## Facts

- Red Sage Limited Partnership operated restaurants and a take-out market in the Westory Building under a commercial lease.
- The lease limited Red Sage’s use to a bar/restaurant and included an exclusive-use covenant barring the landlord from allowing any other tenant to operate a “bar, restaurant or food service establishment of any kind.”
- The lease provided a 50% rent abatement for any period during which a prohibited competing use operated in the building.
- DESPA later acquired the building and became Red Sage’s landlord.
- DESPA leased space to Cakes & Company, described as a specialty cake shop selling cakes, including whole cakes, from a ground-floor location.
- Red Sage claimed Cakes & Company was a prohibited “food service establishment” and sought a declaration that the competing-use lease triggered the 50% rent abatement.
- DESPA argued that Cakes & Company was outside the covenant’s scope and that the 50% abatement was an unenforceable penalty.

## Issues

1. Whether the lease’s 50% rent-abatement remedy for breach of an exclusive-use covenant is enforceable as liquidated damages under District of Columbia law or void as a penalty.
2. Whether DESPA was entitled to summary judgment on alternative grounds, including lease-interpretation arguments about whether Cakes & Company constituted a prohibited competing use.

## Decision

- The court reversed the district court’s summary judgment for DESPA and remanded.
- The court held the 50% rent abatement was not an unenforceable penalty and could be enforced as an agreed damages measure.
- The court rejected DESPA’s alternative arguments for affirmance as a basis for summary judgment.
- On remand, the district court was to determine, applying the lease terms to the facts, whether Cakes & Company’s operation actually triggered the abatement.

## Legal Principles

- Under District of Columbia law, a stipulated damages provision is enforceable as liquidated damages when (1) anticipated harm from breach is difficult to estimate at contracting and (2) the stipulated amount is a reasonable forecast of compensation rather than an unreasonably large, punitive sum.
- Reasonableness is assessed primarily ex ante; the clause need not mirror actual damages proved after breach.
- In a commercial lease, damages from violating an exclusive-use covenant may be difficult to quantify because competitive effects on revenue and related business lines are uncertain.
- A rent-abatement remedy tied to the duration of the competing use may support reasonableness by linking the measure of relief to the period of alleged harm.
- Summary judgment is improper where the record leaves material disputes or unresolved interpretive questions about whether the challenged tenant activity falls within broad covenant language such as “food service establishment of any kind.”

## Conclusion

The D.C. Circuit held that a 50% rent-abatement clause for breach of an exclusive-use covenant could operate as enforceable liquidated damages, reversed summary judgment that treated the clause as a penalty, and remanded to determine whether the cake shop’s operation fell within the lease’s prohibition and thus triggered the abatement.


Red Sage Ltd. P’ship v. DESPA Deutsche Sparkassen Immobilien-Anlage-Gesellschaft MBH, 254 F.3d 1120 (D.C. Cir. 2001)