Tenant, not landlord, may enforce illegal lease

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Hon. Richard S. Brown

Although a landlord cannot enforce a residential lease that contains an unlawful attorney’s fees provision, a tenant may, the Wisconsin Court of Appeals held on Dec. 4.

However, the court also held that, when a tenant seeks to prospectively enforce the lease, he reaffirms the lease and the landlord’s right to enforce it as well.

Lease Provisions

In 1995, J. Dale & Gudrun Dawson leased a parcel of property in Washington County to Robert J. & Eileen K. Goldammer, under a written four-year rental agreement denominated a "farm lease." The property includes the residential home of the Goldammers.

Under the lease, the Goldammers had two renewal options of four years each. The Goldammers properly exercised the first renewal option, which extended the lease until 2003.

The second renewal option, should the Goldammers choose to exercise it, would extend the lease until 2007. The lease requires the Goldammers to cultivate the land.

The lease also contains a provision requiring the Goldammers to pay any costs and attorney’s fees the landlord might incur in enforcing the lease (if a residential, rather than commercial lease, this provision would be unlawful).

The Dispute

In August 2000, the Dawsons brought suit requesting a declaration that the lease between the parties was void and terminated by its own terms as a matter of law. The Dawsons maintained that the lease was a commercial, and not a residential, lease, and the Goldammers breached it by failing to cultivate the land and to pay timely rent in July 2000.

Circuit Court Judge Andrew T. Gonring found that the lease was a residential lease, however, that the Goldammers had paid the July 2000 rent in a timely manner, and the question of whether the Goldammers cultivated the property was inappropriate for summary judgment.

Gonring also determined that the parties had entered into an implied stipulation requiring the Goldammers to pay the $1550 monthly rent into an escrow account pending the outcome of the case.

Gonring then sua sponte raised the Wisconsin Supreme Court’s decision in Baierl v. McTaggart, 2001 WI 107, 245 Wis.2d 632, 629 N.W.2d 277. In Baierl, the court held that inclusion of an attorney’s fees provision in a residential lease renders it unenforceable by the landlord.

Relying on Baierl, Gonring held the lease was unenforceable by either party, leaving the parties with a month-to-month tenancy.

The Goldammers subsequently closed the escrow account and withdrew the money they had deposited for rent without any accounting.

The Goldammers then appealed from the court’s order granting the Dawsons’ motion for summary judgment, and the court of appeals reversed in a decision by Judge Richard S. Brown.

No Legal Nullity

The court held that Baierl does not void the entire lease and render it unenforceable by either party, citing the followin
g language from Baierl:

"We do not view the question as whether the lease is void, i.e., a legal nullity, because in such case no party could enforce the lease. Where a statute is intended to protect one party to a contract, that party may seek enforcement notwithstanding the violation of the statute enacted for their protection. Thus, the question in this case is not whether the lease is void. If it were, not even the tenants could enforce the lease."

From this statement, the court concluded, "the prohibition on attorney’s fees clauses is intended to protect tenants, and thus, a tenant could seek enforcement of a lease containing such a clause."

The court reasoned, "To refuse to allow a tenant in this situation to enforce the lease would stand the rationale of the Baierl decision on its head by punishing the class the regulation is intended to benefit and permitting the landlord to unfairly reap the benefit of the clause’s inclusion. We therefore hold that a tenant may seek enforcement of a rental agreement that includes an attorney’s fees provision in violation of ATCP 134.08(3), and the trial court erred when it concluded that the Goldammers could not seek to enforce the lease."

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The Cost of Enforcement

However, the court refused to interpret Baierl as broadly as the Goldammers wanted – permitting them to enforce the lease, but preventing the landlords from asserting any of their rights under it.

The court stated, "the tenants seek to prospectively enforce the lease. The tenants are aware that the attorney’s fees provision is prohibited by the ATCP regulation but nonetheless are opting for specific performance. In so doing, the tenants may not pick and choose which of the provisions they will adhere to in the future and then rely on the rationale in Baierl to prevent the landlord from asserting his or her rights under the lease. By the tenant’s very action, he or she wants enforcement of the lease and is responsible for the terms of the lease. We therefore hold that while a landlord cannot seek damages for abandonment of a lease that has an ATCP violation, a tenant who seeks to prospectively enforce the lease has waived his or her rights pursuant to Baierl in the event of a breach on the part of the tenant. Accordingly, we conclude that by seeking to enforce the lease, the Goldammers are reaffirming the terms of the lease and the Dawsons’ reciprocal right to enforce those provisions."

The court then declined to address various arguments raised by the Dawsons. The Dawsons argued that Baierl should not apply, because the Goldammers breached the lease by removing the money held in escrow. By doing so, the Dawsons argued, the Goldammers elected to void the lease.

The trial court, however, never addressed these issues, inasmuch as the escrow account was closed after the summary judgment ruling. Accordingly, the court of appeals declined to consider the arguments, and limited itself to reversing the trial court’s decision, and remanding the case.

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David Ziemer can be reached by email.