Landlords Tenants And Property Management Book

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first tuesday

Landlords,

Tenants and

Property

Management

Eighth Edition

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Table of Contents i

Table of

Contents

Table of Forms ..................................................................................................................iv

Introduction ....................................................................................................................vi

Glossary .............................................................................................................................441

Ownership

and

Possession

Chapter 1 Fee vs. leasehold

A matter of possession ......................................1

Chapter 2 The tenancies in real estate

Know your tenancy or lose time ...............................9

Chapter 3 Landlord’s right to enter

Conflict with occupant’s right to privacy ...................21

Chapter 4 Tenant leasehold improvements

Ownership rights when a tenant vacates ..................37

Chapter 5 Options and the right of first refusal to buy

Tenants with rights to acquire the premises ................51

Chapter 6 Property management licensing

When is a CalBRE license required? ........................61

Chapter 7 Property management agreement

Authority to operate a rental property .....................69

Chapter 8 A property manager’s responsibilities

An evolving standard of conduct ............................ 77

Chapter 9 Resident managers

Employees: not independent contractors, not tenants .... 95

Chapter 10 Identification of property manager or owner

Notice to tenant of agent-for-service .......................107

Chapter 11 Exclusive authorization to lease

Leasing agent’s bargain for fees. . . . . . . . . . . . . . . . . . . . . . . . . . .113

Chapter 12 Exclusive authorization to locate space

A leasing agent and the nonresidential tenant ...........123

Chapter 13 Cost of operating in leased space

Disclosures by leasing agents ...............................133

Agency

and

Property

Management

ii Landlords, Tenants and Property Management, Eighth Edition

Chapter 14 Security deposits and pre-expiration inspections

Cover for a tenant’s nonperformance .....................141

Chapter 15 Residential turnover cost recovery

Rent is set to include all operating expenses ...............155

Chapter 16 Accepting partial rent

Residential and nonresidential landlord rights ...........163

Chapter 17 Changing terms on a month-to-month tenancy

Landlord’s notice to tenant ..................................171

Chapter 18 Forfeiture of the lease

Lease agreement obligations survive ......................179

Chapter 19 Surrender cancels the lease agreement

Lost ability to recover future rents ..........................191

Chapter 20 Delinquent rent and the three-day notice

Pay or forfeit your right of possession .....................201

Chapter 21 Three-day notices to quit for nonmonetary breaches

Curable and incurable nonmonetary breaches

...........

213

Chapter 22 Other amounts due under three-day notices

Know what the judge will allow ............................231

Chapter 23 Notices to vacate

Termination of periodic tenancies . . . . . . . . . . . . . . . . . . . . . . . . . 241

Chapter 24 Personal property recovered by tenant

Reclaim it on notice or lose it ...............................255

Chapter 25 Constructive eviction cancels the lease

Interference forces the tenant to vacate ...................267

Chapter 26 Care and maintenance of property

Tenant obligations and remedies ...........................277

Chapter 27 Implied warranty of habitability

Safe and sanitary living conditions ........................289

Chapter 28 Security to prevent crimes

Protective measures and warnings ........................303

Chapter 29 Dangerous on-site and off-site activities

Duty to all to remove on-site dangers ......................309

Deposits

and

Rents

Enforcing

Rents;

Forfeiting

Tenancies

Maintenance

and

Security

Table of Contents iii

Chapter 30 Nonresidential lease agreements

The conveyance of a leasehold .............................321

Chapter 31 Rent provisions in nonresidential leases

Setting the rent ............................................341

Chapter 32 Adjustable rent provisions

Economic goals of nonresidential landlords ..............349

Chapter 33 Nonresidential use-maintenance provisions

Shifting ownership obligations to tenants ................359

Chapter 34 Lease assignments and subleases

Consent conditioned on exactions .........................373

Chapter 35 Residential rental and lease agreements

A review of periodic vs. fixed-term tenancies .............385

Chapter 36 Civil rights and fair housing laws

Property rights and an individual’s status .................395

Chapter 37 Residential rent control

Police power and rent control ..............................411

Chapter 38 Attornment clauses in nonresidential leases

Altering priorities for lenders ..............................419

Chapter 39 Due-on-leasing regulations

Rising interest rates bring lender interference

............

433

Nonresidential

Lease

Provisions

Residential

Leases and

Rental

Agreements

Lender

Considerations

iv Landlords, Tenants and Property Management, Eighth Edition

Table of

Forms

No. Form Name Page

111 Exclusive Authorization to Locate Space ............................................. 127

113 Schedule of Leasing Agent’s Fee .............................................................. 332

1 1 6 R i g h t t o E n t e r a n d E x h i b i t U n i t t o B u y e r s —

For Residential and Nonresidential Rentals ........................................26

116-1 Notice to Occupant of Entry and Completion of Showing —

For Residential and Nonresidential Rentals ........................................27

161 Standard Option to Purchase —

Irrevocable Right-to-Buy ................................................................................ 54

552 Nonresidential Lease Agreement Addendum —

Alienation of Leasehold ...............................................................................383

554 Change of Owner of Property Manager —

Addendum to Rental or Lease Agreement ......................................... 110

558 Partial Payment Agreement — Nonresidential .............................. 165

559 Partial Payment Agreement — Residential ....................................... 168

560 Condition of Premises Addendum .......................................................... 278

561 C o ndit i o n of F u r nis h i ngs A d d end u m —

And Inventory ..................................................................................................280

562 Tenant’s Property Operating Expense Prole .................................... 136

567 Notice of Intent to Enter Dwelling ............................................................25

567-1 Notice of Right to Request a

Joint Pre-Expiration Inspection ............................................................... 146

567-3 Statement of Deciencies on

Joint Pre-Expiration Inspection ............................................................... 148

569 30-Day Notice to Vacate —

For Use by Residential Landlord ............................................................. 243

569-1 60-Day Notice to Vacate –

For Use by Residential Landlord ............................................................. 244

570 30-Day Notice of Change in Rental Terms .......................................... 173

572 30-Day Notice to Vacate — From Tenant ............................................ 174

573 90-Day Notice to Quit Due to Foreclosure —

To Holdover Residential Tenant .............................................................. 252

57 5

Thr e e -D a y Not i c e to P a y Re n t or Q u it —

With Rent-Related Fees ................................................................................ 203

Full

Forms

Full-size, fillable copies of all 350+ first tuesday forms can be found

in the Forms-on-CD accompanying this course.

Table of Forms v

No. Form Name Page

575 - 1 Thre e - Day N o t ice t o Pay R e n t or Q u i t —

Without Rent-Related Fees ........................................................................235

576 Three-Day Notice to Perform or Quit ..................................................... 215

577 Three-Day Notice to Quit —

Residential and Nonresidential ............................................................... 217

579 Right of First Refusal to Buy — Addendum .......................................... 57

580 Proof of Service —

For Service of Notice to Real Estate Tenants ...................................... 225

582 Notice to Landlord to Surrender Personal Property —

For Use by Residential Tenants Only .................................................... 259

582-1 Costs Payable to Reclaim Personal Property ..................................... 265

584 Notice of Right to Reclaim Personal Property —

To Residential Tenant After Termination of Tenancy ................... 257

584-1 Notice of Right to Reclaim Personal Property —

To Others with an Interest in Property ................................................. 261

585 Security Deposit Disposition

On Vacating Residential Premises .......................................................... 150

587 Termination of Lease and Surrender Agreement ............................ 194

591 Resident Manager Agreement .....................................................................98

597 Notice of Nonresponsibility —

From Landlord (Calif.Civil Code §3094) ...................................................4 7

110 Exclusive Authorization to Lease Property ........................................ 115

135 Request for Homeowner Association Documents .............................74

163 Lease-Option – Contract for Deed ...............................................................59

185 Letter of Intent .................................................................................................. 137

352 Annual Property Operating Data Sheet (APOD) .............................. 161

436-1 UCC-1 Financing Statement ..........................................................................48

550 Residential Lease Agreement ....................................................................387

552 Nonresidential Lease Agreement — Single Tenant Gross ..... 6, 323,

346, 350, 351, 361-363, 368-370, 374, 382, 429

552-4 Nonresidential Lease Agreement — Percentage Lease ................ 355

552-8 Lender Subordination and Attornment Provisions .............. 421, 427

590 Property Management Agreement ...........................................................71

Partial

Forms

vi Landlords, Tenants and Property Management, Eighth Edition

Landlords, Tenants and Property Management is written for real

estate licensees, landlords, property managers, attorneys and investors.

The course material is designed to be an educational tool for use in the

classroom and in correspondence studies as well as a strong technical

research and reference tool.

