On May 19, 2017, the Iowa Supreme Court handed down decisions in two highly publicized Iowa City cases in which tenants had brought suit against their landlords - Kline v. Southgate Property Management and Walton v. Gaffey. Both sides have appeared to claim victory from the decisions, and, while Iowa landlords can glean more clarity from the decisions in many respects, landlords are necessarily left with some uncertainty in other respects.
Prior Cases Leading Up to the Kline and Walton Decisions:
In 2013, the Iowa Court of Appeals entered an unpublished decision in the Staley v Barkalow landlord-tenant case, in which the Court entered a decision in favor of the tenants, concluding that (1) under the Uniform Residential Landlord and Tenant Law set forth in Iowa Code Chapter 562A (the “Act”), a landlord is liable for the inclusion of prohibited provisions in a rental agreement, even without enforcement, if the landlord's inclusion was willful and knowing (note: a similar provision can be found within Iowa Code Chapter 562B); and (2) in such event, the tenant may recover from landlord the “actual damages sustained by the tenant and not more than three months' periodic rent and reasonable attorney fees” (note: under Chapter 562B, a tenant’s recoverable damages are less robust than in Chapter 562A). In the years following, other decisions were rendered by various district courts, the Iowa Court of Appeals (such as Amor v. Houser), and the Iowa Supreme Court (Elyse De Stefano v. Apts. Downtown, Inc., and Lenora Caruso v. Apts. Downtown, Inc., a summary of these cases is available here), which dealt with some, but not all, of the issues pertinent to the Kline and Walton cases.
Summary of the Kline and Walton Decisions:
In both cases, tenants sued their landlords over the content of their lease agreements and argued that the landlord was liable for damages and attorney’s fees under the Act because the landlords’ leases included several provisions known by the landlord to be prohibited provisions. The district court granted summary judgment in favor of the tenants, and the landlord appealed. On appeal, the Iowa Supreme Court affirmed in part, and reversed and remanded in part, both of the district courts’ decisions. The questions answered and issues discussed in the Supreme Court’s two decisions are summarized below, but landlords are well-advised to read the entirety of both decisions.
Can a Landlord be Liable for the Mere Inclusion of Unlawful Lease Provisions?
Yes. The Iowa Supreme Court affirmed the district courts’ decisions in this regard, concluding that a landlord is liable for the landlord’s mere inclusion of prohibited provisions in a rental agreement, even without enforcement of those provisions against the tenant, if the landlord's inclusion was willful and knowing.
Are Flat Fees, Fines/Charges, and Liquidated Damages Lease Provisions, Set Without Consideration of a Landlord’s Actual Damages, Categorically Prohibited?
No. The Iowa Supreme Court reversed the district courts’ decisions in this regard. The Iowa Supreme Court held that certain fees, charges, and liquidated damages included within the leases at issue were not “categorically prohibited” merely “because they were set without any consideration of what the landlord's actual damages and fees would be in each situation,” contrary to the district courts’ opinions.
Though, the Iowa Supreme Court emphasized that the lawfulness of any such fees, charges, and liquidated damages are to be determined on a case-by-case basis and are unlawful if they are contrary to the Act or Iowa law, unconscionable, or otherwise unenforceable penalties under the Act or Iowa law. Concerning the specific provisions in the two leases at issue, the Supreme Court agreed that some of those provisions were unlawful as a matter of law, while consideration of the remaining provisions was remanded back down to the district courts to be decided upon at a later date.
What Types of Lease Provisions Are Categorically Prohibited Under the Act?
Consistent with previous decisions, the Iowa Supreme Court held that the Act imposes certain specific categories of lease provisions that are prohibited as a matter of law. The Supreme Court held that, among others, the following categories of lease provisions are unlawful and categorically prohibited under the Act:
- A waiver of a tenant’s rights and/or remedies otherwise established under the Act;
- Exculpation, limitation, or indemnification of a landlord’s duty or liability under the Act or law;
- An agreement by a tenant to pay the landlord’s attorney fees;
- An agreement by a tenant to confess judgment in a certain regard; and
- An unconscionable provision, or unenforceable penalty, under Iowa law.
The Supreme Court held that, “[b]eyond these express prohibitions, however, landlords and tenants are free to form residential rental contracts consistent with Chapter 562A and the principles of law and equity supplementing it.” This is good news for Iowa landlords.
However, for Iowa landlords, the devil is in the details in following the guidance by the Iowa Supreme Court. In particular, a landlord must remember that under Iowa law, and as confirmed by the Kline and Walton decisions, a landlord owes tenants the duty to keep the leased premises in a fit and habitable condition and to otherwise repair and maintain in good and safe working order all electrical, plumbing, HVAC, and other facilities/appliances and to pay for such repair and maintenance work (with a limited exception for single-family residences in which the parties may agree that the tenant shall perform certain repairs/work, but a landlord still cannot charge the tenant for such repairs/work). Thus, as noted in Kline, a lease provision is unlawful if it purports to limit the aforementioned repair and maintenance duties imposed upon landlords, or in any other way limits or extinguishes a landlord’s other duties or liability under the Act or Iowa law. In Kline and Walton, the Iowa Supreme Court also affirmed that a landlord can only deduct from a security deposit amounts for damages to the premises if the landlord proves such damages are “beyond normal wear and tear” resulting from a deliberate or negligent act of a tenant, or tenant knowingly permitting it, thereby invalidating any lease provision to the contrary. Perhaps the most difficult task for landlords in following the guidance of these cases is landlords attempting to answer the question of whether a proposed flat fee, fine, charge, or liquidated damages provision within a lease is unlawful because it is unconscionable or otherwise an unenforceable penalty, which is discussed in the last section below.
