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#9 of Top 10 Ways UDR is Illegally Cashing In on Its CA Tenants: Liquidated Damages Clauses

|Includes: UDR, Inc. (UDR)

#9 

UDR USES LIQUIDATED DAMAGES CLAUSES IN THEIR LEASE AS A WAY OF COLLECTING DOUBLE RENT ON APARTMENTS

What the Hell Are “Liquidated Damages” Anyway??

A liquidated damages clause in a Lease establishes in advance the monetary damages the tenant will owe if they breach the Lease. In another words, if a tenant leaves or is evicted before the end of their Lease, the tenant agrees to pay the landlord a set amount.

The reason why California outlawed these liquidated clauses for residential lease agreements is two-fold:

(1)

The Courts were seeing Landlords (like UDR) perverting the true purpose of a liquidated damages clause.

A liquidated damages clause is ONLY to be used when it is impossible to determine the harm that could result from a breach of the contract. 

It’s not impossible for UDR to determine the harm that could result from a breach of their Lease.  They know (within a reasonable variable) how long it takes to fill a vacancy; that variable is a critical part of their sales projections! 

They’ve been in this business since 1972, folks, they have charts out the wazoo with every possible marketing trend, economic cycle, geographic variable, etc.  Just google UDR 10-K and see what we're talking about.

UDR wants you to believe that it’s “reasonable” that it could take them  2-1/4 months to re-lease your apartment if you leave before the end of your Lease.   Listen, if it took UDR 68 days to fill a vacancy – they’d be out of business long ago and they sure wouldn’t be making $75 million per year in Orange County alone. 

According to UDR’s own financial statement (10-Q), as of March 31, 2009, it owned 4,067 apartments in the Orange County market with an average occupancy rate of 94.4%.  (See:  http://biz.yahoo.com/e....)

That means that in the Orange County market of 14 properties (their financials say 13, but you verify 14 on their website) only 204 apartments are vacant at any given time, an average of 14 apartments per complex.  So, in order for them to maintain even that pretty low occupancy rate for UDR, an apartment can only stay vacant for approximately 18 days.

The bottom line is you’re being screwed to the max.

Furthermore, The Securities & Exchange Commission would never have allowed them to go public and be traded on the New York Stock Exchange if they were clueless about the turnover rate!  The SEC requires a sustained history of financial statistics as well as a proven method of quantifying future financial earnings.

(2)

The Courts were ALSO seeing Landlords (like UDR) inappropriately using a liquidated damages clause as a penalty or fee provision.

The law states,Where a liquidated damages clause is seen as a penalty rather than an effort to agree upon a reasonable amount of estimated damages, the clause will not be enforceable.”

~ ~ ~ ~ ~

Let’s have a look at a sample liquidated damages clause from the UDR Residential Lease Agreement:

Paragraph 37(a), entitled,  “Liquidated Damages for Landlord’s Lost Rent and Additional Reletting Costs.”

Here we go:

For this example, we’re going to say that the tenant’s rent is $1,600.

UDR Lease Sentence #1:  In the event this Lease is terminated early due to Resident’s breach, Resident shall pay Landlord the sum of $3,600 (not to exceed 2-1/4 times the monthly rent due hereunder) as liquidated damages to cover Landlord’s resulting lost rent and additional reletting costs. 

Red Flag:  UDR states it in the form of a “penalty” for breach of contract by saying, “In the event this Lease is terminated early due to Resident’s breach [penalty for breach], Resident shall pay Landlord  … [the penalty sum].  Can’t do it – bad UDR.

Red Flag:  Since it’s not impossible for UDR to determine the “lost rent” and “additional reletting costs” as discussed above, this clause is VOID.

UDR Lease Sentence #2:  In accordance with California Civil Code section 1671, Resident and Landlord agree that it is impractical and impossible to determine what Landlord’s actual lost rent and additional reletting costs will be if the Lease is terminated, because it cannot be predicted when during the Lease term resident may breach, what the rental market conditions will be at that time, and how long the Premises may stay vacant despite Landlord’s good faith efforts to relet the same. 

Red Flag:  UDR sets a perfect example of why they changed California law like they did.  They intentionally misrepresent and restate the law by presenting it as a fact, not as a mutual agreement opportunity when it says:

“In accordance with California Civil Code section 1671, Resident and Landlord agree that it is impractical and impossible to determine ….”  

This just pisses us off because UDR is capitalizing on the ignorance of tenants about the law.  That’s not what the law says.

The law says: 

“Any provision in a contract liquidating damages for the breach of the contract in a lease of real property for use as a dwelling by the party or those dependent upon the party for support is VOID …  

Except that the parties to such a contract MAY AGREE  (it doesn’t say “they DO agree” or “HAVE to agree”) therein upon an amount which shall be presumed to be the amount of damage sustained by a breach thereof, when, from the nature of the case, it would be impracticable or extremely difficult to fix the actual damage.”

Unfortunately, UDR assumes their tenants are stupid and frankly, we think that assumption is going to cost them a lot of money.  It has been and will continue to be a grave error of judgment on their part. 

Did you know that in 2006, a REIT (Real Estate Investment Trust) just like UDR, was sued for the improper assessment of liquidated damages that resulted in a $1.6 million verdict against the REIT.  You wants to sign up?   

The very act of UDR intentionally creating a scenario in their Lease whereby they are earning double rent should be prosecuted.  And UDR should be forced to reimburse every tenant it has ever stolen money from under this clause.  They should also be reported to the Securities & Exchange Commission.  We think we’ll handle that one.

Can anyone say “class action lawsuit”????

Red Flag:  Again, since it’s not impossible for UDR to determine the “lost rent” and “additional reletting costs” this clause is VOID as explained above.

By the way, the Orange County Leases have a footnote at the bottom of each page that says, “California Version 2007.”  So, they know that (1) Landlord-Tenant law differs from state to state; and (2) what the California law is and they don’t give a rip.  

Coming up next … a 2004 California case decided that late fees were also illegal due to the same reasoning as above.  See our next post.

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