The objective of Landlords, Tenants and Property Management

is to inform the reader of federal, state and local landlord/tenant rights

and obligations. This book examines the exacting rules of leasing and

renting both residential and nonresidential income properties. Also

included are examples that vividly present and resolve landlord/

tenant situations encountered by owners and real estate licensees

who manage income property or perform services as leasing agents.

A distinction exists between nonresidential (commercial, industrial,

etc.) and residential landlord-tenant relationships. This distinction

lies in the residential rental exception carved out of the general, long-

standing landlord-tenant rules once applicable to both residential and

nonresidential property. General landlord-tenant rules apply fully to

nonresidential leasing arrangements and, to the extent not overridden

by extensive residential exceptions, apply to residential leasing

arrangements as well.

Included in each chapter is a summary of issues reviewed in the

chapter with definitions of the key terms essential to the reader’s

comprehension of the topic. Unless a form cited in the book says, “See

Form XXX accompanying this chapter” [emphasis added], it is not

in the book. However, the reader has access to a fillable and savable

version of all referenced first tuesday forms on the first tuesday

Forms-on-CD delivered with the course enrollment package. The CD

contains 400+ first tuesday real estate forms, plus a digital version

of our library of the sixteen volumes comprising the first tuesday

Realtipedia publication.

All materials are also accessible online from the reader’s Student

Homepage at www.firsttuesday.us during their one-year enrollment

period.

Future errata, supplemental material and recent developments specific

to Landlords, Tenants and Property Management are available

for further research within the Online Reading section of the reader’s

Student Homepage at www.firsttuesday.us.

Introduction

Chapter 1: Fee vs. leasehold 1

Fee vs. leasehold

After reading this chapter, you will be able to:

• identify the different possessory interests held in real estate, and

the rights and obligations associated with each;

• distinguish the individual rights which collectively comprise real

property;

• identify the different types of leasehold interests held by tenants;

• understand leasehold interests which convey special rights, such

as a ground lease, master lease or sublease.

Chapter

Real estate, sometimes legally called real property or realty, consists of:

• the land;

• the improvements and fixtures attached to the land; and

• all rights incidental or belonging to the property.

1 Calif. Civil Code §658

estate

fee estate

fixed-term tenancy

ground lease

impairment

leasehold estate

legal description

life estate

master lease

parcel

profit a prendre

sublease

tenancy-at-sufferance

tenancy-at-will

Key Terms

Learning

Objectives

A matter of

possession

2 Landlords, Tenants and Property Management, Eighth Edition

A parcel of real estate is located by circumscribing its legal description on

the “face of the earth.” Based on the legal description, a surveyor locates and

sets the corners and surface boundaries of the parcel. The legal description is

contained in deeds, subdivision maps or government surveys relating to the

property.

All permanent structures, crops and timber are part of the parcel of real estate.

The parcel of real estate also includes buildings, fences, trees, watercourses

and easements within the parcel’s boundaries.

A parcel of real estate is three dimensional. In addition to the surface area

within the boundaries, a parcel of real estate consists of:

• the soil below the parcel’s surface to the core of the earth, including

water and minerals; and

• the air space above it to infinity.

For instance, the rental of a boat slip includes the water and the land below

it. Both the water and land below the boat slip comprise the real estate, the

parcel leased. Thus, landlord/tenant law controls the rental of the slip.

In the case of a statutory condominium unit, the air space enclosed within

the walls is the real estate conveyed and held by the fee owner of the unit.

The structure, land and air space outside the unit are the property of the

homeowners’ association (HOA).

The ownership interests a person may hold in real estate are called estates.

Four types of estates exist in real estate:

• fee estates, also known as fee simple estates, inheritance estates,

perpetual estates, or simply, the fee;

• life estates;

• leasehold estates, sometimes called leaseholds, or estates for years; and

• estates at will, also known as tenancies-at-will.

In practice, these estates are separated into three categories: fee estates,

life estates and leasehold estates. Estates at will are considered part of the

leasehold estates category. Leasehold estates are controlled by landlord/

tenant law.

A person who holds a fee estate interest in real estate is a fee owner. In a

landlord/tenant context, the fee owner is the landlord.

Editor’s note — If a sublease exists on a nonresidential property, the master

tenant is the “landlord” of the subtenant.

A fee owner has the right to possess and control their property indefinitely.

A fee owner’s possession is exclusive and absolute. Thus, the owner has the

2 CC §761

estate

The ownership interest

a person may hold in

real estate.

fee estate

An indefinite, exclusive

and absolute legal

ownership interest in a

parcel of real estate.

Fee estates:

unbundling

the rights

Possessory

interests in

real estate

parcel

A three-dimensional

portion of real estate

identified by a legal

description.

legal description

The description used

to locate and set

boundaries for a parcel

of real estate.

Chapter 1: Fee vs. leasehold 3

right to deny others permission to cross their boundaries. No one can be on

the owner’s property without their consent, otherwise they are trespassing.

The owner may recover any money losses caused by the trespass.

A fee owner has the exclusive right to use and enjoy the property. As long as

local ordinances such as building codes and zoning regulations are obeyed, a

fee owner may do as they please with their property. A fee owner may build

new buildings, tear down old ones, plant trees and shrubs, grow crops or

simply leave the property unattended.

A fee owner may occupy, sell, lease or encumber their parcel of real estate,

give it away or pass it on to anyone they choose on their death. The fee estate

is the interest in real estate transferred in a real estate sales transaction, unless

a lesser interest such as an easement or life estate is noted. However, one

cannot transfer an interest greater than they received.

A fee owner is entitled to the land’s surface and anything permanently

located above or below it.

The ownership interests in one parcel may be separated into several fee

interests. One person may own the mineral rights beneath the surface,

another may own the surface rights, and yet another may own the rights

to the air space. Each solely owned interest is held in fee in the same parcel.

[See Case in point, “Separation of fee interests”]

In most cases, one or more individuals own the entire fee and lease the

rights to extract underground oil or minerals to others. Thus, a fee owner

can convey a leasehold estate in the oil and minerals while retaining their

fee interest. The drilling rights separated from the fee ownership are called

profit a prendre.

Profit a prendre is the right to remove profitable materials from property

owned and possessed by another. If the profit a prendre is created by a lease

agreement, it is a type of easement.

3 CC §829

4 Rousselot v. Spanier (1976) 60 C3d 238

5 Gerhard v. Stephens (1968) 68 C2d 864

Consider a fee owner who grants separate fee interests in their property to two individuals.

One individual receives the land’s surface and air space rights. The other individual receives

the subsurface oil and mineral rights.

The surface owner claims title to the entire parcel of real estate should be vested — quieted

— in their name. The subsurface owner objects, claiming the surface owner’s real estate

interest is less than the entire fee estate in the property.

Here, the surface owner’s fee interest in the parcel of real estate is separate from the

subsurface ownership and possession of the oil and mineral rights. Also, they are not co-

owners of the real estate. Both owners hold an individual fee estate in mutually exclusive

and divided portions of the same parcel. [In re Waltz (1925) 197 C 263]

profit a prendre

The right to remove

minerals from

another’s real estate.

Case in point

Separation of

fee interests

Separate

interests

4 Landlords, Tenants and Property Management, Eighth Edition

A life estate is an interest in a parcel of real estate lasting the lifetime of an

individual, usually the life of the tenant. Life estates are granted by a deed

entered into by the fee owner, an executor under a will or by a trustee under

an inter vivos trust.

Life estates are commonly established by a fee owner who wishes to provide

a home or financial security for another person (the life tenant) during that

person’s lifetime, called the controlling life.

Life estates terminate on the death of the controlling life. Life estates may also

be terminated by agreement or by merger of different ownership interests in

the property.

For example, the fee owner of a vacation home has an elderly aunt who

needs a place to live. The fee owner grants her a life estate in the vacation

home for the duration of her lifetime. The aunt may live there for the rest of

her life, even if she outlives the fee owner who granted her the life estate.

Although the aunt has the right of exclusive possession of the entire parcel of

real estate, the fee owner retains title to the fee estate. Thus, the conveyance

of a life estate transfers a right of possession which has been “carved out” of

the fee estate. This is comparable to possession under a leasehold estate since

it is conveyed for its duration out of a fee estate. Unlike a lease, a life estate

does not require rent to be paid.

On the aunt’s death, possession of the property reverts to the fee owner, their

successors or heirs. The right of possession under the life estate is extinguished

on the aunt’s death.

The holder of a life estate based on their life has the right of possession until

death, as though they were the owner in fee. The holder of a life estate is

responsible for taxes, maintenance and a reasonable amount of property

assessments.

