Blog Ohio Real Estate Law / 08.14.2017

Ohio Court of Appeals (Hamilton County) Upholds Late Fee Provisions in a Residential Lease

By Connie S. Carr

On July 26, 2017 the Ohio Court of Appeals, 1st Appellate District (the Court) issued its opinion in Drake Townhouses L.L.C. v. Woodberry, 2017-Ohio-6968, which relates to a landlord-tenant case appealed from the Hamilton County Municipal Court. The plaintiff landlord is Drake Townhouses L.L.C (Landlord) and the defendant tenants were Daniella Woodberry and Kenneth Williams (Tenant).

Tenant leases a residence from Landlord that was on a month to month lease. Either could terminate upon 30 days written notice, but if the notice was provided at any time after the 1st of the month, then the 30 days’ notice wasn’t effective until the 1st of the following month. Whenever Landlord wanted to change a term in the lease, it was required to give Tenant 30 days’ notice of the change and Tenant had 10 days to accept the change or elect to terminate the lease and move out of the residence. A failure to give timely notice results in the lease renewing under the new terms.

In 2014, Tenant received notice of a rent increase effective June 1st with the option to accept or provide 30 days’ notice to terminate with a move-out date. Tenant chose the latter option but failed to mail the notice with May’s rent to the correct address. Landlord did not receive the notice until May 19th and had already sent out an eviction notice on May 12th due to nonpayment of rent.  Tenant further exacerbated the situation by assuming the rent check was lost in the mail, stopped payment on the check, and mailed out a second check. Landlord belatedly received both checks plus the delinquent termination notice and returned the 2 checks to Tenant. In a verbal discussion with a Landlord representative, Tenant agreed to move out by June 1st and Landlord agreed to cancel the eviction. Landlord did dismiss the eviction but proceeded with its case for past due rent and late fees.

The magistrate and trial court both found in favor of Landlord on all counts except the amount of late fees. The lease called for $10/day and both parties agreed that the late fees per month were capped at $150. The magistrate found that the monthly late fees were not equitable and reduced to $50 per month (i.e., $10/day for maximum of 5 days). After crediting the security deposit funds held by Landlord, the amount the lower court ordered due by Tenant was $850.

Tenant appealed to the Court arguing 3 assignments of error under R.C. Chapter 5321.

First, Tenant contended that the eviction filing in May was contrary to R.C. 5321.17(B)which requires a minimum 30 days’ notice to terminate or not renew a lease.  However, the Court correctly pointed out that Landlord’s notice was not for the termination or non-renewal of the lease but to change a term of the less (i.e., the rent amount) and therefore did not follow the law. Tenant’s decision to not accept the higher rent did not change the Landlord’s notice to one of termination or non-renewal.

Second, Tenant attempted to use her nonpayment breach as a basis for not being subject to the required 30 days’ notice pursuant to R.C. 5321.17(D). As the Court correctly pointed out, that argument goes against the purpose of the code provision. Tenant cannot use her own breach to get out of an obligation.

Third, Tenant contended that late fees in a lease are an unenforceable penalty under contract law and therefore shouldn’t be recoverable by Landlord without proof of actual damages.

The Ohio Supreme Court in Sampson Sales, Inc. v. Honeywell, Inc., 12 Ohio St.3d 27, 465

N.E.2d 392 (1984) set out a test to be used to determine whether a contract provision should be considered liquidated damages (i.e., enforceable) or an unenforceable penalty:

“Where the parties have agreed on the amount of damages, ascertained by estimation and adjustment, and have expressed this agreement in clear and unambiguous terms, the amount so fixed should be treated as liquidated damages and not as a penalty, if the damages would be (1) uncertain as to amount and difficult of proof, and if (2) the contract as a whole is not so manifestly unconscionable, unreasonable, and disproportionate in amount as to justify the conclusion that it does not express the true intention of the parties, and if (3) the contract is consistent with the conclusion that it was the intention of the parties that the damages in the amount stated should follow the breach thereof.”

The Court also pointed out that in 2016, the Ohio Supreme Court further clarified that generally “’per diem measures of damages…is more likely to be an enforceable liquidated damages provision than an unenforceable penalty, and in determining the reasonableness of the amount of liquidated damages, a court must look at the per diem amount, and not to the aggregate amount of liquidated damages in application.” (Boone Coleman Constr., Inc. v. Village of Piketon, 145 Ohio St.3d 450, 2016-Ohio-628, 50 N.E.3d 502)

Based on these prior Ohio Supreme Court decisions, the Court found that late fee provisions in a lease are not a per se unenforceable penalty.

However, the Court did agree with the lower court that, based on R.C. 5321.14(A), the amount of late fees should be reduced to $10/day for the 1st 5 days (i.e., $50/month). Notably, Landlord had not objected to the lower court’s determination on this point.  The Court went on to further hold that a late fee for June was inappropriate since the parties agreed in mid-May that Tenant would move out by June 1st.

Because of the Court’s ruling, the amount Tenant owed Landlord was reduced from $850 to $800. A whole lot of legal fees spent to save that $50. For landlords, this decision is helpful in establishing precedent that reasonable late fees in a lease should be enforceable.