On the Surprising Use of Unenforceable Clauses in Consumer Contracts: Evidence from the Residential Rental Market
Abstract: This paper empirically explores a troubling phenomenon: the persistence of unenforceable and misleading terms in consumer contracts. Taking the residential rental market as a test-case, the study systematically analyzes a hand-collected sample of 70 residential leases from Massachusetts in light of the mandatory rules governing the relations between landlords and tenants. The paper’s findings are striking: landlords frequently use legally dubious—as well as clearly invalid—provisions in their contracts. Building on insights from economic and psychological theories, the paper suggests that unenforceable and misleading clauses persist in residential leases because they benefit landlords. When a rental problem arises, tenants are likely to rely on their lease agreement. While mistakenly perceiving their lease provisions as enforceable and binding, they may forgo rights that cannot be overridden by contract, bearing costs that the law deliberately imposes on landlords. The paper proceeds to offer preliminary evidence in support of this theoretical account through a survey-based study of 279 tenants, conducted on Amazon Mechanical Turk. Lastly, in light of the social costs associated with the use of unenforceable and misleading clauses, the paper offers preliminary policy prescriptions, ranging from disclosure obligations to statutory form leases, and estimates their effectiveness and desirability.