The holder of a life estate may not impair the fee interest.

For instance, the holder of a life estate may not make alterations which

decrease the property’s value, such as removing or failing to care for valuable

plants or demolishing portions of the improvements or land.

Conversely, the owner of the life estate has the right to lease the property to

others and collect and retain all rents produced by the property during the

term of the life estate.

In addition, a life tenant is entitled to be reimbursed by the fee owner for the

fee owner’s share of the costs to improve the property.

6 CC §840

7 CC §818

The life estate

improves or

impairs the

fee

impairment

The act of injuring or

diminishing the value

of a fee interest.

life estate

An interest in a parcel

of real estate lasting

the lifetime of the life

tenant.

Life estates

and the life

tenant

Chapter 1: Fee vs. leasehold 5

Leasehold estates, or tenancies, are the result of rights conveyed to a tenant

by a fee owner (or by the life estate tenant or master lessee) to possess a parcel

of real estate.

Tenancies are created when the landlord and the tenant enter into a rental

or lease agreement that conveys a possessory interest in the real estate to the

tenant.

The tenant becomes the owner of a leasehold with the right to possess and

use the entire property until the lease expires. The ownership and title to

the fee interest in the property remains with the landlord throughout the

term of the leasehold. The landlord’s fee interest is subject to the tenant’s

right of possession, which is carved out of the fee on entering into the lease

agreement.

In exchange for the right to occupy and use the property, the landlord is

entitled to rental income from the tenant during the period of the tenancy.

Four types of leasehold estates exist and can be held by tenants. The interests

are classified by the length of their term:

• a fixed-term tenancy, simply known as a lease and legally called an

estate for years;

• a periodic tenancy, usually referred to as a rental;

• a tenancy-at-will, previously introduced as an estate at will; and

• a tenancy-at-sufferance, commonly called a holdover tenancy.

A fixed-term tenancy lasts for a specific length of time as stated in a lease

agreement entered into by a landlord and tenant. On expiration of the lease

term, the tenant’s right of possession automatically terminates unless it is

extended or renewed by another agreement, such as an option agreement.

[See Figure 1, Form 552 §2]

Periodic tenancies also last for a specific length of time, such as a week,

month or year. Under a periodic tenancy, the landlord and tenant agree

to automatic successive rental periods of the same length of time, such as

in a month-to-month tenancy, until terminated by notice by either the

landlord or the tenant.

In a tenancy-at-will (also known as an estate at will) the tenant has the

right to possess a property with the consent of the fee owner. Tenancies-at-

will can be terminated at any time by an advance notice from either the

landlord or the tenant or as set by agreement. Tenancies-at-will do not have

a fixed duration, are usually not in writing and a rent obligation generally

does not exist.

A tenancy-at-sufferance occurs when a tenant retains possession of the

rented premises after the tenancy granted terminates. [See Chapter 2]

tenancy-at-will

A leasehold interest

granted to a tenant,

with no fixed duration

or rent owed. A

tenancy-at-will can be

terminated at any time

by an advance notice

from either party.

fixed-term tenancy

A leasehold interest

which lasts for

the specific lease

period set forth in a

lease agreement. A

fixed-term tenancy

automatically

terminates at the end

of the lease period. [See

ft Form 550 and 552]

tenancy-at-sufferance

A leasehold interest

held by a tenant who

retains possession of

the rented premises

after the termination

of the tenancy. [See ft

Form 550 §3.3]

leasehold estate

The right to possess

a parcel of land,

conveyed by a fee

owner (landlord) to a

tenant.

Leasehold

estates held

by tenants

Types of

leaseholds

6 Landlords, Tenants and Property Management, Eighth Edition

In addition to the typical residential and nonresidential leases, you will

find special use leases.

Oil, gas, water and mineral leases convey the right to use mineral deposits

below the earth’s surface.

The purpose of an oil lease is to discover and produce oil or gas. The lease is a

tool used by the fee owner of the property to develop and realize the wealth

of the land. The tenant provides the money and machinery for exploration,

development and operations.

The tenant pays the landlord rent, called a royalty. The tenant then keeps

any profits from the sale of oil or minerals the tenant extracts from beneath

the surface of the parcel.

A ground lease on a parcel of real estate is granted to a tenant in exchange

for the payment of rent. In a ground lease, rent is based on the rental value

of the land in the parcel, whether the parcel is vacant or improved. Fee

owners of vacant, unimproved land use leases to induce others to acquire

an interest in the property and develop it.

Ground leases are common in more densely populated areas. Developers

often need financial assistance from fee owners to avoid massive cash outlays

to acquire unimproved parcels. Also, fee owners of developable property

often refuse to sell, choosing to become landlords for the long-term rental

income they will receive.

An original tenant under a ground lease constructs their own improvements.

Typically, the tenant encumbers their possessory interest in a ground lease

with a trust deed lien to provide security for a construction loan.

Master leases benefit fee owners who want the financial advantages of

renting fully improved property, but do not want the day-to-day obligations

and risks of managing the property.

For instance, the fee owner of a shopping center and a prospective owner-

operator agree to a master lease.

Figure 1

Excerpt from

Form 552

Nonresidential

Lease

Agreement

Commercial,

Industrial Gross

— Single Tenant

ground lease

A leasehold interest

in which rent is based

on the rental value

of the land, whether

the parcel is vacant or

improved.

master lease

A leasehold interest

which grants a master

tenant the right to

sublease a property in

exchange for rent paid

to the fee owner.

Leaseholds

conveying

special uses

Chapter 1: Fee vs. leasehold 7

As the master tenant, the owner-operator will collect rent from the many

subtenants, address their needs and maintain the property. The master tenant

is responsible for the rent due the fee owner under the master lease, even if

the subtenants do not pay their rents to the master tenant.

The master lease is sometimes called a sandwich lease since the master

tenant is “sandwiched” between the fee owner (the landlord on the master

lease) and the many subtenants with their possession under subleases.

The master lease is a regular, nonresidential lease agreement form with

the clauses prohibiting subletting removed. A sublease is also a regular,

nonresidential lease agreement with an additional clause referencing the

attached master lease and declaring the sublease subject to the terms of the

master lease. [See first tuesday Form 552 §2.5]

Another type of special-use lease is the farm lease, sometimes called a

cropping agreement or grazing lease. Here, the tenant operates the farm and

pays the landlord either a flat fee rent, a percentage of the value of the crops

or livestock produced on the land.

Editor’s note — For simplicity, the remainder of the book will treat the

landlord as the fee owner, unless a sublease is specifically referenced. Fee

owners will be referred to as “landlords,” or, if a distinction is required,

simply as “owners.”

The ownership interests a person may hold in real estate are called

estates. Four types of estates exist in real estate:

• fee estates;

• life estates;

• leasehold estates; and

• estates at will.

In practice, estates at will are considered leasehold estates. Leasehold

estates are controlled by landlord/tenant law.

Four types of leasehold interests exist and can be held by tenants:

• fixed-term tenancies;

• periodic tenancies;

• tenancies-at-will; and

• tenancies-at-sufferance.

Chapter 1

Summary

sublease

A leasehold interest

subject to the terms of

a master lease.

8 Landlords, Tenants and Property Management, Eighth Edition

A fixed-term tenancy lasts for a specific length of time as stated in a lease

agreement entered into by a landlord and tenant. On expiration of the

lease term, the tenant’s right of possession automatically terminates

unless it is extended or renewed by another agreement.

Periodic tenancies last for a specific length of time. Under a periodic

tenancy, the landlord and tenant agree to automatic successive rental

periods of the same length of time, such as in a month-to-month

tenancy, until terminated by notice by either the landlord or the tenant.

Under a tenancy-at-will, the tenant has the right to possess a property

with the consent of the fee owner. Tenancies-at-will can be terminated

at any time by an advance notice from either the landlord or the tenant

or as set by agreement. Tenancies-at-will do not have a fixed duration.

A tenancy-at-sufferance occurs when a tenant retains possession of the

rented premises after the tenancy granted terminates.

In addition, several special use leases exist, including ground leases,

master leases and subleases.

estate ....................................................................................................pg. 2

fee estate .............................................................................................pg. 2

fixed-term tenancy ........................................................................... pg. 5

ground lease ....................................................................................... pg. 6

impairment ........................................................................................pg. 4

leasehold estate ................................................................................pg. 5

legal description ...............................................................................pg. 2

life estate ............................................................................................. pg. 4

master lease ........................................................................................pg. 6

parcel....................................................................................................pg. 2

profit a prendre .................................................................................pg. 3

tenancy-at-sufferance .....................................................................pg. 5

tenancy-at-will .................................................................................pg. 5

Chapter 1

Key Terms

Chapter 2: The tenancies in real estate 9

A landlord and tenant enter into a lease agreement. The lease agreement

does not include an option to renew or extend the term of the occupancy on

expiration of the lease.

