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Ch73-83.pdf
Chapter 73: Property management licensing 479
After reading this chapter, you will be able to:
• identify conduct requiring licensing for property managers and their employees;
• differentiate between activities which require a license and activities which do not require a license; and
• distinguish state-mandated licensing from third-party marketing designations.
Property management licensing
Chapter
73
Consider an individual who owns and operates income-producing real estate, called a landlord. As the owner-operator, they:
• locate and qualify tenants;
• prepare and sign occupancy agreements;
• deliver possession of the premises;
• contract for property maintenance;
• collect rent;
• pay expenses and mortgages; and
• serve any notices and initiate any unlawful detainer (UD) actions to evict tenants.
Does the owner-operator need a California Bureau of Real Estate (CalBRE) broker license to perform these activities?
When is a CalBRE license required?
certified CID manager contingency fee
Learning Objectives
Key Terms
For a more intensive study of this content, see Chapter 7 of Real Estate Property Management.
480 Real Estate Principles, Second Edition
No! The owner of income-producing real estate does not need a real estate broker license to operate as a principal. The owner-operator is not acting on behalf of someone else as their agent when managing their own property.1
Editor’s note — Here, the generic term “agent” refers to anyone who acts on behalf of another.
On the other hand, if the owner-operator decides to hire an individual to take over the general management of the apartment complex, the individual employed to act as property manager under normal business circumstances is to be licensed by the CalBRE as a California real estate broker.
A broker has the authority to act in the capacity of a property manager on behalf of the landlord by virtue of their CalBRE license alone. There is no special “property management” license or endorsement required under California law, other than a CalBRE broker license.
An individual or corporation is to hold a broker license if they perform or offer to perform any of the following services on behalf of another in exchange for a fee:
• listing real estate for rent or lease;
• marketing the property to locate prospective tenants;
• listing prospective tenants for the rental or lease of real estate;
• locating property to rent or lease;
• selling, buying or exchanging existing leasehold interests in real estate;
• managing income-producing properties; or
• collecting rents from tenants of real estate.2
An individual employed by a broker to perform any of the above services will also be licensed by the CalBRE, either as a broker or sales agent.
Administrative and non-discretionary duties performed by a salaried employee of a broker (or landlord) who manages transient housing or apartment complexes are exempt from real estate licensing requirements while the employee is under the broker’s supervision and control.3
Thus, an employee hired to assist the broker in the rental and leasing of residential complexes, other than single family units, may be either:
• licensed; or
• unlicensed.
Unlicensed employees of a broker or landlord may perform tenant-related negotiations, such as:
• showing rental units and facilities to prospective tenants;
1 Calif. Business and Professions Code §10131(b)
2 Bus & P C §10131(b)
3 Bus & P C §10131.01(a)
Hiring of another
Unlicensed vs. licensed
activities
Unlicensed performance
Chapter 73: Property management licensing 481
• providing prospective tenants with information about rent rates and rental and lease agreement provisions;
• accepting tenant screening fees;
• accepting signed lease and rental agreements from tenants; and
• accepting rents and security deposits.4
Licensed employees may perform any activities unlicensed employees perform. However, licensed employees are additionally able to perform activities relating to contacts with the landlord, as opposed to the tenant, about the leasing, care of the property and accounting.
Activities which licensed employees of the broker may perform include:
• landlord-related solicitations;
• entering into property management or leasing agent agreements with the landlord;
• rental or lease negotiations;
• care and maintenance of the property;
• marketing of the unit or space; and
• accounting.
A person is not required to have a real estate broker license when they are acting:
• as an attorney performing management as part of their legal services;5 or
• under court appointment, such as a receiver or bankruptcy trustee.6
Individuals managing property without a license and without qualifying for an exemption will not be able to enforce collection of the fee they were to receive.7
Apartment complexes with 16 or more units will have a resident manager.8
Apartment building management has special licensing rules distinguishing resident managers from nonresident property managers and their other employees.
A resident manager is employed by either the landlord or the broker who manages the apartment building or complex. The resident manager lives on the premises as a requirement of their employment. A resident manager does not need a real estate license to manage the apartment complex.9
4 Bus & P C §10131.01(a)(1)
5 Bus & P C §10133(a)(3)
6 Bus & P C §10133(a)(4)
7 Bus & P C §10137
8 25 Calif. Code of Regulations §42
9 Bus & P C §10131.01(a)(1)
Licensed performance
Other licensing exceptions
Resident managers
482 Real Estate Principles, Second Edition
If a landlord is a corporation, limited liability company (LLC) or partnership, any officer of the entity may manage the entity’s property without a broker license. However, the unlicensed officer may not receive any contingency fees or extra compensation based on achievement, production or occupancy factors during their management of the property. They are to be salaried or on wages. The same rules apply to resident managers.10
A broker license gives the licensee authority to manage any property. However, the license does not automatically confer on the broker the designation of certified common interest development (CID) manager. It is not mandatory under state law for a broker to be “certified” to manage a common interest development, but some employers may request it.
The benchmark third-party professional certification is the Certified Community Association Manager. This certification is issued by the California Association of Community Managers. This designation is not an issue involving the CalBRE. However, the minimum educational criteria for becoming a certified CID manager are set by California law.11
Further, it is a widely held misconception that property managers are required to hold a Certified Property Manager (CPM) membership with the Institute of Real Estate Management (IREM) to perform property management activities.
The CPM designation is a non-required unofficial designation bestowed by a private non-regulatory organization. Brokers and agents may earn them by completing private coursework and submitting proof of experience in property management.
10 Bus & P C §10133(a)(1)
11 Bus & P C §§11502. 11503
Contingent fees and
bonus awards
contingency fee An incentive bonus paid upon successfully completing or hitting certain benchmarks, or received as compensation on the occurrence of an event.
A common “licensing”
misconception
certified CID manager A non-required professional designation certifying an individual has met legislated educational requirements specific to managing common interest developments.
An individual or corporation is to hold a broker license if they perform or offer to or perform any property management services on behalf of another for a fee. An individual employed by the broker to perform activities related to contacts with the landlord is to hold a broker or sales agent license.
However, several licensing exemptions exist. A broker who manages apartment complexes or the landlord may hire unlicensed staff to perform administrative and non-discretionary duties. Resident managers, attorneys, bankruptcy trustees, and (to an extent) those who hold power of attorney are not required to be licensed.
certified CID manager ............................................................... pg. 482 contingency fee ........................................................................... pg. 482
Chapter 73 Summary
Chapter 73 Key Terms
Quiz 14 Covering Chapters 73-78 is located on page 619.
Chapter 74: A property manager’s responsibilities 483
After reading this chapter, you will be able to:
• recognize and act on a property manager’s responsibilities; and • implement a property manager’s best practices in fulfilling their
professional responsibilities.
A property manager’s responsibilities
Chapter
74
Property management is an economically viable and personally rewarding real estate service permitted for real estate licensees. Serious brokers and agents often turn their attention from residential sales to the specialized and more disciplined industry of property management.
A broker’s primary objective as a property manager is to:
• oversee the maintenance of rental property;
• fill vacancies with suitable tenants;
• collect rent; and
• account to the landlord.
Thus, a property manager needs to have time and experience to actively oversee and operate all rental properties entrusted to their management.
An evolving standard of conduct
goodwill
property profile
prudent investor standard
start-up fee
trust account
trust funds
Learning Objectives
Key Terms
For a further discussion of this topic, see Chapter 9 of Real Estate Property Management.
484 Real Estate Principles, Second Edition
In California, an individual who acts as a property manager on behalf of another for a fee is required to hold a valid California Bureau of Real Estate (CalBRE) broker license. Any licensed agent or broker associate involved acts on behalf of their broker.1 [See Chapter 73]
The duty of care a property manager owes a landlord is the same duty of care a broker in real estate sales owes their sellers and buyers. As a property manager, the broker is an agent acting in capacity of a trustee on behalf of the landlord. Sales agents acting on behalf of the broker perform property management services as authorized by the broker.
A property manager’s real estate license may be revoked or suspended if the property manager demonstrates negligence or incompetence in performing their management tasks. This includes any negligence in the supervision of their employees, such as the property manager’s licensed employees.2
To be successful in the property management field, a broker is to first acquire knowledge and experience required to adequately perform their tasks.
Owners can measure how capable a broker will be at handling their properties by judging the caliber of the broker’s management skills. Most owners look to hire an experienced property manager with well-earned credentials and a competent staff who will perform to the landlord’s expectations.
Other indicators that a property manager can successfully handle rental property include:
• prior experience handling and reporting trust account activities;
• a knowledge of current programs used to record and track activity on each property managed by the property manager; and
• a competent staff to perform office and field duties and to quickly respond to both the landlord’s and the tenants’ needs.
A property manager’s obligations to a landlord include:
• holding a broker license;
• diligently performing the duties of their employment;
• sufficient oversight of the broker’s employees acting on behalf of the landlord;
• handling and accounting for all income and expenses produced by the property;
• contracting for services, repairs and maintenance on the property as authorized;
• monitoring utility services provided by the landlord;
• advertising for prospective tenants;
• showing the property and qualifying tenants; 1 Calif. Business and Professions Code §§10130, 10131(b)
2 Bus & P C §§10177(g), 10177(h)
Duty of care
trust account An account separate and apart and physically segregated from a broker’s own funds, in which the broker is required by law to deposit all funds received for clients.
Management obligations
owed the landlord
Chapter 74: A property manager’s responsibilities 485
• negotiating and executing rental and lease agreements;
• responding in a timely manner to the needs of the tenants;
• evaluating rental and lease agreements periodically;
• serving notices on tenants and filing unlawful detainer (UD) actions as needed;
• performing regular periodic property inspections; and
• keeping secure any personal property.
In addition to these tasks, the property manager also needs to:
• confirm or obtain general liability and workers’ compensation insurance sufficient to protect the landlord, naming the property manager as an additionally insured;
• only obligate the landlord to agreements authorized by the landlord;
• maintain the property’s earning power, called goodwill;
• hire and fire resident managers and other on-site employees as needed;
• comply with all applicable codes affecting the property; and
• notify the landlord of any potentially hazardous conditions or criminal activities affecting the health and safety of individuals on or about the property.
A property manager has a duty to employ a higher standard of conduct regarding the operation of a property than a typical landlord might apply. This standard is called the prudent investor standard.
A prudent investor is a person who has the knowledge and expertise to determine the wisest conduct for reasonably managing a property. The prudent investor standard is the minimum level of competency which can be expected of a property manager by a landlord.
To conduct property operations in compliance with the prudent investor standard, a property manager considers the following factors:
• the type of the property and its niche in the market;
• the socioeconomic demographics of the area surrounding the property’s location;
• the competition currently existing in the local market;
• the current physical condition of the property; and
• the existing liens on the property.
The current physical condition (curb appeal) of the property reflects the attitude of the ownership towards tenants. A property manager needs to analyze the repairs, maintenance, landscaping and improvements needed
Other activities of a manager
The prudent investor standard
prudent investor standard A property management standard reflecting the expectations of a well- informed investor for efficient and effective management of rental income and expenses.
Property analysis to understand the tasks
Critical curb appeal
486 Real Estate Principles, Second Edition
to improve the property’s visual appearance and ambiance. Then, they can determine the amount of cost involved for the upgrade and the amount of rent increase the upgrades will bring in.
A prospective tenant’s immediate concern when viewing rental property will be the lure of the landscaping, the freshness of interior and exterior paint and the overall care and tidiness of the premises. More importantly, existing tenants stay or leave based on these observances.
It is good practice for the property manager to run a cursory title check on the property they intend to manage.
A title check, commonly called a property profile, is supplied online by title companies. A property profile will confirm:
• how ownership is vested and who has authority to employ management;
• the liens on the property and their foreclosure status;
• any use restrictions affecting tenants; and
• comparable sales figures in the area.
Any discrepancy between information provided by the landlord and a property profile report is to be cleared with the landlord prior to taking over management of the property.
A property manager’s efforts to locate tenants are documented on a file activity sheet maintained for each property. This paper trail is evidence the property manager has diligently pursued activities leading to the renting of the property. Keeping a file activity sheet reduces the risk of claims that the property manager failed to diligently seek tenants or operate the property.
For example, any advertisements placed by the property manager focus on and clearly identify the property to be rented. Since the advertisement identifies the property, the landlord can be properly billed for the expense of the advertisement. Whenever an advertisement is placed, a purchase order is prepared, whether or not the paperwork is given to the publisher or printer.
As in any business, a purchase order contains the dates the advertisement is to run, the advertising copy, which vendor (newspaper or printer) it was placed with and the property to be charged. This billing referencing the purchase order is a written reminder to the property manager of their activity and which landlord to charge. Computer programs for bookkeeping provide for the entry, control and printout of this data.
The goal in property management is to make a diligent effort to locate a tenant and rent the property as quickly as possible.
Title profile analysis
avoids surprise
property profile A report from a title company providing information about a property’s ownership, encumbrances, use restrictions and comparable sales data.
Due diligence and the paper
trail
Chapter 74: A property manager’s responsibilities 487
Failing to set or keep appointments to meet with prospective tenants is inexcusable neglect. Prospective tenants respond to an advertisement. Thus, the property manager needs to be available to show them the property, unless the property has a resident or on-site manager.
A property manager’s frequent, well-documented inspections of property are nearly as important as their accurate accounting of income and expenses through their trust account. Inspections determine the:
• physical condition of the property;
• availability of habitable units or commercial space; and
• use of the leased premises by existing tenants.
There are several key moments when a property manager makes an inspection of the property:
1. When the property manager and landlord enter into a property management agreement.
Any deferred maintenance or defect which might interfere with the renting of the property is to be discussed with the landlord. The property manager resolves the discrepancy by either correcting the problem or noting it is to be left “as is.”
2. When the property manager rents to a tenant.
A walk-through is conducted with a new tenant prior to giving them occupancy. The property’s condition is noted on a condition of premises addendum form and signed by the tenant. [See RPIForm 560]
3. During the term of the lease.
While the tenant is in possession, the property is periodically inspected by the property manager to make sure it is being properly maintained. Notes on the date, time and observations are made in the property management file. File notes are used to refresh the property manager’s memory of the last inspection, order out maintenance and evidence the property manager’s diligence.
