Red Sage Ltd. Partnership v. DESPA Deutsche Sparkassen Immobilien-Anlage-Gasellschaft mbH

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued February 5, 2001 Decided July 13, 2001

No. 00-7129

Red Sage Limited Partnership,

Appellant

v.

DESPA Deutsche Sparkassen

Immobilien-Anlage-Gasellschaft mbH, a/k/a DespaEuropa,

Appellee

Appeal from the United States District Court

for the District of Columbia

(No. 98cv02533)

Andrew J. Kline argued the cause for appellant. With him

on the briefs was Jeffrey L. Berger.

J. Jonathan Schraub argued the cause for appellee. With

him on the brief was Paige A. Levy.

Before: Edwards, Chief Judge, Ginsburg and Tatel,

Circuit Judges.

Opinion for the Court filed by Circuit Judge Tatel.

Tatel, Circuit Judge: A Washington, D.C. restaurant

sought a declaration that its landlord breached an exclusive

use covenant by renting space in the same building to a

specialty cake shop. The restaurant claimed that under its

lease, the breach entitled it to a 50 percent rent abatement.

The district court granted summary judgment for the land-

lord, finding that under the circumstances of this case, a 50

percent rent abatement would constitute an unenforceable

penalty. Because we conclude that the rent abatement,

negotiated by sophisticated parties, was not an unreasonable

estimate of the damages likely to result from a breach of the

exclusive covenant, and because the landlord's additional ar-

guments for summary judgment fail, we reverse and remand

for further proceedings.

I

Red Sage Limited Partnership operates an "internationally

known ... fine dining" restaurant in the Westory building, a

Washington D.C. office building. Appellant's Opening Br. at

5. In the same building, Red Sage operates several private

dining rooms used for catering and special events, a casual

Tex-Mex restaurant, and the Red Sage Market, a take-out

facility that sells sandwiches, salads, snacks, cold drinks, tea,

coffee, and desserts, including a variety of whole cakes avail-

able by special order.

Red Sage first leased space in the Westory building in

September of 1990. At that time, the building was owned by

607 14th Street Associates Limited Partnership. Insofar as

the original landlord, through his wife, had an ownership

interest in Red Sage, the original lease was not negotiated at

arm's length. The lease provided that "[t]enant shall use and

occupy the Leased Premises solely as a bar and/or a restau-

rant." The lease also included the following exclusive cove-

nant and penalty clause:

34. Exclusive Covenant

(a) To the extent permitted by law, Landlord covenants

that during the Term it shall not permit any other tenant

within the Building to operate a bar, restaurant or food

service establishment of any kind (a "Competing Use").

The provisions of this Section 34 shall be enforceable

only so long as Tenant is operating a bar and/or a

restaurant in the Leased Premises.

...

(e) In the event that a Competing Use is operated in the

Building at any time during the Term and Landlord has

violated its covenants under this Section 34, then (i) one

half (1/2) of the Base Rent payable hereunder shall be

abated during the period that the Competing Use is

operated in the Building, and (ii) Tenant may terminate

this Lease if the operation of the Competing Use contin-

ues for a period of six (6) months after written notice

thereof by Tenant to Landlord.... The provisions of

this subsection (e) shall not limit ... any other remedies

which Tenant may have against Landlord for violating its

obligations under this Section.

Six years later, in 1996, 14th Street Associates and Red

Sage executed an Amended and Restated Lease. The

amended lease contained the same exclusive covenant and

penalty clause as the original lease, but included a revised

tenant use provision:

Tenant use and occupancy of the Leased Premises shall

consist of owning and operating a restaurant and bar and

carrying on any and all activities incidental or related

thereto, including, but not limited to, operating a retail

general store primarily selling t-shirts, sweatshirts, sou-

venirs, spices, baked goods, foods and other items related

to Tenant's bar and restaurant.

The new lease also set base rent at "six and one-half percent

... of [Red Sage's] Gross Revenues, but in no event less than

Four Hundred Thousand Dollars." The parties do not dis-

pute that this lease was executed at arm's length.

