Opinion
No. 85SC472
Decided April 18, 1988.
Certiorari to the Colorado Court of Appeals
Klein, Seigle Krabacher, P. C., Thomas C. Hill; Kirkland Ellis, Bruce A. Featherstone, for Petitioners.
Oates, Hughes Knezevich, P. C., Robert W. Hughes, Deborah Quinn, for Respondent.
In Haan v. Mountain Queen Condominium Association, 717 P.2d 969 (Colo.App. 1985), the Court of Appeals held that under statutory provisions prohibiting the wrongful withholding of security deposits, §§ 38-12-101 to -103, 16A C.R.S. (1982) (hereinafter referred to as the "Security Deposit Act"), respondent Ronald J. Haan (Haan) is entitled to recover treble damages against petitioners Mountain Queen Condominium Association (Mountain Queen), Molly Nowlin (Nowlin), and Marcelle B. Payton (Payton) for Mountain Queen's failure to refund a payment made by Haan. Having granted certiorari to review that judgment, we reverse and remand with directions.
At the time this action was commenced, the Security Deposit Act was codified at §§ 38-12-101 to -103, 16 C.R.S. (1973 1981 Supp.). It is now codified, without change, at §§ 38-12-101 to -103, 16A C.R.S. (1982).
I
Mountain Queen is an association of persons who own condominium units in Aspen, Colorado. On February 2, 1981, Nowlin was the agent for certain of Mountain Queen's members, including Payton, who wished to rent their individual units to others. On that day Haan, a Maryland resident, and Nowlin conducted a very brief telephone conversation concerning Haan's interest in obtaining accommodations in Aspen from March 1 through March 4, 1981. Nowlin stated that a unit was available at a cost of $340 per night and that Haan would have to send her the full amount of $1,360 within seven days as a deposit to "hold" the unit. Neither the precise nature of this payment nor any of Mountain Queen's refund or cancellation policies were discussed. The available unit to which Nowlin referred was owned by Payton.
Haan sent Mountain Queen a check for $1,360, dated February 4, 1981, which Mountain Queen promptly deposited. On February 27, 1981, Haan appeared in person at Mountain Queen's Aspen office, told Nowlin that because his skiing companion had suffered a broken leg he would not be able to stay in Aspen and requested a refund of the $1,360. Nowlin informed Haan that Mountain Queen required notice of cancellation no less than thirty days prior to arrival, that Haan's request was not timely and that no refund would be made. Mountain Queen had not previously informed Haan of any of its cancellation policies, and other than the transmission of Haan's check the parties had not communicated in any manner between February 2 and February 27.
This cancellation policy and other matters relating to occupancy of Mountain Queen units was set forth in a set of written conditions given to renters together with keys upon arrival.
By letter dated April 6, 1981, Haan notified Mountain Queen that unless it refunded the $1,360 deposit within seven days he would file suit for treble damages pursuant to the Security Deposit Act. When Mountain Queen did not refund the money, Haan filed this civil action.
Following a brief trial to court, the trial court concluded that Mountain Queen was required to pay Haan $1,360, plus interest, as a refund of a "rental deposit." The trial court also concluded that the Security Deposit Act did not apply to this transaction because in enacting the Colorado Security Deposit Act the General Assembly did not intend "to bring commercial lodging facilities such as the Mountain Queen condominium association under the application of said law." On appeal, the Court of Appeals reversed the trial court's conclusion that Haan was not entitled to treble damages under the Security Deposit Act. We conclude that Haan's payment was not a "security deposit" as defined by the Security Deposit Act, and therefore reverse the judgment of the Court of Appeals.
On appeal, neither party challenged the trial court's judgment awarding Haan a refund of his "rental deposit."