Several months before the lease expires, they begin negotiations to enter

into a modified or new lease agreement to extend the term of occupancy. The

landlord and tenant do not reach an agreement before the lease expires. On

expiration of the lease, the tenant remains in possession of the property.

The landlord and tenant continue lease negotiations. Meanwhile, the

landlord accepts monthly rent at the same rate the tenant paid under the

expired lease agreement.

The tenancies in

real estate

After reading this chapter, you will be able to:

• differentiate between the four distinct possessory types of

tenancies;

• understand the rights held under each type of tenancy;

• determine how a tenancy is established or changed; and

• serve the proper notice required to terminate a tenancy.

Chapter

holdover rent

holdover tenant

lease agreement

rental agreement

reservation agreement

transient occupancy

trespasser

unlawful detainer

Key Terms

Learning

Objectives

Know your

tenancy or

lose time

10 Landlords, Tenants and Property Management, Eighth Edition

Ultimately, they fail to agree on the terms for an extension or a new lease

agreement. The landlord serves a notice on the tenant to either stay and

pay a substantially higher monthly rent, or vacate and forfeit the right of

possession. [See first tuesday Form 571; see Form 569 in Chapter 23]

The tenant does neither. The tenant remains in possession on expiration of

the notice, but does not pay the increased rent.

Can the landlord evict the tenant by filing an unlawful detainer (UD) action

on expiration of the notice?

Yes! The tenant’s right of possession went from an initial fixed-term tenancy

to a tenancy-at-sufferance when the lease expired. When the landlord

accepted rent for the continued occupancy, the tenancy-at-sufferance became

a periodic tenancy. The tenant’s failure to pay the higher rent demanded

in the notice terminated the tenant’s right of possession under the periodic

tenancy on expiration of the notice to pay rent or quit.

Different types of tenancies and properties trigger different termination

procedures for the landlord, and different rights for the tenant. [See Chapters

20, 30 and 35]

Recall from Chapter 1 that leasehold estates, or tenancies, are possessory

interests in real estate. Four types of tenancies exist:

• fixed-term tenancies;

• periodic tenancies;

• tenancies-at-will; and

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

To initially establish a tenancy, a landlord needs to transfer to the tenant the

right to occupy the real estate. This right is conveyed either orally, in writing

or by the landlord’s conduct, called a grant. If the landlord does not transfer

the right to occupy, the person who takes possession as the occupant is a

trespasser.

Fixed-term tenancies, periodic tenancies and tenancies at will have agreed-

to termination dates, or can be terminated by notice.

A holdover tenancy occurs when a tenant unlawfully continues in

possession of the property after their right to occupy has expired. This

unlawful possession of the property without contractual right is called

unlawful detainer (UD).

A landlord needs to file a UD action in court to evict a holdover tenant. A

tenant’s right of possession under the tenancy is terminated either by service

of the proper notice or expiration of the lease before he can be evicted. Plainly

speaking, the tenant needs to unlawfully detain possession of the property

before the tenant can be evicted for unlawful detainer.

Tenancies

as leasehold

estates

trespasser

A person who occupies

a property without the

landlord’s transfer of

the right to occupy.

unlawful detainer

The unlawful

possession of a

property. [See ft Form

575-578]

Chapter 2: The tenancies in real estate 11

Since the type of notice required to terminate a tenancy depends on the

period of the tenancy, period of the occupancy and location of the property

(e.g., rent control), landlords and property managers needs to understand

how each type of tenancy is created.

A fixed-term tenancy, also called a lease or estate for years, is the result of

an agreement between the landlord and the tenant for a fixed rental period.

If the rental period is longer than one year, the lease arrangements need to

be in writing and signed by the landlord and tenant to be enforceable. The

written document which sets the terms of a fixed-term tenancy is called a

lease agreement. A lease agreement has a commencement date and an

expiration date.

[See Form 550 in Chapter 35]

During the term of the lease, the tenancy can only be terminated and the

tenant evicted for cause. Even then, service of a three-day notice to cure the

breach or vacate the property is required. [See Form 576 in Chapter 21]

Without an exercise of a renewal or extension option, a fixed-term tenancy

automatically terminates on the expiration date, no notice required.

If a renewal or extension option exists, the lease is renewed or extended by

the tenant’s exercise of the option or the landlord’s acceptance of rent called

for in the option.

[See Case in point, “Second lease term is not a periodic

tenancy”]

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

• the right to occupy for the fixed term;

• a predetermined rental amount; and

• limitations on termination or modification.

1 Colyear v. Tobriner (1936) 7 C2d 735

2 CC §§761, 1624

3 CCP §1161(1)

4 CC §1945

A landlord and tenant orally agree to a six-month lease, with rent payable monthly. At the

end of six months, the landlord and tenant orally agree to another six-month lease.

At the end of the second term, the tenant refuses to vacate, claiming the landlord nees to

first serve them with a notice to vacate.

Here, the tenant is not entitled to any further notice beyond the agreed-to termination date.

The oral occupancy agreement was not a periodic tenancy, even though it called for monthly

rent payments. Instead, the occupancy agreement created a fixed-term lease with a set

expiration date. Thus, the tenant’s right of possession terminated on expiration of the orally

agreed-to six-month period. The oral lease agreement was enforceable since it was for a

term of less than one year. [Camp v. Matich (1948) 87 CA2d 660]

Case in point

Second lease

term is not a

periodic tenancy

The

fixed-term

tenancy

lease agreement

The written document

which sets the terms of

a fixed-term tenancy.

[See ft Form 550 and

552—552-4]

12 Landlords, Tenants and Property Management, Eighth Edition

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

tenant:

• the tenant is liable for the total amount of rent due over the entire term

of the lease (less rent paid by any replacement tenant located by the

landlord to mitigate his losses) [See Chapter 19];

and

• the tenant may not vacate prior to expiration of the rental period and

assign or sublet the premises to a new tenant if prohibited by the lease

agreement.

If the landlord finds a fixed-term tenancy too restrictive or inflexible for their

requirements, a periodic tenancy may be more suitable.

A periodic tenancy automatically continues for equal, successive periods

of time, such as a week or a month. The length of each successive period of

time is determined by the interval between scheduled rental payments. A

periodic tenancy is automatically renewed when the landlord accepts rent.

Examples of periodic payment intervals include:

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

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

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

A periodic tenancy is intentionally created by a landlord and tenant entering

into a rental agreement. A rental agreement is the agreement which sets

the terms of a periodic tenancy.

However, the tenancy can also arise due to a defective lease agreement. A

tenant who enters into possession under an unenforceable lease agreement

(e.g., oral, or unsigned) and pays rent in monthly intervals that the landlord

accepts is a month-to-month tenant.

A periodic tenancy continues until terminated by a notice to vacate. This

makes a periodic tenancy flexible, since it allows the landlord and the tenant

to terminate a month-to-month tenancy by giving the appropriate notice to

vacate to the other party.

[See Forms 569 in Chapter 23 and 572 in Chapter 17]

To terminate a periodic tenancy, the notice period needs to be at least as long

as the interval between scheduled rental payments, but need not exceed 30

days. An exception exists: a 60-day notice is required to terminate a residential

periodic tenancy if the tenant has occupied the property for more than 12

months.

[See Form 569-1 Chapter 23]

On a breach of the rental agreement, a three-day notice to vacate can also be

used to terminate a periodic tenancy. [See Form 577 in Chapter 21]

The characteristics of a tenancy-at-will include:

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

consent;

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

6 CC §1946.1

periodic tenancy

A leasehold interest

which lasts for

automatic successive

rental periods of the

same length of time,

terminating upon

notice from either

party. [See ft 551 and

552-5]

The periodic

tenancy

rental agreement

The written document

which sets the terms

of a periodic tenancy.

[See ft Form 551 and

552-5]

The tenancy-

at-will:

consent but

no rent

Chapter 2: The tenancies in real estate 13

Consider a property manager who rents an apartment to a tenant under a fixed-term lease.

At the end of the leasing period, the tenant retains possession and continues to pay rent

monthly, which the property manager accepts.

Later, the tenant is served with an appropriate notice to vacate. On the running of the notice

period, the tenant refuses to vacate. The tenant claims the notice to vacate served by the

landlord merely terminated the tenant’s right of possession and made it a tenancy-at-will

on expiration of the notice. As a tenant-at-will, they are entitled to an additional three-day

notice to vacate before they are unlawfully detaining the property.