In 1997, in preparation for the sale of the Westory Building

to DespaEuropa--Red Sage's current landlord and appellee

in this case--14th Street Associates and Red Sage again

amended the lease. This amendment left intact the tenant

use, base rent, exclusive covenant, and penalty clause provi-

sions in the amended lease, stating that "[a]ll terms and

provisions of the Lease which are not amended hereby are

hereby ratified and confirmed in all respects." Red Sage

asserts that Despa was "actively involved" in negotiating the

1997 amendment, since "reformulation of the Red Sage Lease

was a precondition to the purchase of the Westory Building

by Despa." Appellant's Opening Br. at 6. For its part,

Despa asserts that it "was not involved in any way in the

negotiations for or the drafting of the Red Sage Lease, but

rather inherited it as a second or third generation owner of

the building." Appellee's Br. at 5. It is undisputed, however,

that a Despa representative signed the 1997 amendment,

endorsing it "Accepted and Agreed."

Later that year, Despa purchased the Westory building

from 14th Street Associates and, the following year, leased

space in the building to a specialty store known as Cakes &

Company, triggering the dispute leading to this litigation.

Cakes' original lease permitted it to operate a "bakery/cafe"

selling "specialty cakes, baked goods, coffee, non-alcoholic

beverages and associated paper goods," but as Red Sage

concedes, Despa later amended the lease, deleting the refer-

ence to operating a "cafe" and permitting Cakes to sell food

items only for consumption off the premises. The parties

agree that Cakes primarily sold whole cakes--prepared else-

where and decorated on-site--for weddings and special occa-

sions. It also sold tea, coffee, single slices of cake, and some

of the same prepackaged drinks sold by Red Sage Market.

Cakes had no menu, wait staff, or customer tables or chairs.

In Cakes' first four months of operation, its gross sales were

almost $95,000, its gross profits around $50,000, and its net

income about $11,000.

Learning of the lease to Cakes, Red Sage wrote to Despa,

asserting that the landlord was violating the exclusive cove-

nant in Red Sage's lease and requesting a 50 percent rent

abatement. Despa replied: "The exclusive right you current-

ly enjoy in your lease ... pertains to a competing 'food

service operation.' Cakes & Company could not infringe

upon the highly stylized and critically acclaimed Red Sage."

Letter from Laurie McMahon, Director of Downtown Proper-

ty Management, Cassidy & Pinkard Property Services

L.L.C., to Bo Nilsson, Managing Partner, Red Sage, Inc.

(May 26, 1998).

Red Sage then sued Despa in the Superior Court for the

District of Columbia, seeking a declaration that Despa "has

breached and continues to breach section 34 of the Lease,

[and] that as a result of this breach Red Sage is entitled to an

abatement of one-half of the Base rent...." Compl. for

Declaratory Relief, Red Sage Ltd. P'ship v. DESPA mbH,

No. 98ca007066, at 6 (D.C. Super. Ct. Sept. 16, 1998). Despa

removed the case to federal court, and both parties moved for

summary judgment, contending that there were no disputed

issues of material fact. The district court denied the motions,

stating that "the contractual term 'food service establishment'

is not susceptible to definitive construction as a matter of law

under either the ... Lease or the Municipal Regulations of

the District of Columbia," and that there were "material

questions of fact concerning: 1) the parties' intentions as to

the scope and coverage of the restrictive covenant ... and 2)

the exact nature of the 'services' provided by Cakes." Order

Den. Cross-mot. for Summary J., Red Sage Ltd. P'ship v.

DESPA mbH, No. 98-2533 (D.D.C. Sept. 8, 1999).

At a subsequent status conference, Despa renewed its

motion for summary judgment on the alternative ground that

the rent abatement provision in Red Sage's lease constituted

an unenforceable penalty. Following supplemental briefing

on the issue, the district court granted Despa's motion for

summary judgment, finding that since "a rent abatement of

$200,000 ... would indeed impose an improper penalty,"

Despa was entitled to judgment as a matter of law. Red

Sage Ltd. P'ship v. DESPA mbH, No. 98-2533, Mem. Op. at

1-2 (D.D.C. Feb. 15, 2000), recon. denied, Red Sage Ltd.

P'ship v. DESPA mbH, No. 98-2533 (Apr. 11, 2000). At

some point following the grant of summary judgment, Cakes

closed its shop in the Westory building and terminated its

lease with Despa. The dispute in this case thus concerns the

value of the abatement for the period during which Cakes

operated. "We review a grant of summary judgment de

novo, applying the same standard as the district court. Sum-

mary judgment is appropriate when there is no genuine issue

as to any material fact and the moving party is entitled to

judgment as a matter of law." D.C. Hosp. Ass'n v. Dist. of

Columbia, 224 F.3d 776, 779 (D.C. Cir. 2000) (internal cita-

tions omitted).

