A landlord appeals and a tenant cross-appeals a district court ruling affirming in part and reversing in part a small claims court decision in a residential landlord–tenant dispute.
This is a case under the Iowa Uniform Residential Landlord and Tenant Act (IURLTA). The district court affirmed a magistrate’s determination in small claims court that the landlord violated the IURLTA by attempting to pass the cost of an interior door repair onto the tenants and by requiring tenants to automatically pay for the cost of carpet cleaning upon the termination of the lease. The district court also affirmed the magistrate’s award of damages for badfaith retention of a rental deposit. Additionally, the district court affirmed the magistrate’s award of two months’ rent payments for knowing use of lease provisions prohibited by the IURLTA. While the district court awarded tenant attorneys’ fees, the district court reduced the amount to keep the total recovery below the \($5,000\) jurisdictional limit of small claims court.
Lenora Caruso and two others rented a three-bedroom apartment from Apts. Downtown (Apartments Downtown) starting in August 2010. Upon entering into the lease, the tenants paid a \($1,270\) rental deposit. The lease between the tenants and the landlord was a standard form utilized by the landlord. The contract included a provision stating that the carpets throughout the building are professionally cleaned each time apartments turn over occupancy.
Tenants agree to a charge starting at \($95\) (efficiency) not to exceed \($225\) (6+ bedrooms) being deducted from the deposit for professional cleaning at the expiration of the lease. In addition, the lease contained a provision related to certain repairs. Paragraph 33

(a) read, “Unless the Landlord is negligent, Tenants are responsible for the cost of all damages/repairs to windows, screens, doors, carpet, and walls, regardless of whether such damage is caused by residents, guests or others.” After the lease ended and the tenants moved out in July 2012, the landlord deducted \($904.33\) from the rental deposit. Specifically, it deducted \($134\) as an automatic carpet-cleaning charge, \($105\) in other cleaning charges, \($40\) to replace drip pans, and \($625.33\) for “past due rent and fees.”
The past-due rent and fees included \($199.33\) for replacement of an interior door, which the tenants refused to pay, and monthly penalties totaling \($400\) for failure to pay for the door. Caruso filed a small claims action. Among other claims, the tenant alleged the landlord unreasonably failed to return the rental deposit and willfully used a rental agreement with known prohibited provisions.
JUSTICE APPEL Legality of Automatic Cleaning Deposit. In De Stefano, we considered the legality under the IURLTA of an automatic cleaning charge identical to the provision in this lease. In De Stefano, we noted that Iowa Code section 562A.12(3) authorizes only three grounds for withholding amounts from the rental deposit.
We noted the problem with an automatic carpet-cleaning provision is that it generates a deduction from the rental deposit even if none of the conditions of Iowa Code section 562A.12(3) are met. We emphasized that a rental deposit is not designed to serve as an advance payment of amounts that will always be due under the lease. As with the attorneys’ fee issue, our holding in De Stefano is dispositive of the question of whether the automatic cleaning charge is unlawful under the IURLTA. We affirm the district court on this issue. C. Legality of the Door-Repair Provision. In this case, with respect to the door-repair issue, the magistrate held that [Iowa Code] Section 562A.15 requires the landlord, not the tenant to maintain fit premises, including making all repairs and doing whatever is necessary to put and keep the premises in a fit and habitable condition. The written provision that the tenant is liable for “repairs” removes the obligation of the landlord to maintain fit premises and assesses the cost of upkeep of the premises to the tenant. The district court affirmed the trial court. It noted that the clause in the lease requiring the tenants in this case to pay for the allegedly damaged door is illegal. Under the terms of the lease, [the landlord] is not required to show actual damage before seeking payment from the tenant for repair of items such as doors. There is not sufficient evidence in the record to show that actual damage was sustained by [the landlord] based on the claimed damage to the door.
The landlord argues that Iowa Code section 562A.9(1) generally authorizes a landlord to enter into a rental agreement with a tenant including any terms and conditions not prohibited by the statute or other rule of law. The landlord argues that the statute prohibits only a few narrow categories.
The landlord recognizes, and for purposes of the appeal accepts, that it has statutory responsibilities under Iowa Code section 562A.15. This Code provision includes the duty of the landlord to maintain the premises in a fit and habitable condition. The landlord does not claim that the repair of the door in this case does not implicate the duty to maintain the premises in a fit and habitable condition. The landlord instead only argues that the duty to maintain the premises in a fit and habitable condition simply means that the landlord has a duty to make sure that necessary repairs are made. Under the landlord’s theory, the landlord had a duty to make the repairs, but may shift the financial responsibility of those repairs to the tenant in a lease agreement. In addition to this narrow legal point, the landlord on appeal questions the factual findings of the district court. According to the landlord, the evidence overwhelmingly showed that the door had been damaged by someone in the Caruso’s apartment and needed repair.
The tenant first responds that she testified the door was not damaged and offered photographs supporting her position. Further, the tenant notes that this court should be deferential to the factual findings below. On legal issues, the tenant, like the landlord, points to Iowa Code section 562A.15 as making landlords responsible for repair and maintenance. Like the landlord, the tenant assumes that repair of the door was required under Iowa Code section 562A.15. The tenant argues, however, that the landlord does not discharge its statutory duty by performing the repair and shifting the cost onto the tenant.
According to the tenant, the repair provision in the rental agreement makes the tenant responsible for all repairs, no matter what the cause. Based on the issue as framed by the parties, the landlord cannot prevail. In De Stefano, we concluded that a landlord cannot shift the financial costs of repairs necessary to comply with its duty of fitness and habitability under Iowa Code section 562A.15 to the tenant. ___ N.W.2d at ___. In this appeal, the landlord does not claim that the door repair is outside the scope of its mandatory statutory duty.
We take no view on the question of whether a landlord could shift the cost of a repair or damage through its lease that was not within the scope of the landlord’s duty imposed by Iowa Code section 562A.15. In any event, we note the district court also found that “[t]here is not sufficient evidence in the record to show that actual damage was sustained by [the landlord] based on the claimed damage to the door.” Although not artfully phrased, the district court in effect, in its de novo review of the record, concluded the landlord had failed to sustain its claim for damages to the door based on the record developed by the parties.
In light of the testimony of the tenant that she and her co-tenants were unaware of any damage to the door other than a slight coming or pulling apart, we conclude that the district court’s factual determination is supported by substantial evidence.
Willfully Using a Lease Provision Prohibited by the IURLTA In this case, the district court determined the landlord willfully used provisions in its lease that the landlord knew to be prohibited under the IURLTA. As the above discussion demonstrates, we agree with the district court that the two provisions of the lease at issue were in fact prohibited. The question remains, however, whether on the record developed before the magistrate and reviewed by the district court, the tenant met its burden to show that the landlord willfully used “a rental agreement containing provisions known by the landlord to be prohibited.”
In order to answer this question, we must first decide what legal standard to apply. Once we determine what that legal standard is, we must then canvass the facts to determine whether the district court’s determination is supported by substantial evidence.
Legal standard for willfully using a lease provision known by the landlord to be prohibited. Iowa Code section 562A.11(2) prohibits a landlord from “willfully us[ing] a rental agreement containing provisions known by the landlord to be prohibited” under the IURLTA. The landlord argues this language establishes a requirement of actual, subjective knowledge on the part of the landlord that the specifically challenged lease provisions are prohibited. The tenant does not disagree, but asserts that circumstantial evidence in the record is sufficient to support a factual finding that the landlord actually knew the automatic carpet cleaning and repair-deduction provisions of the lease violated the rental deposit provisions of Iowa Code section 562A.12(3).
There is little doubt that the use of the term “known” in the statute requires actual knowledge. Actual knowledge may be established by direct proof, of course, but it also may be established by circumstantial evidence sufficient to infer the person’s mental state. In order to prove actual knowledge through circumstantial evidence, however, the evidence must be sufficient to draw a conclusion that a reasonable person simply could not have known otherwise. Actual knowledge thus can be established by circumstantial evidence only in rare cases.
The record contains no direct evidence that the landlord had actual knowledge that paragraphs 33