However, an occupancy agreement for an indefinite term with a monthly rent schedule is a

month-to-month tenancy. Thus, a tenant is only entitled to one notice to vacate which needs

to expire before a UD action may be filed to evict them. [Palmer v. Zeis (1944) 65 CA2d

Supp. 859]

• possession for an indefinite and unspecified period; and

• no provision for the payment of rent.

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

• when a tenant is granted the right to indefinitely occupy the property

in exchange for services rendered [See Form 591 in Chapter 9];

• when a tenant takes possession of the property under an unenforceable

lease agreement (e.g., a written lease not signed by either party with

terms orally agreed to) — unless rent is accepted to create a periodic

tenancy;

• when a tenant is given possession of the property while lease

negotiations regarding the rent amount are still in progress and rent is

not accepted.

For a tenancy-at-will, a written notice to pay rent or quit is required to

implement any change in the right to continue to occupy the premises, e.g.,

change it to a different kind of tenancy or terminate the tenancy. However, the

parties can always agree to a shorter or longer notice period to accommodate

the change.

[See Case in point, “Periodic tenancy or tenancy-at-will?”]

Consider, an owner-occupant who agrees to sell their office building. The

terms of the purchase agreement allow them to retain the free use and

possession of the property until they can occupy an office building they are

constructing. Thus, a tenancy-at-will is created.

The buyer agrees in the purchase agreement to give the seller a 90-day written

notice to pay rent or vacate the property.

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

8 Psihozios v. Humberg (1947) 80 CA2d 215

9 Miller v. Smith (1960) 179 CA2d 114

10 CC §§789, 1946

Case in point

Periodic tenancy

tenancy-at-will?

Written

notice

required

before any

change in

the right to

occupancy

14 Landlords, Tenants and Property Management, Eighth Edition

The buyer resells the property to a new owner. The new owner serves notice

on the tenant-seller to pay rent or vacate in three days’ time. The new owner

claims they are not subject to the prior owner’s unrecorded agreement to give

a 90-day notice.

However, the new owner acquired the property subject to unrecorded rights

held by the tenant in possession. Thus, the new owner is charged with

constructive knowledge of the unrecorded agreement regarding 90-day

notices to vacate and took title subject to the terms of the agreement.

Until the tenant-at-will receives the appropriate notice to vacate, they are not

unlawfully detaining the property and the owner/landlord cannot proceed

with a UD action to recover possession.

However, a tenancy-at-will is automatically terminated if the tenant assigns

or sublets their right to occupy the property to another tenant. The new

tenant becomes a holdover tenant. Either form of possession is an unlawful

detainer and grounds for eviction without notice.

Also, a tenancy-at-will terminates on the death of either the landlord or

tenant, unless an agreement to the contrary exists.

When a fixed-term or periodic tenancy terminates by prior agreement or

notice, the tenant who remains in possession unlawfully detains the property

from the landlord. Likewise, a tenant-at-will who receives the appropriate

notice to vacate and who remains in the property also unlawfully detains the

property. These scenarios create a tenancy-at-sufferance, commonly referred

to as a holdover tenancy. [See Case in point, “What steps does a landlord take

to serve an unlawful detainer on a holdover tenant?”]

A holdover tenancy also arises on termination of a resident manager when

the resident manager’s compensation includes the right to occupy a unit

rent-free. When the landlord terminates the employment and the resident

manager fails to vacate immediately, the resident manager unlawfully

detains the premises as a holdover tenant.

[See Form 591 in Chapter 9]

A holdover tenant retains possession of the premises without any

contractual right to do so. Their tenancy has been terminated. Thus, the

landlord is not required to provide a holdover tenant with any additional

notice prior to commencing eviction proceedings.

A holdover tenant no longer owes rent under the expired lease or terminated

rental agreement since they no longer have the right of possession. However,

the rental or lease agreement usually includes a holdover rent provision

which calls for a penalty rate of daily rent owed for each day the tenant holds

over.

11 First & C. Corporation v. Wencke (1967) 253 CA2d 719

12 McLeran v. Benton (1887) 73 C 329

13 Dugand v. Magnus (1930) 107 CA 243

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

15 CCP §1161

The holdover

tenancy

holdover tenant

A tenant who retains

possession of the

rented premises

after their right of

possession has been

terminated.

holdover rent

Rent owed by a

holdover tenant for

the tenant’s unlawful

detainer of the rented

premises. [See ft Form

550 §3.3]

Chapter 2: The tenancies in real estate 15

If the rental or lease agreement does not contain a holdover rent provision,

the tenant owes the landlord the reasonable rental value of the property.

This is a daily rate owed for each day the tenant holds over. [See Case in point,

“Reasonable rental value in a holdover tenancy”; see first tuesday Form

550]

Holdover rent is due after the tenant vacates or is evicted. At that time, the

holdover period is known and the amount owed can be determined, and

demanded. If it is not paid on demand, it can be collected by obtaining a

money judgment.

But a caution to landlords: acceptance of holdover rent prior to a tenant

vacating or being evicted has unintended consequences, as discussed in the

next section.

A landlord, by using an improper notice, can create a different tenancy

relationship from the one they initially conveyed to the tenant. A tenant’s

possessory interest in real estate can shift from one type of tenancy to another

due to:

• a notice;

• expiration of a lease; or

•

by conduct.

A classic example involves a change in the type of tenancy which arises

when a holdover tenant becomes a month-to-month (periodic) tenant.

Facts: An apartment landlord filed an unlawful detainer (UD) against a tenant who was

unlawfully holding over. The landlord attempted to personally serve the UD on the tenant at

the apartment address numerous times but the tenant was out of state. The landlord posted

the notice on the property and mailed a copy to the tenant’s last known address, which was

at the apartment. No other address for the tenant was available. The tenant did not receive

or respond to the UD and the landlord took possession of the property.

Claim: The tenant sought to restore their tenancy claiming the landlord’s attempts to serve

the UD were deficient since all the attempts were executed at the apartment address while

the tenant was out of state and no other actions were taken to reach the tenant.

Counter claim: The landlord sought to prevent the tenant from restoring their tenancy,

claiming sufficient actions were taken to notify the tenant of the UD since multiple attempts

to notify the tenant were executed at the apartment address without response before

posting the notice on the premises and no other address for the tenant was available.

Holding: A California Court of Appeals held the tenant may not regain possession since

personal service was attempted and the notice was posted at the apartment address and

no other address for the tenant was available for personal service or mailing. [The Board of

Trustees of the Leland Stanford Junior University v. Ham (2013) 216 CA4th 330]

Editor’s note – A landlord is not required to expend an indeterminate amount of time

and resources to track down an absent tenant in order to serve a UD. If the UD cannot be

personally delivered, the landlord may leave a copy with a competent adult at the property

or post it on the property, then send¬ the documents by mail to the last known address of

the tenant.

Case in point

What steps

mustdoes a

landlord take

to serve an

unlawful detainer

on a holdover

tenant?

Changing

the type of

tenancy

16 Landlords, Tenants and Property Management, Eighth Edition

A landlord who accepts any rent from a holdover tenant under an expired

lease has elected by their conduct to treat the continued occupancy as a

periodic tenancy.

Thus, the prerequisite to a UD eviction is the service of a proper notice to

vacate on the holdover tenant who paid rent for the continued occupancy,

rent the landlord accepted to create a periodic tenancy.

If a landlord accepts rent from a holdover tenant after a fixed-term tenancy

expires, the expired

lease agreement is renewed on the same terms except for

the period of occupancy, which is now periodic.

On expiration of a fixed-term lease, the landlord’s continued acceptance

of rental payments does not renew the tenancy for another term equal to

the term of the original lease. Rather, the tenancy is extended as a periodic

tenancy for consecutive periods equal to the interval between rent payments

— hence, one month if rent is paid monthly.

A landlord who wants to terminate a periodic tenancy they created by

accepting rent after expiration of a lease needs to serve the tenant with the

proper notice to vacate and let it expire. On expiration of the notice, the

tenant who remains in possession of the premises is unlawfully detaining

the premises and the landlord may file a UD action to evict them.

A landlord and tenant can establish a shorter or lengthier notice period by

agreement. However, the notice period cannot be less than seven days.

Other specialized rules exist for different types of properties and situations.

For example, in a rent-controlled tenancy, terminating the right of possession

is restricted by local ordinances.

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

17 Colyear, supra

18 CC §1945

19 CC §1945

Other

rules for

terminating a

tenancy

A tenant with a fixed-term lease holds over after the lease agreement expires. The lease

agreement contains no provisions for the amount of rent due during any holdover period.