II

We begin with a threshold issue: Red Sage urges us to

treat the rent abatement provision not as a liquidated dam-

ages clause, but rather as a contractual provision adjusting

rent in response to changed conditions. Noting that parties

to a lease sometimes agree in advance that rent will change

upon the occurrence of future conditions, see, e.g., Collins v.

Sears Roebuck & Co., 321 A.2d 444, 449 (Conn. 1973), Red

Sage argues that the rent abatement provision here reflects

the parties' understanding that "the premises leased by Red

Sage" would be "less valuable to Red Sage if there exist[ed]

[another] bar, restaurant, or food service establishment in the

[b]uilding." Appellant's Opening Br. at 15. Acting on this

understanding, the parties "provided for a partial abatement

of base rent in the event a Competing Use is operated in the

building." Id. at 14. "[N]ot knowing the precise nature of

the ... food service establishment which might some day be

located in the Building," they "predetermined" that a compet-

ing use would diminish the "value of Red Sage's premises" by

"one half of the Base Rent." Id. at 15. The abatement

provision, Red Sage argues, is "no different than provisions in

leases for increased rental in the event of a holdover tenancy,

which are routinely enforced even if the increased rental is

three, four or even five times the normal rental rate." Id. at

14.

This argument requires little discussion. Under D.C. law,

"the written language of a contract governs the parties' rights

unless it is not susceptible of clear meaning." Adler v.

Abramson, 728 A.2d 86, 88 (D.C. 1999). Here, we think it

clear from the language of the contract that the rent abate-

ment provision was a liquidated damages clause, not a rent

adjustment. To begin with, the clause states both that

"[r]ent ... shall be abated" if the landlord "violate[s]" the

exclusive covenant and that the rent abatement "shall not

limit ... any other remedies which Tenant may have against

Landlord for violating its obligations under this Section"

(emphasis added). This language strongly suggests that the

rent abatement is a "remed[y]" for a "viola[tion]" of the lease,

rather than a mere adjustment for changed circumstances.

Reinforcing this conclusion, the provision allows Red Sage not

only to abate its rent if the exclusive lease covenant is

violated, but also to "terminate [its] lease if the operation of

the Competing Use continues for a period of six ... months

after written notice thereof by Tenant to Landlord." The

possibility of termination is in some tension with the notion of

a rent adjustment, since it contemplates not an ongoing

landlord-tenant relationship under different terms, but an end

to the relationship altogether. Finally, Red Sage's analogy to

tenant holdover cases actually undermines its argument:

while Red Sage does cite one case from another jurisdiction

treating a double rent provision for holdover tenants as a

simple rent adjustment, First Capital Institutional Real Es-

tate, Ltd. v. Pennington, 368 S.E. 2d 165 (Ga. App. 1988), the

District of Columbia case it cites treats a similar provision as

a liquidated damages clause. Sanchez v. Eleven Fourteen,

Inc., 623 A.2d 1179 (D.C. 1993); see also Horn & Hardart Co.

v. Nat'l R.R. Passenger Corp., 659 F. Supp. 1258, 1266-68

(D.D.C. 1987) (analyzing triple rent holdover provision as

liquidated damages clause).

We thus turn to Red Sage's main argument: that, assum-

ing the rent abatement provision is a liquidated damages

clause, it is valid and enforceable. In reaching a contrary

conclusion, the district court invoked the principle that "[i]f

there is doubt as to whether the parties intended to provide

for legitimate liquidated damages, courts routinely construe

liquidated damages provisions as penalties" and thus decline

to enforce them "to prevent forfeitures." Red Sage, No.

98-2533, at 4 (D.D.C. Feb. 15, 2000) (citing Goldman v. Conn.

Gen. Life Ins. Co., 248 A.2d 154, 158 (Md. 1968)). In applying

this principle, the court neither developed an evidentiary

record of nor relied on extrinsic evidence regarding the

parties' intent. Cf. Farmland Indus., Inc. v. Grain Bd. of

Iraq, 904 F.2d 732, 736 (D.C. Cir. 1990) ("When the meaning

of a contract provision is facially uncertain, a court may

resort to an examination of extrinsic evidence, such as state-

ments, course of conduct, and contemporaneous correspon-

dence, aimed at discerning the intent of the parties."). In-

stead, the court found "considerable doubt" about the parties'

intentions regarding the rent abatement clause for two other

reasons. Red Sage, No. 98-2533, at 4 (D.D.C. Feb. 15, 2000).

