John and Rosa Castro leased residential property from Fred Graylee in May 2015, for $3105 rent per month. In June 2018 Fred sent the Castros notice that they had three days to vacate, and that they owed $27,120 in unpaid rental.
The Castros neither paid nor vacated, so Fred filed an eviction lawsuit.
On October 2, 2018, the parties entered a stipulation with the Court. Under the stipulation, Fred was awarded possession as well as a judgment for $28,970 if the Castros failed to return the keys and vacate by October 31, 2018. The stipulation worked much like a settlement agreement.
In January 2019 Fred filed a motion for entry of a $28,970 judgment against the Castros. Fred’s motion was based on both the stipulation as well as the declaration of Fred’s Property Manager, who claimed that the tenants had not vacated by October 31 but instead moved out the following day – November 1, 2018.
The trial court entered judgment for Fred; Castros appealed.
The Castros claim that the judgment amount of $28,970 was based upon a liquidated damages provision in the stipulation, but it is unenforceable as it bears no reasonable relationship to the range of actual damages the parties could have anticipated based on a short-term tenancy holdover.
The appellate court accepted Castros’ position that the stipulation contained a “liquidated damages” clause. From there, the court considered “liquidated damages” as compensation to be paid in the event of a breach of contract, as determined by an agreement. The court further allowed that liquidated damages clauses become an unenforceable penalty if it bears no reasonable relationship to actual damages.
LD clauses must provide for fair average compensation for an anticipated loss.
In situations where the parties do not attempt to anticipate actual damages but instead merely select an arbitrary amount, the provision can fail. Also, LD provisions that provide for penalties in order to motivate a party to pay are unenforceable.
Courts can look at the efforts undertaken by the parties to calculate the amount of damages that can be anticipated. The result can be measured, after a party has been damaged, against the amount of such damages.
This “look back” procedure automatically makes delicate any LD provision.
In the stipulation, the Castros did not concede the merits of the eviction claim. Neither did they admit to owing $27,100 in unpaid rent. Seeing “no meaningful relationship between the $28,970 judgment and the tenant’s failure to [timely vacate]” allowed the appellate court to determine that the $28,970 amount is an unenforceable penalty.
The trial court’s judgment was reversed; Castros win and Fred loses. See Graylee v. Castro; Case Nos. G057901 and G058409; California 4th Appellate District; Division Three; July 13, 2020: https://cases.justia.com/california/court-of-appeal/2020-g057901.pdf?ts=1596564065.
Lessons / Questions / Issues:
How many disputes have you resolved that require a future payment? Have
you added something extra to motivate a party? Might want to rethink that.
How can you anticipate future damages? Perhaps the mechanism you used
should be inserted into your settlement agreement / stipulation / judgment.
That way, if later contested, a Court can review your algorithms and
spreadsheets to better understand how you arrived at the LD amount.
- Question: Why do Courts have the ability to review LD provisions after the event that triggers the LD payment, to determine if it was, at the time the LDs were contemplated, a reasonable forecast of future damages? Ok so that one might be rhetorical, but still . . .
Stuart A. Lautin, Esq.*
* Board Certified, Commercial (1989) and Residential (1988) Real Estate Law, Texas Board of Legal Specialization
Licensed in the States of Texas and New York