On the tenant’s failure to vacate, the landlord serves the tenant a notice to either pay a rent

amount substantially higher than rental market rates, or vacate. The tenant refuses to pay

any rent or vacate.

On expiration of the notice, the landlord files a UD action seeking payment of rent at the

rate stated in the notice, since the tenant did not vacate.

At the UD hearing, the landlord is awarded the reasonable market rental value for the entire

time the tenant held over after the lease expired, not the higher rent demanded in the

notice.

A UD court will only award a reasonable rental value for the time period the tenant held

over. [

Shenson v. Shenson (1954) 124 CA2d 747]

Case in point

Reasonable

rental value in a

holdover tenancy

Chapter 2: The tenancies in real estate 17

In a tenancy-at-will in a mobile home park, the tenant needs to be given a

60-day written notice.

Industrial and commercial tenants typically require three months minimum

notice due to the time spent receiving and responding to a notice since it

goes through multiple tiers of corporate management before a decision can

be made.

In some instances, an extended 90-day notice is required to terminate

residential tenancies in foreclosed properties. [See Chapter 23]

Another type of occupancy is to be differentiated from the leasehold interests

discussed in this chapter. Transient occupancy is the occupancy of a

vacation property, hotel, motel, inn, boarding house, lodging house, tourist

home or similar sleeping accommodation for a period of 30 days or less. This

type of occupant is classified as a guest, also called a transient occupant.

A transient occupant occupies property known as lodging, accommodation

or unit, not space or premises. The property is not called a rental. The term

“rental” implies a landlord/tenant relationship exists. Further, landlord/

tenant law does not control transient occupancy.

The guest’s occupancy is labeled a stay, not possession. During a guest’s stay

in the lodging, the owner or manager of the property is entitled to enter the

unit at check-out time even though the guest may not yet have departed.

The contract entered into for the lodging is usually called a reservation

agreement, but never a rental agreement or lease agreement. [See first

tuesday Form 593]

Guests pay a daily rate, not a daily or weekly rent. They arrive at a pre-set date

and time for check-in, not for commencement of possession. Likewise, guests

depart at an hour on a date agreed to as the check-out time. Unlike a tenant,

a guest does not vacate the premises; they check out.

When a guest fails to depart at the scheduled check-out hour on the date

agreed, no holdover tenancy is created. Thus, an unlawful detainer does not

exist as with a tenancy conveyed by a rental or lease agreement. A UD action

or court involvement is not required to remove the guest.

However, for the owner or manager to avoid the landlord-tenant UD eviction

process, the guest, when checking in, needs to sign a notice stating:

• the unit is needed at check-out time for another guest who has been

promised the unit; and

• if the guest has not departed at check-out time, the owner or manager

may enter, take possession of the guest’s property, re-key the doors and

clean up the unit for the next guest.

[See first tuesday Form 593]

20 CC §798.55(b)

21 CC §1946

22 CC §1940(b)

23 CC §1865

Transient

occupants

and their

removal

transient occupancy

The occupancy of a

vacation property,

hotel, motel, inn,

boarding house, lodging

house, tourist home

or similar sleeping

accommodation for a

period of 30 days or less.

[See ft Form 593]

reservation agreement

The written document

which sets the terms of

a transient occupancy.

[See ft Form 593]

18 Landlords, Tenants and Property Management, Eighth Edition

To remove a guest who fails to timely depart the unit and remains in the

unit after a demand has been made to leave, the manager can intervene to

remove the guest, a solution called self-help. If the manager’s intervention

might cause a breach of the peace, the manager may call the police. The

police or the sheriff will assist, without the need for a court order, to remove

the guest and prevent a danger to persons or property during the re-keying,

removal of possessions and clean up for the arrival of the next guest.

Transient occupancies include all occupancies that are taxed as such by local

ordinance or could be taxed as such by the city or by the county.

Taxwise, the guest occupancy is considered a personal privilege, not a

tenancy. Time share units when occupied by their owners are not transient

occupancies and are not subject to those ordinances and taxes.

Transient units do not include residential hotels since the occupants of

residential hotels treat the dwelling they occupy as their primary residence.

Also, the occupancy of most individuals in residential hotels is for a period of

more than 30 days.

Also, the operator of a residential hotel may not require a resident to change

units or to check out and re-register in order to avoid creating a month-to-

month tenancy which would place the occupancy under landlord/tenant

law. A residential hotel operator violating this rule is liable for a $500 civil

penalty and attorney fees.

A broker or any other person who manages “vacation rental” stays for

owners of single family homes, units in a common interest development

(condominium project), units in an apartment complex or any other residence

subject to a local transient occupancy tax, is to maintain accounting records.

Further, the property manager needs to send a monthly accounting statement

to each landlord they represent and make the records available for inspection

and reproduction by the owner. They need to also comply with the transient

occupancy tax regarding collection, payment and record keeping.

24 Calif. Penal Code §602(s)

25 Calif. Revenue and Taxation Code §7280

26 CC §1940.1

27 CC §1864

Property

manager’s

self-help

to remove

guests

Chapter 2: The tenancies in real estate 19

A fixed-term tenancy is the result of an agreement between the

landlord and the tenant for a fixed rental period. A periodic tenancy

automatically continues for equal, successive periods of time, such as a

week or a month.

In a tenancy-at-will, possession is delivered to the tenant with the

landlord’s knowledge and consent for an indefinite and unspecified

period, usually without requiring rent. A holdover tenancy is the

result of a tenant retaining possession of a rented premises without any

contractual right to do so.

A tenant’s possessory interest in real estate can shift from one type of

tenancy to another based on conduct of the landlord.

The type of notice required to terminate occupancy depends on the

period of the tenancy or occupancy, the period of the occupancy, the

property type and location.

holdover rent ...................................................................................pg. 14

holdover tenant ..............................................................................pg. 14

lease agreement ..............................................................................pg. 11

periodic tenancy .............................................................................pg. 12

rental agreement ............................................................................pg. 12

reservation agreement ..................................................................pg. 17

transient occupancy ......................................................................pg. 17

trespasser ..........................................................................................pg. 10

unlawful detainer ..........................................................................pg. 10

Chapter 2

Summary

Chapter 2

Key Terms

Notes:

Chapter 3: Landlord’s right to enter 21

Unbeknownst to a residential landlord, a tenant changes the locks on the

door to the rented unit. Several months later, the tenant is arrested by law

enforcement officers as they step out of their apartment. The tenant is hastily

escorted away, leaving lights on and their pet inside, but locking the door.

The landlord becomes aware of the tenant’s dilemma. Fearful the gas stove

was also left on, the landlord attempts, but is unable to enter with their key.

The landlord calls the police to witness their entry and inspection of the

apartment to make sure it is in a safe and secure condition. The landlord then

enters the apartment through a window. The police are let in to observe the

landlord’s conduct.

The police proceed to make a visual inspection of the apartment.

Landlord’s right

to enter

After reading this chapter, you will be able to:

• understand the relationship between a tenant’s right to privacy

and the landlord’s need to access the leased space;

• distinguish the circumstances under which a landlord may enter

a leased premises;

• properly serve a 24-hour notice of entry on a tenant in advance of

the entry; and

• identify resolutions to possessory conflicts arising from the

landlord-tenant relationship.

Chapter

Learning

Objectives

business goodwill

forcible entry

notice of entry

punitive damages

restitution

self-help

Key Terms

Conflict with

occupant’s

right to

privacy

22 Landlords, Tenants and Property Management, Eighth Edition

Unfortunately for the tenant, the police find illegal possessions in plain view

casually lying around the kitchen and dining area of the apartment.

Did the landlord have the right to enter the apartment? Did the landlord

have the right to allow the police to enter the apartment?

Yes to both! The landlord had the right to enter since they reasonably believed

the safety of their other tenants and the building may be in jeopardy.

Also, the police were present at the request of the landlord to act as

eyewitnesses so the tenant may not claim the landlord removed any of the

tenant’s possessions.

In contrast, consider the landlord who permits the police to enter and search

a tenant’s garage without a warrant.

The police have reason to believe the tenant is manufacturing drugs, an

illegal use of the premises and of concern to the landlord.

May a landlord collaborate with the police at their request and allow them

to enter a tenant’s garage?

No! The landlord has no right of possession when the tenant’s right of

possession has not expired or been terminated. This is true even if the tenant

has vacated and only one day remains under a 30-day notice to vacate.

If the tenant’s right of possession has not expired, the landlord has no

possessory right. Thus, they are prohibited from entering the property or

letting the police enter the property, even if the landlord suspects the tenant

of using the premises to commit a crime. The police need to first obtain a

search warrant to legally authorize them to come onto the premises occupied

by the tenant when the landlord has no right to entry.

