120 Week 4 F /For WIZARD KIM

Chapter 34: The tenancies in real estate 241

The tenancies in real estate

Chapter

34

Different types of tenancies and properties trigger different termination procedures for the landlord, and different rights and obligations for the tenant.

Leasehold estates, or tenancies, are possessory interests in real estate. Four types of tenancies exist:

• fixed-term tenancies;

• periodic tenancies;

• tenancies-at-will; and

• tenancies-at-sufferance, also called holdover tenancies.

To initially establish a tenancy, a landlord transfers to the tenant the right to occupy the real estate. This right is conveyed either in a writing, orally or

Tenancies as leasehold estates

After reading this chapter, you’ll be able to:

• differentiate between the different types of tenancies; and • understand how each tenancy is established and terminated.

holdover rent rental agreement

holdover tenant trespasser

lease agreement unlawful detainer (UD)

Learning Objectives

Key Terms

For a further discussion of this topic, see Chapter 2 of Landlords, Tenants and Property Management.

242 Real Estate Principles, Second Edition

by the landlord’s conduct, called a grant. If the landlord does not transfer by grant the right to occupy, the person who takes possession as the occupant is a trespasser.

Fixed-term tenancies, periodic tenancies and tenancies at will have agreed- to termination dates, or can be terminated by notice.

A holdover tenancy occurs when a tenant continues in possession of the property after their right to occupy has expired. This holdover of possession without a contractual right is called an unlawful detainer (UD).

A landlord needs to file a judicial UD action to have a holdover tenant evicted. To be evicted, a tenant’s right of possession under the tenancy granted is to first be terminated either by service of the proper notice or expiration of the lease. Plainly speaking, the tenant needs to unlawfully retain possession of the property before the tenant can be evicted for unlawful detainer.

The type of notice required to terminate a tenancy, other than a fixed-term lease, depends on the period of the tenancy, length of the occupancy and location of the property (e.g., rent control).1

A fixed-term tenancy, also called a lease or estate for years, is the result of an agreement between the landlord and the tenant for a fixed rental period, also called the lease term. If the rental period is longer than one year, the lease arrangement is required to be in writing and signed by the landlord and tenant to be enforceable under the Statute of Frauds. The written document which sets the terms for rent and conditions for occupancy creating a fixed- term tenancy is called a lease agreement. A lease agreement is required to have a commencement date and an expiration date.2 [See Form 550 in Chapter 77]

1 Colyear v. Tobriner (1936) 7 C2d 735

2 Calif. Civil Code §§761, 1624

trespasser A person who occupies a property without the owner’s transfer of the right to occupy.

unlawful detainer (UD) The unlawful possession of a property. [See RPI Form 575 -578]

The fixed-term

tenancy lease agreement The written document which sets the terms of a fixed-term tenancy. [See RPI Form 550 and 552 -- 552-4]

A landlord and tenant orally enter into a six-month lease agreement. Rent for the period is payable monthly. On expiration of the six month lease, the landlord and tenant orally agree to extend the lease for another six-month period.

At the end of the extended term, the tenant refuses to vacate, claiming the landlord must first serve them with a notice to vacate.

Here, the tenant is not entitled to any further notice beyond the agreed-to termination date. The oral occupancy agreement did not create a periodic tenancy, even though it called for monthly rent payments. Instead, the agreement to extend the occupancy created a fixed-term lease with a set expiration date.

Thus, the tenant’s right of possession terminated without further notice on expiration of the orally conveyed six-month period of occupancy, the rent for which was payable monthly. The oral lease agreement was enforceable since it was for a term less than one year. [Camp v. Matich (1948) 87 CA2d 660]

Case in point

Extended fixed- term lease is not a periodic tenancy

Chapter 34: The tenancies in real estate 243

During the term of the lease, the tenancy can only be terminated and the tenant evicted for good cause. Even then, service of a three-day notice to vacate the property (or if curable to cure the breach) is required. [See RPI Form 576]

Without the tenant’s exercise of any option to renew or extend, a fixed-term tenancy automatically terminates on the expiration date, no notice required.3

If a renewal or extension option exists, the lease is renewed or extended by the tenant’s exercise of the option or the landlord’s acceptance of rent called for in the option.4 [See Case in point, “Extended fixed-term lease is not a periodic tenancy”]

A fixed-term tenancy provides a tenant with several advantages:

• the right to occupy for the fixed term;

• a predetermined rental amount; and

• limitations on termination or modification.

