Appellant. Respondent alleged that it leased the premises to Appellant at a monthly
rent of $600 and that it served Appellant with a 3-day notice to pay rent or quit on
May 5, 2017. The 3-day notice, attached as an exhibit to the complaint, demanded
rent in the amount of $600, as well as a late fee in the amount of $50, for a total of
$650. The lease, also attached as an exhibit to the complaint, contains the following
term: 6. Late charge; returned checks: A. Tenant acknowledges either late payment of Rent or issuance of a returned check may cause Landlord to incur costs and expenses, the exact amount of which are extremely difficult and impractical to determine. These costs may include, but are not limited to, processing, enforcement and accounting expenses, and late charges imposed on Landlord. If any installment of Rent due from Tenant is not received by Landlord within 5 calendar days after the date due, or if a check is returned, Tenant shall pay to Landlord,
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respectively, an additional sum of $50.00 as a Late Charge and $25.00 as a NSF fee for the first returned check and $35.00 as a NSF fee for each additional returned check, either or both of which shall be deemed additional Rent. B. Landlord and Tenant agree that these charges represent a fair and reasonable estimate of the costs Landlord may incur by reason of Tenant’s late or NSF payment. Any Late Charge or NSF fee due shall be paid with the current installment of Rent….
Appellant filed an amended answer as well as a motion for summary judgment.
The summary judgment motion was denied and the case proceeded to trial on June
6, 2017 and June 7, 2017. Andrew Del Monte testified for Respondent. Both
Respondent and Appellant’s counsel asked questions about the late fee. After
Appellant’s motion for nonsuit was overruled, Appellant testified. Appellant
requested a statement of decision. The trial court found for Respondent. It ordered
the lease forfeited and awarded Respondent possession of the premises, as well as
“past-due rent” of $650 and holdover damages of $140, for a total judgment of $790.
Judgment was entered on June 7, 2017. Appellant filed a notice of appeal on
September 8, 2017. The trial court entered a statement of decision on September
29, 2017.
Issues on Appeal
Appellant submitted the following issues on appeal:
1. The 3-day notice cannot support a judgment for unlawful detainer because
it contains a demand for an invalid late fee which is prohibited by Civil Code
§1671;
2. The late fee cannot be justified as liquidated damages because the losses
caused by late payment of rent were not extremely difficult or impractical to
determine, and Respondent failed to show that the amount of liquidated
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damages charged were the result of a reasonable endeavor to approximate
those losses.
Discussion
1. Late Fee as Liquidated Damages.
The proponent of a liquidated damages provision in a residential lease bears the
burden of proving its validity under Civil Code §1671. Garrett v. Coast & Southern
liquidated damages may be imposed “when, from the nature of the case, it would be
impracticable or extremely difficult to fix the actual damage” caused by a breach. Civil
Code §1671(d). Then, “the parties may agree…upon an amount which shall be
presumed to be the amount of damage sustained by a breach.” Civil Code §1671(d).
Courts look beyond the language of the contract to determine the actual
circumstances of a liquidated damages clause. Garrett v. Coast & Southern Fed. Sav.
& Loan Assn., 9 Cal.3d at 737. Agreement to an invalid liquidated damages clause
does not insulate it from attack under Civil Code §1671. The losses caused by late
payment of residential rent are limited to interest and administrative costs of collecting
and accounting for the late rent. Orozco v. Casimiro (2004) 121 Cal.App.4th Supp. 7,
11.
Respondent failed to prove that the actual losses caused by late payment of rent
were extremely difficult or impracticable to determine. Moreover, an agreement to the
term setting the amount is not enough. At trial, Respondent testified about types of
losses caused by late payment of rent, but this was little more than a reference to the
language of the lease. Respondent did not articulate specific facts showing why the
circumstances of this case justify liquidated damages to compensate losses caused by
late payment. In fact, Respondent’s Exhibit 1 submitted on appeal demonstrates that
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these losses may not be difficult to calculate. Because Respondent failed to meet its
burden to show that the losses caused by late payment of rent in this case were
extremely difficult or impracticable to determine, liquidated damages were not justified
under Civil Code §1671.
2. Late Fee Not Determined After Reasonable Endeavor to Approximate Actual
Losses by Late Payment of Rent.
As a separate and independent basis for this decision, Respondent failed to meet
its burden to show that the late fee was the result of a reasonable endeavor to
approximate actual losses caused by late payment of rent. To be valid under Civil
Code §1671, a liquidated damages clause must be the result of a reasonable
endeavor to approximate actual losses caused by the breach being compensated. In
re Cellphone Termination Fee Cases (2011) 193 Cal.App.4th 298, 322. Setting the
liquidated damages to a percentage of the contract price demonstrates a purpose
other than compensating losses. Garrett v. Coast & Southern Fed. Sav. & Loan
Assn., 9 Cal.3d at 740. Some analysis of actual losses is required prior to setting the
amount. Util. Consumers’ Action Network, Inc. v. AT&T Broadband of Southern
California, Inc. (2006) 135 Cal.App.4th 1023, 1031. Post-hoc rationalization will be
rejected. In re Cellphone Termination Fee Cases, 193 Cal.App.4th at 328.
Respondent did not show the late fee passes the reasonable endeavor test. First,
Respondent’s witness admitted at trial that the $50 late fee was set at a percentage of
the contract price. Second, Respondent’s witness admitted at trial that it never
attempted to calculate the amount of losses caused by late payment of rent. If no
effort was made to estimate the actual losses, then the resulting fee cannot
approximate the losses. The trial court erred by finding that Respondent met its
burden to show that the late fee met the reasonable endeavor test in this case.
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3. A 3-Day Notice That Overstates the Amount of Rent Owed Does Not Support
Unlawful Detainer.
It is settled law that a defective notice is fatal to an unlawful detainer complaint.
Wasatch Prop. Mgmt. v. Degrate (2005) 35 Cal.4th 1111, 1117. The notice upon
which the complaint in this case is based is defective because it may include an invalid
late fee and it may not support a judgment for unlawful detainer.
ORDER
1. The judgment of the trial court is reversed.
2. Appellant as prevailing party is awarded costs on appeal. CRC 8.891(a)(1)
and (2).
3. The case shall be remanded to the trial court.
Dated: May 11, 2018
_________________________________________ Hon. Dale A. Reinholtsen, Presiding Judge Appellate Division Superior Court of California, County of Humboldt
Hon. Gregory Elvine-Kreis, Judge Appellate Division Superior Court of California, County of Humboldt
Hon. Kelly L. Neel, Judge Appellate Division Superior Court of California, County of Humboldt
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AI Brief
AI-generated · verify before citing
Holding. The court held that a residential lease's late fee provision was invalid under Civil Code section 1671 because the landlord failed to prove that actual damages were impracticable to determine or that the fee resulted from a reasonable endeavor to approximate actual losses. Consequently, a 3-day notice including such an invalid fee is defective and cannot support an unlawful detainer judgment.
Issues
Whether a residential late fee provision is valid as liquidated damages under Civil Code section 1671.
Whether a 3-day notice that includes an invalid late fee can support a judgment for unlawful detainer.
Disposition. reversed
Quotations verified verbatim against the opinion
“Respondent failed to prove that the actual losses caused by late payment of rent were extremely difficult or impracticable to determine.”
“It is settled law that a defective notice is fatal to an unlawful detainer complaint.”
“The notice upon which the complaint in this case is based is defective because it may include an invalid late fee and it may not support a judgment for unlawful detainer.”