The John M. Olin Center

Paper Abstract

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61. Meirav Furth-Matzkin, Unenforceable and Misleading Clauses in Consumer Contracts: Evidence from the Residential Rental Market, 06/2015.

Abstract: Today, most of the contracts we sign, or click “I agree” to, are standardized take-it-or-leave-it agreements that we typically do not read, let alone understand. While some of us may assume that these non-negotiable contracts often include one-sided terms, most of us do not realize that many of their provisions are misleading or even legally invalid.

In recent decades, several scholars have pointed out that unenforceable clauses are frequently included in standard form contracts and have endeavored in explaining why they persist, yet this issue has gained little empirical attention. This paper seeks to take a first step in filling this gap, by presenting an in-depth empirical study of the persistence of unenforceable and misleading terms in one of the most important consumer markets — the residential rental market, whose participants constitute 35 percent of the U.S. population, and whose annual revenues exceed $149 billion.

The paper undertakes the first systematic content-based analysis of unenforceable and deceptive provisions in residential rental leases. The database consists of 70 leases from the Boston Metropolitan Area, and was established especially for the purposes of this research. The study analyzes the provisions of each lease in the sample in light of the mandatory rules regulating the content of residential leases in Massachusetts. These rules pertain, inter alia, to landlord’s liability for loss or injury, maintenance and repair obligations, the warranty of habitability, payments and fees, termination of tenancy, and eviction. The paper documents whether the residential leases in the sample comply with these mandatory rules, contradict them, or misrepresent the legal state-of-affairs.

The study’s findings are striking: 68 out of 70 leases in the sample, constituting 97 percent, contain at least one unenforceable clause. Perhaps more remarkable is the finding that all of the leases in the sample contain at least one misleading clause. Unlike invalid terms, which explicitly conflict with the law, misleading terms selectively disclose the legal state-of-affairs and misinform tenants of their legal rights and remedies. Building on insights from traditional and behavioral law and economics, the paper goes on to suggest that unenforceable and misleading terms persist in residential leases as they benefit the landlords who use them. Tenants, like most consumers, often do not read their residential leases prior to signing them, yet they are likely to read them ex post, once a dispute arises. At that point in time, they will plausibly perceive the lease’s provisions as enforceable and binding, and consequently forgo valid legal claims.

The continued use of unenforceable and misleading terms is harmful from a social welfare perspective and raises distributional concerns. In light of the social costs associated with this practice, the paper offers preliminary policy prescriptions and estimates their effectiveness and desirability. The paper examines both private and public enforcement mechanisms. It concludes that since private enforcement relies on tenants to bring claims to court, it will not be sufficient in overcoming this market failure. Thus, the paper calls for the adoption of public enforcement tools, and proposes different alternatives, ranging from disclosure obligations to more coercive tools like statutory form leases and mandatory pre-approval requirements.