However, a fixed-term tenancy also has disadvantages for the fixed-term tenant:

• the tenant is liable for the total amount of rent due over the entire term of the lease (less rent paid by any replacement tenant located by the landlord to mitigate losses); and

• the tenant may not vacate prior to expiration of the rental period and assign or sublet the premises to a new tenant if prohibited by provisions in the lease agreement.

If the landlord finds a fixed-term tenancy too restrictive or inflexible for their requirements, a periodic tenancy may be more suitable.

A periodic tenancy is automatically extended for equal, successive periods of time, such as a week or a month, until terminated by notice. The length of each successive period of time is determined by the interval between scheduled rental payments.

Examples of periodic payment intervals include:

• annual rental payments, indicating a year-to-year tenancy;

• monthly rental payments, indicating a month-to-month tenancy; and

• weekly rental payments, indicating a week-to-week tenancy.

A periodic tenancy is intentionally created by a landlord and tenant entering into a rental agreement. A rental agreement is the agreement which sets the terms for payment of rent and conditions for possession under a periodic tenancy.

However, the periodic tenancy can also result due to possession under a defective lease agreement. A tenant who takes possession under an

3 Calif. Code of Civil Procedures §1161(1)

4 CC §1945

The periodic tenancy

rental agreement The written document which sets the terms and conditions of a periodic tenancy. [See RPI Form 551 and 552-5]

244 Real Estate Principles, Second Edition

unenforceable lease agreement (e.g., oral, or unsigned) and pays rent in monthly intervals that the landlord accepts has entered into a month-to- month periodic rental agreement.

A periodic tenancy continues until terminated by a notice to vacate. This right to terminate a month-to-month tenancy by either the landlord or the tenant giving the other a notice to vacate makes a periodic tenancy flexible.5 [See RPI Form 569 and 572; see Chapter 81]

To terminate a periodic tenancy, the notice period is to be at least as long as the interval between scheduled rental payments, but need not exceed 30 days. A residential property exception exists: a 60-day notice is required to terminate a periodic tenancy in a dwelling if the tenant has occupied the property for more than 12 months.6 [See RPI Form 569-1; see Chapter 81]

On a material breach of the rental agreement, a three-day notice to vacate can also be used to terminate a periodic tenancy. [See Form 577 in Chapter 82]

The characteristics of a tenancy-at-will include:

• possession delivered to the tenant with the landlord’s knowledge and consent;

• possession for an indefinite and unspecified period; and

• no provision for the payment of rent.

Situations giving rise to a tenancy-at-will include:

• when a tenant is granted the right to indefinitely occupy the property in exchange for services rendered [See RPI Form 591];7

• when a tenant is given possession of property under an unenforceable lease agreement (e.g., a written lease not signed by either party or on terms orally agreed to) — unless rent is accepted which creates a periodic tenancy;8 or

• when a tenant is given possession of the property while lease negotiations regarding the rent amount are still in progress and rent is not accepted.9

For a tenancy-at-will, a written notice to pay rent or quit is required to implement any change in the right to continue to occupy the premises, e.g., change it to a different kind of tenancy or terminate the tenancy.

A tenancy-at-will is automatically terminated if the tenant assigns or sublets their right to occupy the property to another tenant. The new tenant becomes a holdover tenant. Either form of possession is an unlawful detainer and grounds for eviction without notice.10

5 Kingston v. Colburn (1956) 139 CA2d 623; CC §1946

6 CC §1946.1

7 Covina Manor Inc. v. Hatch (1955) 133 CA2d Supp. 790

8 Psihozios v. Humberg (1947) 80 CA2d 215

9 Miller v. Smith (1960) 179 CA2d 114

10 McLeran v. Benton (1887) 73 C 329

The tenancy- at-will:

consent but no rent

Chapter 34: The tenancies in real estate 245

Consider a property manager who rents an apartment to a tenant under a fixed-term lease. At the end of the leasing period, the tenant retains possession and continues to pay rent monthly, which the property manager accepts.