First, "[t]he absence of arms length negotiation undercuts the

ordinary presumption that the language on which the con-

tracting parties have agreed accurately reflects their intent."

Id. Second, since "Red Sage Market ... did not exist when

the lease was written," even if the rent abatement clause

represented a "reasonable effort" by the parties to estimate

damages from breach of the exclusive covenant, that estimate

"obviously related to ... competition from a substantial 'food

service establishment,' and not from a small operation that

would not compete with Red Sage's principal business of

operating a restaurant." Id. at 4-5. Thus finding that the

parties had not clearly intended to provide for liquidated

damages in a case like this, the court construed the rent

abatement as a penalty and refused to enforce it.

Challenging this analysis, and noting that summary judg-

ment is inappropriate "if extrinsic evidence supports more

than one reasonable interpretation of [a] contract," Farmland

Indus., 904 F.2d at 736, Red Sage points out that it submitted

an affidavit from the drafter of the original lease stating that

the rent abatement provision was intended to estimate dam-

ages from breach of the exclusive covenant. It also points

out that the same affidavit, while acknowledging that Red

Sage Market did not exist at the time of the lease drafting,

made clear that none of Red Sage's businesses was operating

at that time, and that all aspects of its operation, including

the Market, were contemplated by the parties. Appellant's

Opening Br. at 19-22.

We need not resolve this aspect of Red Sage's challenge to

the district court's decision, however, because both the dis-

trict court's reasoning and Red Sage's responses concern the

original 1990 lease negotiated between 14th Street Associates

and Red Sage, and as we read the record, Red Sage's dispute

with Despa concerns the 1997 amended lease. Unlike the

1990 lease, the later lease was negotiated at arms length, and

Red Sage Market was operating in 1997. We therefore

consider for the first time whether the rent abatement provi-

sion in the 1997 amended lease was a penalty clause, focusing

in the first instance on its plain language. See Adler, 728

A.2d at 88.

In Davy v. Crawford, 147 F.2d 574 (D.C. Cir. 1945), this

court set out standards for deciding whether a liquidated

damages provision is an unenforceable penalty under District

of Columbia law. Because of its importance to this case, we

quote the relevant passage in full:

[T]he parties to a contract may agree in advance to a

sum certain which shall be forfeited as liquidated dam-

ages for breach of the contract without reference to the

actual damages found at the time of the breach. But if

such an agreement is for a penalty it is void. In order to

determine whether or not the provision should be con-

strued as a penalty the contract must be construed as a

whole as of the date of its execution. If under the

circumstances and expectations of the parties existing at

the time of execution it appears that the provision is a

reasonable protection against uncertain future litigation

the provision will be enforced even though no actual

damages were proved as of the date of the breach. If, on

the other hand, it appears that the stipulation is designed

to make the default of the party against whom it runs

more profitable to the other party than performance

would be, it will be void as a penalty. Thus, damages

stipulated in advance should not be more than those

which at the time of the execution of the contract can be

reasonably expected from its future breach, and agree-

ments to pay fixed sums plainly without reasonable rela-

tion to any probable damage which may follow a breach

will not be enforced.

Davy, 147 F.2d at 575 (citations omitted). The D.C. Code

governing leases, enacted many years after Davy, sets forth

essentially the same standard: "Damages payable by either

party for default ... may be liquidated in the lease agree-

ment, but only at an amount or by a formula that is reason-

able in light of the then anticipated harm caused by the

default ...." D.C. Code Ann. s 28:2A-504(a).

Applying these standards, we think the rent abatement

provision in the 1997 amended lease is valid as a matter of

law. To begin with, as Red Sage claims, at the time the lease

was signed, the parties could reasonably have believed the

damages resulting from a breach of the exclusive covenant

would be difficult to ascertain, rendering future litigation

"uncertain." Davy, 147 F.2d at 575; see also Barnette v.

Sayers, 289 F. 567, 570 (D.C. Cir. 1923) ("Uncertainty in

amount and difficulty of ascertainment of damages are re-

garded as supporting the view that a contract provides for

liquidated damages rather than a penalty...."). Disagreeing

with this conclusion, Despa suggests that damages to Red

Sage's restaurant business from a competing food service

establishment would have been easy to calculate by analyzing

overhead and table turnover to derive the value of lost sales.

