Woodhaven Apartments v. Washington
Annotate this CaseThis opinion is subject to revision before final publication in the Pacific Reporter.
IN THE SUPREME COURT OF THE STATE OF UTAH
----oo0oo----
Woodhaven Apartments,
Plaintiff and Respondent,
v.
Bertha Washington,
Defendant and Petitioner.
No. 960002
F I L E D
July 22, 1997
Third District, West Valley Dep't
The Honorable William A. Thorne
Attorneys: James H. Deans, Salt Lake City, for plaintiff
Bruce M. Plenk, Eric Mittelstadt, Salt Lake City,
for defendant
On Certiorari to the Utah Court of Appeals
RUSSON, Justice:
Woodhaven Apartments brought this action against Bertha Washington for actual and liquidated
damages pursuant to their lease agreement after Washington vacated the apartment prior to the
expiration of the lease. Washington appealed the trial court's decision enforcing the liquidated
damages provision. The court of appeals affirmed, and we granted certiorari to review the
decision of the court of appeals. Woodhaven Apartments v. Washington, 907 P.2d 271 (Ct. App.
1995), cert. granted, 920 P.2d 1194 (Utah 1996). We reverse.
BACKGROUND
Woodhaven Apartments and Bertha Washington entered into an agreement for the lease of an
apartment from May 30, 1991, to May 14, 1992. The lease required Washington to pay monthly
rent in the amount of $354, a nonrefundable "redecorating fee" of $25, and a refundable "security
and damage deposit" of $354. In addition, clause 26 of the lease provided that in the event
Washington vacated the apartment prior to the end of the lease, she would be responsible for the
rent for the balance of the lease, and if it were rerented early, she would be subject to a
"termination fee" of one and one-half months' rent. Specifically, clause 26 stated:
Should Resident vacate the premises prior to the expiration of the terms, Resident will be held
responsible for the term of the lease. In the event that the apartment re-rents prior to the
expiration of the lease, Resident will be assessed a termination fee equal to one and one-half
months [sic] rent.
(Emphasis added.)
On October 31, 1991, Washington prematurely vacated the apartment. On November 15, 1991,
Woodhaven rerented the apartment. Subsequently, Woodhaven filed this action against
Washington, claiming $705 due and owing under the lease. This amount included $190.80 for
sixteen days' rent from the date of Washington's last payment until the apartment was rerented,
$337.50 for damages allegedly caused to the apartment, and a $531 "termination fee" of one and
one-half months' rent, pursuant to paragraph 26 of the lease, less Washington's deposit of $354.
Washington admitted that she owed rent from the time she vacated the apartment until the
apartment was rerented but denied the damage charges as alleged. Further, she denied that
Woodhaven was entitled to liquidated damages inasmuch as the liquidated damages clause,
labeled a "termination fee," was unenforceable under Utah law and unconscionable pursuant to
the Utah Consumer Sales Practices Act (UCSPA).
The trial court denied Woodhaven's claim for damages to the apartment for insufficient
evidence. However, the trial court did find that Woodhaven was entitled to unpaid rent from the
date the apartment was vacated to the date it was rerented in the amount of $354 as well as
liquidated damages pursuant to clause 26 of the lease in the amount of $531. Court costs of $24
were also awarded. From this total amount of $909, Washington was given credit for a $329
deposit fee and $200 previously paid by her co-tenant. Judgment was entered against
Washington in the amount of $389.(1)
The trial court also concluded that the UCSPA applied to landlord/tenant lease agreements but
held that the liquidated damages provision of paragraph 26 was not unconscionable inasmuch as
it reflected a replacement for the costs associated with an early lease termination.
The court of appeals, in a split decision, affirmed the trial court. In doing so, it stated that the
liquidated damages clause in Washington's lease with Woodhaven was valid and enforceable
under Utah law because it was a reasonable forecast of the harm caused if Washington vacated
early and because the harm was difficult for the parties to estimate at the time the lease
agreement was signed. Woodhaven, 907 P.2d at 273. The court of appeals also affirmed that the
liquidated damages provision in question was not unconscionable under common law or the
UCSPA. Id. at 274. Judge Orme dissented, concluding that the termination fee was an
unenforceable penalty and recovery should be limited to actual damages. Id. at 275.