However, a landlord does have the right to enter and also to allow police

to enter a unit which has been abandoned or vacated by the tenant if the

tenancy has been terminated under state law rules of abandonment or

surrender.

[See Chapter 23]

Further, “lock-box” entry by the police in collaboration with a multiple-

listing service (MLS) member to check out a crime is prohibited without a

warrant. The entry violates the purpose of a seller’s broker’s agency and lock-

box authority. The broker may enter only to show the premises to prospective

tenants who accompany them (or other authorized agents).

1 People v. Plane (1969) 274 CA2d 1

2 United States v. Warner (9th Cir. 1988) 843 F2d 401

3 United States v. Sledge (9th Cir. 1981) 650 F2d 1075

4 People v. Jaquez (1985) 163 CA3d 918

Landlord may

not interfere

with tenant’s

possessory

right

Chapter 3: Landlord’s right to enter 23

A landlord’s right to enter a residential or nonresidential unit during the

period of the tenant’s right to occupy the premises is severely limited. The

possessory rights to occupy the property have been conveyed to the tenant

and are no longer held by the landlord, until a reversion of possession occurs

on termination of the tenancy.

A residential landlord may enter the tenant’s actual dwelling space during

the term of the rental or lease agreement only in limited circumstances:

• in an emergency;

• to make repairs, alterations, improvements, or supply services that are

either necessary or previously approved by the tenant;

• to complete a pre-expiration inspection for deficiencies which would

result in a deduction from the security deposit [See Chapter 14];

• to show the unit to prospective buyers, prospective tenants, lenders,

repairmen or contractors;

• when the tenant has vacated the premises and their right to occupy

has been terminated by surrender or abandonment; or

• under a court order allowing entry.

A property manager’s entry into a tenant’s unit out of concern for the safety

of the property or other tenants constitutes an emergency. The property

manager may properly enter the unit without the tenant’s knowledge and

permission for the limited purpose of dealing with the emergency.

Consider a nonresidential lease agreement that prohibits any tenant

violations of government laws and regulations.

The landlord asks the tenant for permission to conduct tests on the property

and investigate whether the leased property contains any contamination

from hazardous waste. The tenant refuses to give the landlord permission

to conduct the investigation, claiming the landlord does not have a right to

determine whether contamination exists until the lease expires.

Here, the landlord, on advance notice to the tenant, has the right to access the

property to determine if contamination has or is occurring on the property.

Hazardous waste contamination is a violation of law and a breach of the

lease provision prohibiting unlawful activities which adversely affect the

value of the property.

Before a residential landlord may proceed with any maintenance or services

which require entry into a tenant’s unit, the tenant needs to be given a

written notice of the landlord’s intent to enter. Maintenance includes all

routine or non-emergency repairs, decorations, alterations, improvements,

replacements or services, whether or not agreed to by the tenant.

[See Form

567 accompanying this chapter]

5 Calif. Civil Code §1954

6 Plane, supra

7 Sachs v. Exxon Company, U.S.A. (1992) 9 CA4th 1491

8 CC §1954

Notice of

entry for

repairs

Entry to

conduct a

hazardous

waste

investigation

Landlord’s

right to enter

another’s

space

24 Landlords, Tenants and Property Management, Eighth Edition

The written notice gives the tenant a reasonable time period to prepare for

the entry. A 24-hour notice is considered reasonable, unless extenuating

circumstances known to the landlord or their property managers, such as

the tenant’s vacation or business trip, indicate the tenant needs more time to

receive the notice and prepare for the entry.

Service of a 24-hour notice of entry in advance of the entry is accomplished

by any one of the following methods:

• handing a written notice to the tenant personally;

• handing the notice to an occupant of the unit who appears of suitable

age and discretion to relay the notice to the tenant; or

• posting the notice on, near or under the usual entry door so it will be

discovered by the tenant.

Alternatively, the notice may be mailed, but at least six days is to pass after

mailing before the intended entry can be scheduled to occur.

A notice is sufficient to request entry during normal business hours,

emergencies excepted. However, to request entry after business hours, the

tenant’s consent needs to be obtained “at the time of entry.”

The notice of entry procedures may not be used to harass a tenant in a

retaliatory or abusive manner.

A tenant in a community apartment project or a homeowner in a common

interest development (CID) is to receive at least 15 days but no more than

30 days written notice when the management or association needs the

occupants to vacate the project in order to treat termites. Condominium

projects and planned unit developments are examples of CIDs.

9 CC §1954

10 CC §1954

11 CC §1364(d)(2)

Facts: A residential landlord owned several rental properties. The city enacted an ordinance

requiring annual inspections of all residential rental properties to identify substandard

properties. The ordinance required inspectors to obtain consent from landlords and tenants

prior to entering units for inspections. However, the ordinance allowed inspectors to enter

properties without consent if the inspector had reason to believe a dangerous condition of

the property required an immediate inspection for public safety.

Claim: The landlord sought to invalidate the ordinance, claiming the ordinance violated

tenants’ right to privacy since the inspections allowed searches without a warrant.

Counter claim: The city claimed the ordinance did not violate tenants’ right to privacy

since landlord and tenant consent was a prerequisite to property inspections, unless an

emergency threatened public safety.

Holding: A California court of appeals held the ordinance did not violate tenant privacy since

inspectors were required to receive consent before entry, unless an emergency threatened

public safety. [Griffith v. City of Santa Cruz (2012) 207 CA4th 982]

Case in point

Do city

inspections

violate tenants’

rights to privacy?

notice of entry

A written document

giving a tenant

advance notice of a

landlord’s intent to

enter a tenant’s unit to

perform maintenance,

make repairs or

inspect. [See ft Form

567]

Chapter 3: Landlord’s right to enter 25

Form 567

Notice of

Intent to Enter

Dwelling

DATE: ____________, 20______, at ______________________________________________________, California.

Items left blank or un checked are not ap pli ca ble.

FACTS:

1. You are a Tenant under a rental or lease agreement

1.1 dated _______________, at ______________________________________________________, California,

1.2 entered into by __________________________________________________________, as the Tenant, and

_________________________________________________________________________, as the Landlord,

1.3 regarding real estate referred to as __________________________________________________________

______________________________________________________________________________________.

NOTICE TO TENANT:

2. Landlord will enter the above premises at or around the normal business hour of _____________,

on _____________, 20______ for the following checked purposes:

2.1

To make necessary or agreed repairs of ___________________________________________________

______________________________________________________________________________________.

2.2

To decorate the unit by _________________________________________________________________

______________________________________________________________________________________.

2.3 To alter or improve the unit by ___________________________________________________________

______________________________________________________________________________________.

2.4

To supply necessary or requested services of _______________________________________________

______________________________________________________________________________________.

2.5 Other __________________________________________________________________________________

______________________________________________________________________________________.

3. You are not required to be on he premises during this entry. A passkey will be used in the event of your absence.

Date: _____________, 20______

Landlord/Agent: ________________________________

Signature: _____________________________________

Address: ______________________________________

_____________________________________________

Phone: _______________________________________

Fax: _________________________________________

Email: ________________________________________

NOTE: A Landlord may enter a Tenant’s unit during normal business hours after giving twenty-four (24) hours prior

notice of intent to enter. [Calif. Civil Code §1954]

NOTICE OF INTENT TO ENTER DWELLING

Prepared by: Agent ____________________________

Broker ____________________________

Phone _______________________

Email _______________________

A residential landlord may enter a tenant’s unit after further notice to

the tenant when the tenant requests a joint pre-expiration inspection of

the premises. The tenant’s request is usually in response to the landlord’s

initial notice mandated to inform the tenant of the tenant’s right to a joint

inspection. [See Chapter 14]

Entry for pre-

expiration

inspection

26 Landlords, Tenants and Property Management, Eighth Edition

The purpose of the pre-expiration inspection prior to termination of the

tenancy is to advise the tenant of any deficiencies in the condition of the

premises. The tenant can then correct or eliminate any deficiencies before

vacating and avoid deductions from the security deposit.

Before the residential landlord may enter to conduct the agreed-to pre-

expiration inspection, the tenant is given a 48-hour written notice stating

the date and time for the inspection.

12 CC §1950.5(f)(1)

Form 116

Right to Enter

and Exhibit Unit

to Buyers

DATE: ____________, 20______, at _______________________________________________________, California.

Items left blank or unchecked are not applicable.

