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Clause Protects Rental Firm

An Indiana court has considered whether a contract clause in a property management agreement protected a leasing firm from liability when it failed to adequately disclose information about a prospective tenant to the owner.

Robert and Judy Geller (“Owners”) had to relocate from their house in Westfield, Indiana, due to a new job opportunity in 2006.  The Owners listed the house for sale but when it did not sell, they began exploring leasing the property.  The Owners had noticed signs for A.M. Rentals, Inc. (“A.M.”) in the area, and so they contacted and eventually entered into a “Lease and Management Agreement” (“Agreement”) with the company in October 2006.  Neither party actually signed the Agreement, but both parties acknowledged that they had accepted its terms.

A.M. eventually located prospective tenants in March 2007.  The prospective tenants were the family of Kurt and Holly Kinney (“Family”).  The Family submitted an application to rent the house, and a representative of A.M. discussed the application and a credit report with the Owners.  A.M.’s representative told the Owners that the Family’s employment and residential information checked out.  The representative noted that the credit report showed that the Family had filed for bankruptcy several years before, but said they were “clean” since the bankruptcy filing.

The parties entered into a three-year lease, and everything went smoothly for the first few months.  However, the Family eventually stopped paying the rent and had to be evicted from the property.  The Owners learned that the Family’s credit report had in fact contained a “High Risk Fraud Alert” on it, and the credit report had noted that the Family had $30,000 in outstanding debts. 

The Owners filed a lawsuit seeking the unpaid lease amounts as well as the remainder of the rent payments from the Family.  The Owners also made allegations against A.M., alleging that they had breached the Agreement by failing to investigate the credit-worthiness of the Family and also failed to exercise due diligence when recommending the Family to the Owner.  The trial entered judgment in favor of the Owner against the Family, but ruled for A.M. on the claims against it.  The Owner appealed.

The Court of Appeals of Indiana affirmed the trial court rulings.  The Owners claimed that they would not have entered into the lease with the Family if A.M. had accurately disclosed the contents of the credit report.  Indiana law requires licensees to disclose known adverse material facts to their clients, and the trial had ruled that A.M. had failed to disclose known adverse material facts to the Owners but A.M. was protected by a clause in the Agreement.

The court affirmed the lower court ruling that an exculpatory clause in the Agreement protected A.M. from liability.  The clause stated that A.M. “shall not be liable to Owner for any error in judgment, nor for any good faith act or omission in its performance or attempted performance of its duties or obligations under this Agreement.”  Based on testimony from the Owners and the A.M. representative, the trial court had concluded that the A.M. representative had acted in good faith.  Since the parties had allocated their risks via contract and A.M. met the terms of the clause, the court ruled that the exculpatory clause protected A.M. 

The Owners argued that the clause was contrary to public policy, since the exculpatory clause altered A.M.’s statutory disclosure responsibilities.  The court determined that because the statute in question did not prohibit such clauses and the fact that the Owners were sophisticated in financial matters, public policy did not bar the enforcement of the Agreement’s exculpatory clause and so affirmed the ruling by the trial court in favor of A.M.

One judge dissented, arguing that the exculpatory clause violated the state’s public policy.

Geller v. Kinney, 980 N.E.2d 390 (Ind. Ct. App. 2012).