4. Two weeks prior to the tenant vacating.
Residential property is inspected prior to termination of possession if the tenant requests a joint pre-expiration inspection after receiving the mandatory landlord’s notice of right to a wear and tear analysis. [See RPIForm 567-1]
5. When the tenant vacates.
The property’s condition is compared against its condition when first occupied by the tenant. Based on any differences in the property’s condition, a reasonable amount can be deducted from the tenant’s security deposit for corrective repairs. These deductions are to be documented when accounting for the return of the deposit.
Property inspections by the manager
488 Real Estate Principles, Second Edition
6. When the broker returns management and possession of the property back to the landlord or over to another management firm.
Documenting all property inspections helps avoid disputes with the landlord or tenants regarding the condition of the property when possession or management was transferred to and from the property manager.
The property’s condition is noted on a form, such as a condition of property disclosure, and approved by the property manager and the landlord. The property manager keeps a copy in the property’s file as part of the paper trail maintained on the property. [See RPIForm 304]
Inspections that coincide with key events help establish who is responsible for any deferred maintenance and upkeep, or for any damage to the property.
On entering into a property management agreement, a broker conducts a comprehensive review of all lease and rental agreement forms used by the landlord, including changes and the use of other forms proposed by the broker.
Also, the competent property manager prepares a worksheet containing the dates of lease expirations, rent adjustments, tenant sales reports, renewal or extension deadlines, and grace periods for rent payments and late charges. Computer programs have made this tracking easier.
Periodic evaluations by the property manager of existing leases and rental agreements are undertaken to minimize expenses and maximize rental income. Vacant units are evaluated to determine the type of tenant and tenancy desired (periodic versus fixed-term), how rents will be established and which units consistently under-perform.
Obtaining the highest rents available requires constant maintenance and repair of the property. The property manager is responsible for all the maintenance and repairs on the property while employed by the landlord. This responsibility still exists if the property manager delegates the maintenance of the units to the tenants in lease agreements.
Thus, the property manager’s knowledge of the property’s condition prior to entering into a property management agreement is required in order to properly ascertain what maintenance and repairs need to be made or will be deferred.
The responsibility for maintenance includes:
• determining necessary repairs and replacements;
• contracting for repairs and replacements;
• confirming completion of repairs and replacements;
• paying for completed repairs and replacements; and
Periodic review of the
leases
Maintenance and repairs
as a responsibility
Chapter 74: A property manager’s responsibilities 489
• advising the landlord about the status of repairs and replacements in a monthly report.
A property manager needs to disclose to their employing landlord any financial benefit the property manager receives from:
• maintenance or repair work done by the property manager’s staff; or
• any other materials purchased or services performed.
To eliminate the risk of accepting undisclosed profits, the property manager makes a written disclosure of any ownership interests or fee arrangements they may have with vendors performing work, such as landscapers, plumbers, etc.
Any undisclosed profit received by the property manager for work performed by the property manager or others on the landlord’s property is improperly received and needs to be returned to the landlord. [See Form 119 accompanying this chapter]
Additionally, the landlord can recover any other brokerage fees they have already paid when the property manager improperly or intentionally takes an undisclosed profit while acting as the landlord’s agent.3
The way a property is operated develops goodwill with tenants. Economically, goodwill equates to the earning power of the property. A property manager in the ordinary course of managing property will concentrate on increasing the intangible image — goodwill — of the property.
Goodwill is maintained when the property manager:
• cares for the appearance of the property;
• maintains an appropriate tenant mix (without employing prohibited discriminatory selection); and
• gives effective and timely attention to the tenants’ concerns.
The manager who fails to promptly complete necessary repairs or correctly maintain the property may be impairing the property’s goodwill built up with tenants and the public. Allowing the property or the tenancies to deteriorate will expose the property manager to liability for the decline in revenue.
To accommodate the flow of income and expenditures from the properties and monies they manage, the property manager maintains a trust account in their name, as trustee, at a bank or financial institution.4
3 Jerry v. Bender (1956) 143 CA2d 198
4 10 Calif. Code of Regulations §2830
Earnings from all sources disclosed
Goodwill is value maintained or lost
goodwill The intangible image or opinion held about a property which affects its earning power.
Reserves and deposits in the trust account
490 Real Estate Principles, Second Edition
A property manager is required to deposit all funds collected on behalf of a landlord into a trust account within three business days of receipt. These funds are called trust funds.
Trust funds collected by a property manager include:
• security deposits;
• rents;
trust funds Items which have or evidence monetary value held by a broker for a client when acting in a real estate transaction.
Form 119
Compensation Disclosure in a Real Estate Transaction
Chapter 74: A property manager’s responsibilities 491
• cash reserves; and
• start-up fees.5
Generally, a property manager receives a cash deposit as a reserve balance from the landlord. The sum of money includes a start-up fee, a cash reserve for costs and the tenants’ security deposits.
A start-up fee is usually a flat, one-time management fee charged by the property manager to become sufficiently familiar with the property and its operations to commence management activities.
The cash reserve is a set amount of cash the landlord agrees to maintain as a minimum balance in the broker’s trust account. The cash reserve is used to pay costs incurred when costs and mortgage payments exceed income. Security deposits are additional to the client’s cash reserves.
The security deposits are accounted for separately from other funds in the trust account, though this is not required. Security deposits belong to the tenant and are to be returned, less reasonable deductions, with an accounting within 21 days after a residential tenant’s departure, or 30 days after a commercial tenant’s departure.6 [See Chapter 78]
To avoid jeopardizing the status of the property manager’s license due to a mishandling of the trust account, the property manager is to:
• deposit the funds received, whether in cash, check or other form of payment, within three business days;7
• keep trust fund account records for three years after the transaction;8
• keep a separate ledger or record of deposits and expenditures itemized by each transaction and for each landlord;9 and
• keep accurate trust account records for all receipts and disbursements.10
Tied to the property manager’s duty to properly maintain their trust account is the duty to account to the landlord.
All landlords are entitled to a statement of accounting no less than at the end of each calendar quarter (i.e., March, June, September and December).
The accounting is to include the following information:
• the name of the property manager;
• the name of the landlord;
• a description of the services rendered;
• the identification of the trust fund account credited;
5 Bus & P C §10145(a); Bureau of Real Estate Regulations §2832
6 Calif. Civil Code §1950.5(g)(1); 1950.7(c)(1)
7 CalBRE Reg. §2832
8 Bus & P C §10148
9 CalBRE Reg. §2831.1
10 CalBRE Reg. §2831
start-up fee A flat, one-time fee charged by a property manager for the time and effort taken to become sufficiently familiar with the operations of the property to commence management.
Manager’s trust account supervision
Accounting to the landlord
492 Real Estate Principles, Second Edition
• the amount of funds collected to date;
• the amount disbursed to date;
• the amount, if any, of fees paid to field agents or leasing agents;
• the overhead costs; and
• a breakdown of the advertising costs, a copy of the advertisement, the name of the newspaper or publication and the dates the advertisement ran.
Also, the property manager needs to give a full accounting when the property management agreement expires or is terminated. Any discrepancy or failure by the property manager to properly account for the trust funds will be resolved against them and in favor of the landlord. Even if the property manager’s only breach is sloppy or inaccurate accounting, they are responsible as though misappropriation and commingling occurred.
A property manager employs a higher standard of conduct regarding their operation of a property than a typical landlord might. The property manager also applies this higher standard of conduct when overseeing the maintenance of rental property, filling vacancies with suitable tenants, collecting rent and accounting to the landlord.
All trust accounts need to be maintained in accordance with standard accounting procedures. A property manager is to diligently manage all accounts to avoid claims of mishandling. The property manager is also responsible for providing a statement of account to the landlord.
goodwill ....................................................................................... pg. 489 property profile .......................................................................... pg. 486 prudent investor standard ...................................................... pg. 485 start-up fee ................................................................................... pg. 491 trust account ............................................................................... pg. 484 trust funds .................................................................................... pg. 490
Chapter 74 Summary
Chapter 74 Key Terms
Quiz 14 Covering Chapters 73-78 is located on page 619.
Chapter 75: Residential rental and lease agreements 493
After reading this chapter, you will be able to:
• negotiate the various terms for occupancy under residential rental or lease agreements; and
• identify the features of periodic, month-to-month residential rental or lease agreements.
Residential rental and lease agreements
Chapter
75
Residential landlords and tenants typically enter into either a fixed-term lease agreement or a periodic rental agreement. Residential periodic tenancies frequently take the form of month-to-month rental agreements.
Residential rental and lease agreements both grant the tenant the right to possession. Both impose the same rights and obligations regarding maintenance of the property on the landlord and tenant. However, the tenant’s expectation of continued occupancy and their obligation to pay future rent differs between a rental agreement and a lease agreement.
Recall that a month-to-month rental agreement runs for an indefinite period of time. It automatically renews monthly, and on the same terms, until modified or terminated by notice. [See RPI Form 551 §3]
A review of periodic vs. fixed-term tenancies
addendum
credit application
rental market
waterbed addendum
Key Terms
Learning Objectives
For an additional discussion of the materials presented in this chapter, see Chapter 50 of Real Estate Property Management.
494 Real Estate Principles, Second Edition
Periodic tenancies can be terminated by either the landlord or the tenant on 30 days’ written notice. However, a landlord needs to give the tenant at least 60 days’ written notice if the tenant’s occupancy has exceeded one year.1
On the other hand, a lease agreement creates a tenancy that continues for a fixed period. At the end of the fixed-period, both the tenant’s right of possession and the lease agreement expires. The terms of the lease set the expiration date, and no further notice is required. [See Figure 1, Form 550 §3]
1 Calif. Civil Code §1946
Figure 1
Form 550
Residential Lease Agreement
For a full-size, fillable copy of this or any other form in this book that may be used in your professional practice, go to realtypublications.com/forms
Chapter 75: Residential rental and lease agreements 495
Unlike a periodic tenancy, the lease agreement does not automatically renew, unless an option to renew or extend has been written into the lease agreement and exercised.
The rental market is the market environment in which landlords seek tenants (and vice versa). The condition of the rental market is determined by:
• the population of prospective tenants;
• the number of properties competing for these tenants; and
• the comparative position of the property and its amenities in relation to competing properties.
The rental market sets the amount of rent a residential landlord is able to charge for occupancy.
Generally, tenants on month-to-month rental agreements pay higher amounts of rent for a unit than do tenants with fixed lease agreements. Month-to-month tenants pay a premium for the privilege of being able to vacate the premises on 30 days’ notice, without liability exposure for future rents. This privilege held by the tenant contributes to the landlord’s uncertainty about their income and costs of tenant turnover.
Tenants typically pay lower rents when they enter into a lease. In stable rental markets characterized by a normal rate of turnover, the longer the lease, the lower the rent as the landlord is assured a steady income flow for the duration of the lease term.
However, rent is subject to adjustments for future price inflation, local appreciation and management operational decisions. During weak market periods of generally high vacancy rates, price-competitive landlords favor using month-to-month rental agreements rather than leases. When rents begin to rise, landlords can adjust rents quickly by serving the proper notice of a change in rental terms. [See Chapter 77]
A landlord cannot alter the terms of a lease agreement during the life of the lease without consideration and the tenant’s consent.
To extend the tenant’s occupancy under a soon-to-expire lease, the landlord contacts the tenant and offers to enter into:
• another lease agreement; or
• a month-to-month rental agreement.
If the tenant desires to remain in possession when their lease expires, the amount of rent a landlord can demand is limited only by negotiations, economic forces in the rental market and the tenant’s cost of relocation (which can be substantial).
Rental market influences
rental market The market environment in which landlords seek tenants and tenants seek landlords for the occupancy of property. The rental market sets the amount of rent a property will command on any given day.
Lease negotiations on expiration
496 Real Estate Principles, Second Edition
As an alternative, a landlord can proactively negotiate and grant options to renew or extend a lease at the same time they initially negotiate the terms of the lease agreement. [See RPI Form 565]
On locating a prospective tenant for a residential unit, the landlord needs to establish the prospect’s creditworthiness. To accomplish this, the tenant begins by filling out a credit application before entering into either a rental or lease agreement. [See RPI Form 302]
The credit application is referenced and attached as an addendum to any rental or lease agreement entered into by the landlord and tenant. The landlord uses the authorization granted by the tenant in the credit application to verify the:
• tenant’s rental history;
• employment;
• credit standing; and
• check-writing history.
If a prospective tenant has a poor credit rating or none at all, yet meets the landlord’s rent-to-income ratio requirements, the landlord might seek assurances in addition to the maximum security deposit allowed. These assurances may include:
• a co-signer on the lease; or
• a guarantee agreement executed by a creditworthy individual. [See RPI Form 553-1]
Occasionally a tenant defaults on their rent or otherwise causes the landlord to incur a loss greater than the security deposit. With these assurances, the landlord can make a demand for payment of the loss on the co-signer or the guarantor since both are liable.
A residential landlord has the statutory duty to maintain the rented premises. Similarly, a residential tenant has the statutory duty to refrain from damaging the premises.
To avoid disputes over who is responsible for any damage to the premises, the residential landlord and tenant complete and sign a condition of premises addendum before the tenant is given possession. [See RPI Form 560]
Before a tenant takes possession, the landlord or resident manager inspects the unit with the tenant, known as a walk-through. Together, the landlord or resident manager and the tenant use a condition of premises addendum to note:
• the premises is in satisfactory condition;
• any existing damage to the premises observed before the tenant takes possession; and
Requisites to accepting
tenants
credit application A document prepared by a prospective tenant which includes a provision authorizing the investigation and receipt of information on the applicant’s creditworthiness. [See RPI Form 302]
Condition of premises addendum
Chapter 75: Residential rental and lease agreements 497
• any repairs the landlord is to make to the premises.
If the unit is furnished, the landlord and tenant complete and sign an additional form on their walk-through called a condition of furnishings addendum. The condition of furnishings addendum confirms:
• the inventory of furnishings located in the unit;
• the current condition of the furnishings; and
• the tenant’s acceptance of the furnishings. [See RPI Form 561]
At the end of the tenancy, the condition of premises addendum is reviewed during the pre-expiration inspection to help establish tenant responsibility for excess wear and tear to the unit rented. [See RPI Form 567-3]
Any provisions agreed to but not included in the boilerplate provisions of pre-printed lease or rental agreements can be included in an addendum. The addendum is then referenced in the body of the rental or lease agreement.
