Arbitration Clauses and Class Action Waivers in Residential Leases: Are They Enforceable?
Landlords and property managers are increasingly adding arbitration clauses with class action waivers to their residential leases. These lease provisions can protect landlords from the significant time and costs associated with litigating claims brought by residents, including potential class claims that present high exposure risk for multifamily owners and managers. But the enforceability of these types of provisions remains an open question in many states.
Arbitration Clauses in Residential Leases
Arbitration—the out-of-court resolution of a dispute through a formal process—is typically faster, less expensive, and less complex than traditional litigation. Many contracts include provisions requiring disputes arising out of the contract to be resolved through arbitration. Residential leases are contracts and can include such provisions.
Some states have statutes prohibiting contractual provisions that require a resident to arbitrate disputes arising out of a lease or otherwise waive a resident’s right to a jury trial. However, under the Federal Arbitration Act (FAA) and the Supreme Court’s 2011 decision in AT&T Mobility L.L.C. v. Concepcion, arbitration provisions in otherwise valid contracts are generally enforceable.
And because the FAA is a federal law, it preempts contrary state laws. If the FAA applies to an agreement that contains an arbitration clause, the agreement will likely be enforced even in the face of a contrary state law (with some limited exceptions).
The key question for landlords is therefore whether the FAA is applicable to residential leases. The FAA applies to contracts “evidencing a transaction involving commerce.” In 1985 in Russell v. United States, the Supreme Court stated that the “rental of real estate is unquestionably” an activity that affects commerce.
Based on Russell, it is likely that a court would conclude that a residential lease is subject to the FAA and an otherwise valid arbitration provision within it is enforceable. Recently, federal courts in California and Louisiana, in Payan v. Owen Village, LLC and Turnipseed v. APMT, LLC respectively, have taken this approach and held that the FAA applied to a residential lease, upholding an arbitration provision in it.
Class Action Waivers in Residential Leases
A class action waiver is a provision included in a contract that prohibits a party to the contract from filing a class action lawsuit against the other party. Class action litigation can be costly, particularly for landlords or property managers who own or manage hundreds or thousands of units in a particular state or nationally.
Class action waivers can protect landlords from a single resident bringing an individual grievance and claiming that all other current and former residents in that building or others owned by the same landlord suffered the same grievance—and seeking hefty monetary relief on behalf of all of those other residents, along with a very large attorney’s fee award (as is permitted in class actions).
Class action waivers can be standalone or embedded within or accompanied by an arbitration provision. When a class action waiver is embedded within an arbitration provision, it may be deemed enforceable under the FAA by extension if the arbitration provision is.
For example, following the Concepcion decision, in 2013 the Massachusetts Supreme Judicial Court in Feeney III held that a class waiver included in an arbitration clause “may not be invalidated on the grounds that it effectively denies the plaintiffs a remedy.” This decision eliminated an argument previously available to consumers in Massachusetts that a class action waiver in an arbitration clause was unenforceable because it rendered an individual’s claim “nonremediable.”
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When a class action waiver is included separately in a lease (i.e., as a “standalone” provision), it does not benefit from the same FAA preemption, and is subject to review under state law. Some states consider class action waivers to be contrary to public policy, and may find them unenforceable.
In Rhode Island, in Metcalfe v. Grieco Hyundai LLC, a federal court concluded that a standalone class action waiver in a car leasing agreement, unaccompanied by an arbitration provision, violated Rhode Island’s public policy and was unenforceable. Under Massachusetts precedent, decisions from the Supreme Judicial Court articulating a public policy favoring consumer class actions could serve to defeat a class action waiver in a contract that is not otherwise subject to the FAA.
However, a Massachusetts court could consider other policy arguments, such as the existence of a dedicated housing court in Massachusetts giving tenants a viable option for pursuing individual relief against a landlord, in evaluating whether to uphold a class action waiver clause.
Other jurisdictions, on the other hand, have upheld freestanding class action waivers. Recently, in July 2024, the New Jersey Supreme Court held in Pace v. Hamilton Cove that class action waivers not tied to arbitration provisions in residential leases are not per se contrary to public policy, and can be enforceable so long as they are not unconscionable or otherwise violative of tenants’ rights under state law.
These examples show that different states may reach opposite conclusions, particularly when applying state laws that take a stance on whether class action waivers comport with public policy.
Recommendations for Landlords
Landlords and property managers operating in states that do not yet have clear precedent upholding arbitration clauses and class action waivers in residential leases should take the following steps toward protecting themselves from costly litigation:
- Include an arbitration clause that clearly states that any claims arising from or relating to the lease will be subject to binding arbitration under the FAA;
- Ensure that the arbitration clause is sufficiently broad to encompass the types of claims that would be suitable for arbitration, and excludes those that may be better suited for court (e.g., eviction proceedings);
- Ensure that any class action waiver is embedded in or accompanied by an arbitration clause;
- Ensure that the lease contains a severability provision so that if one of these provisions is found unenforceable, the rest of the lease remains enforceable; and
- Consult counsel to ensure the arbitration and class action waiver provisions are drafted in a manner consistent with applicable laws, and to discuss whether to allow residents to opt out of the class action waiver to address any concerns under those laws.
Source: JD Supra
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