II
In reversing the trial court's judgment, the Court of Appeals observed that it was "undisputed" that Haan's payment was required "to secure his performance of the rental agreement." Haan v. Mountain Queen Condo. Ass'n, 717 P.2d 969, 970 (Colo.App. 1985). However, both Haan and Mountain Queen categorized the nature of the payment as a matter in dispute in their trial data certificates. Furthermore, the trial court's judgment ordering Mountain Queen to pay Haan $1,360, plus interest, constitutes a portion of the record in this case. In its written order the trial court found that Haan paid the sum "to reserve" the unit for the period March 1 through March 4, 1981, and referred to the payment as a "rental deposit" and a "reservation deposit." Haan's motion for new trial did not question the trial court's characterization of his February 4, 1981, payment as a rental deposit, and Mountain Queen's memorandum in opposition to that motion described the payment as a rental deposit. Finally, Mountain Queen's answer brief filed in the Court of Appeals specifically argued that Haan's payment did not constitute a security deposit as defined by the Security Deposit Act. At no point during the tortuous progress of this litigation have the parties agreed that Haan's payment was in fact a security deposit.
The Court of Appeals also found that the parties did not dispute the fact that the condominium was a residential rather than an office unit.
However, the question of whether the payment was a security deposit pursuant to the Security Deposit Act cannot be disposed of on the ground that the trial court denominated it a "rental deposit." The trial court did not specifically determine the primary function of the payment. The statute requires such a determination, whatever nomenclature might be used to describe it, when the nature of such a payment is contested. § 38-12-102(2), 16A C.R.S. (1982); see also Granberry v. Islay Invs., 161 Cal.App.3d 388, 207 Cal.Rptr. 652 (1984); Pratt v. McNally-Rathbone, Inc., 61 Or. App. 443, 658 P.2d 516 (1983). Although the character of this payment is disputed, the critical evidence in this case is not in dispute; thus, we can make a legal determination of the nature of this payment on appeal. See Stanske v. Wazee Elec. Co., 722 P.2d 402 (Colo. 1986).
The Security Deposit Act states in pertinent part as follows:
" 38-12-101. Legislative declaration. The provisions of this part 1 shall be liberally construed to implement the intent of the general assembly to insure the proper administration of security deposits and protect the interests of tenants and landlords.
" 38-12-102. Definitions. As used in this part 1, unless the context otherwise requires:
. . . .
"(2) 'Security Deposit' means any advance or deposit of money, regardless of its denomination, the primary function of which is to secure the performance of a rental agreement for residential premises or any part thereof.
" 38-12-103. Return of security deposit. (1) A landlord shall, within one month after the termination of a lease or surrender and acceptance of the premises, whichever occurs last, return to the tenant the full security deposit deposited with the landlord by the tenant, unless the lease agreement specifies a longer period of time, but not to exceed sixty days. No security deposit shall be retained to cover normal wear and tear. In the event that actual cause exists for retaining any portion of the security deposit, the landlord shall provide the tenant with a written statement listing the exact reasons for the retention of any portion of the security deposit. When the statement is delivered it shall be accompanied by payment of the difference between any sum deposited and the amount retained. The landlord is deemed to have complied with this section by mailing said statement and any payment required to the last known address of the tenant. Nothing in this section shall preclude the landlord from retaining the security deposit for nonpayment of rent, abandonment of the premises, or nonpayment of utility charges, repair work, or cleaning contracted for by the tenant.
"(2) The failure of a landlord to provide a written statement within the required time specified in subsection (1) of this section shall work a forfeiture of all his rights to withhold any portion of the security deposit under this section.
"(3)(a) The willful retention of a security deposit in violation of this section shall render a landlord liable for treble the amount of that portion of the security deposit wrongfully withheld from the tenant, together with reasonable attorneys' fees and court costs; except that the tenant has the obligation to give notice to the landlord of his intention to file legal proceedings a minimum of seven days prior to filing said action.
"(b) In any court action brought by a tenant under this section, the landlord shall bear the burden of proving that his withholding of the security deposit or any portion of it was not wrongful.