One such addendum is the pet addendum. If a landlord allows pets, they often:
• impose restrictions on the type or size of the pet; and
• require the landlord’s written consent to keep the pet on the premises. [See RPI Form 551 §6.9 and Form 550 §6.9]
The landlord and tenant can sign and attach a pet addendum stating:
• the type of pet and its name;
• the security deposit to be charged for the pet (but limited as part of the maximum security deposit allowed) [See Chapter 78]; and
• the tenant’s agreement to hold the landlord harmless for any damage caused by the pet. [See RPI Form 563]
A landlord cannot prohibit a disabled person from keeping a specially trained guide dog on the premises.2 [See Chapter 7]
Additionally, a landlord who allows pets may not:
• favor declawed or devocalized animals in any advertisement;
• refuse to rent to a tenant because their pet has not been declawed or devocalized; or
• require tenants’ pets to be declawed or devocalized as a condition of renting the property.3
Editor’s note — Although landlords may not favor declawed or devocalized pets, they may still protect against property damage or noise by including a lease provision barring specific pet behavior or prohibiting pets altogether.
2 CC §54.1(b)(5)
3 CC §1942.7
Pet and waterbed addendum
addendum An attachment to a contract, rental or lease agreement for incorporating any provision agreed to but not included in the boilerplate provisions of the agreement. [See RPI Form 250]
waterbed addendum An addendum to a rental or lease agreement setting the additional security deposit and insurance coverage the tenant will provide the landlord to keep a waterbed on the premises. [See RPI Form 564]
498 Real Estate Principles, Second Edition
Lease agreements and month-to-month rental agreements also prohibit a tenant from keeping a waterbed or other liquid-filled furnishings on the premises without addendums providing the landlord’s written consent. [See RPI Form 551 §6.9 and Form 550 §6.9]
When a tenant has a waterbed, the landlord may require the tenant to sign a waterbed addendum. [See RPI Form 564]
To prohibit smoking under rental or lease agreements, landlords are required to include a provision specifying the areas on the property where smoking is prohibited. Alternatively, landlord may use a non-smoking addendum to prohibit smoking on the premises. [See RPI Forms 550, 551 and 563-1]
To prohibit smoking under existing rental agreements entered into before January 1, 2012, the landlord is to notify tenants by delivering a written 30- day notice of change in rental terms. The no-smoking condition is enforceable on the expiration of the 30-day notice period. [See RPI Form 570]
Other addenda which may be made part of a residential rental or lease agreement include:
• house or building rules; and
• any rent control disclosures required by local rent control ordinances.
A residential landlord seeking to sell a property may also grant the tenant an option to purchase the property. [See RPI Form 161]
Residential tenants typically provide a security deposit to the landlord to cover the cost to clean the unit or remedy any damage caused to the unit beyond reasonable wear and tear. [See RPI Form 551 §2 and Form 550 §2; see Chapter 78]
In return for the use and possession of the premises, the tenant pays the landlord rent until expiration of the lease, or periodic tenancy. The tenant agrees to pay a late charge if rent is not paid on the due date, or within the established grace period. [See RPI Form 551 §4 and Form 550 §4; see Chapter 79]
Also, the number of guests the tenant may have in their unit and the period of time over which their guests may visit is limited. [See RPI Form 551 §5.6 and Figure 1, Form 550 §5.6]
The tenant agrees to comply with all building or project rules and regulations established by any existing covenants, conditions and restrictions (CC&Rs) controlling use of the unit, or the landlord. [See RPI Form 551 §6.1 and Form 550 §6.1]
Non-smoking addendum
Other addenda
Terms of residential occupancy
Chapter 75: Residential rental and lease agreements 499
The landlord and tenant agree who will pay or how they will share the financial responsibility for the unit’s utilities. For example, landlords of apartment buildings or complexes often retain the responsibility of providing water to the units. [See RPI Form 551 §6.2 and Form 550 §6.2]
In both rental and lease agreements, tenants agree to hold the landlord harmless from all liability for damages caused by the tenant or their guests. An insurance policy provided by the tenant and naming the landlord as an additional insured is to be considered. [See RPI Form 551 §7.1 and Form 550 §7.1]
Residential lease agreements and month-to-month rental agreements often contain redundant provisions that restate the landlord’s and tenant’s statutory rights and duties.
For example, the rental agreement reiterates the landlord’s statutory obligation to furnish a tenant with:
• a security deposit refund;
• notice of the right to a joint pre-expiration inspection of the unit and delivery of an itemized statement of repairs/cleaning ; and
• a statement of security deposit accounting and an itemization of any deductions. [See RPI Form 551 §2.4 and Form 550 §2.4; see Chapter 78]
Also, rental agreements often advise tenants of their limited statutory right to make necessary repairs to the premises and deduct the cost from the rent. This situation arises when the landlord fails to make the repairs the tenant has brought to the landlord’s attention. [See RPI Form 551 §6.2 and Figure 1, Form 550 §6.2]
A rental or lease agreement may prohibit a tenant from:
• using the premises for an unlawful purpose;
• creating a nuisance; and
• committing waste. [See RPI Form 551 §6.7, §6.8 and Form 550 §6.7, §6.8]
Even if the lease or rental agreement does not restate these statutory prohibitions, a tenant who carries on any of these prohibited activities can be evicted with a three-day written notice to quit. [See RPI Form 576; see Chapter 80]
Statutory rights and duties
500 Real Estate Principles, Second Edition
A fixed-term lease agreement creates a tenancy that continues for a fixed period. A month-to-month rental agreement runs for an indefinite period of time. It automatically renews monthly, and on the same terms, until modified or terminated by notice.
Tenants typically pay lower rents when they enter into a fixed-term lease. In stable rental markets, the longer the lease, the lower the rent.
Any provisions agreed to but not included in the boilerplate provisions of pre-printed lease or rental agreements can be included in an addendum to the rental or lease agreement, such as a pet, waterbed or non-smoking addenda.
addendum ..................................................................................... pg. 497 credit application ....................................................................... pg. 496 rental market ............................................................................... pg. 495 waterbed addendum .................................................................. pg. 497
Chapter 75 Summary
Chapter 75 Key Terms
Quiz 14 Covering Chapters 73-78 is located on page 619.
Chapter 76: Commercial lease agreements 501
After reading this chapter, you will be able to:
• distinguish the various types of commercial lease agreements and use them to meet the objectives of the landlord and tenant; and
• determine whether the tenant or the landlord is responsible for paying property operating expenses and attending to the care and maintenance of the leased premises under lease agreement provisions.
Learning Objectives
Commercial lease agreements
Chapter
76
A lease agreement is a contract of conveyance entered into by a landlord and tenant. The lease agreement addresses tenant and landlord obligations, such as the payment of money and the care of the real estate.
The lease agreement also conveys a possessory interest in real estate, called a leasehold estate, or simply a lease.1
1 Calif. Civil Code §761(3)
The conveyance of a leasehold
For an additional discussion of the materials presented in this chapter, see Chapter 41 of Real Estate Property Management.
ad valorem taxes
attorney fee provision
choice-of-law provision
full-service gross lease
gross lease
heirs, assigns and successors clause
net lease
pure-net lease
reasonable certainty
reversionary interest
triple-net lease
Key Terms
502 Real Estate Principles, Second Edition
By entering into a lease agreement and delivering possession to the tenant, the landlord conveys the exclusive right to occupy a parcel of real estate, or space in a parcel, for a fixed period of time. The continued right to occupy the real estate is conditioned on the tenant’s performance under two sets of provisions in the lease agreement:
• one calling for the payment of rent; and
• the other calling for any maintenance of the property delegated to the tenant.
On expiration of the lease term, the right of possession to the real estate reverts to the landlord. During the lease term when the tenant holds the right to possession, the landlord, as the owner of the fee simple, holds a reversionary interest in the leased parcel or space.
Once the landlord and tenant have entered into a lease agreement, the right of possession of the leased real estate is controlled by landlord/tenant law, not contract law.
The rent provisions in the lease agreement evidence the debt the tenant has contracted to pay to the landlord over the term of the lease. If the tenant breaches a material provision in the lease agreement, the landlord may prematurely regain possession of the real estate by forfeiting the tenant’s leasehold interest and right of possession.
However, forfeiture of the tenant’s right of possession does not automatically cancel the underlying lease agreement, the contract rights. The lease agreement calling for the tenant to pay rent and other amounts for the duration of the lease term remains intact.
A lease agreement conveying a term of occupancy exceeding one year needs to be written to be enforceable. This is a requirement of the statute of frauds.2
The provisions contained in a lease agreement fall into one of three categories of activities:
• conveyance of the leasehold interest
• the lease debt, called rent; and
• responsibility for care and maintenance of the leased premises. [See Figure 1, RPI Form 552]
Editor’s note — Many variations of the commercial lease exist. Which of these the landlord and tenant choose depends on the specifics of the tenancy. Realty Publications, Inc. (RPI) offers numerous lease agreements tailored to common variations in commercial lease agreements, including:
• Single Tenant Gross Lease [See RPI Form 552];
• Multi-Tenant Gross Lease [See RPI Form 552-1];
• Single Tenant Net Lease [See RPI Form 552-2];
2 CC §1624(a)(3)
reversionary interest A future interest a person retains on the grant of property which reverts to the person on the occurrence of an event.
Validity of the lease
agreement form
Chapter 76: Commercial lease agreements 503
• Multi-Tenant Net Lease [See RPI Form 552-3];
• Percentage Lease [See RPI Form 552-4]; and
• Month-to-Month Tenancy [See RPI Form 552-5].
To be valid, a lease agreement needs to:
• designate the size and location of the leased premises with reasonable certainty;
Figure 1
Form 552
Commercial Lease Agreement
Gross — Single Tenant
504 Real Estate Principles, Second Edition
• set forth a term for the tenancy conveyed; and
• state the rental amount, and its time, place and manner of payment.3
A broker, representing the landlord or tenant, uses either a letter of intent (LOI) or an offer to lease to initiate and document lease negotiations prior to entering into the lease agreement itself. [See RPI Form 556]
The actual lease agreement is prepared and signed after its terms and conditions have been negotiated and agreed to in the LOI or offer to lease.
A commercial lease agreement form has five sections:
• identification of the parties and the premises, and the conveyance and term of the lease;
• the terms for payment of rent and other amounts owed, collectively called the rent provisions;
• the provisions setting forth the responsibility for care and maintenance of the leased property, collectively called the use-maintenance provisions;
• miscellaneous provisions for circumstances specific to the transaction; and
• the signatures of the parties.
The identification section of a real estate lease agreement includes:
• the names of the landlord and the tenant;
• a description of the leased premises;
• words of conveyance transferring the leasehold interest in the property;
• a receipt for prepaid rents and the security deposit; and
• a list of the addenda which contain exhibits or additional terms. [See RPI Form 552 §1.3]
Each party to a lease agreement needs to be properly identified. On the lease agreement form, the identification of the tenant indicates how their ownership of the lease conveyed will be vested.
When the fee ownership interest of the landlord is community property, both spouses need to consent to agreements leasing the community property for a fixed term exceeding one year. If not, the community is not bound by the lease agreement.
Also, if challenged within one year after commencement by the nonconsenting spouse, the tenant cannot enforce the conveyance of the leasehold right.4
3 Levin v. Saroff (1921) 54 CA 285
4 Calif. Family Code §1102
The contents of a lease
agreement
Proper identification of the parties
Chapter 76: Commercial lease agreements 505
In addition to individuals, business entities which may own or lease property include:
• corporations and out-of-state entities qualifying as a corporation such as business trusts;
• limited liability companies (LLCs);
• partnerships, general or limited;
• real estate investment trusts (REITs);
• nonprofit organizations; and
• governmental agencies.
Individuals who sign a lease agreement on behalf of the landlord or the tenant need to have the capacity and the authority to act on behalf of and bind the landlord or tenant.5
The commercial lease agreement needs to describe the premises to be leased so the premises can be located with reasonable certainty. A description is reasonably certain if it furnishes a “means or key” for a surveyor to identify the parcel’s location.6
If the premises is a building or a space in a building, the common street address, including the unit number, is a sufficient description to identify the premises.
If the premises is not easily identified by its common address, a plot map or floor plan should be included as an addendum to the lease agreement identifying the space rented.
The terms common to commercial leases are contained in the provisions of a regular lease agreement form.
However, the terms and conditions unique to the leasing of a particular type of commercial tenancy are handled in an addendum attached to the lease agreement.
When inconsistencies arise between provisions in the pre-printed lease agreement and an attached addendum, the provisions in the addendum control. Also, any handwritten or typewritten provisions added to an agreement control over conflicting pre-printed or boilerplate provisions.7
Addenda occasionally attached to a commercial lease agreement include:
• terms unique to the type of property leased;
• a property description addendum, such as a plot map or site plan;
• a structural or tenant improvement agreement;
• a condition of premises addendum [See RPI Form 560];
5 CC §§2304; 2307
6 Beverage v. Canton Placer Mining Co. (1955) 43 C2d 769
7 Gutzi Associates v. Switzer (1989) 215 CA3d 1636
Premises identified with certainty
reasonable certainty The degree of certainty expected from a reasonable person.
Addenda to the lease agreement
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• maintenance modification addendum [See RPI Form 552-6];
• a building rules addendum;
• an option or right of first refusal to renew or extend [See RPI Form 566];
• a brokerage fee addendum [See RPI Form 273];
• a tenant leasehold subordination agreement regarding a future mortgage [See RPI Form 552-8];
• a non-disturbance and attornment provision;
• a signage or tenant association agreement;
• an option or right of first refusal to lease additional space;
• authority to sublease or assign [See RPI Form 552-7]; and
• an option or right of first refusal to buy. [See RPI Form 161 and Form 579]
If the lease agreement is for a sublease of the premises, a copy of the master lease is referenced and attached to the lease agreement. [See RPI Form 552 §2.4]
A commercial lease agreement is a contract to rent real estate for a fixed term. The lease agreement indicates the dates on which the lease term commences and expires.8 [See RPI Form 552 §2.1]
The date for delivery and acceptance of possession are addressed separately from the date of the lease agreement. The date of the lease agreement is solely for the purpose of identifying the document. [See RPI Form 552 §2.1]
On expiration of the lease term on the date stated in the lease agreement, the tenant’s right to possession automatically terminates. The tenant vacates the property on or before the lease expiration date unless further occupancy agreements exist. No further notice is required from the landlord or tenant to terminate the tenancy.9
However, a holdover tenancy, also called a tenancy at sufferance, is created when:
• the tenant remains in possession after the lease term expires without the exercise of an option to renew or extend the tenancy; and
• the landlord refuses to accept further rent payments.