Later, the tenant is served with an appropriate notice to vacate. On the running of the notice period, the tenant refuses to vacate. The tenant claims the notice to vacate served by the landlord merely terminated the tenant’s right of possession and made it a tenancy-at-will on expiration of the notice. As a tenant-at-will, they are entitled to an additional three-day notice to vacate before they are unlawfully detaining the property.

However, an occupancy agreement for an indefinite term with a monthly rent schedule is a month-to-month tenancy. Thus, a tenant is only entitled to one notice to vacate which must expire before a UD action may be filed to evict them. [Palmer v. Zeis (1944) 65 CA2d Supp. 859]

Also, a tenancy-at-will terminates on the death of either the landlord or tenant, unless an agreement to the contrary exists.11

When a fixed-term or periodic tenancy terminates by prior agreement or notice, the tenant who remains in possession unlawfully detains the property from the landlord. Likewise, a tenant-at-will who receives the appropriate notice to vacate and who remains in possession of the property also unlawfully detains the property. These scenarios create a tenancy-at- sufferance, commonly referred to as a holdover tenancy.

A holdover tenancy also arises on termination of a resident manager when the resident manager’s compensation includes the right to occupy a unit rent-free. When the landlord terminates the employment and the resident manager fails to vacate immediately, the resident manager unlawfully detains the premises as a holdover tenant.12 [See RPI Form 591]

A holdover tenant retains possession of the premises without any contractual right to do so. Their tenancy has been terminated. Thus, the landlord is not required to provide a holdover tenant with any additional notice prior to commencing eviction proceedings.13

A holdover tenant no longer owes rent under the expired lease or terminated rental agreement since they no longer have the right of possession. However, the rental or lease agreement usually includes a holdover rent provision which calls for a penalty rate of daily rent owed for each day the tenant holds over.

If the rental or lease agreement does not contain a holdover rent provision, the tenant owes the landlord the reasonable rental value of the property. This is a daily rate owed for each day the tenant holds over. [See RPI Form 550]

11 Dugand v. Magnus (1930) 107 CA 243

12 Karz v. Mecham (1981) 120 CA3d Supp. 1

13 CCP §1161

The holdover tenancy

holdover tenant A tenant who retains possession of the rented premises after their right of possession has been terminated, called a tenant-at-sufferance.

holdover rent Rent owed by a holdover tenant for the tenant’s unlawful detainer of the rented premises as a tenant- at-sufferance. [See RPI Form 550 §3.3]

Case in point

Periodic tenancy or tenancy-at-will?

246 Real Estate Principles, Second Edition

Holdover rent is not due and is not to be collected by the landlord until the tenant vacates or is evicted. On vacating, the holdover period is known and the amount owed can be determined, demanded and collected. If it is not paid on demand, rent can be collected by deducting it from any security deposit or obtaining a money judgment.

But a caution to landlords: acceptance of any holdover rent prior to a tenant vacating or being evicted by a UD action has unintended consequences.

A landlord, on using an improper notice, can create a different tenancy from the one they initially conveyed to the tenant. A tenant’s possessory interest in real estate can shift from one type of tenancy to another due to:

• a notice from the landlord

• expiration of a lease; or

• by conduct of the landlord.

A classic example involves a change in the type of tenancy which arises when a holdover tenant under an expired lease agreement becomes a month-to- month (periodic) tenant.

A landlord who accepts any rent from a holdover tenant under an expired lease has elected by their conduct to treat the continued occupancy as a periodic tenancy.14

Thus, the prerequisite to filling a UD eviction action when the holdover tenant pays rent for any part of the continued occupancy which the landlord accepts, and thus creates a periodic tenancy, is the service of a proper notice to vacate.15

If a landlord accepts rent from a holdover tenant after a fixed-term tenancy expires, the expired lease agreement is renewed on the same terms except for the period of occupancy, which is now periodic – month-to-month.16

On expiration of a fixed-term lease, the landlord’s continued acceptance of rental payments does not renew the tenancy for another term equal to the term of the original lease. Rather, the tenancy is extended as a periodic tenancy for consecutive periods equal to the interval between rent payments — hence, one month if rent on expiration of the lease is paid monthly.17

A landlord who wants to terminate a periodic tenancy they created by accepting rent after expiration of a lease is to serve the tenant with the proper notice to vacate and let it expire. On expiration of the notice, the tenant who remains in possession of the premises is unlawfully detaining the premises and the landlord may file a UD action to evict them.