On certiorari, Washington argues that the liquidated damages clause is unenforceable and,
furthermore, is unconscionable under the Utah Consumer Sales Practices Act.(2)
STANDARD OF REVIEW
Appellate courts give "deference to the trial court's findings of fact, and we will not set them
aside unless we find them to be clearly erroneous." Reliance Ins. Co. v. Utah Dep't of Transp.,
858 P.2d 1363, 1366 (Utah 1993). Legal conclusions are reviewed for correctness and afforded
no deference. Id. Mixed questions of law and fact are reviewed for abuse of discretion in
applying the law to the facts. State v. Pena, 869 P.2d 932 (Utah 1994).
ANALYSIS
A. Liquidated Damages
This court has long had a policy against the imposition of liquidated damages that constitute a
penalty for breach of a contractual agreement. In Perkins v. Spencer, 243 P.2d 446 (Utah 1952),
we stated:
It will be observed that in all cases where the stipulation for liquidated damages was enforced it
bore some reasonable relation to the actual damages which could reasonably be anticipated at the
time the contract was made and was not a forfeiture which would allow an unconscionable and
exorbitant recovery.
. . . .
On the contrary, where enforcement of the forfeiture provision would allow an unconscionable
and exorbitant recovery, bearing no reasonable relationship to the actual damages suffered, we
have uniformly held it to be unenforceable.
Id. at 449-50.
More recently, in Reid v. Mutual of Omaha Insurance Co., 776 P.2d 896 (Utah 1989), in
adopting the rule that a landlord is required to take steps to mitigate its loss after a tenant
breaches a lease, we reasoned:
[This rule] is more in keeping with the current policy disfavoring contractual penalties. Damages
recoverable under a liquidated damages provision in a contract will generally be limited to an
amount that represents a reasonable estimation, at the time the contract was drafted, of what
would be necessary to compensate the nonbreaching party for losses caused by the breach. This
policy is based on the view that any liquidated damages provision not so limited results in the
imposition of a penalty on the breaching party that is not permitted.
Id. at 905.
In Allen v. Kingdon, 723 P.2d 394 (Utah 1986), we considered the enforceability of a liquidated
damages provision contained in an earnest money agreement which "provided that the sellers
could retain all amounts paid by the buyers as liquidated . . . damages in the event the buyers
failed to complete the purchase." 723 P.2d at 397. We stated:
"Under the basic principles of freedom of contract, a stipulation to liquidated damages for breach
of contract is generally enforceable. Where, however, the amount of liquidated damages bears no
reasonable relationship to the actual damage or is so grossly excessive as to be entirely
disproportionate to any possible loss that might have been contemplated that it shocks the
conscience, the stipulation will not be enforced."
Id. (quoting Warner v. Rasmussen, 704 P.2d 559, 561 (Utah 1985)).
"In determining the validity of a liquidated damages provision, this court has adopted section 339
of the Restatement of Contracts." Reliance Ins. Co., 858 P.2d at 1366. Section 339 states in
pertinent part:
(1) [A]n agreement, made in advance of breach fixing the damages therefor, is not enforceable as
a contract and does not affect the damages recoverable for breach, unless
(a) the amount so fixed is a reasonable forecast of just compensation for the harm that is caused
by the breach, and
(b) the harm that is caused by the breach is one that is incapable or very difficult of accurate
estimation.
A liquidated damages provision must meet both prongs of this test to be enforceable.
For a liquidated damages provision to satisfy the first part of the Restatement test, "the amount so
fixed [must be] a reasonable forecast of just compensation for the harm that is caused by the
breach." Reliance Ins. Co., 858 P.2d at 1366. "The issue of whether liquidated damages are a
reasonable forecast of actual damages is one of fact." Id. at 1367.
The liquidated damages provision in question, entitled "termination fee," was set at "one and one
half months [sic] rent." In the case of Washington, this amounted to $531. This amount was
obviously meant to cover those costs incurred in rerenting the apartment prior to expiration of the
lease in addition to lost rent and cleaning costs, which are provided for elsewhere in the lease.
The lease provides that an early departing renter must pay the balance of the lease unless the
apartment is relet, in which case the renter is responsible only for the days the apartment remains
vacant. Woodhaven sued for the sixteen days the apartment was empty. Mrs. Washington does
not dispute her obligation in this regard. As for cleaning, the lease required Mrs. Washington to
pay a nonrefundable redecorating fee. She likewise has no dispute with this fee. What she does
dispute is the termination fee, which covers the administrative costs of reletting the apartment.(3)
In applying the Restatement test, the first prong requires a determination of whether this
liquidated damages fee was a reasonable forecast of the administrative costs of reletting the
apartment after early termination of the lease. More specifically, the issue is whether, at the time
the lease was executed, $531 was a reasonable forecast of the costs of early termination of the
lease.