The holdover tenancy ends when the tenant vacates or is evicted.
A holdover rent provision in the lease agreement calls for a set dollar amount of rent to accrue daily during the holdover period. The rent is due and payable on demand after the tenant vacates or is evicted.
The daily rent is usually significantly higher than the fair market rate, a penalty rate for the unlawful detainer of possession. As a result, holdover rent
8 CC §761(3)
9 CC §1933
The term of the tenancy
Chapter 76: Commercial lease agreements 507
is considered unreasonable if sought as an award in an unlawful detainer (UD) action. An UD action allows only market rent rates for the holdover period. [See RPI Form 552 §2.3]
The landlord can initiate UD proceedings to evict the holdover tenant immediately on expiration of the lease term.10
Lease agreement provisions set the date the tenant is to take possession of the leased premises. They also address the consequences when a landlord fails to deliver the premises to the tenant as agreed. [See RPI Form 552 §5]
The tenant is given the opportunity to terminate the lease agreement if possession is not delivered within the agreed-to number of days after commencement of the lease.
A landlord sometimes fails to deliver possession to the tenant due to their inability to recover the premises from a previous tenant or complete tenant or structural improvements. To cover this risk, the lease agreement states the tenant is not liable for rent payments until possession is delivered. [See RPI Form 552 §5.2]
The responsibility for paying brokerage fees for leasing services is controlled by compensation provisions in:
• an authorization to lease;
• a property management agreement;
• an offer to lease or LOI; or
• the lease agreement itself.
This redundancy allows the broker to enforce payment of the brokerage fees in case the prior documents did not include a commitment from either the tenant or the landlord to pay the brokerage fees. [See RPI Forms 552 §24.1 and 113]
An attorney fee provision enables the landlord to recover costs incurred to enforce payment of rent or evict the tenant. Regardless of how an attorney fee provision is written, the prevailing party in litigation is entitled to be awarded their fee.11 [See RPI Form 552 §25.2]
The heirs, assigns and successors clause binds those who later take the position of the landlord or tenant to the existing lease (or rental) agreement through a(n):
• grant;
• assignment; or
10 CCP §1161(1)
11 CC §1717(a)
Delivery and acceptance of possession
Brokerage fees
Miscellaneous provisions
attorney fee provision A provision in an agreement permitting the prevailing party to a dispute to receive attorney fees when litigation arises due to the agreement. [See RPI Form 552 §23.2]
heirs, assigns and successors clause A clause in a lease agreement which binds those who later take the position of landlord or tenant to the existing agreement. [See RPI Form 552 §23.3]
508 Real Estate Principles, Second Edition
• assumption.12 [See RPI Form 552 §25.3]
A choice-of-law provision in the lease agreement assures application of California law when a dispute arises between the tenant and the landlord. [See RPI Form 552 §25.4]
Application of California law in disputes over property located in California adds stability to the legal expectations of the landlord and tenant. It also produces greater commercial certainty in real estate transactions and stabilizes property values.
A tenant who acquires a leasehold interest in commercial real estate agrees to be obligated for none, some or all of the operating costs of the real estate, as rent due. These expenses are incurred by the tenant in addition to payment of the base rent and periodic rent adjustments.
Editor’s note — Residential lease agreements rarely require the tenant to undertake the full care and maintenance of the premises. Usually, residential tenants always have the obligation to prevent excessive wear and tear.
Typically, the longer the term of the commercial lease, the more extensive the shift of ownership costs and responsibilities to the tenant, including:
• property operating expenses;
• all or future increases in real estate taxes, called ad valorem taxes;
• hazard insurance premiums;
• repair and maintenance; and
• the risk of an increase in interest payments on an adjustable rate mortgage (ARM) encumbering the property.
When a long-term lease obligates the tenant to pay for all expenses incurred in the ownership and operation of the property, the tenant incurs the expenses in one of two ways:
• directly, where the tenant contracts for services and pays the cost, including taxes and insurance premiums; or
• indirectly, when the landlord incurs the expenses and then bills the tenant for payment, such as common area maintenance charges (CAMs).
The responsibility for the payment of operating costs is reflected in the reference to commercial leases as either:
• a gross lease; or
• a net lease.
Variations and modifications exist for both types of leases.
12 Saucedo v. Mercury Savings and Loan Association (1980) 111 CA3d 309
choice-of-law provision A clause which sets the state law applicable in the event of a dispute. [See RPI Form 552 §23.4]
The economics of
commercial leases
ad valorem taxes Real estate taxes imposed on property based on its assessed value. [See RPI Form 552-2 §5.1]
Expenses incurred
gross lease A commercial lease specifying that the tenant pays for their utilities and janitorial fees, but unless modified is not responsible for any other care, maintenance or carrying costs of the property. [See RPI Form 552 and 552-1]
Chapter 76: Commercial lease agreements 509
Leasing agents have no universally accepted definitions or guidelines for titles they use to identify the economics of a lease and the classifications for leases are forever changing. Often, agents clarify with each other the type of lease their clients intend to enter into.
A commercial lease is typically called a gross lease if the tenant pays for their utilities and janitorial fees, but is not responsible for any other care, maintenance or carrying costs of the property.
When the landlord of an office building retains the responsibility for payment of all costs of care and maintenance, including the tenant’s utilities and janitorial services, the lease used is referred to as a full-service gross lease.
Conversely, a commercial lease that transfers to the tenant the obligation to pay some or all of the costs and responsibilities of ownership, in addition to utilities and janitorial services, is referred to as a modified gross lease or net lease.
A lease becomes more net (and less gross) for the landlord as they shift more ownership responsibilities and operating costs to the tenant.
The modified gross or net lease is the most commonly used commercial lease agreement. Significant supply and demand changes alter bargaining positions during business cycles and in turn shift the responsibility for property operating costs through negotiations.
Another type of lease is the triple net lease, sometimes referred to as a net-net-net lease. A triple net lease passes the responsibility for all costs and maintenance of the property to the tenant, either directly or through CAMs. Under a triple net lease, the landlord is only responsible for capital improvements, such as replacement of structural components.
When a tenant assumes absolutely all ownership duties under a lease agreement, and the landlord merely collects rent payments without concern for their management of the property, the lease is called a pure-net lease.
full-service gross lease A commercial lease specifying that the landlord retains the responsibility for payment of all costs of care and maintenance, unless modified, including the tenant’s utilities and janitorial services. [See RPI Form 552 and 552-1]
net lease A commercial lease which transfers to the tenant the obligation, unless modified, to pay all of the costs of ownership in addition to utilities and janitorial services. [See RPI Form 552-2 and 552-3]
triple net lease A commercial lease which passes the responsibility for all costs and maintenance of the property to the tenant. [See RPI Form 552-2 and 552-3]
pure-net lease A commercial lease in which a tenant assumes absolutely all the obligations of ownership. [See RPI Form 552-2 and 552-3]
A lease agreement is a contract entered into by a landlord and tenant addressing the tenant’s primary responsibilities: the payment of money and the care of the real estate. The lease agreement also acts to convey a possessory interest in real estate to the tenant. By entering into a lease agreement and delivering possession to the tenant, the landlord conveys to the tenant the exclusive right to occupy a parcel of real estate, or space in a parcel, for a fixed period of time. On expiration of the term of the lease, the right of possession to the real estate reverts to the landlord.
Chapter 76 Summary
510 Real Estate Principles, Second Edition
The provisions contained in a written lease agreement fall into one of three categories of activities:
• conveyance of the leasehold interest;
• the money obligation of the tenant, a debt called rent; and
• responsibility of the tenant and the landlord for care and maintenance of the leased premises and other property operating expenses.
A commercial lease agreement form has five main sections:
• identification of the parties and the premises, and the conveyance and term of the lease;
• the terms for payment of rent and other amounts owed, collectively called rent provisions;
• the provisions setting forth the responsibility for care and maintenance of the leased property, collectively called the use- maintenance provisions;
• miscellaneous provisions for circumstances specific to the transaction; and
• the signatures of the parties.
A lease agreement conveying a term of occupancy exceeding one year is required to be written to be enforceable.
ad valorem taxes .......................................................................... pg. 508 attorney fee provision ................................................................ pg. 507 choice-of-law provision ............................................................. pg. 508 full-service gross lease ............................................................... pg. 509 gross lease ...................................................................................... pg. 507 heirs, assigns and successors clause ....................................... pg. 507 net lease ......................................................................................... pg. 509 pure-net lease ............................................................................... pg. 509 reasonable certainty ................................................................... pg. 505 reversionary interest .................................................................. pg. 502 triple-net lease ............................................................................. pg. 509
Chapter 76 Key Terms
Quiz 14 Covering Chapters 73-78 is located on page 619.
Chapter 77: Changing terms on a month-to-month tenancy 511
After reading this chapter, you will be able to:
• apply the rules a landlord adheres to when changing the terms of a month-to-month tenancy; and
• observe the proper procedure for serving the tenant with a notice of change in rental terms.
Changing terms on a month-to-month tenancy
Chapter
77
All conditions in a residential or commercial month-to-month rental agreement may be changed on written notice by the landlord. This notice is commonly referred to as a notice of change in rental terms.
The most common notice of change in rental terms requires a 30-day notice period. However, a 60-day notice period is required for rent increases greater than 10% or greater.1 [See RPI Form 570 and 574]
Editor’s note — Conditions in a rental or lease agreement are also commonly referred to as provisions, clauses, terms, conditions, addenda, covenants, etc.
For example, a residential or commercial landlord under a month-to-month rental agreement can increase the rent, or shift repair and maintenance obligations to the tenant, by serving a 30-day notice of change in rental terms. [See RPI Form 570]
1 Calif. Civil Code §827
Notice to change rental terms
notice of change in rental terms Written notice served on the tenant noting changes in the terms or conditions of a month- to-month rental agreement. [See RPI Form 570 and 574]
notice of change in rental terms
notice of intent to vacate
Key Terms
Learning Objectives
For an additional discussion of the materials presented in this chapter, see Chapter 22 of Real Estate Property Management.
512 Real Estate Principles, Second Edition
To be enforceable, a notice of change in rental terms needs to be served in the same manner as a three-day notice to pay rent or quit.
In contrast to the rights of a landlord, a month-to-month tenant has no ability to alter the terms of the rental agreement, other than to terminate the tenancy and vacate. Only the landlord may unilaterally change the terms in a rental agreement.2
In rent control communities, a landlord or property manager needs to be fully apprised of how rent control ordinances affect their ability to alter provisions in leases and rental agreements.
A landlord or property manager may serve the tenant under a periodic rental agreement with a notice of change in rental terms on any day during the rental period.
Once a notice of change in rental terms is served on a periodic tenant, the new terms stated in the notice immediately become part of the tenant’s rental agreement.3
However, the new rental terms stated in the notice do not take effect until expiration of the 30-day notice.
If a residential or commercial landlord under a month-to-month rental agreement desires to increase rent, the length of the notice period depends on the amount of the rent increase.
To determine whether a 30-day or 60-day notice is required, the landlord compares the increased rent sought with the lowest rent amount paid by the tenant during the last 12 months.
If the total increase in rent is 10% or less of the lowest amount of rent paid during the previous 12 months, the landlord may serve the tenant with a 30- day notice of change in rental terms.
However, if the total increase in rent is more than 10%, the landlord needs to serve the tenant with a 60-day notice of change in rental terms.4
For instance, consider a residential landlord charging a month-to-month tenant a rent of $1,000 per month. The landlord has not increased the tenant’s rents during the last 12 months, but now seeks to increase the rent by $100 per month. Since the total rent increase is 10%, the landlord serves the tenant with a 30-day notice.
Now consider another landlord and tenant. In the last 12 months, the landlord increased the tenant’s monthly rent from $950 to $1,000. The
2 CC §827; CC §1946
3 CC §827
4 CC §827
The notice period needs
to run
Notice periods for increasing
rent
Chapter 77: Changing terms on a month-to-month tenancy 513
landlord currently seeks to increase the rent by an additional $100. The requested increase of $100 (totaling $1,100) is compared to lowest amount of rent paid during the last 12 months — $950.
Since the total increase in rent is now 15.8%, the landlord serves the tenant with a 60-day notice of a change in rental terms.
On being served with a notice of a change in rental terms, the month-to- month tenant has three options:
• remain in possession and comply with the new rental terms;
• serve the landlord with a 30-day notice of intent to vacate and continue paying rent, including pro rata rent, through the end of the 30-day period to vacate [See RPI Form 572]; or
• remain in possession, refuse to comply with the rental terms, and raise defenses, such as retaliatory eviction, in the resulting unlawful detainer (UD) action.
If the change in terms is a rent increase, the tenant owes pro rata rent at the new rate for the days after the rent increase becomes effective through the date the tenant’s notice to vacate expires. The pro rata rent is payable in advance on the due date for the next scheduled payment of rent, usually the first.
Most rent control ordinances allow a landlord or property manager to increase the rent to:
• obtain a fair return on their investment;
• recover the cost of capital improvements to the property; and
• pass through the cost of servicing the debt on the property.
Thus, without further authority from the rent control board, a landlord may increase rent in one of three ways:
• increase rent by the maximum percentage set by local ordinance;
• increase rent by the maximum percentage of the consumer price index (CPI) as set by local ordinance; or
• increase rent by the maximum amount previously set by the local rent control board.
Landlords of newly constructed units or individual units may establish their own rent rates, within limitations, if they are subject to rent control ordinances established prior to 1995.
Tenant responses to a change
notice of intent to vacate A tenant’s notice to the landlord signifying their intent to vacate the leased property. [See RPI Form 571 and 572]
Rent control restrictions
514 Real Estate Principles, Second Edition
All conditions in a residential or commercial month-to-month rental agreement may be changed on written notice by the landlord, but not the tenant. To be enforceable, the notice needs to be served on the tenant in the same manner as a three-day notice to pay rent or quit.
A residential or commercial landlord or property manager may serve a notice of change in rental terms on any day during the rental period. For rent increases of 10% or less, a 30-day notice is required. For rent increases greater than 10%, a 60-day notice is required. The new rental terms stated in the notice do not take effect until expiration of the notice.
notice of change in rental terms ............................................. pg. 511 notice of intent to vacate .......................................................... pg. 513
Chapter 77 Key Terms
Quiz 14 Covering Chapters 73-78 is located on page 619.