14 Peter Kiewit Sons Co. v. Richmond Redevelopment Agency (1986) 178 CA3d 435

15 Colyear, supra

16 CC §1945

17 CC §1945

Changing the type of

tenancy

Continued acceptance

of payments

Chapter 34: The tenancies in real estate 247

A landlord and tenant can by agreement establish a shorter or lengthier notice period than the period of the tenancy. However, the notice period cannot be less than seven days.

Overriding rules also exist for different types of properties and situations. For example, in a rent-controlled residential tenancy, terminating the right of possession is restricted by local ordinances.

With a tenancy-at-will in a mobile home park, the tenant needs to be given a 60-day written notice.18

Industrial and commercial tenants often provide three months minimum notice before the notice expires due to the time spent in multiple tiers of corporate management for receiving and responding to a notice.19

In some instances with foreclosed residential properties, an extended 90- day notice period is required to terminate the tenancies created before the foreclosure sale. [See Chapter 81]

18 CC §798.55(b)

19 CC §1946

Other rules for terminating a tenancy

A fixed-term tenancy is the result of an agreement between the landlord and the tenant for a fixed rental period. A periodic tenancy automatically continues for equal, successive periods of time, such as a week or a month.

In a tenancy-at-will, possession is delivered to the tenant with the landlord’s knowledge and consent for an indefinite and unspecified period, usually without requiring rent. A holdover tenancy is the result of a tenant retaining possession of a rented premises without any contractual right to do so.

A tenant’s possessory interest in real estate can shift from one type of tenancy to another based on conduct.

The type of notice required to terminate occupancy depends on the period of the tenancy or occupancy, the period of the occupancy, the property type and location.

Chapter 34 Summary

248 Real Estate Principles, Second Edition

Quiz 7 Covering Chapters 31-36 is located on page 612.

holdover rent ................................................................................ pg. 245 holdover tenant ........................................................................... pg. 245 lease agreement ........................................................................... pg. 242 rental agreement ......................................................................... pg. 243 trespasser ....................................................................................... pg. 242 unlawful detainer (UD) ............................................................. pg. 242

Chapter 34 Key Terms

Chapter 35: Tenant leasehold improvements 249

After reading this chapter, you will be able to:

• identify the different types of tenant improvements; • understand the landlord’s rights and tenant obligations regarding

tenant improvements on termination of the lease; and • determine the landlord or tenant’s obligation to complete or pay

for the construction of tenant improvements.

Learning Objectives

Tenant leasehold improvements

Chapter

35

A retail business owner enters into a commercial lease agreement to occupy commercial space as a tenant. The leased premises do not contain tenant improvements (TIs) since the building is nothing more than a shell. [See RPI Form 552 through 552-4]

The tenant agrees to make all the tenant improvements needed to occupy the premises and operate a retail business (i.e., interior walls, flooring, ceilings, air conditioning, electrical outlets and lighting, plumbing, sprinklers, telephone and electronic wiring, etc.).

The lease agreement provides for the property to be delivered to the landlord on expiration of the lease “in the condition the tenant received it,” less

Ownership rights when a tenant vacates

tenant improvements Improvements made to a leased property to meet the needs of the occupying tenant. [See RPI Form 552 §11]

Key Termsfurther improvements provision

mechanic’s lien

notice of nonresponsibility

permissive improvement

real estate fixture

reversion

tenant improvements

trade fixture

For a more intensive analysis of this topic, see Chapter 4 of Landlords, Tenants, and Property Management.

250 Real Estate Principles, Second Edition

normal wear and tear. However, no lease provision addresses whether, on expiration of the lease, the TIs will remain with the property or the property is to be restored by the tenant to its original condition before the addition of the tenant improvements.

On expiration of the lease, the tenant strips the premises of all of the tenant improvements they placed on the property and vacates. The building is returned to the landlord in the condition it was found by the tenant: an empty shell, less wear and tear. To relet the space, the landlord replaces nearly all the tenant improvements that were removed.

Is the tenant liable for the landlord’s costs to replace the tenant improvements removed by the tenant on vacating?

