Page 6 — Property Management Quarterly — April 2022
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W
hether for a minor remod-
el or a large-scale ten-
ant improvement, most
construction contracts
include a waiver-of-conse-
quential-damages provision, under
which both parties waive all claims
for consequential damages. Build-
ing owners and landlords should
understand both the potential con-
sequences of agreeing to such a
provision and the available alterna-
tives to ensure losses are recover-
able.
Understanding the potential
consequences of a mutual waiver-
of-consequential-damages provi-
sion requires a brief foray into the
basics of contract law. The scenario
in which this provision applies
assumes that two parties have
entered into an enforceable con-
tract and that one of those parties
has breached the contract by failing
to perform its obligations. Gener-
ally, there are two types of damages
arising out of a breach of a contract:
compensatory damages covering
losses that the nonbreaching party
incurred as a direct result of the
breach and consequential damages
covering losses that flow indirectly
from the breach, such as loss of
rental income, rent abatement, loss
of reputation and relocation costs.
A waiver-of-consequential-damages
provision prevents the nonbreach-
ing party from recovering this sec-
ond category of losses.
As an example, take a scenario
where a building owner seeks to
attract a steady tenant by remodel-
ing an existing commercial space
into a new restaurant, including a
commercial kitch-
en, dining area and
outdoor patio. The
owner engages a
contractor to build
out the space.
The construction
contract sets a
completion date at
the start of sum-
mer to maximize
patrons’ interest
in the outdoor
patio. Simultane-
ously, the owner
enters into a lease with a tenant
to occupy and operate the restau-
rant, with payments due under the
lease commencing on the expected
completion date. Relying upon the
anticipated completion date, the
tenant hires a chef, a manager
and other employees, it purchases
advertisements for a grand opening,
and it orders furniture, fixtures and
equipment. However, the contractor
badly underestimated the time nec-
essary to perform the work, and the
restaurant opens four months later
than expected, just as fall arrives.
The tenant incurs significant dam-
ages related to the delay, includ-
ing payment for services it could
not use, lost revenues, a tarnished
reputation and storage costs for the
furniture, fixtures and equipment,
all of which the tenant seeks to
recover from the owner under the
lease. In addition, the owner suffers
significant damages in the form of
loss of rental income, loss of profit
sharing and rent abatement.
In this scenario, what damages
is the owner entitled to recover
from the contrac-
tor? The answer
depends upon
whether the con-
struction contract
included a waiver-
of-consequential-
damages provi-
sion. If so, then
the owner likely
will be limited to
recovering com-
pensatory dam-
ages (e.g., property
taxes, utility bills
and professional
services for the period of delay);
and will be prevented from recov-
ering consequential damages (e.g.,
loss of rent, rent abatement, inter-
est carry on the construction loan,
and damages owed to third parties,
including the tenant). This outcome
can be a bitter pill for an owner to
swallow at the end of a troubled
project, particularly if the owner
was not fully aware that these dam-
ages were being waived.
The most obvious way to avoid
this outcome would be for the
owner to reject the waiver-of-conse-
quential damages provision in the
contract. However, the owner likely
will have a difficult time doing so
because such provisions are consid-
ered typical in the current market
– contractors have little incentive to
“bet the company” on a single con-
struction project by exposing them-
selves to the owner’s consequential
damages, which are inherently
unpredictable.
The next best way to avoid this
outcome would be for the owner to
require a liquidated damages provi-
sion in the contract to compensate
the owner from losses resulting
from the breach – direct and indi-
rect, compensatory and consequen-
tial. As a general rule, an owner
should never agree to a mutual
waiver-of-consequential-damages
provision unless there is a liqui-
dated damages provision elsewhere
in the contract. To be most effective,
however, it is critical that the liqui-
dated damages provision accurately
project all of the costs that the
owner or landlord expects to incur
as a result of the delay. If the liqui-
dated damages rate is set too low
or is capped, the owner may not be
adequately protected.
Finally, if the contractor is not
willing to agree to liquidated dam-
ages but also is insisting on a
waiver-of-consequential-damages
provision, then the best way for the
owner to protect itself is to carve
out exceptions to the provision. For
example, the owner could identify
certain kinds of losses (e.g., rent
abatement) that are exempted.
Alternatively the owner could state
that the provision does not apply
to consequential damages that are
paid by insurance applicable to the
project. While these exceptions may
not make the owner whole, they
may strike an appropriate balance
between protecting the owner from
loss while not exposing the contrac-
tor to an unquantifiable risk. s
A primer on waivers of consequential damages
Kevin Walsh
Shareholder,
Brownstein Hyatt
Farber Schreck LLP
Chloe Mickel
Associate,
Brownstein Hyatt
Farber Schreck LLP