Chapter 77 Summary
Chapter 78: Security deposits and pre-expiration inspections 515
After reading this chapter, you will be able to:
• notify a residential tenant of their right to request a joint pre- expiration inspection of their unit prior to vacating;
• apply the differing residential and commercial security deposit refund requirements; and
• provide an itemized statement of deductions to account for recoverable expenses and any interest accrued the landlord is to pay on the security deposit.
Learning Objectives
Security deposits and pre-expiration inspections
Chapter
78
Both commercial and residential landlords prudently require a tenant to pay the first month’s rent and make a security deposit as a requisite to entering into a rental or lease agreement. [See RPI Form 550 and 552]
The security deposit provides a source of recovery for money losses incurred by the landlord due to a tenant default on monetary obligations agreed to in the rental or lease agreement. Tenant monetary obligations include:
• paying rent;
• reimbursing the landlord for expenses incurred due to the tenant’s conduct;
• maintaining the premises during occupancy; and
security deposit A source of funds to pay tenant obligations owed the landlord on the tenant’s default in the rental or lease agreement. [See RPI Form 550 §2.1 and 552 §1.2]
final inspection
joint pre-expiration inspection
security deposit
statement of deficiencies Key Terms
For an additional study of this topic, see Chapter 19 of Real Estate Property Management
516 Real Estate Principles, Second Edition
• returning the premises in the same level of cleanliness as existed at the time possession was initially taken, less ordinary wear and tear.
The amount of security deposit the residential landlord may demand and receive is controlled by law. Further, the amount of any security deposit is greatly influenced by the current condition of the local residential and non- residential market. If competition is tight, a landlord may be forced to lower the security deposit amount demanded, if not the rent, to attract tenants.
Aggressively competitive landlords are less likely to require a security deposit. However, this exposes them to an increased risk of loss if the tenant defaults.
To protect residential tenants from abuse, California public policy limits the amount of security deposits a residential landlord may demand and collect from a tenant.
Residential security deposits are limited to:
• two months’ rent for unfurnished units; and
• three months’ rent for furnished units.1
In addition, a residential landlord is limited to collecting one month’s advance rent, the first month’s rent. This amount is exclusive of in the security deposit limit.
Thus, for residential rental properties, all monies paid to the landlord in addition to the first month’s rent are considered part of the security deposit, except screening fees and waterbed administrative fees.
Landlords often try to “mask” refundable security deposit funds by giving them names such as “nonrefundable deposit”, “cleaning charge” or “last month’s rent.” However, any advance funds in excess of the first month’s rent, screening fees and waterbed administrative fees, no matter how the fees are characterized by the residential landlord, are classified as security deposits, subject to the above limits.2
A residential landlord has limited authority to also demand and collect a pet deposit as part of the maximum security deposit allowed if the tenant is permitted to keep one or more pets in the unit. However, the total advance funds, including the pet deposit, may still not exceed the above limits.3
Any funds received and legally recharacterized as a security deposit are refundable when the tenant vacates, less permissible deductions.
The amount of a residential security deposit demanded of all prospective tenants needs to be uniform based on either the amount of the rent charged or the tenant’s creditworthiness.
1 Calif. Civil Code §1950.5(c)
2 CC §§1940.5; 1950.5(b), (c); 1950.6
3 CC §1950.5(c)
Residential security
deposits: not rents, not
fees
Precise standards of
setting the deposit
Chapter 78: Security deposits and pre-expiration inspections 517
If the security deposit is based on a tenant’s creditworthiness, the landlord needs to establish clear and precise standards for the different levels of creditworthiness (such as credit scoring) they use in the selection of tenants. Further, the security deposit amount set for each level of creditworthiness is to be applied to every prospective tenant who falls within each level.4
Further, a landlord cannot require higher security deposits for tenants with children than for tenants without children as this is a prohibited discriminatory activity. Any increase in a security deposit for larger versus smaller families is also a prohibited discriminatory practice.5 [See Chapter 7]
A commercial landlord has the discretion to set security deposit amounts under a rental or lease agreement without limitations. Amounts set for commercial deposits are generally based on the tenant’s type of operations and the accompanying risks of damage they pose to the leased property.
For instance, a small services firm may pay an amount equal to one month’s rent as a security deposit, to cover a default in rent. On the other hand, a photography studio which uses chemicals in its rendering of services may be asked to pay an amount equal to two or more month’s rent.
When the availability of unfurnished residential units is tight, residential landlords often require all prospective tenants to advance the maximum permissible amount of rent and security deposit. Landlords charge maximum amounts upfront in hopes of preventing less solvent tenants from renting their units.
For residential rentals, the first and last month’s rent are legally recharacterized as the first month’s rent and a security deposit equal to one month’s rent.6
Commercial landlords typically require an advance payment of both the first and last month’s rent on a lease. They do so without considering that an advance payment of the last month’s rent is economically equivalent to a security deposit, as is mandated by residential rental rules.
Security deposits are held by the landlord as impounds. The funds belong to the tenant who advanced them and are to be accounted for by the landlord.7
However, while the security deposit belongs to the tenant, a landlord may commingle the funds with other monies in a general business account. No trust relationship is established when a landlord holds a tenant’s security deposit.8
4 24 CFR §100.60(b)(4)
5 Calif. Government Code §12955(a); 24 Code of Federal Regulations §100.65
6 CC §1950.5(c)
7 CC §§1950.5(d); 1950.7(b)
8 Korens v. R.W. Zukin Corporation (1989) 212 CA3d 1054
Commercial security deposits
The problematic last month’s rent
Proprietor treatment of security deposits
518 Real Estate Principles, Second Edition
Without a trust relationship, the landlord’s receipt of a security deposit does not obligate them to pay interest on the security deposit for the period held. However, some local rent control ordinances require residential landlords to pay tenants interest at or below bank savings account rates on their security deposits.
A residential landlord is to notify a tenant in writing of the tenant’s right to request a joint pre-expiration inspection of their unit prior to the tenant vacating the unit.
Editor’s note — The notice of right to request a joint pre-expiration inspection needs to also contain a statement notifying residential tenants of their right to reclaim abandoned personal property.
However, unless the tenant requests an inspection after receiving the notice, the landlord and their agents are not required to conduct an inspection or prepare and give the tenant a statement of deficiencies before the tenancy expires and the tenant vacates.
The notice requirement does not apply to tenants who remain in possession after the expiration of a three-day notice to pay/perform or quit.
The purpose for the joint pre-expiration inspection, also called an initial inspection, is to require residential landlords to advise tenants of the repairs or conditions the tenant needs to perform or maintain to avoid deductions from the security deposit.
When a residential tenant requests the pre-expiration inspection in response to the notice, the joint pre-expiration inspection is to be completed no earlier than two weeks before the expiration date of:
• the lease term; or
• a notice to vacate initiated by either the landlord or the tenant.9 [See Form 567-1 accompanying this chapter]
Ideally, the notice advising the tenant of their right to a joint pre-expiration inspection is given to the tenant at least 30 days prior to the end of the lease term. In the case of a rental agreement, the inspection rights notice is provided immediately upon receiving or serving a 30-day notice to vacate.
A period of 30 days allows the tenant time to request and prepare for the inspection. After the inspection, the tenant has time to remedy any repairs or uncleanliness the landlord observes during the inspection. Thus, the tenant is provided time to avoid a security deposit deduction.
When the landlord receives the tenant’s oral or written request for a pre- expiration inspection, the landlord serves a written 48-hour notice of entry on the tenant stating:
• the purpose of entry as the pre-expiration inspection; and
• the date and time of the entry.
9 CC §1950.5(f)(1)
Joint pre- expiration
inspections and the deposit
joint pre-expiration inspection An inspection conducted by a residential landlord or the property manager to advise a tenant of the repairs the tenant needs to perform to avoid deductions from their security deposit. [See RPI Form 567-1]
Chapter 78: Security deposits and pre-expiration inspections 519
Following expiration of the 48-hour notice of entry served on the tenant, the landlord may inspect the property whether or not the tenant is present, unless the tenant has previously withdrawn their request for the inspection.
On completion of the joint pre-expiration inspection, the landlord needs to give the tenant an itemized statement of deficiencies. In it, the landlord specifies any repairs or cleaning which need to be completed by the tenant to avoid deductions from the security deposit.
Also, the itemized statement of deficiencies is to contain the contents of subdivisions (b) and (d) of Calif. Civil Code §1950.5. [See Form 567-3 accompanying this chapter]
The landlord’s pre-expiration inspection statement needs to be prepared at the time of the inspection and delivered to the tenant by either:
• handing the statement directly to the tenant if they are present at the inspection; or
• leaving the statement inside the premises at the time of the inspection if the tenant is not present.10
If the tenant chooses to withdraw their request for an inspection after submitting it, the landlord needs to send a memo to the tenant confirming the tenant’s decision to withdraw. [See RPI Form 525]
Within a window period of 21 days after a residential tenant vacates, the residential landlord is to:
• complete a final inspection of the premises;
• refund the security deposit, less reasonable deductions; and
• provide the tenant with an itemized statement of deductions taken from the security deposit.11 [See RPI Form 585]
Also, the residential landlord is to attach copies of receipts, invoices and/or bills to the itemized statement showing charges incurred by the landlord that were deducted from the security deposit.12
If repairs by the landlord are not completed and the costs are unknown within 21 days after the tenant vacates, the landlord may deduct a good faith estimated amount of the cost of repairs from the tenant’s security deposit.
This estimate is stated on the itemized security deposit refund statement. This statement is to disclose the name, address and telephone number of any person or entity providing repair work, materials or supplies for the incomplete repairs.13
10 CC §1950.5(f)(2)
11 CC §1950.5(g)
12 CC §1950.5(g)(2)
13 CC §1950.5(g)(3)
Expiration of notice
statement of deficiencies A document a residential landlord presents to a vacating tenant specifying any repairs or cleaning to be completed by the tenant to avoid deductions from the security deposit. [See RPI Form 567-3]
Residential deposit refund requirements
final inspection An inspection of the premises conducted by the landlord within 21 days after a residential tenant vacates the property. [See RPI Form 585]
520 Real Estate Principles, Second Edition
Then, within 14 days after completion of repairs or final receipt of bills, invoices or receipts for the repairs and materials, the landlord is to deliver to the tenant a final itemized security deposit refund statement with attached receipts and invoices.14
It is not necessary for the landlord to provide copies of receipts, bills or invoices for repair work or cleaning to the tenant if:
14 CC §1950(g)(3)
The refund statement
Form 567-1
Notice of Right to Request a Joint Pre- Expiration Inspection
Page 1 of 2
Chapter 78: Security deposits and pre-expiration inspections 521
• the total deduction from the security deposit to cover the costs of repairs and cleaning is equal to or less than $125; or
• the tenant signs a waiver of their right to receive bills when or after notice to terminate their tenancy is given.15
If the residential landlord is not required to provide copies of receipts to the tenant, the tenant may still request copies of receipts for repair work or cleaning within 14 days after receipt of the itemized security deposit refund statement. The landlord is then to provide copies of the documents within 14 days after receipt of the tenant’s request.16
Editor’s note — Residential security deposits may be refunded to the tenant electronically by mutual agreement between the landlord and the tenant. The itemized statement of deductions from the security deposit, with copies of receipts, may be delivered via email.17
Reasonable deductions from a residential tenant’s security deposit include:
• any unpaid rent, including late charges and bounced check charges incurred and requested on a proper demand;
• recoverable costs incurred by the landlord for the repair of damages caused by the tenant;
• cleaning costs to return the premises to the level of cleanliness as existed when initially leased to the tenant, less wear and tear; and
15 CC §1950.5(g)(4)
16 CC §1950.5(g)(5)
17 CC §1950.5
Reasonable deductions from the deposit
Form 567-1
Notice of Right to Request a Joint Pre- Expiration Inspection
Page 2 of 2
522 Real Estate Principles, Second Edition
Form 567-3
Statement of Deficiencies on Joint Pre- Expiration Inspection
Page 1 of 2
• costs to replace or restore furnishings provided by the landlord if agreed to in the lease. 18
The landlord may not deduct from a tenant’s security deposit the costs they incur to repair defects in the premises which existed prior to the tenant’s occupancy. To best avoid tenant claims that defects were pre-existing, a joint inspection of the unit and written documentation of any defects is completed before possession is given to the tenant.19 [See RPI Form 560]
18 CC §§1950.5(b); 1950.7(c)
19 CC §1950.5(e)
Chapter 78: Security deposits and pre-expiration inspections 523
Form 567-3
Statement of Deficiencies on Joint Pre- Expiration Inspection
Page 2 of 2
A commercial lease does not need to set forth:
• the circumstance under which a tenant’s security deposit will be refunded; or
• a time period within which a landlord will refund a tenant’s security deposit. [See RPI Form 552]
However, a commercial landlord is to refund the security deposit within 30 days after the transfer of possession of the property from the tenant to the landlord, if:
• a refund period is not agreed to; and
• the commercial landlord takes no deductions from the security deposit.
Permissible deductions from the security deposit include unpaid rent, cost of cleaning or repairs.
Unless otherwise stated in the rental or lease agreement, the commercial landlord is prohibited from deducting additional costs from the security deposit for “key money” or to cover attorney’s fees incurred in preparing, altering or renewing the lease or rental agreement.20
Unlike the residential landlord, the commercial landlord is not required to provide tenants with an itemized statement of deductions when the security
20 CC §1950.8(b)
Commercial deposit refund rules
524 Real Estate Principles, Second Edition
deposit is refunded. However, a prudent commercial landlord provides tenants with an itemized statement when they vacate, unless a full refund is made.
An accounting avoids the inevitable demand for documentation which arises when a tenant does not receive a full refund of their security deposit. A commercial landlord who, in bad faith, fails to comply with the refund requirements is liable to the tenant for up to $200 in penalties.21
21 CC §1950.7(f)
The security deposit provides a source of recovery for money losses incurred due to a tenant’s default on obligations agreed to in the rental or lease agreement.
The amount of security deposit the residential landlord may demand and receive is controlled by code. On a commercial landlord’s entry into a rental and lease agreement, security deposit amounts may vary at the landlord’s discretion.