As Red Sage points out, however, even if it could demonstrate

a decline in sales, "isolat[ing] the new competitor as the sole

reason for the decline" would be "almost impossible," making

damages difficult to prove. Appellant's Reply Br. at 2.

Moreover, "[l]ost sales do not represent the only damages

potentially arising from competition.... [D]amages may take

the form of lost opportunities whereby the new competitor,

instead of having an impact on existing sales, affects the

restaurant's ability to increase sales." Id. at 2-3. Damages

might also include a variety of intangible losses such as lost

goodwill, which would likewise be difficult to calculate and

prove.

We also cannot say that the abatement is "plainly without

reasonable relation to any probable damage which may follow

a breach." Davy, 147 F.2d at 575. Despa disagrees, arguing

that it would have been unreasonable to think the damages

resulting from Cakes' competition with Red Sage Market--

which the lease describes as an "incidental use" and which

produces only a small portion of Red Sage's total income--

would amount to 50 percent of its rent for all its operations,

especially in view of the fact that the same measure of

damages would apply to competition from a large-scale opera-

tion such as another bar and restaurant. The question before

us, however, is not whether a 50 percent rent abatement

would have been a reasonable estimate of anticipated dam-

ages from a competitor on the scale of Cakes. We read the

exclusive covenant as intending to ensure that Red Sage will

be the only "bar, restaurant[,] or food service establishment

of any kind" in the Westory building: as Red Sage put it in

its motion for summary judgment, the purpose of the cove-

nant was to "prevent[ ] another destination restaurant from

opening in the Westory Building" and "to prevent[ ] the

location of another food service business in the Westory

Building to service the office tenants." Plaintiff's Motion for

Summary Judgment, Red Sage Ltd. P'ship v. Despa mbH,

No. 98-2533 at 14 (D.D.C. June 15, 1999). The rent abate-

ment provision sets damages for a breach of this covenant,

and such a breach could involve a wide variety of competing

uses giving rise to a wide range of possible damages. The

question we must ask is thus whether a 50 percent reduction

in base rent was reasonable as a single formula intended to

estimate damages from a wide variety of possible competing

uses.

Although it is true, as Red Sage itself acknowledges, that

the parties might well have anticipated that damages from a

competitor like Cakes would probably be less than 50 percent

of base rent ($200,000 in this case), the parties might also

have anticipated that damages from a competing restaurant

would be considerably greater than this amount. (Though its

net income was not especially high, Red Sage's annual gross

income in a recent year was around $6.5 million.) According-

ly, as a single formula designed to capture the expected value

of damages from breach of the exclusive covenant, we cannot

say that half of base rent was unreasonable as a matter of

law.

Nor do we think the rent abatement provision "appears ...

designed to make the default of the party against whom it

runs more profitable to the other party than performance

would be." Davy, 147 F.2d 575. Although in this case the

rent abatement clause might well result in Red Sage receiv-

ing more than it actually lost as a result of Cakes' competi-

tion, the clause might significantly underestimate Red Sage's

damages in other circumstances, such as if the landlord were

to rent space to another upscale, full-service restaurant. In

other words, the provision does not guarantee Red Sage a

certain windfall in case of a breach. Cf. Raffel v. Medallion

Kitchens of Minn., Inc., 139 F.3d 1142, 1144-46 (7th Cir.

1998) (invalidating as a penalty a lease provision requiring

tenant to pay a "windfall" equivalent to seven months' rent if

rent was more than thirty days late).

Despa's strongest argument is that the very use of a single

formula to capture such a wide range of damages renders the

clause unenforceable. Because the rent abatement provision

"applies to a variety of types of defaults, each of which could

have vastly differing degrees of damages associated with

them," Despa urges us to declare it "null and void, under the

reasoning that there could not have been a good faith attempt

to pre-estimate possible damages, since the real and obvious

possibility existed that the damages provided for would turn

out to be excessive." Appellee's Br. at 18-19; see generally 5

Corbin on Contracts s 1066 (1964). In support of this claim,

Despa relies on Davy, which involved a lease for a house.

