Fees and Liquidated Damages

This may come as no surprise to you, dear reader, but we are pretty nerdy here at the TRC. We do a lot of jobs here, but when we dive into tenant-landlord law, we go deep, because the details are crucial for the folks who come in to talk to us. This is one of those deep dives. 

Generally speaking, when a landlord charges a fee in a lease, then that fee needs to reflect actual damages that a landlord experiences.* For example: a tenant gets locked out of his apartment, and he asks the maintenance person to let him in. The cost of the maintenance person swinging by and unlocking a door with a master key during work hours, is pretty low. Perhaps $15 of someone's time? It might be higher if the call came after work hours, and more if the whole lock needed to be re-keyed. In the end, the tenant could only be charged the actual costs that the landlord experiences in dealing with this issue - in this case, the cost of the maintenance person's time, the cost of the new key. But what happens if the lease holds a weird escalating fee clause - the first time a key is lost, it's $15 to replace. The second? $50. The third? $200. And so on.

Sometimes, fees in a lease are written in as a penalty, which are not reflective of the amount of monetary damage that a landlord faces as a result of a problem, and are simply put in the lease as a way to deter behavior. And punitive fees, my friends, are not allowed.

And in order to explain why, we get to jump into contract case law. Whee!

What exactly are liquidated damages? Liquidated damages are a kind of fee allowed in a contract if one of the parties (usually, for us, the tenant) doesn't fulfill their obligations. They are very different from punitive damages. The reason why we have liquidated damages is for situations where it would be hard to know what a breach of contract will cost, if it happens. And so, a fee is written into the contract to anticipate that difficult situation. However, in the end, the party experiencing a breach (usually, for us, a landlord) can't charge more than the actual amount of monetary damage that they've suffered. They cannot simply charge a penalty fee. (For more info, Wikipedia explains here and the Cornell Law School defines it here).

A couple disclaimers: we are not attorneys. This is not legal advice; rather, this is information about laws and case law that are publicly available. If you want legal advice, then you need to talk to an attorney. Our attorney referral list is here.  

Here's how this works:

1. Leases are contracts. A legal definition of a contract, with lots of citations, is here. Basically, though, it's an agreement between 2 or more parties, and it's enforceable under the law. 

2. Contract law is made up of lots of case law. Tenant-landlord law is its own branch of law, and normally, what we see in the statutes is what we get - we don't get much information about how to interpret the laws based on written decisions made by judges in appealed cases. Business contracts are more likely to go through the expensive appeals process than rental agreements are, and so there is more information about how to interpret some contract situations, which, in the end, applies to rental agreements and leases. 

3. Contract case law says:

4. What we think this means for rental contracts:

Landlords always have a right to charge a tenant for the monetary damage that a landlord experiences as a result of the tenant breaching the contract. When landlords put fees in leases to charge tenants for costs associated with a breach of contract, that's pretty suspicious for us, and looks like something that is supposed to be punitive in nature, which is not allowed. Here's why it's suspect - there are 2 main reasons:

  1. Because the landlord is always allowed to charge actual costs if a tenant makes the landlord lose money as a result of not following the rental contract, and
  2. Because the costs that landlords experience at the time of breach are usually pretty clear, and therefore, guessing what they would be at the time of the formation of the contract is not necessary. The three main situations that come up are:
    1. Repairs are needed as a result of the tenant's actions. In this case, the landlord can charge the actual cost of repairs. The laws do not allow the landlord to charge for depreciation of the unit, or costs of repairs that they don't do. Therefore, these costs are clear at the time of breach.
    2. Loss of rent. This, again, is very clear. The cost of the loss of rent is a clear amount, and is not ambiguous or difficult to assess. The law states the need for landlords to mitigate damages, and once that burden is performed, the landlord has a right to charge the tenant for the amount of rent that is outstanding under the lease.
    3. Advertising costs, if re-rental is necessary during a time in which the tenant has a contract. Again, these costs are fairly clear.

Note: Of course, for all of these, the parties might disagree on the amount owed, and in those situations, we encourage the parties to try to work it out or take it to small claims court.

Because these situations are so financially clear-cut at the time of breach, any fee amount stated in a lease looks inherently unreasonable - it looks like a penalty. Case law says that if the fees allowed in the lease turn out to be way more than the cost at the time of the breach, then those fees become unreasonable (a "reasonable forecast of harm," above) and therefore those fees are not allowable. 

* Let's talk about late fees

Sooooo. We are talking about fees. But there's an elephant in the room: Late Fees, when a tenant pays rent late, and the landlord charges them a late fee because of that late rent payment, as authorized by a lease. Are these late fees a part of this conversation on liquidated damages? Or are they different? That's a great question, and there's not a great answer. Maybe both?