"(4) Upon cessation of his interest in the dwelling unit, whether by sale, assignment, death, appointment of a receiver, or otherwise, the person in possession of the security deposit, including but not limited to the landlord, his agent, or his executor, shall, within a reasonable time:
"(a) Transfer the funds, or any remainder after lawful deductions under subsection (1) of this section, to the landlord's successor in interest and notify the tenant by mail of such transfer and of the transferee's name and address; or
"(b) Return the funds, or any remainder after lawful deductions under subsection (1) of this section, to the tenant.
"(5) Upon compliance with subsection (4) of this section, the person in possession of the security deposit shall be relieved of further liability.
"(6) Upon receipt of transferred funds under subsection (4)(a) of this section, the transferee, in relation to such funds, shall be deemed to have all of the rights and obligations of a landlord holding the funds as a security deposit.
"(7) Any provision, whether oral or written, in or pertaining to a rental agreement whereby any provision of this section for the benefit of a tenant or members of his household is waived shall be deemed to be against public policy and shall be void."
§§ 38-12-101 to -103, 16A C.R.S. (1982).
The statute itself recognizes that language adopted by the parties to a rental agreement to describe a payment made by the tenant to the landlord prior to occupancy is not dispositive of the question of whether the payment constitutes a "security deposit." § 38-12-102(2). Such payment could be designed to respond to a variety of needs.
Landlords may select from a variety of well-recognized mechanisms to protect themselves from the consequences of a tenant's failure to fulfill the terms of tenancy under a rental agreement. Liquidated damage clauses providing for the forfeiture of a pre-determined sum; payment of a bonus, or some other additional consideration, by the tenant for the execution of a lease; and advance periodic payments are but a few examples of such mechanisms. See Holmes v. Canlen Mgmt. Corp., 542 S.W.2d 199 (Tex.App. 1976); see generally Restatement (Second) of Property § 12.1 comments k and l (1976); R. Cunningham, W. Stoebuck D. Whitman, The Law of Property 370-71 (1984); J. Rose, Landlords Tenants 78 (1973); Note, Security Deposits on Residential Leases, 8 Val. U.L. Rev. 63, 65 (1973). The advance payment of all or part of the rent for premises is in reality performance by the tenant of what may be only one of several obligations of tenancy under a particular rental agreement. Such a payment fulfills the rental payment requirement of the lease; it does not serve to secure performance of obligations thereunder. Thus, at common law a tenant is not entitled to a refund of an advance payment of rent because title thereto passes to the landlord immediately upon delivery. See generally R. Schoshinski, American Law of Landlord and Tenant § 6.29 (1980); Note, Security Deposits in Residential Leases, 8 Val. U.L. Rev. 63, 65 (1973). The sparse evidence introduced at trial certainly supports the trial court's characterization of the payment as advance rent, perhaps conditioned upon Haan's occupancy of the unit.
See supra note 3.
Even though a copy of a condominium information sheet stating the conditions of occupancy of Mountain Queen's units was never transmitted to Haan, some indication of the association's view of the function of the advance payment may be gleaned from that document. It states in pertinent part as follows:
" A deposit of 50% is required to confirm a reservation. This must be made no later than 10 days after scheduling the reservation. The balance is due 30 days prior to arrival, and a 7% tax is due upon arrival. Sorry, we do not accept credit cards. We reserve the right to withhold a 10% handling fee on any confirmed reservation which is cancelled more than 30 days prior to your arrival. If your reservations are cancelled less than 30 days prior to your arrival, the monies will be forfeited unless we are able to re-rent the unit for the same period. If at any time the reservation is changed — then cancelled, the deposit will be forfeited."