Under the lease, the tenant had an option to purchase at the

end of a fixed rental period. The lease required a "down

payment," which it described as "compensation for the option

to purchase and also liquidated damages for failure to exer-

cise it." Davy, 147 F.2d at 575. But the lease also provided

that the down payment (together with any accumulated equi-

ty in the house) would be forfeited for breach of "any

covenant" in the lease, including such things as promises to

pay gas, electric, and water bills on time. The court found

that the forfeiture provision was an unenforceable penalty in

part because the damages applicable to a major breach--

failure to exercise the option to purchase--would also have

applied to a "minor and insubstantial default" on the part of

the breaching party. Davy, 147 F.2d at 575. According to

Despa, the same is true here: under Red Sage's interpreta-

tion of the lease, the 50 percent abatement applies whether

the "competing use" is a small-scale operation like Cakes that

competes incidentally with Red Sage, or a full-scale restau-

rant competing directly with Red Sage's principal businesses.

This case, however, differs from Davy in at least four

significant ways. First, the provision at issue in Davy called

for forfeiture of a fixed sum regardless of the nature of the

breach. Davy, 147 F.2d 574; cf. Raffel, 139 F.3d at 114

(stating that liquidated damages clauses are penalties where,

among other things, "the amount of the damages is invariant

to the gravity of the breach") (emphasis added); 5 Corbin on

Contracts s 1066, at 379 (characterizing contracts that make

"one sum of money ... payable as damages for any breach

whatever" as penalty clauses) (emphasis added). The rent

abatement provision at issue here, in contrast, does not set

damages as a single sum: because the provision applies only

as long as a competing use is present, damages will vary with

the duration of the competing use. Second, the provision at

issue in Davy appears to have been one-sided: the down

payment would have been forfeited for failure to exercise the

option, or for a variety of smaller breaches, but never, it

seems to us, in a situation that would have disadvantaged the

landlord. Cf. Raffel, 139 F.3d at 1146 (because a 10 percent

late fee fully compensated a landlord for the effect of late

rent payments, an additional fine when rent was more than

thirty days late "ensure[d] the lessor more than his actual

damages" and was therefore invalid). Here, because the rent

abatement clause could just as easily have under- as over-

estimated actual damages, the provision appears not to have

been intended to penalize Despa. Third--and closely relat-

ed--the court in Davy found the lease as a whole, including

both the liquidated damages provision and other parts of the

contract, to have an "unconscionable and overreaching char-

acter" that heavily favored the landlord at the expense of the

tenant. Davy, 147 F.2d at 575. Here, neither party claims

that the lease as a whole is unconscionable and overreaching.

Finally, and perhaps most important, the agreement in Davy

appears to have involved a corporate landlord and a private

individual. See id. at 574 ("Action by Beatrice I. Crawford

and others against Myron Davy and others, trading as River

Terrace Company...."). The rent abatement provision in

Red Sage's lease, in contrast, was negotiated by sophisticated

parties, and District of Columbia courts, as well as Maryland

courts, to which District of Columbia courts often look for

guidance, see Geico v. Fetisoff, 958 F.2d 1137, 1143 (D.C. Cir.

1992), are generally reluctant to disturb terms agreed upon

by such parties. See, e.g., District of Columbia v. C.J.

Langenfelder & Son, Inc., 558 A.2d 1155, 1163 (D.C. 1989)

(rejecting the view that the phrase "equitable adjustment" in

a contract gave the court "roving discretion to reform the

contracts of informed and sophisticated parties"); Mass

Transit Admin. v. CSX Transp., Inc., 708 A.2d 298, 309 (Md.

1998) ("A decent respect for the freedom of sophisticated

parties contractually to establish the rules governing their

business relationship compels the conclusion that the [Mary-

land] General Assembly intended contracting parties to be

able to determine, when they contract, whether [a statutory

provision] applies to their agreement."); Mattvidi Assocs.

Ltd. P'ship v. NationsBank of Va., 639 A.2d 228, 239 (Md. Ct.

Spec. App. 1994) ("When two commercially sophisticated par-

ties freely enter into an agreement containing a late charge

clause ... it seems entirely appropriate that the burden of

proof should be on the party who later claims that the clause

is invalid.").

