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84-2a-504. Liquidation of damages. (1) Damages payable by either party for default, or any other act or omission, including indemnity for loss or diminution of anticipated tax benefits or loss or damage to lessor's residual interest, may be liquidated in the lease agreement but only at an amount or by a formula that is reasonable in light of the then anticipated harm caused by the default or other act or omission.

(2) If the lease agreement provides for liquidation of damages, and such provision does not comply with subsection (1), or such provision is an exclusive or limited remedy that circumstances cause to fail of its essential purpose, remedy may be had as provided in this article.

(3) If the lessor justifiably withholds or stops delivery of goods because of the lessee's default or insolvency (K.S.A. 84-2a-525 or 84-2a-526), the lessee is entitled to restitution of any amount by which the sum of such lessee's payments exceeds:

(a) The amount to which the lessor is entitled by virtue of terms liquidating the lessor's damages in accordance with subsection (1); or

(b) in the absence of those terms, 20% of the then present value of the total rent the lessee was obligated to pay for the balance of the lease term, or, in the case of a consumer lease, the lesser of such amount or $500.

(4) A lessee's right to restitution under subsection (3) is subject to offset to the extent the lessor establishes:

(a) A right to recover damages under the provisions of this article other than subsection (1); and

(b) the amount or value of any benefits received by the lessee directly or indirectly by reason of the lease contract.

History: L. 1991, ch. 295, § 52; February 1, 1992.

KANSAS COMMENT, 1996

1. Liquidated damages provisions are common in lease contracts. This section modifies the statutory analogue, section 84-2-718, to give added flexibility to the parties in formulating enforceable liquidated damages provisions.

2. Subsection (1) states the general rule: damages may be liquidated in the lease contract so long as the amount or formula is "reasonable in light of the then anticipated harm caused by the default or other act or omission." This subsection differs from the statutory analogue in a variety of ways. First, its sole standard for evaluating the legality of a liquidated damages clause its reasonableness in light of the anticipated harm at the time the lease is made. Two other factors specified in section 84-2-718(1) — the difficulty of proving the amount of loss and the feasibility of otherwise obtaining adequate relief — are omitted. The Official Comments explain that those factors were omitted because "(t)he ability to liquidate damages is critical to modern leasing practice," which outweighs any justification for the two additional requirements. Second, the subsection expressly permits damages to be liquidated by formula in addition to amount. Common formulas used in lease contracts are described in the Official Comments. Third, this subsection omits the statement in section 84-2-718(1) that a term that fixes unreasonably large liquidated damages is void as a penalty. Instead, under subsection (2), if a liquidated damages provision fails to comply with subsection (1) (whether it is too high or too low) or fails of its essential purpose, the aggrieved party may have any remedy provided in this Article.

3. Subsections (3) and (4) address when a lessor that justifiably denies the lessee the goods must make restitution of any payments made by the lessee. Under subsection (3), the lessee is entitled to restitution of payments made in excess of any liquidated damages or, if none, in the case of a consumer lease, the smaller of $500 or 20% of the present value of the total rent. In a non-consumer lease, the $500 limitation is omitted "as unrealistically low." See Official Comments to this section. Subsection (4) makes clear that the lessee's right to restitution is subject to offset by the amount of damages recovered by the lessor and benefits received by the lessee.


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