(a) and 37

(e) violated Iowa Code section 562A.12(3).
Instead, the record at best contains circumstantial evidence. Joseph Clark, a landlord representative, testified that he was familiar “for the most part” with the IURLTA and that he was familiar with the non-waiver provisions of Iowa Code section 562A.11. He was not asked, however, whether he knew that the automatic carpet-cleaning or repair-deduction provisions violated the rental-deposit protection provisions of the IURLTA. There was evidence that an attorney drafted the lease, thereby at least implying some reliance on counsel to ensure the provisions of the lease were lawful.
The record developed in the small claims court on the level of sophistication of the landlord is limited. The nature of the lease documents, the existence of multiple employees to tend to the landlord’s business, and the use of counsel to draft the lease documents certainly suggest that the landlord is not an amateur.
Yet, actual knowledge is a very high standard. On the record in this case we do not think there is substantial evidence to support a finding of actual knowledge that the automatic repair-deduction and carpet-cleaning provisions of the lease violated Iowa Code section 562A.12(3) beyond speculation that the landlord, as a sophisticated party, must have known the provisions were illegal.
We reverse that portion of the district court decision finding willful use of provisions “known by the landlord” to be prohibited under the IURTLA. We therefore vacate the district court’s award of two months’ rent under Iowa Code section 562A.11(2). In the future, of course, landlords will face a different environment if automatic deductions similar to those contained in the lease are utilized. We have now unambiguously held in De Stefano and in this case that such lease provisions violate Iowa Code section 562A.12(3). The existence of our precedent alone, however, will not prove actual knowledge of illegality in a future case, but it will be a circumstance to be considered by the fact finder in making that determination.
CRITICAL THINKING:
To demonstrate your understanding of the significance of specific facts in any legal action, provide a list of the kinds of facts that would have been adequate circumstantial evidence to demonstrate that the landlord in this case actually knew the automatic carpet-cleaning and repair-deduction provisions of the lease violated the rental deposit provisions of Iowa Code section 562A.12(3).
ETHICAL DECISION MAKING:
As you read the contract elements that the tenant signed, what is your assessment of the ethics of the lease? Rely on the ethical guidelines in the WH method to form your answer.