Upon receipt of the evidence, the trial court concluded that Woodhaven was entitled to liquidated
damages, stating:
Plaintiff, whenever there is an early termination of a lease agreement, incurs costs over and above
those normally associated with providing residential housing. Plaintiff reasonably could
anticipate incurring those costs only when the lease terminates at the expiration of the lease term.
Plaintiff is required to clean premises, perform whatever minor repairs are necessary to make the
unit attractive to a prospective tenant, perform the necessary administrative details to ensure that
the work is properly and timely done, advertise for the vacancy, have personnel available to show
the apartment to prospective tenants, prepare the necessary paperwork for the prospective tenant,
perform various checks of prospective tenants, etc. All of these duties draw upon the resources
of the plaintiff. Incurring these costs sooner than anticipated when the lease is terminated early
results in added costs and expenses for a landlord.
And the court of appeals in affirming the trial court stated:
In addition, the record indicates that Woodhaven incurs extra costs and expenses when a tenant
terminates a lease early. For example, Woodhaven must perform additional administrative work
such as ensuring that the cleaning and repairs are timely done, advertising for the vacancy,
showing the apartment to prospective tenants, and preparing paperwork for the prospective
tenants. As the trial court found, an assessment of one and one half month's rent is not out of
proportion to the effort and resources required to re-let the apartment. The early termination
assessment agreed to by the parties was reasonable in light of the then-anticipated expenses
expected to be caused by Washington's possible early termination.
Woodhaven, 907 P.2d at 273.
However, a review of the record indicates insufficient evidence to support such findings.
Nowhere in the record is there evidence of time and costs generally required in reletting an
apartment early except testimony of the manager to the effect that a vacated apartment is
normally ready for rerenting in three to six days. There is no evidence at all to support findings
as to what is required or the costs of advertising, showing the apartment, arranging for cleaning,
preparing necessary paperwork, or performing various checks of prospective tenants. The
cleaning costs were covered by the nonrefundable redecorating fee, not by the liquidated
damages clause. As for repairs, the trial court denied the same for lack of evidence.
To determine if the liquidated damages clause amount has a reasonable relationship to the fee,
there must at least be some evidence of the costs anticipated when the lease was executed. There
was insufficient evidence as to time and costs reasonably to be anticipated in an early departure,
as well as the relationship of these expenses to the termination fee. Therefore, it is impossible to
determine the reasonableness of the fee.
The only evidence at trial of the anticipated costs was the testimony of the manager, Mrs. Allen,
who testified that it takes time to put the apartment "back on the market, to rent it and to get it
ready," but she further testified that when a tenant moves out in the middle of a lease, all that is
required in turning over an apartment is to get the cleaning done and that it is usually ready to be
rerented in "5 to 6 working days" and "if it's left clean, normally 3 working days."
Furthermore, it should be noted that these are costs that Woodhaven would have incurred when
Washington eventually vacated if she had fulfilled the lease. As the trial court noted, the only
added cost to plaintiff caused by Washington's breach is the loss of the use of that money (i.e.,
administrative costs of reletting the apartment) for the balance of the lease. Even Woodhaven's
attorney refers to the termination fee as a penalty.
We conclude that there was insufficient evidence to support the trial court's finding that the
amount fixed in this lease for liquidated damages was based upon a reasonable forecast of the
harm caused by breach of the lease. Accordingly, we hold that the lower court's finding that the
liquidated damages clause was reasonable is clearly erroneous and the court of appeals erred in
affirming it. Indeed, the evidence shows that the liquidated damages provision as applied to
Washington constituted a penalty.
Inasmuch as the provision in question does not meet the "reasonable forecast" prong of the test
set forth in Reliance Insurance Co., 858 P.2d at 1366, it is not enforceable; therefore, there is no
need to discuss the second prong of the test.
The Utah Consumer Sales Practices Act
In response to Woodhaven's complaint to enforce the termination fee, Washington
counterclaimed that Woodhaven violated the UCSPA, Utah Code Ann. 13-11-1 through -23,
and therefore, she was entitled to damages as provided by that act. The act provides for
consumer actions against suppliers who commit deceptive or unconscionable acts as defined and
provides relief in the form of court costs and damages.
