Woodhaven Apartments v. Washington

This opinion is subject to revision before final publication in the Pacific Reporter.

IN THE SUPREME COURT OF THE STATE OF UTAH

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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

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.