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Lease Terms Apply to Penalty
by Ron Davis

The cost of leasing a kiosk at an Ohio shopping center has skyrocketed for a kiosk tenant that failed to pay the specified rental fee.

The shopping center is Eastwood Mall, located in suburban Youngstown. And the tenant had leased the kiosk two years ago. Thatís when the centerís owners and the tenant agreed to the usual lease requirements. But in addition to the obligatory payments of rent and certain other standard charges, the tenant agreed to a penalty in case of rental default.

That penalty amounted to payment of interest at the rate of 18 percent per annum on any debt that the tenant owed to the centerís owners. Such a penalty, however, was higher than state-law restrictions allow.

When the tenant defaulted on the lease requirements and stopped paying rent, the centerís owners sued, demanding the back rent plus interest on that rent at the 18-percent rate. In response, the tenant argued that the 18-percent rate is excessive and that state usury laws prohibited such a penalty.

At trial, an Ohio court ruled that the tenant must pay back rent for the amount owed to the shopping center owners. But, without explanation, the judge reduced the interest-rate penalty for lease default from 18 percent per year to 5 percent per year.

The shopping centerís owners appealed that ruling. They complained that the courtís ďunsolicited modification of the contractual interest rate was contrary to the agreement between a tenant and a property owner.Ē And they pointed out that the Ohio Supreme Court had previously ruled that state law allows two parties to agree to a higher rate of interest than the stateís maximum ceiling.

But certain standards are required in disputes over interest-rate ceilings. First, the property owner must be able to show a written contract between the two parties. Second, that contract must provide a rate of interest that becomes due and payable at a certain date. Finally, the written contract must include an agreement to which both parties have assented.

The centerís owners pointed out that they had met those standards. Moreover, the owners added that Ohioís appellate courts have consistently ruled that in a commercial lease, a party receiving a default judgment in its favor is entitled to the interest rate specified in the written contract.

In its ruling in favor of the centerís owners, an Ohio appellate court stated, ďBoth parties assented to the written agreement which explicitly provided for interest at the rate of 18 percent per annum. Therefore, the centerís owners are entitled to prejudgment interest at the contractual rate. Likewise, the same analysis dictates that the centerís owners are entitled to postjudgment interest at 18 percent per year.Ē

(Marion Plaza, Inc., v. D& L Enterprises, Inc., 2010 WL 5296958 [Ohio App. 7 Dist.])

Decision: December 2010
Published: December 2010



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