Whether this act applies to a residential lease is unclear in our earlier decisions. In Wade v. Jobe,
818 P.2d 1006, 1015, 1018 (Utah 1991), Justice Durham and Justice Zimmerman stated that the
Utah consumer protection statute should apply to residential leases, while the remaining three
justices expressed no opinion in that respect. In a subsequent case, Carlie v. Morgan, 922 P.2d 1,
6 (Utah 1996), this court held that the UCSPA did not apply because the habitability of the
premises was at issue and that a more specific statute, the Utah Fit Premises Act, applied in its
stead. In other words, the more general law, the UCSPA, was preempted by the more specific
law.
However, the case before us involves the contractual relationship between the lessee and the
lessor, not the fitness or habitability of the apartment. Therefore, the Utah Fit Premises Act has
no application and does not preempt the UCSPA. We have not discovered, nor have the parties
brought to our attention, any other specific laws that apply to landlord/tenant transactions that
would preempt the UCSPA. Therefore, we now address whether the UCSPA does, indeed, apply
to landlord/tenant transactions such as the one before us.
The UCSPA provides that a supplier who commits an unconscionable act "in connection with a
consumer transaction" is liable according to Utah Code Ann. 13-11-5(1). The statute defines
consumer transaction as follows:
(2) "Consumer Transaction" means a sale [or] lease, . . . of goods, services or other property,
both tangible and intangible (except securities and insurance), to a person for primarily personal,
family or household purposes . . . .
Utah Code Ann. 13-11-3(2) (emphasis added).
When construing a statute, we first look to its plain language. K & T, Inc. v. Koroulis, 888 P.2d 623, 627 (Utah 1994). We assume each term was "used advisedly; thus the statutory words are
read literally, unless such a reading is unreasonably confused or inoperable." Savage Indus., Inc.
v. State Tax Comm'n, 811 P.2d 664, 670 (Utah 1991) (footnote omitted). We look beyond the
statutory language only when there is ambiguity. Schurtz v. BMW of N. Am., Inc., 814 P.2d 1108, 1112 (Utah 1991).
The statute in question is plain and unambiguous. "Consumer transaction" includes a "lease" of
"tangible property" to persons "for personal or household purposes." Utah Code Ann.
13-11-3(2). Clearly, the UCSPA applies to leases of residential property. Washington's lease
of the apartment is undeniably a lease of tangible property for personal or household purposes.
We are inclined to add that the statute is justified inasmuch as today's landlord/tenant
relationships are akin to commercial contracts. As stated in Wade, the contemporary view of
landlord/tenant relations and the public policy behind the consumer protection laws support the
application of the UCSPA to residential leasing since "the tenant, much like a buyer of a used
car, is a consumer of housing." 818 P.2d at 1015. In other words, a residential tenant is a
consumer who needs protection from deceptive and unconscionable acts, as would a used car
buyer. We therefore agree with the court of appeals' affirmation of the lower court's ruling that
the UCSPA applies in this case.
Unconscionability
Having concluded that the UCSPA applies in this case, we must now determine whether
Woodhaven's actions were unconscionable and violated the act. Washington claimed that
Woodhaven violated the UCSPA in that the liquidated damages clause was disproportionate to
the amount of damages actually suffered and constitutes a deceptive or an unconscionable act in
violation thereof. The trial court held that there was no such violation, stating:
The Court hereby finds that the contested provision is not unconscionable. The terms, while not
particularly well drafted, are not deceptive or misleading. It is the last substantive provision
appearing before the signature. There was no apparent attempt to bury the provision in the body
of the lease. While the better practice might have been to place the liquidated damages provision
in bold letters, or require that initials be placed in the margin to draw attention to the clause, the
lack of these steps does not render the provision unconscionable. There is no complicated
formula to be applied. Even a cursory reading would put a tenant on notice that there is a penalty
for early termination of the lease. The contract is not an adhesion contract, the tenants were not
forced to rent from a complex offering patently offensive terms. In the absence of compelling
evidence the court must assume that other rental properties were available in the Salt Lake
housing market at the time Defendant chose to lease from Plaintiff.
The court of appeals affirmed the trial court in this regard, stating:
"Unconscionable," according to our supreme court, "is a term that defies precise definition.
Rather, a court must assess the circumstances of each particular case in light of the twofold
purpose of the doctrine, prevention of oppression and unfair surprise." Resource Management
Co. v. Weston Ranch and Livestock, 706 P.2d 1028, 1041 (Utah 1985).
