Posted by Connie Carr
On July 26, 2017 the Ohio Court of Appeals, 1st
Appellate District (the Court) issued its opinion in Drake Townhouses L.L.C. v. Woodberry, 2017-Ohio-6968,
which relates to a landlord-tenant case appealed from the Hamilton County
Municipal Court. The plaintiff landlord is Drake Townhouses L.L.C (Landlord)
and the defendant tenants were Daniella Woodberry and Kenneth Williams
(Tenant).
Tenant leases a residence from Landlord that was on a month
to month lease. Either could terminate upon 30 days written notice, but if the
notice was provided at any time after the 1st of the month, then the
30 days’ notice wasn’t effective until the 1st of the following month.
Whenever Landlord wanted to change a term in the lease, it was required to give
Tenant 30 days’ notice of the change and Tenant had 10 days to accept the
change or elect to terminate the lease and move out of the residence. A failure
to give timely notice results in the lease renewing under the new terms.
In 2014, Tenant received notice of a rent increase effective
June 1st with the option to accept or provide 30 days’ notice to terminate
with a move-out date. Tenant chose the latter option but failed to mail the
notice with May’s rent to the correct address. Landlord did not receive the
notice until May 19th and had already sent out an eviction notice on
May 12th due to nonpayment of rent.
Tenant further exacerbated the situation by assuming the rent check was
lost in the mail, stopped payment on the check, and mailed out a second check.
Landlord belatedly received both checks plus the delinquent termination notice
and returned the 2 checks to Tenant. In a verbal discussion with a Landlord
representative, Tenant agreed to move out by June 1st and Landlord
agreed to cancel the eviction. Landlord did dismiss the eviction but proceeded
with its case for past due rent and late fees.
The magistrate and trial court both found in favor of
Landlord on all counts except the amount of late fees. The lease called for
$10/day and both parties agreed that the late fees per month were capped at
$150. The magistrate found that the monthly late fees were not equitable and
reduced to $50 per month (i.e., $10/day for maximum of 5 days). After crediting
the security deposit funds held by Landlord, the amount the lower court ordered
due by Tenant was $850.
Tenant appealed to the Court arguing 3 assignments of error
under R.C. Chapter 5321.
First, Tenant contended that the eviction filing in May
was contrary to R.C. 5321.17(B)
which requires a minimum 30 days’ notice to terminate or not renew a lease. However, the Court correctly pointed out that
Landlord’s notice was not for the termination or non-renewal of the lease but
to change a term of the less (i.e., the rent amount) and therefore did not
follow the law. Tenant’s decision to not accept the higher rent did not change
the Landlord’s notice to one of termination or non-renewal.
Second, Tenant attempted to use her nonpayment breach as a basis
for not being subject to the required 30 days’ notice pursuant to R.C. 5321.17(D). As the Court
correctly pointed out, that argument goes against the purpose of the code
provision. Tenant cannot use her own breach to get out of an obligation.
Third, Tenant
contended that late fees in a lease are an unenforceable penalty under contract
law and therefore shouldn’t be recoverable by Landlord without proof of actual
damages.
The Ohio
Supreme Court in Sampson Sales, Inc. v.
Honeywell, Inc., 12 Ohio St.3d 27, 465
N.E.2d 392
(1984) set out a test to be used to determine whether a contract provision
should be considered liquidated damages (i.e., enforceable) or an unenforceable
penalty:
“Where the parties have agreed on the
amount of damages, ascertained by estimation and adjustment, and have expressed
this agreement in clear and unambiguous terms, the amount so fixed should be
treated as liquidated damages and not as a penalty, if the damages would be (1)
uncertain as to amount and difficult of proof, and if (2) the contract as a whole
is not so manifestly unconscionable, unreasonable, and disproportionate in
amount as to justify the conclusion that it does not express the true intention
of the parties, and if (3) the contract is consistent with the conclusion that
it was the intention of the parties that the damages in the amount stated
should follow the breach thereof.”
The Court also
pointed out that in 2016, the Ohio Supreme Court further clarified that
generally “’per diem measures of damages…is more likely to be an enforceable
liquidated damages provision than an unenforceable penalty, and in determining
the reasonableness of the amount of liquidated damages, a court must look at
the per diem amount, and not to the aggregate amount of liquidated damages in
application.” (Boone Coleman Constr.,
Inc. v. Village of Piketon, 145 Ohio St.3d 450, 2016-Ohio-628, 50 N.E.3d
502)
Based on
these prior Ohio Supreme Court decisions, the Court found that late fee
provisions in a lease are not a per se unenforceable penalty.
However, the
Court did agree with the lower court that, based on R.C. 5321.14(A), the amount of
late fees should be reduced to $10/day for the 1st 5 days (i.e.,
$50/month). Notably, Landlord had not objected to the lower court’s
determination on this point. The Court
went on to further hold that a late fee for June was inappropriate since the
parties agreed in mid-May that Tenant would move out by June 1st.
Because of
the Court’s ruling, the amount Tenant owed Landlord was reduced from $850 to
$800. A whole lot of legal fees spent to save that $50. For landlords, this
decision is helpful in establishing precedent that reasonable late fees in a
lease should be enforceable.
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