Lawsuits brought by residents against landlords are often costly and lengthy, have reputational consequences, and are generally unpleasant. The good news is that landlords can incorporate arbitration agreements and class-action waivers in leases in order to keep resident disputes out of the court system.
Under federal law, courts are required to honor and enforce written arbitration agreements according to their terms, absent a legal or equitable ground for revocation of any contract. Congress enacted the Federal Arbitration Act (FAA) to ensure the enforcement of private arbitration agreements. In fact, the Supreme Court refers to the FAA as “a liberal federal policy favoring arbitration agreements.”
As a federal law, the FAA preempts any state law on the same topic. This means, that unless the parties specifically agree that a state’s arbitration law applies, the FAA governs the agreement and not state law. While federal law will govern even if the agreement does not expressly state so, it is advisable that landlords specify in their lease agreements that the FAA procedural arbitration law governs to maximize the benefit of the FAA’s presumption in favor of arbitration.
Courts Favor Arbitration Agreements, But Clarity is Key
Just because arbitration is favored does not mean that every arbitration provision, however positioned or phrased in the lease, will be enforceable. It is important for arbitration agreements to be worded in a clear and unmistakable manner, to avoid any ambiguity between residents and landlords. If the agreement is ambiguous, residents may challenge the provision as oppressive or one-sided, which then may be grounds for invalidity under generally applicable state contract defenses. Therefore, despite the presumption in favor of arbitration, it is best practice for landlords to make arbitration provisions clear, explicit, and unequivocal.
An arbitration agreement provision should be clear, set off, and distinguishable from the rest of the lease and should explain its purpose. The provision should make clear that by signing the lease, residents are agreeing to give up their right to bring a lawsuit in court. Landlords should avoid small font or short single sentence provisions buried amongst a large string of other text. Instead, such clauses should be set apart by using bold, capitalized, and large-sized font, drawing residents’ attention to the clause. For example, the provision should be set out in its own section of the lease and clearly reference arbitration; such as: “ARGREEMENT TO ARBITRATE.”
What About Class-Action Waivers?
Another vehicle for landlords to minimize legal costs related to resident disputes are class-action arbitration waivers in residential leases. A class-action arbitration waiver requires residents to take their disputes to an arbitrator individually, rather than litigating or arbitrating collectively as a group. Under federal law, such waivers are permitted and parties may waive their right to pursue or participate in class-action arbitration.
Effectively, the arbitration agreement (assuming it is not found invalid by a contract defense) would prevent the resident from bringing suit (whether individually or in a class) and the class-action arbitration waiver would prevent the resident from arbitrating as a class with other residents. The end result would be that each resident, individually, would be required to arbitrate any dispute with his or her landlord.
Enforceability Hurdles of Both Arbitration Agreements and Class-Action Waivers
As stated above, arbitration clauses and class-action waivers may be invalidated under principles of general state contract defenses. Under one such state law principle, residents challenging the enforceability of lease provisions may argue the lease is an adhesion contract. Adhesion contracts are often referred to as “take it or leave it” contracts. Residents may argue that leases are “take it or leave it” contracts because they are not given the opportunity to negotiate terms.
However, even if a resident is successful in convincing the fact-finder that a lease is an adhesion contract, it does not mean that such a provision in the lease is necessarily unenforceable. If a court deems a contract to be one of adhesion, before the resident can succeed on its claim that the contract is unenforceable, the court must also conclude that the contract, or its provision, is unconscionable. A contract or term is unconscionable, and therefore avoidable, only where there is a lack of meaningful choice in the acceptance of the challenged provision and it unreasonably favors the party asserting it.
Therefore, to win an enforceability challenge, residents must prove both of these factors. As a practical matter, providing residents with an opportunity to read over the lease agreements, using clear and precise language, and drafting provisions to benefit both parties will put landlords in a better position to defeat any potential enforceability challenges.
Key Takeaways for Landlords
By including arbitration agreements and class-action waivers in residential leases, landlords can limit the ability of residents to bring claims against them in court. Including these provisions can provide quicker and less costly dispute resolution, more privacy and heightened confidentiality, and greater control over resident disputes. A carefully crafted waiver can mitigate class-action suits brought against landlords as well.
In order for these provisions to be enforceable, landlords should make sure they are clear and explicit, give residents a meaningful choice in their acceptance, and do not unreasonably favor landlords. These are important considerations for landlords who wish to keep their court presence to a minimum and to reduce fees and costs. If you decided to include arbitration or class action-waiver provisions in your leases, you should have an attorney review those provisions to ensure they are consistent with any federal and state legal requirements.