ATTORNEY FOR APPELLANTS: ATTORNEY FOR APPELLEE:
PAULA GORDON WHITE THOMAS A. BERRY
Student Legal Services Thomas A. Berry & Associates
Bloomington, Indiana Bloomington, Indiana
RANDI GERSHIN, SALLY KOGOD, ) ERICA BURTEN, JOANNA ARONSON, ) BETSEY ABRAMSON and ) DARRYL SHERMAN ) ) Appellants-Defendants, ) ) vs. ) No. 53A01-9704-CV-118 ) SHEREE DEMMING, ) ) Appellee-Plaintiff. )
1. Whether the trial court erred when it awarded a per diem late fee for the period
between expiration of the lease term and the date of judgment.
2. Whether the late fee provision is enforceable as liquidated damages.
3. Whether Landlord is entitled to appellate attorney fees.
Supplemental Record at 180. Tenants provided a $1,300.00 security deposit and five
guaranties from their parents.
In May of 1995, Tenants notified Landlord of their intent to abandon the premises. Tenants moved from the house and did not tender the rent payments that were due in June, July and August of 1995. Landlord attempted to mitigate damages by subleasing the premises during the summer months, but she was unable to locate anyone willing to assume the remaining lease term. Landlord had already rented the premises for a new term beginning August 15, 1995.
Landlord filed suit to collect unpaid rent, late fees, damages and attorney fees. Two tenants, Gershin and Kogod, entered into a settlement with Landlord in which they agreed
to pay $4,182.22, and Landlord dismissed them and their guarantors as defendants. At trial
on April 12, 1996, Tenants admitted their breach of the lease but disputed Landlord's damage
claims, and trial was held on damages. After trial Landlord dismissed the remaining
guarantors without prejudice. On August 23, 1996, the court entered a judgment against
Tenants which totaled $11,791.86 plus court costs.
sum sought to be fixed as liquidated damages is grossly disproportionate to the loss which
may result from the breach, the courts will treat the sum as a penalty rather than as liquidated
damages. Czeck, 143 Ind. App. at 463, 241 N.E.2d at 274 (citing Beiser v. Kerr, 107 Ind.
App. 1, 8, 20 N.E.2d 666, 669 (1939). In determining whether a stipulated sum payable on
a breach of contract constitutes liquidated damages or a penalty, the facts, the intention of
the parties and the reasonableness of the stipulation under the circumstances of the case are
all to be considered. Nylen, 535 N.E.2d at 184. The distinction between a penalty provision
and one for liquidated damages is that a penalty is imposed to secure performance of the
contract and liquidated damages are to be paid in lieu of performance. 9 I.L.E. Liquidated
and Exemplary Damages § 101 at 256. Notwithstanding a plethora of abstract tests and
criteria for the determination of whether a provision is one for a penalty or liquidated
damages, there are no hard and fast guidelines to follow. Zalweski v. Simpson, 435 N.E.2d
74, 77 (Ind. Ct. App. 1982) (citing Skendzel v. Marshall, 261 Ind. 226, 232, 33, 301 N.E.2d
641, 645 (1973), cert. denied, 415 U.S. 921 (1974)). The question whether a liquidated
damages clause is valid, or whether it constitutes a penalty, is a pure question of law for the
court. Nylen, 535 N.E.2d at 178.
so substantial and burdensome as to compel compliance with the terms of the lease,See footnote
than to compensate the landlord for the actual damages likely to result from the breach, the
provision is not compensatory but punitive and is unenforceable as a liquidated damages
The trial court awarded $5,837.00 in late fees. Tenants contend that these fees are greatly disproportionate to Landlord's actual loss due to late rental payments and, specifically, that the trial court erred when it awarded late fees from the end of the lease term to the date of judgment, a period of 374 days. They argue that late fees should run only from June 1, 1994, when Tenants first failed to pay rent on time, to August 14, 1995, the end of the lease term, a period of 75 days.
We have not previously considered whether a per diem late fee may be assessed beyond the lease term. In Nylen, although the tenants had been ejected, late fees continued to accrue for the balance of the lease term because the tenants continued to be liable for rental payments under a savings clause in the rental agreement. Nylen, 584 N.E.2d at 184. The judgment in Nylen included late fees assessed only to the end of the lease term. Also, in Gigax v. Boone Village Ltd., 656 N.E.2d 854 (Ind. Ct. App. 1995), we held that the trial court erred as a matter of law when it assessed rent and late fees after termination of the lease. Id. at 860. However, our holding in Gigax is not directly on point because in that case
late fees were assessed only once against each late payment and not on a per diem basis.See footnote
Here, in contrast, the late fees were not assessed once but were assessed on the date of default and continued to accrue daily thereafter. Tenants argue that when late fees continue to accrue after the lease term has ended into the indefinite future, the amount of late fees awarded is arbitrary as it depends upon the time taken to initiate and conclude litigation, during which time late fees continue to accumulate. Thus, Tenants contend that late fees beyond the lease term penalize them for exercising their right to litigate.
