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Wisconsin REALTORŪ
August 2001
Volume 17, Number 11
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Legal Matters |
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Illegal Provision Stops Landlord from Enforcing Lease
By Debbi Conrad
Landlords who have leases containing provisions that violate Wis. Admin. Code § ATCP 134.08 should not expect to be able to enforce those leases against their tenants. The Wisconsin Supreme Court recently reversed a Court of Appeals decision and held that a landlord cannot enforce a lease that contains a provision illegal under § ATCP 134.08(3) against the tenant.
The Court of Appeals had found that the illegal provision could be severed from the lease and the balance of the lease could still be enforced against the tenant. A summary of the Court of Appeals decision appears in the September 2000 edition of the Wisconsin
REALTORŪ (see the summary of Baierl v. McTaggart, 2000 WI App 193, 238 Wis. 2d 555, 618 N.W.2d 754 (2000)
online)
This supreme court's decision in Baierl v. McTaggart is being touted in the media and by the Wisconsin Department of Agriculture, Trade and Consumer Protection (DATCP) as a great tenants' rights victory. The consequence for a landlord who includes an illegal provision in a lease is to lose the ability to enforce the entire lease against the tenant. The supreme court found that simply severing the illegal provision and enforcing the rest doesn't send a clear enough message to landlords.
On the other hand, landlord groups are grumbling because the tenants in this case were permitted to breach the lease and receive double damages plus costs and actual attorneys' fees for their trouble. The same groups, however, are warning owners to review their lease forms and delete any provisions that violate § ATCP 134.08.
In this case there are two sides, two viewpoints, and it is difficult to assert that either side is 100 percent right. Clearly, neither party was 100 percent innocent.
The Lease in Baierl Case
The two-page residential lease in the Baierl case was accompanied by several addenda, one which included the following language:
"In the event that [the landlord] shall be obliged to commence legal action in order to enforce the terms and conditions of any portion of this lease and amendment, the tenant shall be liable to [the landlord] for all [the landlord's] costs, disbursements and expenses incurred including, without limitation, reasonable attorney fees incurred."
Wis. Admin. Code § ATCP 134.08 provides: "Prohibited rental agreement provisions. No rental agreement may: . . . . (3) "Require payment, by the tenant, of attorney's fees or costs incurred by the landlord in any legal action or dispute arising under the rental agreement. This does not prevent the recovery of costs or attorney's fees by a landlord or tenant pursuant to a court order under ch. 799 or 814, Stats." There seems to be no dispute that the lease addendum language violates this regulation.
The Tenants' Breach
The lease term was from August 1, 1996, to July 31, 1997. In a letter dated November 29, 1996, the tenants notified the landlord that they were terminating the lease effective February 1, 1997. Since the tenants acted unilaterally to end their lease term early, in breach of the lease and without paying the balance of the rent due under the contract, the tenants clearly were in the wrong.
The landlord unsuccessfully tried to re-rent the apartment, and then withheld the security deposit for unpaid rent and sued the tenants to enforce the lease terms. The landlord never implemented the illegal provision and only sought the minimal attorney fees authorized in the statutes.
The tenants alleged that the entire lease was void because of the illegal provision - and that the landlord could not retain their security deposit under a void lease. The trial court agreed and awarded the tenants double damages - twice the $1,790 security deposit less some expenses. On appeal to the Wisconsin Court of Appeals, the landlord argued that, per the holding in the Simenstad v. Hagen case, the prohibited clause should have been severed from the lease because it was a non-essential clause which could be severed without defeating the primary purpose of the parties' agreement. In other words, the lease should be read as if the illegal provision has been deleted or voided, leaving the balance of the lease in place. The Court of Appeals agreed, but on appeal to the Wisconsin Supreme Court, this decision was overturned. In doing so, the Wisconsin Supremem Court issued a majority opinion, a concurring opinion, and a dissenting opinion.
The Majority Opinion - Consumer Protection Controls
In the majority opinion, the fact that the landlord had violated the consumer regulations protecting tenants upstaged the fact that the tenants breached the contract and caused monetary losses for the landlord. The issue in the case became not which party was the less in the wrong but rather whether the landlord could enforce the lease.
As the court noted, in common law the severability rule is conditional and must take into account whether the offending provision is prohibited by statute, or in this case, an administrative regulation. The fact that the provision violates the tenant rules, the court stated, can prevent the application of the severability rule. At the same time, the court also found that the tenants' position that any time there is a violation of the consumer protection rules the entire contract is automatically void also sweeps too broadly. If the lease was void neither party could enforce it because it would not exist. The court found that the question was not whether the lease was automatically void, but rather a question of enforceability in light of the intent of the rental practice rule at issue.