The sum is required to "confirm a reservation" — not to secure performance of a rental agreement. The sum is refundable in whole or in large part depending on varied factors: when the refund is requested; whether, on short notice, a replacement renter materializes or is found; or whether the reservation is changed prior to cancellation. The information sheet does not state that the deposit will be refunded if Haan pays the rent and occupies the premises — the only obligations Haan agreed to perform. The document's failure to suggest that the "deposit" was designed to insure a renter's future compliance with the Mountain Queen's rules and regulations supports the trial court's apparent conclusion that the sum was designed to discharge fully Haan's obligation to pay the agreed upon rent for the unit.
Haan testified only that Nowlin said advance payment of the sum was necessary to "hold the unit" for his occupancy. He did not testify concerning any other understanding or assumption he might have entertained about the function of his payment. This testimony does not establish either that the sum was designed to secure Haan's future performance of obligations under the rental agreement or that Haan so considered the payment. A more practical view of his testimony, as well as of his subsequent conduct in seeking a refund, is the conclusion that he too assumed that he was discharging his obligation to pay rent for the unit, conditioned upon his ultimate occupancy thereof. The fact that no party contested the trial court's characterization of the payment as a rental deposit further supports the conclusion that at the time the payment was made both Haan and Mountain Queen viewed it as a prepayment of the entire rent for the unit.
Although the Security Deposit Act does not discuss the concept of prepayment of rent, other legislative bodies have expressly recognized the distinction between advance rental payments and security deposits in statutes similar to the Security Deposit Act. See Cal. Civ. Code § 1950.5 (West 1988); Conn. Gen. Stat. § 47a-21 (1987); Fla. Stat. Ann. § 83.49 (West 1987 1988 Cum. Supp.); Iowa Code §§ 562A.6 to 562A.12 (1987); Md. Ann. Code, Real Property § 8-203(a) (1988); Mass. Gen. Laws Ann. ch. 186 § 15B (1988); Or. Rev. Stat. § 91.760 (1987). Courts construing such statutes have also acknowledged the distinction between a security deposit and the prepayment of rent. See Granberry v. Islay Invs., 161 Cal.App.3d 388, 207 Cal.Rptr. 652 (1984); Pratt v. McNally-Rathbone, Inc., 61 Or. App. 443, 658 P.2d 516 (1983).
The acknowledgment of the distinction between these two forms of payment manifests itself in varying ways. Some statutes expressly exclude advance rent from the definition of the term "security deposit," see Or. Rev. Stat. § 91.760 (1987); while others expressly include such a payment within the definition, see Cal. Civ. Code § 1950.5 (West 1988).
In Pratt v. McNally-Rathbone, Inc., 61 Or. App. 443, 658 P.2d 516 (1983), the Oregon Court of Appeals held that a payment denominated a "security deposit" was not truly a security deposit because there was no circumstance under the lease on which the payment would be returned by the lessor to the lessee. In Granberry v. Islay Investments, 161 Cal.App.3d 388, 207 Cal.Rptr. 652 (1984), the California Court of Appeals found that the provision in its security deposit statute which suggested that an advance payment of rent could be a security deposit was "absurd."
On the basis of the evidence presented at trial, the trial court's findings and conclusions, and the legal arguments advanced by the parties at all stages of this case, we conclude that the parties did not agree that Haan's $1,360 payment served to secure his performance of the rental agreement. To the contrary, the uncontradicted evidence requires the conclusion that the payment constituted performance in advance of his obligation to pay rent, as the trial court's order indicated. The evidence does not support Haan's claim that the payment constituted a security deposit as that term is defined for purposes of the Security Deposit Act. In view of this holding, we need not address Mountain Queen's further argument that its relationship with Haan did not constitute a landlord-tenant relationship for purposes of the Security Deposit Act.
For a discussion of the meaning of landlord-tenant relationship as that term is used in the Security Deposit Act, see Houle v. Adams State College, 190 Colo. 406, 547 P.2d 926 (1976).
III
For the foregoing reasons, the judgment of the Court of Appeals is reversed. The case is remanded to that court with directions to reinstate the judgment of the trial court.
JUSTICE MULLARKEY specially concurs.