Vol. 76, No. 3, March 2003

Illegal Provisions Void Entire Lease

by Thomas L. Doerr Jr.

The Wisconsin Supreme Court in 2001 in Baierl v. McTaggart opined that when a residential lease includes a provision that violates the Wisconsin Administrative Code, the landlord may not enforce the remaining provisions of the lease. Section ATCP 134.08(3) prohibits, as an unfair trade practice, the inclusion of any clause requiring tenants to pay the landlord's attorney fees and costs incurred when enforcing the lease. Wisconsin courts have long acknowledged an inherent inequality in the bargaining power between landlords and tenants in residential leases. Section ATCP 134.08 attempts to alleviate the tenants' limited bargaining power.

Baierl v. McTaggart: Facts and Procedural History

In July 1996 the McTaggarts signed a residential lease with Baierl as their landlord. Under the lease, the McTaggarts agreed to rent an apartment owned by Baierl for one year, from Aug. 1, 1996 to July 31, 1997. The lease contained a provision reportedly requiring the tenant to indemnify the landlord for all costs and attorney fees incurred by the landlord in enforcing the lease. This provision was in direct violation of section ATCP 134.08(3).

In November 1996 the McTaggarts informed Baierl that they would be vacating their apartment in January 1997, several months before the lease expired, because of employment reasons. In January the McTaggarts vacated the apartment and instructed Baierl to deduct the January 1997 rent from their security deposit. Before the McTaggarts departed, Baierl deducted costs for other damage to the apartment and the January rent from their security deposit. Unable to subsequently rent the apartment, Baierl withheld the remainder of the deposit and sought to enforce the lease terms. After unsuccessfully demanding payment, Baierl sued to collect damages under the lease.

The McTaggarts counterclaimed that Baierl wrongfully retained their security deposit to satisfy rent for which they had no liability because the lease was void due to the illegal provisions. They sought double damages, costs, and attorney fees under Wis. Stat. section 100.20(5). The trial court concluded that because the lease included the provision requiring the McTaggarts to pay attorney fees and costs, the entire lease was void. As a consequence of the lease invalidation, the court awarded damages to the McTaggarts in the amount of the security deposit remaining after the deduction of the January 1997 rent. The court then doubled the damages and awarded the McTaggarts reasonable attorney fees.

Baierl appealed. In a divided decision, the court of appeals reversed the trial court. The majority explained that under common law, a contract containing an illegal provision may be enforceable if severance of the illegal provision would not defeat the contract's primary purpose. The court concluded that the purpose of the lease could still be satisfied absent the illegal provision. The court examined the equities of the case and determined that because the McTaggarts breached the lease, equity favored the landlord.

Ultimately, the case reached the Wisconsin Supreme Court. In a July 11, 2001, decision the court agreed that the inclusion of the attorney fee provision was a violation of Wisconsin law, and the sole question before it was whether the remaining items of the lease may be enforced. The court addressed two positions: 1) whether the "rule of severability" permits a contract to survive if an illegal clause can be severed from the contract without defeating the contract's primary purpose; and 2) whether a violation of an administrative regulation results in the unenforceability of the entire contract. The court concluded that both parties' positions failed to consider the principle that ultimately was controlling: the intent underlying the statute or regulation that was violated.

The Ultimate Decision

The Wisconsin Supreme Court stated that ultimately it is the intent underlying the regulation that dictates whether a clause is severable and whether the inclusion of the clause renders the entire contract unenforceable. The court reviewed the text, the history, and the object of section ATCP 134.08 to determine the regulation's underlying intent. The court concluded that enforcement of a lease containing a prohibited provision would not only fail to advance the goals of the Wisconsin Department of Agriculture, Trade and Consumer Protection (the DATCP) but would completely undermine them. The court stated that section ATCP 134.08 was enacted because the DATCP sought to eliminate the intimidation of residential tenants by landlords, and the inclusion of such an unenforceable clause poses a great threat.

The court noted that if it were to allow the clause to be severed and permit the remainder of the lease to be enforced, neither of the aforementioned goals would be advanced. The court believed that if it permitted the landlord to enforce the lease, despite the fact that it included an illegal provision, landlords would continue to include such provisions in their leases with the knowledge that courts merely would sever the clause and enforce the remainder of the lease. Thus, the goal of eliminating tenant intimidation would be completely frustrated. Allowing the clause to be severed and the remainder of the lease to be enforced by the landlord also would undermine the effectiveness of private enforcement of tenant rights.

Conclusion

In sum, a landlord who includes a provision specifically prohibited by the Wisconsin Administrative Code in a residential lease will be prohibited from enforcing the remaining terms of that lease. Having examined the underlying intent of section ATCP 134.08(3), the Wisconsin Supreme Court has determined that allowing the enforcement of such a lease would fail to advance the overall intent of the regulation and would completely undermine the objectives of the DATCP and its attempt to bring equality to residential landlords and tenants. All residential leases should be reviewed to ensure that they comply with Wisconsin law and do not result in a void lease.

Wisconsin Lawyer