Yes! Improvements made by a tenant that are permanently affixed to real estate become part of the real estate to which they are attached. Improvements remain with the property on expiration of the tenancy, unless the lease agreement provides for the tenant to remove the improvements and restore the property to its original condition.1

However, the landlord’s right to improvements added to the property and paid for by the tenant depends upon whether:

• the tenant improvements are permanent (built-in) or temporary (free-standing); and

• the lease agreement requires the tenant to remove improvements and restore the premises.

All improvements attached to the building become part of the real estate, except for trade fixtures (as discussed later in this chapter).2

Examples of improvements that become part of the real estate include:

• built-ins (i.e., central air conditioning and heating, cabinets and stairwells);

• fixtures (i.e., electrical and plumbing);

• walls, doors and dropped ceilings; and

• attached flooring (i.e., carpeting, tile or linoleum).

Commercial lease agreements typically contain a further-improvements provision allowing the landlord to either:

• retain tenant improvements and alterations made by the tenant; or

• require restoration of the property to its original condition on expiration of the lease. [See RPI Form 552]

Further-improvement provisions usually include clauses stating:

• who will make the construction of improvements (landlord or tenant);

1 Calif. Civil Code §1013

2 CC §660

Leasehold improvement

provisions

further-improvements provision A commercial lease provision which allows a landlord to retain tenant improvements or require the restoration of the property to its original condition upon expiration of the lease. [See RPI Form 552 §11.3]

Chapter 35: Tenant leasehold improvements 251

• who will pay for the construction of the improvements (landlord or tenant);

• the landlord’s consent is required before the tenant makes improvements;

• any mechanic’s liens due to improvements contracted by the tenant will be removed by the tenant;

• the condition of the premises on expiration of the lease; and

• whether and on what conditions the improvements are to remain or be removed on expiration of the lease.

A landlord under a lease agreement who agrees to make improvements to the rented premises is required to complete the improvements in a timely manner. If the landlord fails to make timely improvements, the tenant may cancel the lease agreement. [See RPI Form 552 §10]

Conversely, lease agreement provisions can obligate a tenant to construct or install improvements on the property. The time period for commencement and completion is agreed to in the lease agreement. If not agreed to, a reasonable period of time is allowed.3

Further-improvement provisions typically call for the landlord to approve the planned improvements before construction is commenced. Alternatively, some lease agreement provisions allow a tenant to make necessary improvements without the landlord’s further consent. These improvements are not specifically mandated, or required to be completed in exchange for a reduction in rent. This non-mandatory type of improvement is called a permissive improvement.

All tenant improvements are to remain with the leased property on termination of a lease unless the lease agreement permits or mandates their removal by the tenant as a restoration of the premises.

Most lease agreements merely provide for the property to be returned in good condition, minus ordinary wear and tear for the years of the tenant’s occupancy. Thus, the tenant is not required to restore the property to its actual condition when they took possession since tenant improvements are part of the real estate.

A provision calling for the tenant’s ordinary care of the premises does not also require the tenant to remove their improvements or renovate the premises to eliminate deterioration, obsolescence or normal wear and tear caused by the tenant’s permitted use of the property.4

If a lease does not require the tenant to restore the property to the condition it was in when received, the tenant may only remove their personal improvements, called trade improvements or trade fixtures.

3 CC §1657

4 Kanner v. Globe Bottling Co. (1969) 273 CA2d 559

Improvements promised

permissive improvement A nonmandatory improvement the tenant is authorized to complete without further landlord consent.

Surrender of improvements

252 Real Estate Principles, Second Edition

Two types of fixtures exist for classifying improvements installed in a building:

• real estate fixtures; and

• trade fixtures.

A real estate fixture is personal property that is attached to the real estate. It becomes part of the real estate it is attached to and is conveyed with the property.5

5 CC §§660; 1013

Real estate fixtures vs.

trade fixtures

real estate fixture Personal property attached to the real estate as an improvement, which becomes part of the conveyable real estate.

trade fixtures A fixture used to render services or make products in the trade or business of a tenant.

Form 597

Notice of Nonresponsibility

Chapter 35: Tenant leasehold improvements 253

For example, a tenant rents an office and builds bookshelves into the wall rather than merely anchoring them to the wall. As a result of the permanence of the bookshelves, they become part of the improvements located on the real estate.

