STATE COURT'S RULING CRACKS DOWN ON LANDLORD FEES.

Byline: TERRENCE STERNBERG 

In a stunning defeat for a San Francisco landlord and its rental agent, an appeals court has upheld a decision ordering them to return $1 million in various charges they had unlawfully assessed apartment renters over a four-year period. The decision, handed down in the case of Kraus vs. Trinity Management Services Inc., offers a cautionary tale for landlords statewide.

A group of former renters brought a civil suit alleging that two of Trinity's rental practices violated statutes governing residential leases and constituted unfair business practices. The plaintiffs targeted Trinity's practice of collecting a nonrefundable $100 ``initiation fee'' from every new tenant at the time they signed their lease, and its collection of a liquidated damage deposit equal to one month's rent.

Plaintiffs argued that what Trinity called an initiation fee was in reality a security deposit. Under state law, security deposits from residential tenants cannot be made nonrefundable. The law also restricts the landlord's right to collect security deposits to four specific purposes: to cover losses which result from the tenant's failure to pay rent; to repair damage caused by the tenant; to pay to clean the premises after the lease terminates; and to pay to replace or repair personal property, such as furniture, covered by the lease.

Trinity Management claimed that the initiation fee was not a security deposit because its purpose was to cover expenses incurred before the start of the lease. Trinity also argued that the law applied only to landowners, not rental agents such as itself.

The Court of Appeal rejected both defenses, explaining that the statutory definition of what constituted a security deposit was broad enough to cover almost any advance fee charged by Trinity. Both Trinity's collection of a fee for purposes not allowed under the statute and its attempt to make such fees nonrefundable constituted unfair business practices.

Finally, the court ruled, the law focuses on the nature of the fee collected and not on the identity of the party who collects it. If the fee is unlawful, it makes no difference whether it is collected by the owner or by its agent.

Trinity fared no better on the liquidated damages issue. Liquidated damage provisions are allowed in situations where the actual amount of damages which might result from a party's default would be difficult to calculate. Rather than having to argue later about the amount of damages, the parties may include in their contract a liquidated damage provision in which they agree upon a set amount of damages to which a party will be entitled in the event of default.

Such provisions are frequently included in real estate purchase agreements where the calculation of damages can involve sophisticated expert opinions on real estate values.

Trinity's standard form lease, which apparently was not subject to negotiation, required each tenant to deposit one month's rent, which it then held as liquidated damages in the event the tenant moved out before the lease ended. The first difficulty with Trinity's lease was that the damages suffered by a landlord when a tenant vacates an apartment early are relatively easy to determine. As a result, the court found that this was not the proper situation for the use of a liquidated damage provision.

The second and perhaps bigger problem was that the lease stated that in addition to the liquidated damage deposit, the tenant was also liable for all other damages including all unpaid rent and attorneys' fees.

Trinity was in effect trying to recover the same loss twice, once as liquidated damages and once as actual damages. Here, too, the court found Trinity's approach an overreaching and unfair business practice.

Trinity's loss reflects the fact that both the Legislature and the courts are more protective of residential tenants then they are commercial tenants.

In fact, the statute governing security deposits involved in this case applies only to residential tenants.

Residential landlords, frustrated by the stricter controls they face and the additional limitations imposed by local rent-control ordinances, are sometimes tempted to find new ways to recover what they view as a fair return on their investment. This case serves as a sober reminder of the possible consequences of such efforts.