PREVENTION VERSUS CURE
By Neil S. Shankman
Over the course of the last 25 years, at least 3 or 4 times per year, I have made presentations to groups of landlords and property managers. One key element of every presentation has been the importance of reviewing and updating leases on a regular basis. Laws change. Federal regulations are amended. Courts reinterpret the meaning of words. The consequences of your failure to update your knowledge of the law and change your basic working documents can cost your company literally thousands of dollars.
Simple mistakes or even honest misinterpretations of the law can lead to substantial consequences.
A number of property management companies in the State of Maine have included provisions in their lease by which a tenant would have to pay a fee if they terminate their tenancy early. While State law has always been clear that “liquidated damages” clauses are looked at with disfavor by the Courts however they are permitted under limited circumstances. This basic rule applies to business contracts as well as to landlord/tenant situations.
Between 2005 and 2007, one Portland property management company routinely charged their tenants an early termination fee pursuant to the terms and conditions of their lease. The rational was that even if the company was able to find a new tenant, there would be certain inevitable expenses for advertising, screening new tenants, cleaning the apartment (normal wear and tear) and extra staff time that warranted a $600.00 flat fee. The basic position was that this was not an arbitrary “liquidated damages” clause, but rather a rational financial consequence that would be suffered by the landlord due to early termination.
The Attorney General concluded otherwise and in April of 2008 a Complaint was filed against the property management company. Ultimately, the company concluded that the cost of litigation was not worth arguing for the validity of the $600.00 fee. A Consent Decree was entered whereby the landlord agreed to refund to the affected former tenants up to $46,711.00 of “improper fees charged”. Additionally, the company was also ordered to pay a $10,000.00 fine. Furthermore, the company agreed that it would not charge tenants for such fees in the future.
Title 14 § 6010-A of the Maine Revised Statutes Annotated provides that a landlord is under a duty to mitigate damages when a tenant wrongfully terminates his or her tenancy. The landlord cannot simply leave the apartment un-rented for months at a time and expect the tenant to provide full reimbursement. Essentially, the tenant is on the hook for the actual out of pocket expenses that the landlord expends to re-rent the unit. However, once the unit is re-rented, the tenant’s obligation is complete (so long as the landlord has been fully reimbursed for his or her losses).
Many of us in the property management industry have been aware of the inherent risk of liquidated damages causes. However, the recent Consent Decree is the first time that the Attorney General has challenged such a provision with such vigor. If your lease contains a penalty for early termination, it is imperative that you amend your lease immediately. If you have a tenant currently subject to such a provision, it is your obligation to notify the tenant that the provision will not be imposed against them. At the same time, however, you can explain to your tenants that the consequences of early termination include personal liability for the full amount of actual damages incurred by the landlord.
All of this is simply another reminder that an ounce of prevention is worth a pound of cure, the early bird gets the worm, and an annual review of your leases and other basic forms is a wise business decision. ...Neil S. Shankman, Attorney, Lewiston, Maine
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