The inclusion of the offending provision was undeniably illegal and constituted an unfair trade practice - this is clear from the administrative code and the statutes. However, § ATCP 134.08 itself does not indicate whether a violation makes the entire lease unenforceable or whether the illegal provision can be severed. The court turned to the subject matter, legislative history, and object of the regulation for further insight into DATCP's intent in promulgating the rule.
Landlord-tenant relations, the court observed, have been viewed as an area filled with consumer protection concerns often stemming from the tenant's limited bargaining power. DATCP held hearings in the late 1970s where it heard testimony that residential leases are usually not negotiated contracts but rather are preprinted forms, and that objectionable clauses in these leases would intimidate tenants. Tenants would give up their legal rights, even if the clauses were not applied or enforced. Section ATCP 134.08(3) was enacted to prevent situations where tenants give up their lawful rights out of fear that they will be forced to pay the landlord's litigation expenses.
The court viewed this as critical because private enforcement actions are crucial for the preservation of tenants' legal rights. Intimidating tenants from taking action to enforce their rights impedes the overall legislative and regulatory scheme for consumer protection. Thus the court concluded that enforcement of a lease with the prohibited provision would undermine the goals of § ATCP 134.08(3). Landlords could insert prohibited clauses at will if they know that the worse that is going to happen is that the clauses will not be enforced and will be severed from the rest of the rental agreement. The intent of the prohibition is to stop landlords from engaging in the listed unfair trade practices. That is, to stop them from using the prohibited provisions instead of allowing them to intimidate tenants.
Thus the court held that the inclusion of the illegal provision made the lease unenforceable by the landlord. Even though the tenants failed to live up to the terms of their bargain, the controlling factor is the intent of DATCP. A landlord who includes a provision specifically prohibited by Wis. Admin. Code § ATCP 134.08(3) in a residential lease may not enforce the terms of that lease.
The Concurring Opinion - Quantum Meruit May Still Provide Relief for Landlords
The concurring opinion urges landlords across the state to review their rental agreements and ensure that they comply with § ATCP 134.08 to avoid having their agreements inadvertently invalidated.
The concurring opinion also suggests that a landlord in these circumstances may still pursue an equitable, non-contract remedy like quantum meruit - a claim for the reasonable value of the services rendered. A quantum meruit claim is based upon an implied contract that the tenant would pay the landlord as much as was deserved for services or materials provided; in this case, for the use of the rental unit. In the absence of such a payment, the tenant is unjustly enriched because he received goods and services without paying for them. This theory may allow a landlord to recover even when a contract is unenforceable.
In the Baierl case, quantum meruit was applied by the circuit court to allow the landlord to receive the rent up through the time the tenants vacated the unit.
The Dissenting Opinion - The Legal "Gotcha" Game
The dissenting opinion observed that the majority opinion "allows the tenants in this case to use the code not as a shield against unfair trade practice by their landlord, but as a sword to escape legal responsibility for breaching their lease, and worse, as a means of enriching themselves in the process." The tenants were allowed to intentionally walk out of their lease more than six months early without liability for the breach. Plus, they received double the security deposit, costs and actual attorneys' fees as damages. The tenants' attorney apparently reviewed the lease to find a way to avoid liability for the tenants, found the prohibited provision, and used it to achieve this result. In the process, the court discounts the common law of severability even though there is nothing in the landlord/tenant statutes or rules that requires that result.
The tenants caused a monetary loss for the landlord and did not suffer a monetary loss themselves. There was no financial loss as a result of the inclusion of the prohibited provision in the lease - the tenants probably did not even know that the provision was there.
Landlords Must Review Their Leases
The majority's decision may lead Wisconsin courts to reach similar results whenever a prohibited provision appears in a lease. The decision does not give a black and white rule for dealing with prohibited provisions in leases-there is no holding that the inclusion of a prohibited provision automatically makes the whole lease unenforceable against the tenant. However, there could be a tendency for courts to follow the reasoning of the Baeirl decision, conclude that a provision may intimidate tenants, and then hold that the lease is unenforceable against the tenant. Any good attorney hired to defend a tenant will scour the rental agreement to look for illegal provisions to absolve the tenant of liability, despite whatever breach the tenant may have actually committed.
