulatory and case law framework in which the matter had to be resolved. Specifically, it outlined the following:
The Supreme Court also highlighted that there have been several legislative initiatives in this area. However, the Supreme Court insisted that it must respect its case law as indicated in the above bullet until Article 1154 of the Civil Code is modified.
Resolution of disputed issue
The Supreme Court upheld the cassation appeal and ordered the lessee to pay the amount established in the penalty clause in its entirety. The court based this decision on the following arguments:
The Supreme Court concluded that the disputed penalty clause:
Consequently, the Supreme Court concluded that the fact that the lessor had entered into a new lease agreement immediately after recovering possession of the commercial premises and thus had not suffered any damage due to the early termination of the contract was not a circumstance which would permit a reduction of the punitive penalty clause. Thus, the Supreme Court ordered that the punitive penalty clause be applied in its entirety.
For further information on this topic please contact Ana Ribó or Leah Daniels at Pérez-Llorca by telephone (+34 93 481 30 75) or email (firstname.lastname@example.org or email@example.com). The Pérez-Llorca website can be accessed at www.perezllorca.com.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
ILO is a premium online legal update service for major companies and law firms worldwide. In-house corporate counsel and other users of legal services, as well as law firm partners, qualify for a free subscription.