Graylee v Castro

Facts: A residential tenant enters into an occupancy agreement with the landlord agreeing to pay rent monthly. Several years into the tenancy, the landlord serves the tenant with a Three-Day Notice to Pay Rent or Quit claiming delinquent rent. The tenant does not pay the amount demanded or vacate. The landlord files an unlawful detainer (UD) action. Prior to the UD trial, the landlord and tenant enter into a settlement agreement setting a date and time of day the tenant will vacate in exchange for the landlord waiving its pursuit of the alleged unpaid rent. . The tenant vacates the unit on the day agreed but misses the move-out deadline by a few hours.

Claim: The landlord seeks compensation equal to the amount of alleged unpaid rent and reasonable attorney fees, claiming the tenant violated the settlement agreement since they did not vacate the premises by the agreed time of day.

Counterclaim: The tenant claims the settlement agreement is unenforceable since the amount of the penalty bears no reasonable relationship to the money losses incurred by the landlord due to the inconsequential delay in delivering possession.

Holding: A California appeals court holds the settlement agreement constitutes an unenforceable penalty since it is unrelated to any money losses incurred by the landlord due to the tenant’s negligible tardiness in vacating. [Graylee v. Castro  (July 13th, 2020)__CA6th__]

Editor’s note – Realty Publications, Inc. (RPI) deliberately excludes provisions in our forms which increase the risk of litigation or generally work against the best long-term interests of the participants in the agreements, especially the brokers. As a matter of policy, liquidated damages provisions – penalties – are not included in RPI forms. They create an unenforceable expectation of windfall profits for a transaction participant and thus constitute forfeitures, as the Graylee case holds.


Read the whole case here