When the lease expires, real estate fixtures are the landlord’s property, not the tenant’s who installed them. The landlord takes possession of the real estate fixtures as part of the real estate forfeited or surrendered to the landlord, unless the lease agreement provides for restoration of the property by removal of the TIs by the tenant. The conveyance of real estate fixtures from tenant to landlord on expiration of the lease is called reversion.6

Conversely, trade fixtures do not revert to the landlord on expiration of the lease. A trade fixture is an improvement that is attached to the real estate by the tenant and is unique to the operation of the tenant’s business, not the use of the building. Examples include mirrors, salon chairs, wash stations and dryers in a beauty salon.

A tenant may, at the end of or anytime during the lease term, remove any fixture used for trade purposes if the removal can be done without damaging the premises.7

Fixtures that have become an integral part of the building’s structure due to the way they are attached or the general purpose they serve cannot be removed. Examples of fixtures which cannot be removed include toilets, air conditioners, vent conduits, sprinkler systems and lowered ceilings.8

Lease agreements often contain a default provision prohibiting the tenant from removing the trade fixtures when the agreement is breached. The tenant (and their unsecured creditors) no longer has a right to the trade fixtures under a default provision.

Tenants occasionally contract for improvements to be constructed on the premises they have leased. Any mechanic’s lien by a contractor for nonpayment initially attaches to the tenant’s leasehold interest in the property.9

However, the mechanic’s lien for unpaid labor and materials also attach to the fee simple interest held by the landlord if:

• the landlord or the landlord’s property manager acquires knowledge the construction is taking place; and

• they fail to post and record a Notice of Nonresponsibility. [See Form 597 accompanying this chapter]

6 City of Beverly Hills v. Albright (1960) 184 CA2d 562

7 Beebe v. Richards (1953) 115 CA2d 589

8 CC §1019

9 CC §8442(a)

reversion The conveyance of real estate fixtures from a tenant to landlord on expiration of a lease.

Removal without damage

Notice of non- responsibility

mechanic’s lien A lien entitling a contractor or subcontractor to foreclose on a job site property to recover the amount due and unpaid for labor and materials they used.

Two types of fixtures exist for classifying improvements installed in a building:

• real estate fixtures; and

• trade fixtures.

A real estate fixture is personal property that is attached to the real estate. It becomes part of the real estate it is attached to and is conveyed with the property.5

5 CC §§660; 1013

Real estate fixtures vs.

trade fixtures

real estate fixture Personal property attached to the real estate as an improvement, which becomes part of the conveyable real estate.

trade fixtures A fixture used to render services or make products in the trade or business of a tenant.

254 Real Estate Principles, Second Edition

Tenant improvements (TIs) are improvements made to a rented property to meet the needs of the occupying tenant. The landlord’s right to tenant improvements depends upon whether the tenant improvements are a real estate fixture or a trade fixture, and whether the further- improvements provision in the lease agreement requires the tenant to remove improvements and restore the premises.

further-improvements provision............................................ pg. 250 mechanic’s lien ............................................................................ pg. 253 notice of nonresponsibility ...................................................... pg. 254 permissive improvement .......................................................... pg. 251 real estate fixture ......................................................................... pg. 253 reversion ........................................................................................ pg. 253 tenant improvements ................................................................ pg. 249 trade fixture .................................................................................. pg. 252

Chapter 35 Summary

Chapter 35 Key Terms

A Notice of Nonresponsibility is a written notice which is to be:

• posted in a conspicuous place on the premises within ten days after the landlord or their property manager first has knowledge of the construction; and

• recorded with the county recorder’s office within the same ten-day period.10

However, the landlord who becomes aware of the construction and fails to post and record the Notice of Nonresponsibility does not become personally liable to the contractor. Rather, the contractor can only lien the landlord’s interest in the real estate and foreclose on their mechanic’s lien to collect for unpaid labor and materials delivered to improve the property under contract with the tenant.11

Further, if the lease requires the tenant to make mandatory improvements, a mechanic’s lien attaches to the landlord’s interest even when the landlord has posted and recorded a Notice of Nonresponsibility.

10 CC §8444

11 Peterson v. Freiermuth (1911) 17 CA 609

notice of nonresponsibility A notice used by an owner to declare they are not responsible for any claim arising out of the improvements their tenant is constructing on their property. [See RPI Form 597]

Quiz 7 Covering Chapters 31-36 is located on page 612.