Landlord counters that the late fees are fully justified in this case where the Tenants intentionally abandoned the lease and failed to pay the remaining rent without excuse. Landlord further contends that Tenants could have tolled the accrual of late fees at any time if they had paid their rent and that absent any provision to the contrary in the lease, the late fees may continue to accrue beyond the lease term until the rent has been paid or a judgment has been entered.
The question before us is whether there is any limitation on the useful life of a late fee provision in a residential lease. Whether denominated as a "late fee," "late charge, "late payment penalty," "administrative fee" or equivalent term, such a provision is meant to compensate the landlord in liquidated damages for the late payment of rent. The liquidated damages provision is the remedy prescribed by agreement for the breach that occurs when
a rent payment is untimely. The "late fee" which attaches to a late payment implies an
expectation that the payment is forthcoming.
However, a second breach occurs where, as here, the rent is not only late but also unpaid. We cannot define the point in every case at which late payment becomes non- payment. However, we can say that late payment becomes nonpayment when, as here, the lease term ends, the tenants are no longer in possession of the premises, the rent remains unpaid, the parties no longer have a landlord-tenant relationship and the landlord has no further expectation of voluntary payment. At that point, the landlord's damages are no longer uncertain or difficult to ascertain, and the continued assessment of liquidated damages in addition to actual damages for the same unpaid rent becomes a penalty.
Thus, we hold that after expiration of the lease term, when actual damages can be ascertained, "late fees" for late payment of rent otherwise assessable during the lease term as liquidated damages become a penalty designed to compel performance of the lease. Here, post-termination late fees of $4,862.00 were charged for the 374 days between the end of the lease term and the date of judgment. These late fees exceeded the unpaid rent by $1,612.00. Such fees were grossly disproportionate to Landlord's actual loss from late rental payments and were manifestly unreasonable. Late fees should not have been assessed beyond expiration of the lease term. The proper remedy would have been prejudgment interest.See footnote 5
amounted to a $6.00 per day late fee, although the trial court only awarded $362.00.See footnote
184. The landlord in Nylen testified that a tenant's failure to pay rent resulted in extra work
for management in sending notices, preparing a weekly rent delinquency report, calling the
tenant, and using and preparing additional cash journals. Id. Thus, the late fees were for the
administrative cost actually incurred by the landlord as a result of the tenants' breach.
Tenants contend that in this case Landlord failed to prove that the one percent per day late fee approximates Landlord's actual loss from the late payment of rent. However, as we have already noted, one feature of a liquidated damages provision is the forfeiture upon breach of an agreed sum without proof of damages. General Bargain Ctr., 430 N.E.2d at 411. Here, the breach is undisputed, and certain damages are inherent in the nature of the breach.
As we have stated, the late fee is intended to compensate Landlord for the administrative expense and inconvenience associated with untimely rent, including late payment notices and additional bookkeeping, and for the loss of use of rental income. Landlords in residential leases typically have mortgage payments, real estate taxes, insurance, maintenance and other expenses required to maintain the leased property. Delinquent rent not only results in a loss of use, measured as interest, but also interrupts normal cash flow and may affect a landlord's ability to meet its operating expenses. The
severity of this interruption is a function of both the amount of rent owed and the duration
that rent remains past due. The greater the amount of late rent and the longer the rent
remains past due, the greater the adverse impact on the landlord's business. Thus, a late fee
based on a percentage of unpaid rent and on the duration of the delinquency corresponds
directly with the magnitude of the breach.
We do not consider a one percent per day late fee to be excessive. If the rent were only a few days late, the late fee would be modest. While here the total of $975.00 in late fees might seem high, it represents 75 days of late rent. This accumulation of late fees occurred only because the tenants repudiated the lease and committed an anticipatory breach. We cannot say under the circumstances of this case that such a fee is grossly disproportionate to Landlord's loss resulting from 75 days of delinquent rent or that the fee is an unenforceable penalty as a matter of law. Thus, we hold that the per diem late fee provision to the end of the lease term is not unreasonable.
Ind. App. 497, 506-07, 336 N.E.2d 833, 838-39 (1975). In this case, because Landlord's loss of use of rental income was included in the late fee, Landlord's recovery of prejudgment interest on unpaid rent would have been limited to the period from the end of the lease tern to the date of judgment. However, the question of prejudment interest was not raised by either party in the trial court or on appeal, and that issue is not before us. Regardless, because the question of prejudgment interest was not raised by either party in the trial court or on appeal, the issue is not before us.
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