## Facts

- A municipality leased township-owned commercial property to Wasserman’s, Inc. under a lease executed in May 1971 after the township advertised for bids and Wasserman’s submitted the only bid.
- The lease included a cancellation clause requiring the township, upon cancellation, to pay (1) pro rata reimbursement of tenant improvement costs and (2) “damages of twenty-five percent” of the lessee’s average gross receipts for one year.
- Wasserman’s made agreed improvements totaling $142,336.01 and later sold its business and sublet the premises to Jo-Ro, Inc. with township approval.
- The township cancelled the lease on December 31, 1988, then sold the property at public auction in 1989 for $610,000.
- The township refused to pay amounts demanded under the cancellation clause; Wasserman’s and Jo-Ro sued for breach of contract.

## Issues

1. Whether the lease was invalid due to statutory limits on municipal leasing, including whether later-enacted public-bidding requirements applied retroactively or required the cancellation clause to have been part of bid specifications.
2. Whether the cancellation clause constituted enforceable liquidated damages or an unenforceable penalty, particularly where damages were measured by a percentage of gross receipts.

## Decision

- The Supreme Court of New Jersey held the lease valid and enforceable and rejected retroactive application of later public-bidding requirements to invalidate a lease executed under the earlier statute.
- The Court affirmed liability for breach based on the township’s cancellation and refusal to pay.
- The Court reversed the lower courts’ automatic enforcement of the stipulated-damages formula and remanded for fact development and a judicial determination of whether the clause was reasonable liquidated damages or a penalty.

## Legal Principles

- A municipality’s lease executed under the statute in effect at the time is not rendered void by later-enacted leasing requirements absent retroactive application.
- A liquidated-damages clause is enforceable if it reflects a reasonable forecast of just compensation for harm caused by breach; a penalty clause is unenforceable.
- Reasonableness may be evaluated in light of both anticipated harm at contracting and actual harm at breach.
- Enforceability of a liquidated-damages provision is a question of law, but the legal determination may depend on resolving underlying factual questions about the relationship between the stipulated measure and probable or actual loss.
- A formula tied to gross receipts may be suspect because it can materially exceed actual losses (including where expenses are not accounted for), requiring careful scrutiny, particularly in contracts involving public entities.
- Damages analysis may include consideration of mitigation and the types of losses actually incurred (e.g., profits lost, unrecovered improvement costs, relocation-related losses).

## Conclusion

The court upheld the municipal lease and rejected retroactive statutory invalidation, but required a trial-level factual record to determine whether the cancellation clause’s gross-receipts-based damages were a reasonable estimate of harm or an unenforceable penalty.


Wasserman’s Inc. v. Twp. of Middletown, 137 N.J. 238, 645 A.2d 100 (N.J. 1994)