A residential landlord is to notify a tenant in writing of the tenant’s right to request a joint pre-expiration inspection of their unit prior to the tenant vacating the unit. The joint pre-expiration rules require residential landlords to advise tenants of the repairs or conditions the tenant needs to perform or maintain to avoid deductions from the security deposit.
final inspection ............................................................................ pg. 519 joint pre-expiration inspection ............................................... pg. 518 security deposit ............................................................................ pg. 515 statement of deficiencies .......................................................... pg. 519
Chapter 78 Summary
Chapter 78 Key Terms
Quiz 14 Covering Chapters 73-78 is located on page 619.
Chapter 79: Delinquent rent and the three-day notice 525
After reading this chapter, you will be able to:
• properly implement the rules for use of a three-day notice to pay rent or quit; and
• understand the consequences of notices to pay rent or quit served on tenants.
Learning Objectives
Delinquent rent and the three-day notice
Chapter
79
A tenant, residential or commercial, defaults on their rental or lease agreement by failing to:
• pay rent and any other amounts due and called for in the rental or lease agreement; or
• perform nonmonetary obligations called for in the rental or lease agreement.
The rules covered in this chapter for use of the three-day notice apply to both residential and commercial tenancies, unless specifically stated to be residential or commercial.
Default, notice and cure or vacate
delinquency incurable breach
due date material breach
grace period minor breach
Key Terms
For a further study of this topic, see Chapter 25 of Real Estate Property Management.
526 Real Estate Principles, Second Edition
When a tenant does not timely pay rent, the landlord may make a demand on the tenant to cure the default or vacate the premises within three days, called a three-day notice to pay rent or quit. [See Form 575 accompanying this chapter and RPI Form 575-1]
Editor’s note — Other three-day notices to quit are discussed in Chapter 80.
The three-day notice states the exact amount of:
• delinquent rent unpaid; and
• other delinquent amounts owed to the landlord and unpaid.
The three-day notice contains a declaration of forfeiture provision. It states the tenant’s failure to pay the delinquent rent before the notice expires gives the landlord the right to possession of the property.
However, only a material breach allows the landlord to forfeit the tenant’s right of possession. A forfeiture of possession does not interfere with the landlord’s right to collect rents under the rental or lease agreement. A forfeiture does not also cancel the agreements.
Failure to pay rent or perform other significant obligations called for in the rental or lease agreement is a material breach. Conversely, the tenant’s failure to pay late charges, interest penalties, bad check charges or security deposits are minor breaches, which do not justify a three-day notice to cure or quit.1
Thus, a UD action cannot be based on a minor breach by the tenant.
Some nonmonetary defaults by a tenant cannot be cured. These are known as incurable breaches. Incurable breaches include:
• waste to the premises;
• alienation of the leasehold; or
• significant criminal activity which has occurred on the property.
The landlord’s remedy for an incurable breach is to serve notice on the tenant to quit the premises within three days after service. The tenant has no alternative but to vacate. Here, a declaration of forfeiture provision accompanying the three-day notice is unnecessary, and if included, is ineffective since the failure cannot be cured and the tenancy cannot be reinstated.2
After a landlord serves a tenant with a three-day notice to pay rent or quit, containing a declaration of forfeiture provision, the tenant needs to cure the breach in three calendar days to avoid a forfeiture of possession and eventual eviction. The first day in the three-day period is the day after service of the notice.3
1 Keating v. Preston (1940) 42 CA2d 110
2 CCP §1161(4)
3 Calif. Civil Code §10
material breach A significant contractual breach that prevents the completion of the agreed upon activity.
minor breach Failure to pay late charges, interest penalties, bad check charges or security deposits.
incurable breach Nonmonetary defaults in leases or mortgages that cannot be cured or undone. [See RPI Form 577]
Three days between
notice and UD
Chapter 79: Delinquent rent and the three-day notice 527
Form 575
Three-Day Notice to Pay Rent or Quit
The tenant may tender payment of the delinquent rent in the same manner the tenant made past rental payments — by personal or business check, money order, cashier’s check, credit card, cash or electronic transfer.4
4 Strom v. Union Oil Co. (1948) 88 CA2d 78
528 Real Estate Principles, Second Edition
Rent paid by check and timely received by the landlord becomes delinquent when the check is returned due to insufficient funds and replacement funds are not received within the established grace period. With rent now delinquent, the landlord may serve a three-day notice to pay or quit.
To cure a delinquency, the tenant’s delinquent rent payment needs to actually be paid to the landlord. For instance, when a check for delinquent rent is returned because of insufficient funds, the delinquent rent demanded in a three-day notice has not been paid. Unless the tenant actually pays the delinquent rent prior to expiration of the notice, the tenant’s right of possession will be terminated under the declaration of forfeiture provision. At that point, the landlord may file an unlawful detainer (UD) action if the tenant remains in possession.
A three-day notice may only demand rents which became due during the one year prior to the date of service. If a three-day notice demands delinquent rents which have been due for more than one year on service of the notice, the notice is defective and will not terminate the right of possession.
More rent has been demanded than will be awarded by a court in a UD action. Thus, any UD action based on a notice demanding rent for delinquencies more than a year old at the time the notice is served will fail.5
Before a landlord or property manager serves a tenant with a three-day notice to pay rent or quit, the following questions need to be answered:
• Is the rent delinquent?;
• What amounts are due and unpaid?;
• When can delinquent rent be estimated in the three-day notice?;
• What is a reasonable estimate of unknown but delinquent rent?;
• When does the three-day notice expire?;
• When does the tenant’s right of possession terminate?;
• Is the rental or lease agreement cancelled?; and
• How are subtenants evicted?
Rent needs to be delinquent before a three-day notice to pay or quit may be served.
Rent becomes delinquent:
• the business day following the due date, unless a grace period is established in the rental or lease agreement; or
• the business day following the last calendar day of the grace period established in the rental or lease agreement.
5 Bevill v. Zoura (1994) 27 CA4th 694
delinquency A tenant or borrower’s failure to pay the agreed amounts on or before the due date or expiration of any grace period.
One-year delinquent
rent limitation for UD
Before serving a three-day
notice
When is the rent
delinquent?
Chapter 79: Delinquent rent and the three-day notice 529
If no grace period exists, when the last day scheduled for payment of rent falls on a legal holiday, the payment is not delinquent if it is tendered before or on the next business day. For purposes of paying rent, legal holidays include:
• Saturdays;
• Sundays; and
• state and federal holidays.6
A grace period is set in the rental or lease agreement. It is the time period following the due date during which rent may be paid without incurring a late charge. While rent may be past due and unpaid, it is not delinquent until the grace period expires.
When the last day of a grace period for payment of past due rent falls on a legal holiday, the tenant’s rent payment is not delinquent if it is received by the landlord on the next business day.7
Similarly, when the final day of the three-day notice falls on a holiday such as a Saturday, Sunday or other legal holiday, the three-day notice expires on the next business day.8
To be valid, the three-day notice to pay rent or quit served on a residential tenant is to state the exact amount of money due and unpaid. Conversely, a commercial landlord may estimate the amount of money due and unpaid, when the exact amount cannot be accurately ascertained.
A residential tenant is not required to pay more than the amount due and unpaid to retain their possessory rights under a rental or lease agreement.
However, if the amount stated in a three-day notice served on a residential tenant exceeds the amounts actually due and unpaid at the time of the UD trial, the notice is invalid and an UD action based on it will fail.9
For both residential and commercial tenants, if the amount stated in the three-day notice is less than the actual amount due and unpaid, the tenant may pay the amount stated and avoid eviction. To collect any amounts omitted in a three-day notice, the landlord serves another three-day notice to pay the balance or quit.
A three-day notice served on a commercial tenant may include an estimate of the amounts due if:
• the notice states the amount due is an estimate; and
• the amount estimated is reasonable.10
6 CCP §§10; 12a
7 CCP §13; Calif. Government Code §6706
8 Lamanna v. Vognar (1993) 17 CA4th Supp. 4; CCP §12a
9 Jayasinghe v. Lee (1993) 13 CA4th Supp. 33
10 CCP §1161.1(a)
grace period The time period following the due date for a payment during which payment received by the lender or landlord is not delinquent and a late charge is not due. [See RPI Form 550 §4.3 and 552 §4.7]
Accurate residential rent demands
Estimated commercial rent
due date The date provided in the rental or lease agreement on which rental payments are due. [See RPI Form 550 §4.1 and 552 §4.1]
530 Real Estate Principles, Second Edition
A property manager may serve a tenant, residential or commercial, with a three-day notice to pay rent or quit when the tenant defaults on their rental or lease agreement. The tenant defaults when they fail to pay rent or perform other significant obligations called for in the rental or lease agreement
After a landlord serves a tenant with a three-day notice to pay rent or quit, the tenant needs to cure the breach in three business days to avoid forfeiture and eventual eviction in an unlawful detainer (UD) action.
delinquency .................................................................................. pg. 528 due date .......................................................................................... pg. 529 grace period ................................................................................... pg. 529 incurable breach .......................................................................... pg. 526 material breach ............................................................................ pg. 526 minor breach ................................................................................. pg. 526
Chapter 79 Summary
Chapter 79 Key Terms
Quiz 15 Covering Chapters 79-85 is located on page 620.
Failure to indicate that an estimated amount due is an estimate renders the three-day notice invalid.
An estimate of rent owed in a three-day notice is considered reasonable if:
• the actual amount owed is truly in question; and
• the delinquent amount demanded is neither 20% more or less than the amount determined due at the UD hearing.11
An estimate which contains amounts not yet due, such as unbilled common area maintenance expenses (CAMs), is not considered reasonable. Future amounts due are not delinquent, and may not be included in an estimate of delinquent amounts due and unpaid.12
11 CCP §1161.1(e)
12 WDT- Winchester v. Nilsson (1994) 27 CA4th 516
Chapter 80: Three-day notices to quit 531
After reading this chapter, you’ll be able to:
• differentiate between a curable breach a tenant can resolve and an incurable breach a tenant cannot correct; and
• identify the proper three-day notice to serve on a tenant for a nonmonetary material breach of a rental or lease agreement.
Learning Objectives
Three-day notices to quit
Chapter
80
A tenant breaches a provision in their rental or lease agreement and is served a three-day notice to quit by the landlord. If the three-day notice is not the correct type, an unlawful detainer of a premises by the tenant cannot be established and the tenant evicted.
Depending on the nature and extent of the tenant’s breach, the landlord will serve a:
• three-day notice to pay rent or quit [See RPI Form 575 in Chapter 79];
• three-day notice to perform or quit [See Form 576 accompanying this chapter]; or
• three-day notice to quit. [See Form 577 accompanying this chapter]
Types of three-day notices for various breaches
For additional information on this topic, see Chapter 26 of Real Estate Property Management.
nonmonetary breach
nonwaiver provision
nuisance
retaliatory eviction
statutory breach
waste
Key Terms
532 Real Estate Principles, Second Edition
When a tenant’s breach is the failure to pay rent or other money obligation which is due, the tenant is served with a three-day notice to pay rent or quit. This type of breach is known as a monetary breach which is curable by paying money.
When the provision breached is not for rent or other money obligation and the breach can still be quickly corrected by the tenant, the tenant is served with a three-day notice to perform or quit. This type of breach is known as a nonmonetary breach. [See Form 576]
When a tenant is in default for a failure to pay rent as well as a curable nonmonetary breach, a three-day notice to perform or quit is used. The demand to pay rent is listed as an additional (monetary) breach to be cured under the notice to perform or quit.
The three-day notice to perform or quit requires the tenant to either:
• perform under the breached lease provision; or
• vacate the premises.1
The tenant’s breach of a provision in a rental or lease agreement needs to be a significant breach, called a material breach, to justify serving a three-day notice. A minor or trivial breach by the tenant will not support a three-day notice.2
For a tenant to avoid a forfeiture of their right of possession, they need to be given an opportunity to reinstate the rental or lease agreement if the breach can be cured in three days.
The three-day notice to perform or quit will specify the provision breached and the action required to cure the breach. When the tenant cures the breach before the three-day notice expires, the breach of the rental or lease agreement is eliminated and possession continues as though no breach occurred.
If a tenant fails to cure the breach or vacate as required after the service of a three-day notice to perform or quit containing a declaration of forfeiture provision, the landlord may initiate an unlawful detainer (UD) action to have the tenant removed. Since the declaration of forfeiture provision exists in the three-day notice, the tenant is barred from reinstating their possession after the three-day notice expires.3
A landlord is required to allow a tenant to cure a material breach, monetary or nonmonetary, within three days after notice when the tenant is capable of performing under the breached lease provision within three days.4
1 Calif. Code of Civil Procedures §1161(3)
2 Baypoint Mortgage v. Crest Premium Real Estate Investments Retirement Trust (1985) 168 CA3d 818
3 CCP §1161(3)
4 CCP §1161(3)
monetary breach A tenant’s failure to timely pay rent or other money obligation due.
nonmonetary breach A tenant’s breach of any obligation other than an obligation to pay money.
Notice to perform or
quit
Chapter 80: Three-day notices to quit 533
A three-day notice to quit requiring the tenant to vacate without alternative is served when the tenant’s breach is:
• impossible to cure in three days;5 or
• a statutory breach.6
5 Matthew v. Digges (1920) 45 CA 561
6 CCP §1161(4)
Notice to quit; no alternatives
Form 576
Three-Day Notice to Perform or Quit
534 Real Estate Principles, Second Edition
Incurable breaches and statutory breaches automatically forfeit the tenant’s right of possession. These breaches either cannot be remedied within the notice period, or are incurable by statute.7
Statutory breaches, being incurable, include:
• an unauthorized subletting or assignment of the premises;
• maintaining a nuisance on the premises; or
• unlawful use of the premises.8
The three-day notice to quit does not need to indicate the provision breached or the activity of the tenant constituting the breach. Nor does it need to include a lease forfeiture declaration by the landlord. Since these breaches cannot be cured by the tenant, the right of possession can only be reinstated if the landlord chooses to waive the forfeiture.
However, when a forfeiture of the lease has already occurred, a UD court requires service of a three-day notice before a landlord may recover possession.
Consider a tenant who leases agricultural property. The lease agreement states the tenant’s use of the property is limited to grazing sheep. However, the tenant plants crops on the property.
Based on the tenant’s unauthorized use of the premises, the landlord serves a three-day notice to quit on the tenant.
