Source: https://www.in.gov/judiciary/opinions/previous/archive/100802.ewn.html
Timestamp: 2019-04-24 17:55:22+00:00

Document:
Sheree Demming ("Landlord") entered into a one-year lease with six tenants. The tenants notified Landlord of their intent to abandon the premises before the lease term had ended and then failed to pay the remaining rent. Landlord filed suit. Two of the tenants, Gershin and Kogod, settled with Landlord and were dismissed from the action.See footnote 1 After a bench trial, the court awarded Landlord $3,250.00 in unpaid rent, $3,019.08 in other damages, $5,837.00 in late fees and $258.60 in expenses. With a credit for the $4,182.22 settlement and a $1,300.00 security deposit, the trial court entered a judgment of $6,882.46 in damages plus $4,909.40 in attorney fees and court costs against the four remaining tenants, Burten, Aronson, Abramson and Sherman ("Tenants").See footnote 2 Tenants now appeal from the award of late fees.
1. Whether the trial court erred when it awarded a per diem late fee for the period between expiration of the lease term and the date of judgment.
2. Whether the late fee provision is enforceable as liquidated damages.
3. Whether Landlord is entitled to appellate attorney fees.
to pay $4,182.22, and Landlord dismissed them and their guarantors as defendants. At trial on April 12, 1996, Tenants admitted their breach of the lease but disputed Landlord's damage claims, and trial was held on damages. After trial Landlord dismissed the remaining guarantors without prejudice. On August 23, 1996, the court entered a judgment against Tenants which totaled $11,791.86 plus court costs.
We are asked to decide whether the late fee provision in the lease is a valid liquidated damages clause or an unenforceable penalty. A typical liquidated damages provision provides for the forfeiture of a stated sum of money upon breach without proof of damages. General Bargain Ctr. v. American Alarm Co., 430 N.E.2d 407, 411 (Ind. Ct. App. 1982). Liquidated damages provisions are generally enforceable where the nature of the agreement is such that when a breach occurs the resulting damages would be uncertain and difficult to ascertain. Id. However, the stipulated sum will not be allowed as liquidated damages unless it may fairly be allowed as compensation for the breach. Sterne v. Fletcher Am. Co., 204 Ind. 35, 50, 181 N.E. 37, 43 (1932).
sum sought to be fixed as liquidated damages is grossly disproportionate to the loss which may result from the breach, the courts will treat the sum as a penalty rather than as liquidated damages. Czeck, 143 Ind. App. at 463, 241 N.E.2d at 274 (citing Beiser v. Kerr, 107 Ind. App. 1, 8, 20 N.E.2d 666, 669 (1939). In determining whether a stipulated sum payable on a breach of contract constitutes liquidated damages or a penalty, the facts, the intention of the parties and the reasonableness of the stipulation under the circumstances of the case are all to be considered. Nylen, 535 N.E.2d at 184. The distinction between a penalty provision and one for liquidated damages is that a penalty is imposed to secure performance of the contract and liquidated damages are to be paid in lieu of performance. 9 I.L.E. Liquidated and Exemplary Damages § 101 at 256. Notwithstanding a plethora of abstract tests and criteria for the determination of whether a provision is one for a penalty or liquidated damages, there are no hard and fast guidelines to follow. Zalweski v. Simpson, 435 N.E.2d 74, 77 (Ind. Ct. App. 1982) (citing Skendzel v. Marshall, 261 Ind. 226, 232, 33, 301 N.E.2d 641, 645 (1973), cert. denied, 415 U.S. 921 (1974)). The question whether a liquidated damages clause is valid, or whether it constitutes a penalty, is a pure question of law for the court. Nylen, 535 N.E.2d at 178.
so substantial and burdensome as to compel compliance with the terms of the lease,See footnote 3 rather than to compensate the landlord for the actual damages likely to result from the breach, the provision is not compensatory but punitive and is unenforceable as a liquidated damages clause.
The trial court awarded $5,837.00 in late fees. Tenants contend that these fees are greatly disproportionate to Landlord's actual loss due to late rental payments and, specifically, that the trial court erred when it awarded late fees from the end of the lease term to the date of judgment, a period of 374 days. They argue that late fees should run only from June 1, 1994, when Tenants first failed to pay rent on time, to August 14, 1995, the end of the lease term, a period of 75 days.
late fees were assessed only once against each late payment and not on a per diem basis.See footnote 4 Id.
a rent payment is untimely. The "late fee" which attaches to a late payment implies an expectation that the payment is forthcoming.
However, a second breach occurs where, as here, the rent is not only late but also unpaid. We cannot define the point in every case at which late payment becomes non- payment. However, we can say that late payment becomes nonpayment when, as here, the lease term ends, the tenants are no longer in possession of the premises, the rent remains unpaid, the parties no longer have a landlord-tenant relationship and the landlord has no further expectation of voluntary payment. At that point, the landlord's damages are no longer uncertain or difficult to ascertain, and the continued assessment of liquidated damages in addition to actual damages for the same unpaid rent becomes a penalty.