Washington here claims oppression, rather than unfair surprise as the basis for finding paragraph
26 to be unconscionable. However, it is still the law in Utah that parties may contract at arms
length without the intervention of the courts to rescue one side or the other from the result of that
bargain. Id. at 1040. Parties are permitted to enter into contracts that later appear to be unfair or
unreasonable. Id. "Although courts will not be parties to enforcing flagrantly unjust agreements,
it is not for the courts to assume the paternalistic role of declaring that one who has freely bound
himself need not perform because the bargain is not favorable." Bekins Bar V Ranch v. Huth,
664 P.2d 455, 459 (Utah 1983).
Having considered all the surrounding circumstances in this case, the "trial court did not find this
contract to be unconscionable, and there is no basis upon which we can say, as a matter of law,
that he erred in his conclusion." Jacobson v. Swan, 3 Utah 2d 59, 67, 278 P.2d 294, 300 (1954).
Woodhaven, 907 P.2d at 274.
Whether the termination fee was unconscionable is a mixed question of law and fact. A trial
court's determination of the law is reviewed for correctness, while its findings of fact are
reviewed for clear error. Its application of the law to the facts is reviewed for abuse of any
discretion granted the trial court in applying the stated rule of law to the facts of the case. Pena,
869 P.2d at 937. Pena sets forth a four-part process through which an appellate court determines
the appropriate amount of discretion to be granted a lower court's ruling on a mixed question of
law and fact. In the case at hand, however, there is insufficient evidence to rule that the clause
was unconscionable under any degree of discretion that a Pena analysis might indicate is
appropriate. Therefore, a detailed analysis is not necessary.
In Wade, we addressed the question of unconscionability in the context of the UCSPA and in
doing so relied upon an earlier case, Resource Management, 706 P.2d at 1041, wherein the
doctrine of unconscionability was discussed at length. In Resource Management, we analyzed
unconscionability of contract in terms of procedural and substantive unconscionability. Id.
Procedural unconscionability addresses whether the party had a reasonable opportunity to read
and understand the terms of the contract. Washington does not claim procedural
unconscionability, nor does she argue unfair surprise. Indeed, the trial court found that "[t]here
was no apparent attempt to bury the provision in the body of the lease . . . . Even a cursory
reading would put a tenant on notice that there is a penalty for early termination of the lease"
(emphasis added).
What Washington does argue is substantive unconscionability. Substantive unconscionability
requires more than the mere unenforceability of a contract provision. As we stated in Resource
Management, it requires a disparity that is so great as to "shock the conscience." Id. (citing
Morris v. Sykes, 624 P.2d 681, 684 (1981)). We also stated that "an unconscionable contract [is]
one in which no decent, fair-minded person would view the results without being possessed of a
profound sense of injustice." Id. (citing Carlson v. Hamilton, 332 P.2d 272, 275 (Utah 1958)).
To determine whether or not the termination fee was unconscionable, a comparison must be
made between the actual administrative costs of early termination and the termination fee. Any
disparity between the two must shock the conscience or produce a profound sense of injustice
before there can be a determination of unconscionability. However, the record reflects no such
evidence. While there is evidence that early termination requires additional work and
administrative costs, there is no evidence as to the time involved and the extent of those costs.
Without such evidence, a comparison necessary to determine whether such clause was
unconscionable cannot be made.
Furthermore, our determination that the contract provision is unenforceable does not necessarily
mean that such provision was unconscionable. There must be sufficient evidence to find
unconscionability and in this case such is lacking. Accordingly, we affirm the court of appeals in
its affirmance of the trial court's conclusion that the termination fee is not unconscionable.
CONCLUSION
For the foregoing reasons, we reverse the decision of the court of appeals as to the termination
fee and remand to the trial court to recalculate damages consistent with this opinion. As to
Washington's counterclaim, we affirm the court of appeals as to the applicability of the UCSPA
in this case and the lack of a violation of the same by Woodhaven.
Chief Justice Zimmerman, Justice Howe, and Justice Durham concur in Justice Russon's
opinion.
Associate Chief Justice Stewart concurs in the result.
Opinion Endnotes:
1. We note two errors in the trial court's computation of damages. First, the amount of unpaid rent claimed by Woodhaven is $190.80 for 16 days. The trial court erroneously included a full month of rent due. Second, the court also erred in subtracting $200 and $329 from the subtotal of $909 which equals $380, not $389. From those figures alone, judgment should have been entered against Washington in the amount of $216.80. However, this amount does not reflect our holding here and should be altered accordingly.
2. Woodhaven Apartments did not submit a brief. Accordingly, this case is submitted on Washington's brief only.
3. If the termination fee covers items already covered by the lease, enforcing it would amount to double collection which would be a strong indication of its punitive nature. To the extent that this termination fee covers damage elements that are already covered, it is unenforceable.
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