The tenant’s use of the property to raise crops, instead of the single agreed-to use as a pasture, is an incurable nonmonetary breach of the lease agreement. The tenant cannot reverse the effects of raising the crops on the soil since the activity has already occurred.9
A tenant may be evicted for maintaining a nuisance or unlawful use of the premises, even if these activities are not prohibited by the lease agreement. 10
A nuisance includes anything which:
• is injurious to health, such as contamination of the property’s soil;
• is offensive to the senses, such as excessive noise levels or obnoxious fumes; or
• obstructs the use and enjoyment of surrounding property.11
A tenant’s unlawful use of the premises under the statute includes violations of local laws or ordinances affecting the property, such as noncompliance with zoning ordinances restricting the use of the premises. The leasehold is
7 CCP §1161(3)
8 CCP §1161(4)
9 Harris v. Bissell (1921) 54 CA 307
10 CCP §1161(4)
11 Calif. Civil Code §3479
statutory breach A breach of the lease agreement which automatically forfeits the tenant’s right of possession.
Quit! The breach
cannot be undone
Breach of statutory
prohibitions
nuisance An action which is injurious to health, offensive to the senses, or obstructs the use and enjoyment of surrounding property. [See RPI Form 550 §6.7 and 552 §7.3]
Chapter 80: Three-day notices to quit 535
Form 577
Three-Day Notice to Quit
forfeited automatically due to the statutory violation. The three-day notice is required only as a requisite to a UD action when the tenant remain in possession.12
However, before the unlawful use justifies service of a notice to quit, the use needs to:
• threaten the physical safety of the property;
• stigmatize the premises; or
12 Haig v. Hogan (1947) 82 CA2d 876
536 Real Estate Principles, Second Edition
• impair the landlord’s continued receipt of rent.
Waste to the leased premises by a tenant is a breach that cannot be cured. Waste terminates the tenant’s right of possession. The tenant needs to vacate if the landlord serves a three-day notice to quit.
However, waste is grounds for eviction only when the value of the leased premises is substantially or permanently impaired due to the tenant’s conduct.
Waste forfeits the lease
waste The intentional destruction or neglect of property which diminishes its value. [See RPI Form 550 §6.8 and 552 §7.4]
Form 580
Proof of Service
Chapter 80: Three-day notices to quit 537
Waste occurs when a tenant:
• intentionally damages or destroys the leased premises; or
• neglects the premises and impairs its value by failing to care for and maintain it as agreed.
Statutory requirements are to be strictly followed when preparing and serving a three-day notice.
If the three-day notice is incorrectly or inaccurately prepared, or improperly served on the tenant, the notice is invalid. To later evict the tenant, a new three-day notice needs to be correctly and accurately prepared, and properly served on the tenant.13
A proof of service form needs to be filled out and signed by the person serving the three-day notice. Without a proof of service, a UD action cannot be maintained. [See Form 580 accompanying this chapter]
A landlord may concurrently serve both a three-day notice to pay (perform) or quit and a 30-day notice to vacate or change terms. However, the notices are to be served separately. If attached or otherwise combined, other than in time, they may be reasonably confused as one. The confusion would properly defeat any UD action based on the three-day notice.
Also, each notice is to be accompanied by its own separate proof of service to clarify their independent existence. [See Form 580]
A retaliatory eviction occurs when a residential landlord attempts to evict a tenant for:
• exercising their right to file a complaint with an appropriate agency regarding the habitability of the premises;
• orally complaining to the landlord about the habitability of the premises;
• filing documents to initiate a judicial or arbitration proceeding regarding the habitability of the premises;
• organizing or participating in a tenant association or an association for tenant’s rights; or
• lawfully exercising any rights, such as the refusal to authorize credit reports or personal investigation after vacating the premises.14
Recall that a notice to vacate need not include a reason for the termination of occupancy. It is therefore up to the tenant to determine whether the landlord’s conduct may justify the claim of a retaliatory eviction.
A landlord convicted of a retaliatory eviction is liable for punitive damages up to $2,000 for each act of retaliation.15
13 Lamey v. Masciotra (1969) 273 CA2d 709
14 CC §1942.5
15 CC §1942.5
Service of notice
Retaliatory eviction
retaliatory eviction A tenant whose tenancy is sought to be terminated for lawfully exercising any rights.
• impair the landlord’s continued receipt of rent.
Waste to the leased premises by a tenant is a breach that cannot be cured. Waste terminates the tenant’s right of possession. The tenant needs to vacate if the landlord serves a three-day notice to quit.
However, waste is grounds for eviction only when the value of the leased premises is substantially or permanently impaired due to the tenant’s conduct.
Waste forfeits the lease
waste The intentional destruction or neglect of property which diminishes its value. [See RPI Form 550 §6.8 and 552 §7.4]
538 Real Estate Principles, Second Edition
A breach which can be remedied by action from the tenant during the notice period is known as a curable breach. A breach which cannot be remedied by action from the tenant during the notice period is known as an incurable breach.
Depending on the nature and extent of the tenant’s breach, one of the following types of three-day notices may be served:
• a three-day notice to pay rent or quit;
• a three-day notice to perform or quit; or
• a three-day notice to quit.
When a tenant’s breach is the failure to pay rent or other money obligation which is due, the tenant is served with a three-day notice to pay rent or quit. This type of breach is known as a monetary breach and is curable by paying money.
When the lease provision breached is not for rent or other money obligation and the breach can be quickly corrected, the tenant is served with a three-day notice to perform or quit. This type of breach is known as a nonmonetary breach and is not curable by paying money.
A three-day notice to quit is used when the tenant’s material breach is:
• an incurable breach; or
• a statutory breach.
Incurable breaches and statutory breaches automatically forfeit the tenant’s right of possession.
monetary breach .......................................................................... pg. 532 nonmonetary breach .................................................................. pg. 532 nuisance ......................................................................................... pg. 534 retaliatory eviction .................................................................... pg. 537 statutory breach ........................................................................... pg. 534 waste ............................................................................................... pg. 537
Chapter 80 Summary
Chapter 80 Key Terms
Quiz 15 Covering Chapters 79-85 is located on page 620.
Chapter 81: Notices to vacate 539
After reading this chapter, you will be able to:
• determine a landlord’s and tenant’s correct use of a notice to vacate to terminate month-to-month tenancies; and
• differentiate the circumstances under which a landlord uses a 30-, 60- or 90-day notice to vacate.
Learning Objectives
Notices to vacate
Chapter
81
A residential or commercial landlord terminates a month-to-month tenancy by serving the tenant with a notice to vacate. A 30-day notice to vacate is used, except when notifying a residential tenant who has occupied the property for one year or more, in which case the landlord uses a 60-day notice to vacate.1
However, if the tenant has materially breached the rental agreement, a landlord may use the appropriate three-day notice to quit to terminate the tenancy. [See RPI Form 579; see Chapter 80]
A notice to vacate form (as distinguished from a notice to quit) used by a landlord contains:
• the name of the tenant;
• the address of the premises;
1 Calif. Civil Code §1946.1
Landlord’s intent to evict
bona fide lease agreement Section 8 housing
owner-by-foreclosure
Key Terms
For a deeper analysis of this subject matter, see Chapter 29 from Real Estate Property Management.
540 Real Estate Principles, Second Edition
• a reference to the rental agreement or expired lease;
• a statement that the unit is to be vacant within the applicable number of days (30 or 60) after service of the notice;
• the dollar amount of pro rata rent to be paid when rent is next due;
• a statement regarding the security deposit and its disposition;
• a statement informing the tenant of their right to request a joint pre- expiration inspection of the premises; and
• a statement notifying residential tenants of their right to reclaim abandoned personal property.
Notices to vacate do not need to include declarations of forfeiture. The tenancy terminates automatically on expiration of the notice period. Due to its contents, the landlord’s notice to vacate eliminates any confusion as to the amount of pro rata rent to be paid and when the rent is due. [See RPI Form 571 §4]
A residential or commercial tenant who intends to vacate under a month-to- month rental arrangement serves the landlord with at least a 30-day notice to terminate the occupancy and vacate. The notice may be in the form of a letter personally delivered to the landlord or their agent, or sent by certified or registered mail.2 [See RPI Form 572]
Some landlords are willing to accept oral notice of the tenant’s intent to vacate without reducing the notice to a writing signed by the tenant.
A tenant’s 30-day notice to vacate acknowledges:
• the tenancy is terminated on expiration of 30 days after service of the notice on the landlord or property manager;
• the tenant’s intent to pay pro rata rent on the next rent due date;
• the amount of the security deposit;
• the tenant’s right to request a joint pre-expiration inspection;
• the tenant’s right to receive an itemized statement of maintenance and cleaning deficiencies for any potential deductions from the security deposit;
• a security deposit statement and refund based on any deductions for cleaning and repairs on a final review of the premises by the landlord or property manager; and
• the landlord’s right to show the premises to a prospective tenant on 24 hours’ notice. [See RPI Form 572]
If a tenant serves a 30-day notice to vacate but fails to vacate after expiration of the notice, they become a holdover tenant. Thus, they are unlawfully in
2 CC §1946
Tenant’s intent to
vacate
Holdover tenancy
Chapter 81: Notices to vacate 541
possession of the property. The landlord may immediately file an unlawful detainer (UD) action to evict the tenant on the running of the 30 days after service.
A notice to vacate may be served at any time during the month.3
However, a commercial landlord and tenant may memorialize in the rental agreement that the 30-day notice to vacate cannot be served later than seven days before the end of the rental term (e.g., the end of the month, in a month- to-month tenancy).
To be effective, the notice to vacate from a commercial tenant or landlord needs to be served:
• in the same manner as a three-day notice (in person, by substitution or post and mail); or
• by certified or registered mail, a method of service not available for three-day notices to quit.4 [See Chapter 80]
Conversely, a residential landlord serves a notice to vacate by personally delivering the notice to the tenant. The residential landlord may also concurrently:
• leave a copy of the notice either at the residence or the tenant’s place of business with a person of appropriate age;
• post the notice in a conspicuous place on the property; and
• mail the notice by certified or registered mail.5
The maximum period within which the tenant is to vacate begins to run the day after the date of service, which is day one of the 30- or 60-day period.6
If the day for expiration of the notice is a Saturday, Sunday or a federal holiday, the tenant is not required to vacate until the next business day.7
A properly completed notice to vacate form gives a specific date, on or after the minimum time period following service, for termination of the occupancy. The day is not left to chance and, as a practical matter, not set as a weekend or holiday.
Unlike the extension of a lease term, the 30-day rental period under a month- to-month rental agreement is automatically extended for the same period and on the same conditions. [See RPI Form 569 and 572]
3 CC §1946
4 CC §1946
5 Calif. Code of Civil Procedures §§ 1161a, 1162
6 CC §10
7 CCP §12a
Service of the notice to vacate
Periodic tenancies extended/ terminated
542 Real Estate Principles, Second Edition
The right to automatic extensions is terminated by a notice to vacate from either party to the other. However, if the property is residential and the tenant has resided on it for one year or more, the landlord is required to give the tenant at least a 60-day notice to vacate.8 [See RPI Form 569-1]
If the notice to vacate expires and the tenant has not vacated, the landlord may file a UD action to evict the month-to-month tenant without further notice.9
When a residential rental property is located in a rent control community, the landlord has less discretion to evict tenants with a notice to vacate.
Typically, the termination of a tenancy and evictions are allowed in rent control communities when:
• the tenant fails to pay rent or otherwise materially breaches the lease agreement;
• the tenant creates a nuisance;
• the tenant refuses to renew a lease;
• the tenant uses the residence for an illegal purpose; or
• the landlord or a relative will occupy the unit.
A landlord and their property manager of a property subject to rent control need to make themselves aware of the local restrictions imposed on the eviction of tenants.
A landlord is not required to state their reasons in a notice to vacate, or even have good cause for evicting a month-to-month tenant.10
Exceptions exist. If a tenant’s unit is subject to rent control, or a tenant’s rent is subsidized by the Department of Housing and Urban Development’s (HUD) Section 8 housing program, the landlord needs to set forth good cause as the reason for the termination. The good cause is documented in the 30-day notice to vacate. Thus, the tenant is given notice so they can prepare their defense to avoid eviction.11
However, a landlord may not evict a tenant:
• in retaliation for the tenant making official complaints about the property or against the landlord;
• based on discriminatory reasons, such as the tenant’s ethnicity or marital status; or
• due to the landlord’s failure to maintain the property in a habitable condition.
8 CC §1946.1
9 CCP §1161(5)
10 CC §1946
11 Mitchell v. Poole (1988) 203 CA3d Supp. 1
Rent control limitations on
eviction
Good reason to evict
exception Section 8 housing A government housing program for low income households which provides qualifying tenants with rent subsidies and minimum habitability standards.
Chapter 81: Notices to vacate 543
The owner of a residential income property is in default on a loan secured by a trust deed encumbering the property. While the owner is in negotiations with the lender to modify the loan’s payment schedule, the owner enters into a two-year lease agreement with a tenant.
Shortly after the tenant takes possession, negotiations with the lender break down. The lender records a notice of default (NOD) and forecloses on the property. The property is sold at a trustee’s sale nearly one year later. The high bidder takes title to the property as the new owner-by-foreclosure.
An owner-by-foreclosure who purchases a residential property at a trustee’s sale for investment purposes may only terminate an existing residential tenancy by serving the tenant with at least a 90-day notice to vacate. This rule is set to expire December 31, 2019.12 [See RPI Form 573 and 573-1]
However, an owner-by-foreclosure cannot use a 90-day notice to vacate to terminate an occupancy and avoid:
• a bona fide lease agreement entered into prior to the foreclosing lender recorded the NOD which grants the tenant the right of possession for a period running beyond the 90-day notice period.
• an existing Section 8 or state housing assistance payment contract which subsidizes the tenant’s rent; or
• state or local rent control codes or ordinances that provide the residential tenant with a greater time period for occupancy or other tenant benefits such as relocation money.13
A bona fide lease agreement is one entered into by a tenant and the prior owner which meets all of the following criteria:
• the lease agreement is an arm’s length lease agreement, meaning the tenant is not a parent, spouse or child of the prior owner; and
• the lease agreement calls for payment of a fair market rent at the time entered into.14
12 CCP §§1161a,1161b
13 CCP §1161b
14 Pub L 111-22 §702 (a)(1)(2)(B)
Residential foreclosure and possession
owner-by- foreclosure The winning bidder at a trustee’s sale who takes title to the property sold by a trustee’s deed.
bona fide lease agreement A lease agreement with a fair market rent held by a residential tenant when ownership of the property is transferred by a foreclosure sale. [See RPI Form 550 and 552]
544 Real Estate Principles, Second Edition
Quiz 15 Covering Chapters 79-85 is located on page 620.