The late fee provision allows for a late fee of "1% of monthly rent due, per day, including Saturday and Sunday." Under that provision, Landlord claimed and the trial court awarded $13.00 per day in late fees.See footnote 6 At that rate, the provision would allow Landlord to recover $975.00 in late fees to the end of the lease term.See footnote 7 Tenants contend that this provision operates as a penalty and punishes them with an interest rate of 365 percent per year on unpaid rent, noting that such a rate far exceeds the maximum allowable rate for consumer credit transactions under the Uniform Consumer Credit Code. See Ind. Code § 24-4.5-2- 201. Tenants also contend that a charge of one percent per day for delinquent rent is disproportionate to the losses actually suffered by Landlord from the breach.
amounted to a $6.00 per day late fee, although the trial court only awarded $362.00.See footnote 8 Id. at 184. The landlord in Nylen testified that a tenant's failure to pay rent resulted in extra work for management in sending notices, preparing a weekly rent delinquency report, calling the tenant, and using and preparing additional cash journals. Id. Thus, the late fees were for the administrative cost actually incurred by the landlord as a result of the tenants' breach.
Tenants contend that in this case Landlord failed to prove that the one percent per day late fee approximates Landlord's actual loss from the late payment of rent. However, as we have already noted, one feature of a liquidated damages provision is the forfeiture upon breach of an agreed sum without proof of damages. General Bargain Ctr., 430 N.E.2d at 411. Here, the breach is undisputed, and certain damages are inherent in the nature of the breach.
severity of this interruption is a function of both the amount of rent owed and the duration that rent remains past due. The greater the amount of late rent and the longer the rent remains past due, the greater the adverse impact on the landlord's business. Thus, a late fee based on a percentage of unpaid rent and on the duration of the delinquency corresponds directly with the magnitude of the breach.
We do not consider a one percent per day late fee to be excessive. If the rent were only a few days late, the late fee would be modest. While here the total of $975.00 in late fees might seem high, it represents 75 days of late rent. This accumulation of late fees occurred only because the tenants repudiated the lease and committed an anticipatory breach. We cannot say under the circumstances of this case that such a fee is grossly disproportionate to Landlord's loss resulting from 75 days of delinquent rent or that the fee is an unenforceable penalty as a matter of law. Thus, we hold that the per diem late fee provision to the end of the lease term is not unreasonable.
Landlord argues that she is entitled to appellate attorney fees based on a paragraph in the lease which provides that the Tenants are liable for the payment of Landlord's "attorney fees." We agree. See Nylen, 535 N.E.2d at 185 (disparity in bargaining power between landlord and tenant does not bar the award of appellate attorney fees). However, Landlord is only entitled to recover the amount of appellate attorney fees that can be attributed to that portion of the appeal upon which she has prevailed. Accordingly, we remand and direct the trial court to hear evidence and make a determination on that issue.
Footnote: 1 Although Gershin and Kogod were dismissed in the trial court, their names appear in the caption of the record and briefs filed on appeal. All parties of record in the trial court shall be parties on appeal. Ind. Appellate Rule 2(B). However, Gershin and Kogod were unaffected by the trial court's judgment and have no interest in this appeal. The parties should have moved to amend the caption.
Footnote: 2 The trial court made an arithmetic error when it calculated the damage award in its August 23, 1996, order. The court properly listed the damages and the corresponding amounts, but incorrectly computed the total amount due. The court stated that the Tenants were responsible for $3,683.38 plus attorney fees of $4,909.40, $3,199.08 less than the actual judgment. Tenants concede that they agreed to the correction of these errors at the hearing on their motion to correct error. That agreement was reduced to a final order on February 2, 1997. Thus, we conclude that the nunc pro tunc entry correcting the arithmetic error is valid. However, we agree with Tenants that the trial court's ruling on their motion to correct error was not timely and is a nullity. See Ind. Trial Rule 53.3(A).
Footnote: 3 A penalty is defined as, "the sum a party agrees to pay in the event of a contract breach, but which is fixed, not as a pre-estimate of probable actual damages, but as a punishment, the threat of which is designed to prevent the breach." Black's Law Dictionary 1133 (6th ed. 1990).
Footnote: 4 The late fee provision in Gigax provided that a late fee of $.05 for each dollar of overdue rent could be charged. Gigax, 656 N.E.2d at 859 n. 1.
Ind. App. 497, 506-07, 336 N.E.2d 833, 838-39 (1975). In this case, because Landlord's loss of use of rental income was included in the late fee, Landlord's recovery of prejudgment interest on unpaid rent would have been limited to the period from the end of the lease tern to the date of judgment. However, the question of prejudment interest was not raised by either party in the trial court or on appeal, and that issue is not before us. Regardless, because the question of prejudgment interest was not raised by either party in the trial court or on appeal, the issue is not before us.
Footnote: 6 We believe the late fee provision is ambiguous. It can also be read to mean that the late fee equals 1% of rent due, i.e., that the late fee increases as the amount of unpaid rent accumulates each month. However, Landlord interpreted the clause to mean that the late fee equals 1% of the monthly rent or a flat $13.00 per day, and judgment was entered on that basis. Our decision adopts that interpretation.
Footnote: 7 This sum represents the period from June 1, 1995, through August 14, 1995 (75 days x $13.00 = $975.00).
Footnote: 8 In Nylen, one of three tenants vacated the property and refused to pay rent beginning in February, 1987. The tenant's former roommates continued to pay their portion of the rent in February and March. Id. On March 13, 1987, the remaining tenants vacated the premises upon court order. Id. Eventually, all three tenants were ordered to pay damages, including the balance of unpaid rent for February through July and late fees of $362.00. However, neither the trial court nor our court indicated how the specific sum of $362.00 was reached. We adduce that the trial court only charged the $2.00 per day, per person late fee against the tenant who initially breached the lease which calculates to be $362.00 (181 days of unpaid rent from February until July x $2.00).

References: v. 
 v. 
 v. 
 § 101
 v. 
 v. 
 § 24