What Conclusions did the Iowa Supreme Court Reach Regarding the Specific Lease Provisions?
In the two decisions, the Iowa Supreme Court affirmed the district courts’ rulings that the following provisions were unlawful:
- in the Walton case, an automatic carpet cleaning provision in which a landlord automatically imposed a carpet cleaning fee and automatically deducted that fee form the security deposit at the end of every lease term, regardless of whether such cleaning was necessary to restore the premises to the condition at the outset of the tenancy beyond ordinary wear and tear;
- in Kline, a delayed possession provision in which the tenant’s sole remedy for delayed possession was rent being rebated on a pro rata basis, as such provision constituted an unlawful exculpation and limitation of the landlord's liability arising under law;
- in Walton, a provision limiting the landlord's liability for any loss of use or consequential damages arising from appliance failure, as such provision also constituted an unlawful exculpation provision; and
- in Walton, a provision providing that the landlord was not liable for any damage or loss of any of the tenant's personal property for any cause whatsoever, as such provision was an unlawful exculpation provision.
Conversely, in the Kline case, the Supreme Court held that an apartment-inspection checklist provision was not categorically prohibited because the Court viewed the provision as a “procedural device to promote documentation of the condition of the dwelling at the outset of the landlord–tenant relationship,” and concluded that, while such prohibition creates a presumption that may have some “evidentiary significance in the event [the landlord] claims the tenant caused damage to the dwelling,” such provision was not a black-and-white unlawful exculpation provision.
Finally, the Iowa Supreme Court concluded that numerous other fees, charges, and liquidated damages provisions in the leases at issue -- including a charge for returned checks, maintenance call charge, liquidated damages provision for unauthorized pets, fee for subletting, per diem fee for holdover tenants, charge for lockout service calls, charge for replacement keys, and charges/fines for certain lease violations -- were not “categorically prohibited” as a matter of law. Instead, the Court remanded those issues back to the district courts to consider on a case-by-case basis within the confines of the principles set forth within the decisions and otherwise by the Act and Iowa law. If the district courts enter decisions on the aforementioned remanded issues, I will provide another update, however, there is certainly a possibility that the parties in the two cases will settle their remaining disputes and eliminate the need for any further district court proceedings.
Are There Any Unanswered Questions?
Yes. The Iowa Supreme Court necessarily left open questions to be answered by future courts on a case-by-case basis. Specifically, the question of what fines, flat fees, charges, and liquidated damages provisions are lawful and what ones are not? Future courts will have to consider, on a case-by-case basis, any challenged lease provisions and, pursuant to the Supreme Court’s guidance, will strike down as unlawful any such provisions that are unconscionable, unenforceable penalties, or otherwise prohibited under the Act or Iowa law. Below is a very brief summary of further Iowa law in this regard.
Regarding unconscionability, in prior cases, the Iowa Supreme Court has emphasized that “[b]ecause of its equitable purpose, neither the courts nor the legislature have attempted to give [unconscionability] a precise definition.” Generally, “[a] bargain is said to be unconscionable at law if it is such as no man in his senses and not under delusion would make on the one hand, and no honest and fair man would accept on the other . . . We look at the factors of assent, unfair surprise, notice, disparity of bargaining power, and subjective unfairness.” Regarding liquidated damages provisions being deemed to be unenforceable penalties, the Iowa Supreme Court has held in prior cases that liquidated damages provisions are enforceable and lawful when both the “anticipated amount of actual damages resulting from a breach of the lease were uncertain” and the “amount fixed in a liquidated damages provision is reasonable to the extent that it approximates the loss anticipated at the time of the making of the contract, even though it may not approximate the actual loss.” On prior occasions, the Iowa Supreme Court has struck down fines and liquidated damages provisions, on public policy grounds, when the contractual provision provided for “unreasonably large liquidated damages” or an amount that was “out of reasonable proportion to the loss or injury actually sustained or reasonably to be anticipated.”
We will all keep an eye on future court decisions in which these issues are analyzed in more detail. If you have any questions regarding these decisions or your leases, please contact us.
Jodie McDougal is a partner at the Davis Brown Law Firm and is an Iowa landlord-tenant, construction law, and litigation attorney. In her real estate and construction law work, Jodie represents residential and commercial landlords, landlords of manufactured housing/mobile home communities, real estate buyers/sellers, and construction contractors and subcontractors.
Jodie McDougal, Davis Brown Law Firm, 515-288-2500, firstname.lastname@example.org