All liquidated damages clauses, if implemented in situations

where damages are difficult to estimate, will generally end up

either over- or under-estimating actual damages. And while

the range of possible damages in this case is quite wide, the

parties may have had good reason for wanting a broad

exclusive use covenant: for example, they may have wished to

ensure expansive protection for Red Sage's food service oper-

ations. The parties may also have had good reason for

wanting a single formula for calculating damages from a

breach of the exclusive covenant: they may have worried that

specifying different levels of damages to cover different levels

of breach could have enmeshed them in time-consuming and

expensive disagreements over which damages applied to a

particular breach. We do not know exactly why the parties

agreed to this particular clause, nor is it our role to discern

their precise intentions. Because the provision is neither

obviously one-sided nor obviously intended to impose a penal-

ty that would coerce performance, because the actual esti-

mate is not clearly unreasonable in relation to the range of

possible damages, and because both parties are sophisticated

businesses, we find that as a liquidated damages clause

covering operations of the scale of Cakes and larger, the rent

abatement provision in Red Sage's lease is enforceable as a

matter of law. See Langenfelder, 558 A.2d at 1163; see also

id. at 1169 (dissenting opinion) ("I agree with my colleagues

that judges have no roving commission to relieve sophisticat-

ed parties of their contractual obligations.").

III

In its original motion before the district court, Despa

suggested two additional bases for summary judgment: (1) on

its face, the phrase "food service establishment" excludes

Cakes; and (2) if the phrase covers Cakes, the exclusive

covenant is an unreasonable restraint of trade. According to

Despa, because the actual order accompanying the district

court's summary judgment opinion did not specify the

grounds for decision, the court implicitly accepted the addi-

tional arguments in Despa's original motion, and since Red

Sage's opening appellate brief addressed only the penalty

clause issue, and not the two alternate theories, Red Sage has

conceded those arguments.

This argument is absurd. Quite apart from the fact that

the district court rejected Despa's original motion for sum-

mary judgment and awarded relief only after ordering sup-

plemental briefing on the penalty clause issue, the court's

opinion makes abundantly clear that it awarded summary

judgment only because it decided the rent abatement provi-

sion was an unenforceable penalty. The three citations Des-

pa invokes for the proposition that courts "speak[ ] only by

[their] orders"--one of which is to a dissenting opinion,

another of which is to an unpublished decision--concern

instances where orders conflict directly with other court

documents. See Shafer v. Children's Hosp. Soc. of L.A., 265

F.2d 107, 117 (D.C. Cir. 1959); Flannigan v. Consol. Rail

Corp., 888 F.2d 127, 1989 WL 130634 (6th Cir. 1989); Mur-

daugh Volkswagen, Inc. v. First Nat'l Bank of S.C., 741 F.2d

41, 44 (4th Cir. 1984). Those citations thus have no bearing

on this case. Because Despa has re-asserted its alternate

arguments for summary judgment before this court, however,

and because Red Sage has responded in its reply brief, we

consider whether these arguments provide an alternate basis

for sustaining summary judgment for Despa. See In re

Swine Flu Immunization Prods. Liab. Litig., 880 F.2d 1439,

1444 (D.C. Cir. 1989) (stating that this court may affirm a

district court's grant of summary judgment on grounds not

relied upon by that court).

First, Despa argues that as a matter of law, the phrase

"food service establishment of any kind" in the exclusive use

covenant does not cover Cakes. Under District of Columbia

law, as we have already noted, "the written language of a

contract governs the parties' rights unless it is not susceptible

of clear meaning." Adler, 728 A.2d at 88. "In deciding

whether contract language has a clear meaning, the court

asks what a reasonable person in the position of the parties

would have thought the disputed language meant." Id. (in-

ternal quotations omitted). "When the meaning of a contract

provision is facially uncertain, a court may resort to an

examination of extrinsic evidence, such as statements, course

of conduct, and contemporaneous correspondence, aimed at

discerning the intent of the parties." Farmland Industries,

904 F.2d at 736.

Here, the plain language of the lease--"food service estab-

lishment of any kind"--could well describe a business like

Cakes. As Red Sage argues, the modifier "any" suggests

that the parties intended the provision to be read broadly. In

addition, the lease specifies that its terms are to be construed

according to District of Columbia law, and District regula-

tions define the similar phrase "food service operation" to

include businesses in which "food is prepared for service and

consumption elsewhere." D.C. Mun. Regs. tit. 23, s 2499.

Other features of the lease, however, indicate that the

parties may have intended the exclusive covenant to have a

narrower reach. The covenant refers to "restaurant[s],

bar[s], or food service establishment[s] of any kind" as "com-

peting use[s]," suggesting that the purpose of the clause was

to prevent competition with Red Sage. This in turn suggests

that an establishment that sold food but did not compete with

Red Sage in any way--a store selling freeze-dried camping

food, for example--might not fall within the covenant's reach.