The message for landlords is clear: take your leases and rental agreements to your attorney. Any provisions that violate § ATCP 134.08 must be removed. It may also be wise to make sure that there are no other provisions that violate other ATCP 134 rules. The ATCP 134 rules can be found at
www.legis.state.wi.us/rsb/code/atcp/atcp134.pdf
The legislative history of all of the ATCP 134 rules is based upon strong consumer protection concerns that may win out over contract law in light of this decision.
A copy of the Wisconsin Supreme Court decision in this case, Bairl v. McTaggart, 201 WI 107 (2001) can be found at
www.courts.state.wi.us/sc/opinions/98/pdf/98-3329.pdf
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Best of the Legal Hotline
By Debbie Conrad & Tracy
Rucka
The following questions were recently asked of the Legal Hotline:
| Q. Clarification of rental weatherization requirements. A broker is listing a commercial property with one rental unit above it. Does this need a rental weatherization certificate? |
| A. Rental weatherization will be required for the rental unit but not the commercial property, assuming that the rental unit is 50% or less of the total floor area of the building. A certificate will not be required for the rental unit if a certificate was previously issued for the unit. A certificate also will not be required for the rental unit if the building was constructed after December 1, 1978 (building containing up to two dwelling units). A certificate also is not required for any building containing more than two dwelling units if it was constructed after April 15, 1976.
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| Q. The WRA's Real Estate Condition Report (RECR) forms have been modified to include an entry for "Land sold with the property has been valued under Wis. Stat. § 70.32(2r) (use-value assessment). Please explain. |
| A. As matter of practice, REALTORSŪ should advise all sellers of agriculture land that they must disclose to buyers if the land being sold is assessed under the use-value system. Although this will typically apply only to farmland, the disclosure has been included on all the WRA RECR forms to ensure that the seller's disclosure obligation will be met. The disclosure is on Zip Forms now and is in the process of being added to hard copy RECR forms.
The use-value assessment of farmland is essentially a tax break for owners of agricultural land. Rather than assessing the farmland based on its fair market value, the use-value assessment assesses farmland based on its agricultural productive value. The program was intended to allow farmers to continue farming their land without incurring significant tax burdens due to the increased value of their land.
A penalty is assessed to any person who changes the use of land assessed under the use-value system to a non-agricultural use. The penalty is equal to the difference between the property taxes that would have been levied on the land if the land had been assessed at fair market value and the property taxes levied on the land for the last two years that the land had been valued under the use-value system. The penalty is not triggered when the property is sold, but rather whenever someone "changes the use" of the property. Because this penalty can be substantial and have an impact on someone's decision to purchase the land or the price they are willing to pay for it, sellers are required to disclose to prospective buyers that the land is assessed under the use-value system.
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| Q. Notice of sex offender registry. Are sellers required to give the notice and contact information relative to the sex offender registry? Does this apply to FSBO sellers as well as sellers assisted by brokers? Should the buyer be notified by the broker or by the seller about sex offender registry? |
A. The language of Wis. Stat. § 706.20 applies to all sellers and provides as follows:
- Except as provided in sub. (2), an owner of an interest in real property has no duty to disclose to any person in connection with the sale, exchange, purchase or rental of the real property any information related to the fact that a particular person is required to register as a sex offender under s. 301.45 or any information about the sex offender registry under s. 301.45.
- If, in connection with the sale, exchange, purchase or rental of real property, a person requests of an owner of an interest in the real property information related to whether a particular person is required to register as a sex offender under s. 301.45 or any other information about the sex offender registry under s. 301.45, the owner has a duty to disclose such information, if the owner has actual knowledge of the information.
- Notwithstanding sub. (2), the owner is immune from liability for any act or omission related to the disclosure of information under sub. (2) if the owner in a timely manner provides to the person requesting the information written notice that the person may obtain information about the sex offender registry and persons registered with the registry by contacting the department of corrections. The notice shall include the appropriate telephone number and Internet site of the department of corrections.
In other words, a seller has no duty to disclose information about sex offenders in connection with the sale of the property unless the seller is asked. If asked, the seller must disclose any information that the seller actually knows. If the seller instead gives the person making the inquiry the designated telephone number and Internet address for the Department of Corrections, the seller is immune from liability related to the disclosure of the requested information about sex offenders.
Including the sex offender disclosure language in the agency disclosure forms protects
REALTORSŪ from liability with respect to the buyer. Putting the disclosure language in the real estate condition reports, a document coming from and signed by the seller, protects the sellers from liability.
Notice: You may obtain information about the sex offender registry and persons registered with the registry by contacting the Wisconsin Department of Corrections on the Internet at
http://www.widocoffenders.org
or by phone at 877-234-0085.
