James G. McCone
Attorney at Law

LAW  OFFICES  OF JAMES  G.  MCCONE
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email: jgmccone@mcconelaw.com
Landlord and Tenant Issues Specialist
                                                                                                                                  
Date: Wed, 15 Apr 2009 14:56:54 -0700

Greetings to all,

As some of you may know, from time to time I provide updates on the law regarding landlord tenant issues that may be relevant to your practice.  Something has come to my attention that may concern you and if it does, please pay attention (conversely, if it doesn't, feel free to ignore me completely).

LATE FEES IN RESIDENTIAL LEASES.

    California Civil Code §1671 (d) provides, in the case of residential dwellings by the party to a lease “a provision in a contract liquidating damages for the breach of the contract is void except that the parties to such a contract may agree therein upon an amount which shall be presumed to be the amount of damage sustained by a breach thereof, when, from the nature of the case, it would be impracticable or extremely difficult to fix the actual damage.”
    Thus, under Civil Code §1671, if a provision of a residential lease contains a late charge fee, it is presumed to be a measure of damages incurred as a result of the late payment.  The Los Angeles Superior Court Appellate Division parsed the language of Civil Code §1671 to assign the burden of both pleading and proof in Orozco v. Casimiro (2004) 121 Cal.App.4th Supp. 7).
In Orozco, a landlord served a tenant with a 3 Day Notice To Perform Or Quit, demanding payment of a $50 late fee which was the amount set in the rental agreement executed by both parties.  The trial court ruled in favor of the Plaintiff/Landlord upon the evidence that the rent was paid late and that the tenant failed to pay the late fee either prior to, or after, the service of the notice.
    The appellate division reversed the decision.  In discussing the late charge issue, the court acknowledged that under Civil Code §1951.1 specifically made applicable §1671 to residential leases.  The court further analyzed that late charges are presumed valid if they are agreed upon in the contract, and if the “damages” are difficult or impracticable to ascertain: 
"[f]or liquidated damages to be valid under subdivision (d) of Civil Code section 1671, it must have been 'impracticable or extremely difficult to fix the actual damage.' [Citation.]" (Hitz v. First Interstate Bank,  38 Cal.App.4th at p. 288.) Additionally, "the amount of liquidated damages 'must represent the result of a reasonable endeavor by the parties to estimate a fair average compensation for any loss that may be sustained.' [Citation.]" (Ibid.) Finally, "[a]bsent either of these elements, a liquidated damages provision is void, although breaching parties remain liable for the actual damages resulting from the breach. [Citation.]"
    However, the court went further to analyze the burden of pleading and proof and, without case citation, held that because the landlord neither pleaded in the complaint that the late charge amount was impracticable or difficult to fix, nor presented evidence of that element of Civil Code §1671 during their prima facie case, that the landlord could not rely on the presumption that the late charge is valid because it is agreed upon in the written lease.
    It appears the analysis of the court hinged on the placement of the word “when”.  Section 1671(d) provides that the [late charge] is void “except that” the parties may agree to a fixed sum which is presumed to be the amount of damages sustained by a breach thereof when, from the nature of the case, it would be impracticable or extremely difficult to fix the actual damages.  The Appellate Division interpreted the placement of the phrase “when, from the nature of the case . . .” that in order to be entitled to the benefit of the presumption, the landlord must first establish that in this particular case damages are impracticable or extremely difficult to fix.
    According to the court in Barbera v. Sokol (1980) 101 Cal.App.3d 725, the party seeking to invoke the presumption afforded by Civil Code §1671, the party must present the foundational facts necessary to trigger the presumption.  “As a rebuttable presumption, the liquidated-damages clause in a contract must be considered in light of the procedural functioning of a rebuttable presumption which imposes upon the party utilizing the presumption the burden of introducing evidence and proving the existence of the foundational facts of the presumption. This becomes necessary in order for such party to obtain the benefit of the presumed fact which flows from the existence of the foundational facts. (See Jefferson, Cal.  Evidence Benchbook (1972) § 46.3, pp. 801-809.)
    Thus, it does appear proper for the Orozco court to have held that a landlord must prove the foundational facts that the actual damages suffered by a late payment of rent are extremely difficult to fix.  You should have, in your contractual late charge clause, the words "the parties agree that damages occasioned by the late payment of rent are impracticable or extremely difficult to fix" and therefore agree on a particular set amount which should be, but is not required to be, 6 percent of the monthly rent or less.

LATE FEES PAID IN PAST AS OFFSET AGAINST FUTURE RENTS

I have, in the past, offered that even if your contract does not contain the "magic language" which would legalize a late fee provision, the tenant cannot assert past payment of late fees as an "offset" against future rents.  Apparently, our esteemed Appellate Division of the LA Superior Court disagrees.  In a currently non-published case entitled Jones & Jones Management, Inc. v. James Hill LA Appellate Division Case Number BV027703, filed April 7, 2009, the court found that payment of "illegal" late fees could be used to offset future rents.  In this case, the tenants admittedly failed to pay rent for two months on their Century City apartment.  The landlord started eviction proceedings and the case proceeded as a jury trial in Judge Connor's court in Santa Monica.  The defendants sought to introduce evidence of late charge payments made during the course of the tenancy and Judge Connor ruled the evidence irrelevant because "late fees paid without objection over the course of the tenancy" which were not included in the 3 day notice to pay rent or quit, cannot be used to dispute an otherwise valid 3 day notice.

The Appellate Division reversed, finding that under an analysis crafted in Nourafchan v. Miner (1985) 169 Cal.App.3d 746 (which held that rent paid in excess of the rent control cap on maximum rent under Santa Monica's rent control law could offset future payments of rent and be asserted as an affirmative defense against a non-payment U.D. to the extent of the cumulative overpayment) late fees paid under a lease provision determined to be invalid under Civil Code §1671 could act as an offset against future rents and be asserted as a valid affirmative defense against a non-payment U.D.

The Jones & Jones case is currently unpublished.  There is a movement, however, spearheaded by Ken Carlson, to petition the appellate division to publish this decision. 

SUGGESTION

If you are going to charge late charges under the terms of a lease or rental agreement, make sure you have the documentation to support the charge, at least in broad terms, and make sure that your lease or rental agreements contain the magic language outlined in Civil Code §1671.  Until this issue is settled more favorably, when in doubt, do not charge a late charge, especially in a rent control jurisdiction.  If you have charged late charges and your contract does not contain the magic words, consider backing the cumulative late charge total out of the 3 day notice before serving it.

FINALLY, for those of you with LA Rent Control properties, April is the month when Registration Certificates come out.  Be sure and make copies of the Certificates and circulate copies to all your tenants.  LAMC §151.05 provides that a landlord may not demand or accept rent from a tenant until having first procured and served on the tenant the registration certificate.    You may pass through a portion of your registration fee to the tenants ONLY during the month of June.  You should notify your tenant via a 30 day notice of the obligation to pay the pass-through and then collect it with the June rent.

Hope this is helpful.

James McCone
Law Offices of James McCone