In addition, the fact that the exclusive covenant applies only

so long as Red Sage operates a "bar and/or restaurant" could

mean that it excludes only food service operations that com-

pete with Red Sage's restaurants, not those that compete

with "incidental" uses like the Red Sage Market.

We thus think the language of the contract is unclear.

Beyond the lease itself, we have no factual record regarding

the 1997 parties' understanding of the phrase "food service

establishment of any kind." And if in fact that understanding

has something to do with protecting Red Sage from competi-

tion, there are (as the district court found) disputed issues of

fact regarding the exact nature of Cakes' business and its

degree of competitive overlap with Red Sage market. The

parties disagree, for example, about the degree to which

Cakes targeted its services to office workers in the Westory

building: while Red Sage asserts that Cakes "under[took]

special efforts to market cake[ ] and coffee as a snack combi-

nation," Appellant's Opening Br. at 9, Despa asserts that

Cakes "did not advertise any on-premises food service or

sales." Appellee's Br. at 8. Summary judgment would thus

be inappropriate on the question of whether the exclusive

covenant covers Cakes. See D.C. Hosp. Ass'n, 224 F.3d at

779.

Despa also argues that if Cakes is a "competing use" within

the meaning of the exclusive use covenant, that provision

amounts to an unreasonable restraint of trade. In the Dis-

trict of Columbia, covenants restricting competition are valid

if ancillary to some other legitimate interest. See Ellis v.

James V. Hurson Assocs., 565 A.2d 615, 618 (D.C. 1989).

Here, the exclusive covenant is ancillary to the landlord-

tenant relationship between Red Sage and Despa. Such

covenants, however, are invalid if they are "greater than is

needed to protect the promisee's legitimate interest." Re-

statement (Second) of Contracts s 188(1) (1981) [hereinafter

Restatement] (quoted in Venture Holdings, Ltd. v. Carr, 673

A.2d 686, 689 n.4 (D.C. 1996)). Here, Despa argues that the

exclusive use covenant, assuming it prohibits the lease to

Cakes, restrains more trade than is reasonable because com-

petition from Cakes was at best incidental to Red Sage. If

the covenant covers Cakes, Despa concludes, it amounts to a

complete prohibition on any competition whatsoever, and a

promise to "refrain altogether from competition" "implicates

the common law policy against unreasonable restraints of

trade." Venture Holdings, 673 A.2d at 689.

The District of Columbia has "adopted the common law

principles regarding promises in restraint of trade[ ] as re-

ported in the Restatement (Second) of Contracts." Venture

Holdings, 673 A.2d at 689. "Comment d" to the Restatement

provides that the extent of a restraint on competition may be

limited in three ways: by geographical area, time, and type of

activity. Restatement s 188 cmt. d. Here, the covenant is

restricted in all three ways: it applies only to the Westory

building; it lasts only the length of the lease; and rather than

preventing all retail activities, it prevents only food service

activities. The discussion in Venture Holdings on which

Despa relies is not to the contrary: that case concerned a far

more sweeping promise by a former employee not to "engage

in business competition" of any kind with his former employ-

er. See 673 A.2d at 689. As the Restatement suggests,

"[p]ost-employment restraints are scrutinized with particular

care because they are often the product of unequal bargaining

power and because the employee is likely to give scant

attention to the hardship he may later suffer through loss of

his livelihood." Restatement s 188 cmt. g. Not only are

similar considerations inapplicable here, but courts have pre-

viously enforced lease provisions like the one at issue in this

case. See, e.g., Grand Union Co. v. Laurel Plaza, Inc., 256

F. Supp. 78, 81 (D. Md. 1966) (enforcing a lease provision

making a supermarket the sole retailer of food to be con-

sumed off-premises in a shopping mall). We thus conclude

that the exclusive covenant in Red Sage's lease is not an

unreasonable restraint of trade.

IV

In sum, we find that as a matter of law, the rent abatement

provision would constitute neither an unenforceable penalty

nor an unreasonable restraint of trade as applied to Cakes.

Because we agree with the district court that the phrase

"food service establishment of any kind" cannot be definitive-

ly construed as a matter of law, we remand to the district

court to determine whether, in light of the contract's lan-

guage, the parties' intent, and the nature of Cakes' operation,

Despa's lease to Cakes entitles Red Sage to a rent abatement.

So ordered.