Landlords definitely experience damages when a tenant pays their rent late - if they pay a mortgage, they may have fees from the bank for paying late, or they may bounce checks when paying for regular expenses. But, beyond those kinds of actual damages, are late fees allowed?

We're not sure. We believe that excessive late fees are frowned upon by judges, but that late fees, when written into a lease, are pretty commonly accepted. Unlike other fees, late fees are referenced in tenant-landlord laws, lending them some legitimacy. There is one case in Wisconsin appeals court in which $50/mo late fees were upheld for a landlord, against a tenant (Three & One Co. v. Geilfuss, 178 Wis.2d 400, 504 N.W. 2d 393), but there is no further guidance beyond that. 

Generally, landlords should be cautious if late fees are unreasonable (the three-part case law test above has some guidance about reasonable-ness). And generally, tenants can bring a case to court and ask for a judge to rule on the late fees that they believe were unreasonably paid. And, if you do one of these things, let us know how it goes? We love to get nerdy about this kind of stuff. 

Steps for tenants to take

We get a lot of phone calls from tenants trying to deal with punitive fees. They are most commonly about these situations: Sublet fees, breaking lease fees, escalating key replacement fees. Of course, there are many more. What these have in common: the landlord is using a fee to try and discourage behavior, and the fees themselves are not a reasonable forecast of harm.

Please keep in mind that landlords can charge tenants for actual damages they experience, like rent (if a lease has been broken and a landlord is properly mitigating), or advertising costs. 

Some concepts in dealing with invalid fees:

  1. Write a letter. Here is a sample letter, but please keep in mind: we are not attorneys (for legal advice, that's who you should contact), and you need to make sure that any letter accurately reflect your circumstances. 
  2. If the landlord responds and is able to demonstrate actual damages that are allowed under tenant-landlord law, then you might consider paying those. For questions about what a landlord is allowed to charge, you can read up on the rest of our website, or contact us.
  3. If you have paid an illegitimate fee, consider writing a letter asking that it be returned, and if that doesn't work, you can always sue in Small Claims Court

Steps for landlords

So, landlords, it's our perspective that you guys don't normally get your needs met by putting a fee into a rental contract. Normally, when fees are put into a rental contract, it's because landlords wish to discourage tenants from doing something. But it doesn't really seem to work. 

An example: a landlord wanted to make it so that their tenants wouldn't throw keg parties (can you tell that we are in a college town?), so the landlord wrote a $500 fee into the lease if there was a keg in the apartment. This backfired. The tenants who had massive, obtrusive, keg parties made more at the door than the $500, and therefore were happy(ish) to pay the fee and just keep doing it every weekend. Because it was only a fee, and not a restriction in the lease (like a clause in the lease saying "no keg parties"), the landlord couldn't issue an eviction notice for the parties and restrict their tenant's ability to throw the parties. And, the landlord in this situation had rights all along to charge for any damages done by the party.

So, an alternative is this: put a clause in the lease restricting the activity you wish to discourage (along the lines of: "no keg parties"). You could add a clause saying that those who throw keg parties will be charged for damages done as a result (which is true whether or not you put a clause like that into the lease). This allows a landlord to issue an eviction notice for the behavior they don't like (unauthorized pets, keg parties, whatever it is for you), and still charge for damages as a result of those activities. 

One more thing

Normally, the terms of a contract are developed together through negotiation by all impacted parties. But, that doesn't really happen in tenant-landlord law. Contractually, there's a power differential, in which the landlord decides on the terms, and the tenant doesn't usually negotiate, but instead, simply accepts or rejects the contract in full. As a result, a legal thought process called "contra proferentem" comes into play.

Contra proferentem is a latin term to indicate that courts should interpret "ambiguous [contract] language "most strongly" against the maker or drafter." Moran v. Shern, 60 Wis.2d 39, 49, 208 N.W.2d 348 (1973). The rule is often applied to "aid a party whose bargaining power was less than that of the draftsperson." 5 Corbin, Corbin on Contracts §§ 24.27, at 292 (Kniffen & Perillo ed. 1998). 

When looking at something like fees, there are different ways to interpret the language in a lease. However, because of the legal concept of "contra proferentem," we need to read ambiguous language in a way that benefits the tenant, since the tenant did not draft the contract itself - the landlord did.

I know I already said this, but: it's really important that you know that we are not attorneys, and that this isn't legal advice. If what we've written here doesn't sound right to you, talk about it with someone you trust. For help finding an attorney, check out our attorney referral list.