A residential or commercial landlord terminates a month-to-month tenancy by preparing and serving the tenant with at least a 30-day notice to vacate. If the tenant has resided in a residential property for one year or more, the landlord is required to give the tenant at least a 60-day notice to vacate However, if the tenant has materially breached the rental agreement, a landlord may use a three-day notice to quit to terminate the tenancy.
A residential or commercial tenant who intends to vacate and avoid further liability under a month-to-month rental agreement gives at least 30 days’ advance notice to the landlord.
An owner-by-foreclosure of a residential property is required to serve a bona fide tenant occupying the property at the time of the foreclosure sale with at least 90 days’ notice before the tenant’s right of possession is terminated.
bona fide lease agreement ........................................................ pg. 543 owner-by-foreclosure ................................................................. pg. 543 Section 8 housing ........................................................................ pg. 542
Chapter 81 Summary
Chapter 81 Key Terms
Chapter 82: Implied warranty of habitability 545
After reading this chapter, you will be able to:
• identify the circumstances in which the implied warranty of habitability is breached; and
• the actions a tenant may take when the landlord breaches the implied warranty of habitability.
Learning Objectives
Implied warranty of habitability
Chapter
82
The residential tenant under a lease agreement acquires a leasehold interest to occupy the leased premises for a specific period of time. The tenant expects the premises and appurtenances (e.g., common areas, parking and storage) available to them to be safe, sanitary and fit for use. It is to be habitable at all times.
All residential rental and lease agreements carry an implied warranty of habitability regardless of the provisions in the lease agreements. However, commercial leases do not contain an implied warranty of habitability.
The implied warranty requires the residential landlord to care for the premises by maintaining it in a habitable condition. A habitable condition is the minimum acceptable level of safety and sanitation permitted by law.1
1 Hinson v. Delis (1972) 26 CA3d 62; Calif. Code of Civil Procedure §1174.2
Safe, sanitary and fit for use
implied warranty of habitability An unwritten provision, included by statute, in all residential lease agreements requiring the landlord to provide safe and sanitary conditions in the rental unit.
habitability defense implied warranty of habitability
habitable condition
Key Terms
For an additional discussion of this topic, see Chapter 37 of Real Estate Property Management.
546 Real Estate Principles, Second Edition
Residential property which is not in a habitable condition cannot be rented or leased “as-is.” A property cannot be rented “as-is” even if defective property conditions have been fully disclosed and consented to by the tenant.
The public policy establishing the warranty of habitability was legislated due to landlord abuses during periods of scarcity in low-cost housing. This economic situation left residential tenants in lesser socioeconomic neighborhoods without the bargaining power possessed by more affluent and mobile tenants.
Landlords breach the implied warranty of habitability when they fail to comply with building and housing code standards that materially affect health and safety.2
A habitable place to live is a dwelling free of major defects which would interfere with the tenant’s ability to use the premises as a residence. This definition does not include mere inconveniences.
A residential dwelling is uninhabitable if any features of the dwelling are:
• not properly maintained; or
• do not substantially comply with building and housing codes
To be habitable, a residential property needs to have:
• effective waterproofing and weather protection of roof and exterior walls, including unbroken windows and doors;
• plumbing and gas facilities;
• a hot and cold running water system with appropriate fixtures connected to a sewage disposal system;
• heating facilities;
• electrical lighting; and
• floors, stairways and railings.3
In applying these guidelines, a leaky faucet would not render a residential unit uninhabitable. However, lack of running water is a significant defect that materially interferes with the tenant’s ability to use the property as shelter.
At the time the rental or lease agreement is entered into, the building grounds and appurtenances are to be clean and sanitary. This includes:
• the communal pool;
• laundry facilities;
• storage areas; and
• parking structures.
2 CCP §1174.2(c)
3 Calif. Civil Code §1941.1
habitable condition The minimum acceptable level of safety, utility and sanitation permitted in a residential rental.
Landlord’s breach of the
warranty
Clean and sanitary
Chapter 82: Implied warranty of habitability 547
To meet habitability guidelines, the building grounds and appurtenances are to be free from all accumulations of debris, filth, rodents and vermin.4
Further, the landlord is required to provide an adequate number of clean garbage receptacles.5
A residential tenant in an apartment complex is not expected to make repairs to major components of the complex. Major components include a central heating system, an electrical or plumbing system or the roof.
If a residential landlord fails to make necessary repairs, and the cost of the repair is less than one month’s rent, the tenant may order out and pay for the needed repairs. The tenant may then deduct the cost from the rent, called the repair-and-deduct remedy.6
However, the repair-and-deduct remedy is not often feasible in apartment dwellings since areas where repairs need to be made are in the possession and control of the landlord.
The residential tenant then resorts to other remedies, such as:
• vacating the premises, called a constructive eviction;
• stop paying rent and prove the landlord breached the implied warranty of habitability in the ensuing unlawful detainer (UD) action; or
• raise and prove the defense of retaliatory eviction in any UD action.
Before renting a residential unit in a building intended for human habitation, the landlord is to:
• install and maintain an operable dead bolt lock on each main entry door of a unit, unless the door is a horizontal sliding door;
• install and maintain operable security or locking devices for windows which are designed to be opened, unless the window is a louvered window, casement window, or more than 12 feet vertically or six feet horizontally from the ground, roof or other platform; and
• install locking mechanisms on the exterior doors leading to common areas with access to dwelling units in an apartment complex.
A tenant is responsible for promptly notifying the landlord of an inoperable dead bolt lock, window security or locking device in the unit. The landlord will only be liable for injuries caused by their failure to correct the defect once on notice. The landlord has a reasonable period of time after being notified or becoming aware of the defect to correct it before becoming liable for future injuries.7
If a residential landlord fails to comply with required security measures, the tenant may:
• repair and deduct the cost from rent;
4 CC §1941.1(f)
5 CC §1941.1(g)
6 CC §1942
7 CC §1941.3(b)
Pre-leasing maintenance program
548 Real Estate Principles, Second Edition
• vacate the premises;
• recover money losses incurred due to the condition of an uninhabitable building;
• recover losses caused by any landlord retaliation;
• file an action for breach of contract; or
• seek injunctive relief to stop the landlord from maintaining an uninhabitable building.8
A landlord may not allow a tenant to take possession of a property known to be unsafe or unsanitary. Before renting out such a unit, the landlord is to ensure the premises is fully repaired.
The warranty of habitability is breached when the need for repairs is:
• known by the landlord, either through notice from the tenant or by the physical state of the property at the time it is rented; and
• the landlord fails to immediately correct the defective conditions.
Landlords have a duty to inspect and maintain their property and improve or correct known substandard conditions before renting it. Landlords are not granted a reasonable time to repair uninhabitable conditions if they are known to the landlord to exist before renting out the property to a tenant.9
However, during the time a tenant has possession of the property, the tenant is to make the landlord aware of any unsafe or unsanitary conditions that develop before the landlord can be held responsible for repairing them.
In a UD action, a tenant who successfully raises the habitability defense will be allowed to:
• retain possession of the premises;
• pay a reduced amount of rent based on the uninhabitable condition of the property; and
• recover attorney fees and costs of litigation.10
To remain in possession, the tenant is to pay the rent amount awarded to the landlord, offset by the tenant’s attorney fees, within:
• five days of the entry of judgment; or
• ten days, if the UD judgment is served on the tenant by mail.11
If the tenant fails to pay the rental amounts set by the court in a timely manner, the landlord is awarded possession of the premises.12
8 CC §1941.3(c)
9 CC §1714
10 CCP §1174.2(a)(1)
11 CCP §1174.2(a)
12 CCP §1174.2(b)
Repair before renting
Landlord’s warranty of habitability
defense
Chapter 82: Implied warranty of habitability 549
The UD judgment may or may not require the landlord to make all repairs necessary to return the premises to a safe and sanitary condition. When a landlord is ordered to correct the uninhabitable conditions by returning the premises to a safe and sanitary condition:
• the tenant remaining in possession pays the reasonable monthly rental value of the premises in its uninhabitable condition until the repairs are completed; and
• the court retains control to oversee compliance by the landlord.13
The tenant who raises the habitability defense instead of paying the rent takes the risk of being evicted. The landlord’s failure to make repairs may not rise to the level of a substantial breach of the warranty of habitability. If the repairs are minor and are judged to create only an inconvenience or annoyance for the tenant, the landlord has not substantially breached the warranty of habitability, and:
• the landlord is awarded the right of possession; and
• the tenant is liable for rent accrued through the date of judgment.14
13 CCP §1174.2(a)
14 CCP §1174.2(b)
habitability defense A residential tenant’s pursuit of a legal remedy due to a landlord’s failure to maintain habitable conditions on the rented premises.
Quiz 15 Covering Chapters 79-85 is located on page 620.
A residential landlord’s failure to maintain the premises in a habitable condition constitutes a breach of the implied warranty of habitability. All residential rental and lease agreements are subject to this implied warranty regardless of the provisions in the lease agreement. Commercial leases do not contain an implied warranty of habitability.
The implied warranty requires the residential landlord to care for the premises by maintaining it in a habitable condition. On noticing a condition that breaches the implied warranty of habitability, the tenant has a duty to notify the landlord and give them a reasonable amount of time to make the repairs before taking other action.
habitability defense ................................................................... pg. 549 habitable condition .................................................................... pg. 546 implied warranty of habitability ............................................ pg. 545
Chapter 82 Summary
Chapter 82 Key Terms
Notes:
Chapter 83: Security to prevent crimes 551
After reading this chapter, you will be able to:
• identify the landlord’s responsibilities to reduce the risk of crime through prevention; and
• understand the landlord’s responsibilities to prevent reasonably foreseeable crime or warn tenants of known criminal activity.
Learning Objectives
Security to prevent crimes
Chapter
83
Assaults on tenants have occurred in the common areas of an apartment complex. The landlord receives a composite drawing of the criminal and a description of the criminal’s activities by the local police.
The landlord does not undertake any security steps to reduce the risk of similar criminal activities.
The landlord later rents a unit to a new tenant. The landlord does not disclose the recent criminal assaults. Further, the landlord represents the complex as safe and patrolled by security.
Later, the tenant is assaulted by the same perpetrator inside the tenant’s apartment unit. The tenant seeks to recover their money losses caused by the assault from the landlord. The tenant claims the landlord failed to disclose the prior assaults and misrepresented the safety of the apartment complex.
Protective measures and warnings
reasonably foreseeable Key Term
For a further study of this discussion, see Chapter 39 of Real Estate Property Management.
552 Real Estate Principles, Second Edition
The landlord claims they are not liable for the tenant’s injuries since the assault occurred within the tenant’s apartment unit, whereas the prior attacks occurred in the common areas.
May the tenant recover money losses from the landlord?
Yes! The landlord is liable for the tenant’s injuries. The landlord knew of criminal activity on the premises and owed a duty to care to the tenant. Thus, the landlord failed to protect the tenant by either:
• providing security measures in the common areas; or
• warning the tenant of the prior assaults.1
Based on the prior criminal incidents, the likelihood of similar future assaults on tenants is reasonably foreseeable. When criminal activity is reasonably foreseeable, the landlord has a duty to take reasonable measures to prevent harm to persons on the property from future similar criminal activities. Due to the landlord’s failure to put security measures in place, the landlord needs to compensate the injured tenant by paying for their losses, called damages.
The landlord’s duty to provide protection is determined in part by balancing the foreseeability of harm against the burden imposed on the landlord to remove or prevent the harm. A high degree of foreseeability is necessary to impose a duty on a landlord to hire security guards.
Unless prior incidents of similar crimes are brought to the landlord’s attention, the high degree of foreseeability required to impose a duty on the landlord to take steps to prevent or eliminate future injury does not exist.
However, prior similar incidents are not the only determining factor. The foreseeability of an injury is also determined by the circumstances surrounding the injury and its occurrence, such as the nature, condition and location of the premises.2
The extent of the security measures a landlord is required to provide is dictated by the degree of foreseeability of any future harm to others.3
If the nature, condition and location of the leased premises do not indicate a person entering or using the property is at a foreseeable risk, the landlord is not liable for an injury. The landlord is similarly not liable even if security measures would have prevented the injury from occurring.
Consider an apartment complex where previous criminal activity has not occurred. However, the community where the complex is located is known as a high-crime area.
1 O’Hara v. Western Seven Trees Corporation Intercoast Management (1977) 75 CA3d 798
2 Ann M., supra
3 Ann M., supra
reasonably foreseeable The possibility a crime or danger may occur due to a previous crime on the premises. A landlord has a duty to take reasonable measures to prevent harm to persons on the property or warning tenants of the prior criminal activity.
High degree of
foreseeability
No liability if not
foreseeable
Chapter 83: Security to prevent crimes 553
The light bulb installed at the entrance to a tenant’s apartment burns out. The tenant asks the landlord to replace the light bulb. The lighting in the common area is functional.
Before the landlord replaces the bulb, the tenant is assaulted in their unit, suffering injuries. The tenant claims the landlord is liable for their injuries since the landlord has a duty to provide adequate lighting as a security measure.
The landlord claims they are not liable since the light bulb outside the tenant’s unit is for the tenant’s convenience. It is not intended as a protective security measure .
Here, the landlord is not liable. Prior criminal activity had not occurred on the premises that would put the landlord on notice of foreseeable risks. Thus, the landlord has no duty to take security precautions against criminal activity. Further, lighting alone is not considered an adequate security measure for deterring crime.4
Further, the landlord does not have a duty to protect a tenant from criminal activity when they are not on the leased premises.5
4 7735 Hollywood Boulevard Venture v. Superior Court (1981) 116 CA3d 901
5 Rosenbaum v. Security Bank Corporation (1996) 43 CA4th 1084
Quiz 15 Covering Chapters 79-85 is located on page 620.
When criminal activity is reasonably foreseeable due to known prior criminal activity, the landlord has a duty to take reasonable measures to prevent harm to persons on the property from future similar criminal activities.
A landlord is to properly maintain existing security features on the leased premises. However, the landlord does not have a duty to take control over an adjoining property and remove or prevent injury from dangerous conditions existing on the adjoining property.
reasonably foreseeable .............................................................. pg. 552
Chapter 83 Summary
Chapter 83 Key Term
Notes:
