Loft It or Leave It

SF Apartment : July 2016

COURT TALK

Loft It or Leave It

by Clifford Fried

As our sharing economy evolves, so do court decisions that interpret various codes and regulations.

Chen v. Kraft
January 1, 2016
Appellate Division of Superior Court, County of Los Angeles

The proliferation of shared rental housing has prompted litigation, and we are now seeing judicial opinions that give some guidance to landlords on how to deal with some relatively new problems.

In Chen v. Kraft, a landlord filed an unlawful detainer action against her tenant claiming renting out a spare room at the premises via Airbnb constituted an illegal use of the property under the Los Angeles Municipal Code (LAMC).

The tenant occupied a rent-controlled apartment with one bedroom and a loft in Los Angeles under a written agreement that allowed her and her sons to reside there.

The landlord filed an unlawful detainer complaint for failing to comply with three notices: a 10-day notice to pay rent or quit; a 10-day notice to stop using the attic for any purpose or quit; and a 10-day notice to stop illegally subletting the unit by allowing subtenants or short-term renters to reside on the premises or quit.

The tenant answered the complaint by denying the landlord’s allegations and claiming as defenses that the attic was part of the rented premises, that the LAMC permitted the sharing of the premises, and that the prior landlord expressly permitted her to use the premises as an Airbnb rental.

In response to the landlord’s motion for summary judgment, the tenant argued that she had a signed written lease addendum that permitted Airbnb rentals, that she had not been cited by the City for illegal use, and that she had a permit to collect the required Transient Occupancy Tax.

The trial court granted the landlord’s motion for summary judgment and ruled that the tenant’s use of the premises as a vacation rental violated the applicable zoning ordinances.

The tenant appealed to the Appellate Division of the Los Angeles Superior Court. The Appellate Division affirmed the trial court’s decision holding that the landlord established an unlawful detainer based on the theory of illegal purpose. Both California Code of Civ. Proc. Sec. 1161, subd. 4 and the LAMC provide that a landlord may bring an action to recover possession if the tenant is using or permitting the premises to be used for any illegal purpose.

The Appellate Division said that in order to prevail on a theory of illegal purpose, the landlord must establish that the tenant used the premises for an unlawful purpose. The landlord met her burden of proof by providing evidence establishing that the premises was located in an R1 zone, that the defendant was operating a bed and breakfast facility or allowing transient occupancy, and that the use was illegal under the LAMC.

In response, the tenant could only show that the prior landlord expressly agreed to allow the tenant to engage in Airbnb activities. The Appellate Division said that the prior consent is not dispositive because the consent constituted an illegal contract in violation of existing regulations, and was therefore void and unenforceable.

Many Bay Area cities likewise prohibit the use of dwellings for short-term rentals such as Airbnb. If a tenant refuses to stop renting out rooms on a short-term basis, one possible remedy for landlords would be to serve a notice to quit based on a theory that the tenant is using the premises for an unlawful purpose.
It is also possible to terminate a tenancy for just about any use of the premises that is in violation of the law. This theory of recovery is not only for drug-related activities, but also for uses in violation of Federal laws, local zoning or planning codes, or the Penal Code.

Boston LLC v. Juan Juarez
February 25, 2016
California law permits a landlord to evict a tenant for failing to cure a breach of the lease within three days after service of a notice to perform or quit. But must the breach be substantial before a landlord can recover possession?

In Boston LLC v. Juan Juarez, the rental agreement contained a clause stating that any failure of compliance or performance by the Renter shall allow Owner to forfeit this agreement and terminate Renter’s right to possession. It also contained a clause stating that the tenant shall obtain and pay for any insurance coverage necessary to protect Renter for any personal injury or property damage.

After 15 years of the tenant failing to obtain insurance, the landlord served a three-day notice to perform or quit on the tenant. The tenant obtained insurance shortly after the three-day period expired. The landlord sued for unlawful detainer. The trial court and the Appellate Department ruled in favor of the landlord holding that the forfeiture clause of the rental agreement precluded the tenant from arguing that the insurance clause wasn’t material and that certain defenses applied.

The Court of Appeal exercised jurisdiction over the case to settle an important question of law: whether a tenant’s breach of a rental agreement, regardless of the breach’s materiality or impact on the landlord, justifies the landlord forfeiting the agreement and terminating the tenancy.

The Court held that a tenant’s breach must be material to justify forfeiture of the rental agreement. In this case, the Court said that the tenant’s obligation to obtain and pay for insurance protected the tenant’s interest, not the landlord’s.

Accordingly, the tenant’s failure to obtain a policy could not have harmed the landlord and therefore, was not a material breach of the agreement constituting grounds for forfeiture.

The landlord brought its unlawful detainer action under subd. 3 of Code of Civ. Proc. Sec. 1161, which establishes that a tenant is guilty of unlawfully detaining the premises when continuing in possession after a failure to perform after being served with a three-day notice to perform the covenant or quit. The landlord argued that this code section provides for a statutory forfeiture.

The Court of Appeal disagreed and said that the statute does not provide a substantive forfeiture right. Instead, the purpose of the statute is to provide the landlord with a procedure for recovering possession once the consensual basis for the tenant’s occupancy ends. The statute does not note what kinds of substantive failures to perform covenants trigger a right to recover possession. In the absence of a statutory directive, the courts will look to prior case law for the substance of what kind of breaches allow the procedural statute to take effect.

Case law has consistently held that a lease may be terminated only for a substantial breach and not for a mere technical or trivial violation. And this materiality limitation even extends to leases that contain clauses purporting to dispense with the materiality limitation. The law recognizes that while every instance of noncompliance with a contract’s terms constitutes a breach, not every breach justifies treating the contract as terminated. Termination will only be permitted if the breach can be classified as material, substantial, or total.

The Court of Appeal also pointed out that avoiding a forfeiture of the lease would further the purposes of the local rent control ordinance that was born out of the shortage of affordable housing. Allowing landlords to forfeit leases based on minor breaches would allow landlords to circumvent just cause for eviction ordinance requirements under the cloak of contract provisions.

Foster v. Britton
December 1, 2015

Code of Civ. Proc. Sec. 827, a state law, permits a landlord to change the terms of a tenancy by giving 30 days’ notice. However, the San Francisco Rent Board passed Regulation 12.20, which says that notwithstanding state law, a tenant may not be evicted for violating an obligation that was not included in the tenant’s original rental agreement, unless permitted by the San Francisco Rent Ordinance, is required by law, or is accepted by the tenant in writing.

In Foster v. Britton, the issue before the Court was whether state law preempted local law and whether the Rent Board exceeded its powers when it adopted the regulation being challenged.

Tenant Foster had lived for more than 40 years in an apartment recently purchased by Landlord Britton. After purchasing the building, the landlord served all of the tenants with a notice changing the terms of tenancy by imposing new house rules. The rules were nothing out of the ordinary and were required to maintain order and tranquility in the building. The rules stated that tenants would: share the backyard equally, maintain their own garbage service, keep all property inside of units and out of sight, and use outside laundromats instead of sinks and bathtubs.

The landlord informed Tenant Foster that under the new house rules, she wouldn’t be able to store personal items outside of her unit. The tenant responded that the longstanding terms of her tenancy included garbage service, two parking spaces, an assigned area in the backyard, specific storage space, and the use of her service porch for laundry and storage. She objected to the change in the terms in tenancy.

Tenant Foster brought a lawsuit against her landlord alleging that the new rules conflicted with the terms that were included in her rental agreement. She sought a declaration of her rights and an injunction against the enforcement of the rules.
Landlord Britton cross-complained against the Rent Board seeking injunctive relief and a declaration that Sec. 827 preempted Reg. 12.20, and that the Rent Board exceeded its authority in enacting the rule.

The Supreme Court of California has long held that cities may by ordinance limit the substantive grounds for eviction by specifying that a landlord may gain possession of a rental unit only on certain limited grounds. The only limit on local rent laws is that they may not procedurally impair the summary eviction scheme set forth in the unlawful detainer statutes and that they may not alter the Evidence Code burdens of proof.

In Foster v. Britton, the Court of Appeal ruled that Board Reg. 12.20 is not preempted by the Section 827, which allows the terms of the tenancy to be changed by the landlord.

The purpose of Section 827 is to establish procedural safeguards for tenants when landlords raise the rent or change other terms of the tenancy, and not to prevent local governments from regulating the substantive grounds for eviction.

The Court further held that the Rent Board did not exceed its authority in promulgating Reg. 12.20. It said that the enabling legislation is the Rent Ordinance, which grants the Rent Board the power to promulgate policies, rules, and regulations to effectuate the purposes of the Rent Ordinance. It reasoned that one purpose of the Rent Ordinance is to limit the grounds for eviction, and that Reg. 12.20 properly acts to govern the grounds for eviction by prohibiting a landlord from evicting a tenant for violating a unilaterally imposed term of the tenancy.

The information contained in this article is general in nature. Consult the advice of an attorney for any specific problem. Clifford Fried is with Fried & Williams, LLP and can be contacted at 415-421-0100.