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| Q. If a transaction is not going to close and parties do not agree on disbursement of earnest money and do not sign a Cancellation Agreement and Mutual Release (CAMR), can the property be re-marketed? If another offer is accepted after the scheduled closing date on first offer but no CAMR has been signed, could seller proceed to close on the second offer? |
| A. Although it may appear to be clear that the parties to the original offer will not meet their obligations under the contract, the seller needs to be sure that the first buyer does not retain some sort of claim with respect to the first offer. This assurance can best be obtained if the parties execute a cancellation agreement and mutual release. If the parties refuse to sign a CAMR, the seller may obtain an attorney's opinion that the offer has terminated before accepting another offer as primary and proceeding with the sale of the property to the second buyer.
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| Q. Is it a requirement when an offer is presented that the offer be presented to a seller and returned to the cooperating office, so they have evidence that the offer was actually presented? |
| A. Wis. Admin. Code § RL 24.13(4) provides guidance about a listing agent's proper response once an offer to purchase has been presented to the seller: "NOTIFICATION OF ACTION TO BUYERS. Licensees shall promptly inform prospective buyers whether the seller has accepted, rejected or countered their written offer to purchase, and shall immediately provide a written statement concerning the date and time when an offer was rejected or that an offer had expired without acceptance when such a statement is requested by a prospective buyer, a buyer's agent or a selling broker."
Pursuant to § RL 24.13, a licensee or the buyer may request written information relating to the seller's response to the offer to purchase. Upon receipt, the listing broker must immediately provide a written reply. Notations on the offer to purchase may be used to fulfill this requirement. If the listing agent does not respond to the inquiry, the licensee may request the information from the supervising broker or owner of the company. If no written response is given, a complaint against the listing office may be filed with the Department of Regulation and Licensing.
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| Q. Can a licensee have advertising offering a $100-$200 rebate at closing off a listing commission for properties that are listed during a certain time period? |
| A. Incentives may be offered to sellers and/or buyers to induce them to sell or purchase real estate. Seller or buyer incentives can be offered in any amount as cash or as an item of personal property such as a home warranty plan, a savings bond, a gift certificate, an appliance or some other item. Such incentives must be clearly documented in advance - prior to closing. The parties must have a clear and thorough understanding of the incentive's terms and conditions. This advance documentation of the party incentive is necessary to establish that the incentive is not a fee-splitting arrangement with a non-licensee, which would be illegal under Wisconsin law.
Standard of Practice 12-3, which interprets Article 12 of the Code of Ethics, provides that:
"REALTORSŪ shall be careful at all times to present a true picture in their advertising and representations to the public. ..." Standard of Practice 12-3 states "The offering of premiums, prizes, merchandise discounts or other inducements to list, sell, purchase, or lease is not, in itself, unethical even if receipt of the benefit is contingent on listing, selling, purchasing, or leasing through the
REALTORŪ making the offer. However, REALTORSŪ must exercise care and candor in any such advertising or other public or private representations so that any party interested in receiving or otherwise benefiting from the offer will have clear, thorough, advance understanding of all the terms and conditions of the offer. ..."
This standard assumes the omission of even one detail will cause the advertisement to present less than a true picture. This may be disputable should someone bring an ethics complaint concerning an ad for party incentives that does not contain every detail - the issue will be whether there is a true picture of the offered incentive in the ad. An ad that states, "see broker for details," however, is like a red flag waving in the face of a competitor who lives by the Standards of Practice - it may be seen as an admission that less than a true picture has been disclosed in the ad.
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Office
Technology Policy Manual Now Available to Members
The WRA has completed development of the first edition of an Office
Technology Manual. This tool will assist brokers in addressing the use
of technology systems by employees and agents. The Office Technology
Policy Manual begins where Legal Update 01.05 left off, focusing on
the implantation of internal policies to maximize productivity and
minimize potential liability. The manual covers a wide range of issues
related to employee and agent use of e-mail and web sites. Checklists
are provided as a tool to ensure compliance with company policies.
like any other generic manual, the Office Technology Policy Manual
should be adapted to correspond with each office's unique policies and
procedures.
The Office Technology Policy Manual is being offered as a member
benefit. The manual will be able to be downloaded from the WRA Web
Site as a Word document or as a text file at www.wra.org/Resources/resource_pages/ecommerce_resources.htm.
This is a member's only document, so you will need to log in to access
it.
This is the first addition of the Office Technology Policy Manual.
The Manual will be revised and updated based upon legal and regulatory
changes as well as your comments and suggestions. Contact Rick
Staff with your comments and suggestions.
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