FACTS:

1. You are a Tenant under a rental or lease agreement

1.1 dated __________________, at __________________________________________________, California,

1.2 entered into by ________________________________________________________, as the Tenant, and

_______________________________________________________________________, as the Landlord,

1.3 regarding real estate referred as ___________________________________________________________

_____________________________________________________________________________________.

NOTICE TO TENANT:

2. You are hereby advised the premises you occupy has been placed on the real estate market “For Sale."

3. During the period of 120 days following the date of this notice, Landlord or his authorized Listing Agent for

the sale of the property may need to enter your unit during normal business hours for the purpose of showing

the premises for review by prospective or actual Buyers.

4. At least 24 hours prior to entry for this purpose, you will be given telephonic or personal notice of our intent to

enter.

5. You are not required to be present on the premise during the entry and showing. A passkey will be used should

you be absent.

On departing the premises, Landlord or Listing Agent will leave a written note identifying themselves and indicating

they have entered and completed their showing of the unit to Buyers. [See ft Form 116-1]

RIGHT TO ENTER AND EXHIBIT UNIT TO BUYERS

For Residential and Nonresidential Rentals

NOTE: For 120 days after notice to a Tenant, a Landlord or his Listing Agent may enter the leased premises during

normal business hours to show the unit to prospective Buyers after giving the Tenant at least twenty-four (24) hours

telephonic notice of their intent to enter. [Calif. Civil Code §1954]

Date: _____________, 20______

Landlord: ___________________________________________________

Listing Agent: ______________________________ DRE #:____________

Signature: __________________________________________________

Address: ____________________________________________________

____________________________________________________________

Phone: __________________________ Cell: _______________________

Fax: ________________________________________________________

Email: ______________________________________________________

Prepared by: Agent ____________________________

Broker ____________________________

Phone _______________________

Email _______________________

Chapter 3: Landlord’s right to enter 27

Service of the 48-hour notice of entry is accomplished in the same manner

as for the 24-hour notice of advance entry to complete repairs. However, the

tenant may waive the 48-hour notice if both the tenant and the landlord sign

a written waiver.

A residential or nonresidential property occupied by a tenant is called a

rental. Real estate brokers who list rentals for sale need to inform the seller of

the seller’s right to coordinate prospective buyer inspections of the property.

These inspections can be completed using one of two notice procedures.

13 CC §1950.5(f)(1)

14 CC §1954

Form 116-1

Notice to

Occupant of

Entry and

Completion of

Showing

DATE: ____________, 20______, at _______________________________________________________, California.

Items left blank or unchecked are not applicable.

FACTS:

1. You are a Tenant under a rental or lease agreement

1.1 dated __________________, at __________________________________________________, California,

1.2 entered into by ________________________________________________________, as the Tenant, and

_______________________________________________________________________, as the Landlord,

1.3 regarding real estate referred as ___________________________________________________________

_____________________________________________________________________________________.

NOTICE TO TENANT:

2. On ____________, 20______, you were given notice of Landlord's or Listing Agent's intent to enter the leased

premises you occupy to show the unit to prospective Buyers. [See ft Form 116]

3. You are hereby advised the showing of your unit has been completed by

__________________________________________________________________, as the Listing Agent, or

_____________________________________________________________________________, as the Landlord.

NOTE: For 120 days after notice to a Tenant, a Landlord or his Listing Agent may enter the leased premises during

normal business hours to show the unit to prospective Buyers after giving the Tenant at least twenty-four (24) hours

telephonic notice of their intent to enter. [Calif. Civil Code §1954]

On departing the premises, the Landlord or Listing Agent will leave this notice for the Tenant identifying themselves and

indicating they have entered and completed their showing of the unit to prospective Buyers. [Calif. Civil Code

§1954(d)(2)]

Date: _____________, 20______

Landlord: ___________________________________________________

Listing Agent: ______________________________ DRE #:____________

Signature: __________________________________________________

Address: ____________________________________________________

____________________________________________________________

Phone: ___________________________ Cell:_______________________

Fax: ________________________________________________________

Email: ______________________________________________________

NOTICE TO OCCUPANT OF ENTRY AND COMPLETION OF SHOWING

For Residential and Nonresidential Rentals

Prepared by: Agent ____________________________

Broker ____________________________

Phone _______________________

Email _______________________

Entry during

“For Sale”

period

28 Landlords, Tenants and Property Management, Eighth Edition

The first notice procedure works exactly the same as the 24-hour written

notice of entry for repairs. This notice may also be mailed, as discussed in the

prior section.

The second, or alternative notice procedure to the 24-hour written notice is

a 120-day “For Sale” notice. The “For Sale” notice may be given to the tenant

personally or by regular mail at any time after the seller enters into a listing

to sell the property.

[See Form 116 accompanying this chapter]

The “For Sale” notice commences a 120-day “for sale” period. During this

period, the seller or the seller’s agent may enter the unit during normal

business hours with a prospective buyer to conduct an inspection of the unit.

[See Case in point, “Are weekends normal business hours?”]

Prior to the time for entry during the “for sale” period, the tenant receipt of

the notice is to be given no less than 24 hours advance notice by phone or in

person of the actual entry date and time. The actual entry is conditioned on

the listing agent leaving a written note in the unit regarding the entry and

completion of the inspection. [See Form 116-1 accompanying this chapter]

Here, the giving of the 24-hour notice by phone, during the 120-day period

following service of the written “For Sale” notice, is exclusively the right

of the seller and their listing agent. The buyer’s agent needs to arrange for

the listing agent to give the 24-hour advance telephonic notice. The buyer’s

agent does not have, and may not be given the authority to notify the tenant

(unless they are also the listing agent).

Thus, on taking a listing to sell property occupied by tenants, the listing agent

needs to inform the seller of the two available notice-of-entry procedures.

Once resolved as to which notice procedure the seller is willing to authorize

in the listing agreement, the information is shared with buyer’s agent.

This information regarding a buyer’s access to the listed property is reported

in MLS listings under “showing instructions.” For example, “Call the listing

office (LO) or listing agent (LA) to arrange for 24-hour telephonic (or alternative

written) notice of entry.”

Once informed of the procedure for entry and inspection, some sellers may

restrict inspections of the property to qualified buyers who have entered into

a purchase agreement. Thus, sellers might not allow prospective buyers to

preview the premises until they have entered into a purchase agreement

and been financially qualified as capable buyers.

A landlord or their manager may enter a unit when:

• the tenant’s right of possession has been terminated; and

• the tenant has vacated the unit.

15 CC §1954(d)(2)

Entry on

surrender,

abandonment

or forfeiture

Chapter 3: Landlord’s right to enter 29

Caution: the tenant vacating the property does not automatically trigger a

termination of the tenant’s right of possession. The tenant’s leasehold right of

possession is terminated by:

• the expiration of a lease (or rental agreement, by a proper notice to

vacate) [See Chapter 23];

• a properly-established surrender [See Chapter 19];

• an abandonment, with a notice of abandonment [See Chapter 18]; or

• a forfeiture, with a three-day notice containing a declaration of

forfeiture. [See Chapter 18]

A landlord has the right to recover possession of the premises due to a forfeiture

declared in a three-day notice to quit, or expiration of the rental or lease

agreement. However, a landlord may only enforce their right to recover

possession from a holdover tenant by the legal eviction process. Self-help is

absolutely unacceptable.

For example, in an unlawful detainer (UD) action, a landlord obtains a UD

judgment against a tenant when the tenant fails to promptly answer the UD

lawsuit. Before the eviction is carried out under the court order, the court

“sets aside” the judgment. The court-ordered eviction order is now invalid.

Even though the landlord knows the eviction order is invalid, the landlord

privately calls on two uniformed county marshals to assist in the eviction.

Without knowing the eviction order is invalid, the two marshals demand

the tenant vacate the unit.

The tenant leaves the unit immediately and the landlord takes possession.

Later, the tenant seeks a money judgment against the landlord claiming the

conduct of the landlord was a forcible entry and detainer of the premises.

The landlord claims their conduct cannot be considered a forcible entry and

detainer since the method used to evict the tenant did not lie entirely outside

Facts: A landlord and tenant enter into a residential lease agreement. The landlord later

lists the property for sale and intends to hold an open house on the weekend for the purpose

of marketing the property to prospective buyers. The tenant refuses to permit the landlord

to hold an open house on the weekend.

Claim: The landlord sues to hold an open house on the weekend, claiming they have the

right to show the property during a real estate agent’s normal business hours, which include

weekends.

Counter claim: The tenant seeks to prevent the landlord from showing the property on

weekends, claiming the tenant is not required to allow weekend access since the weekend

is outside normal business hours.

Holding: A California Court of Appeals held the landlord is allowed to hold open houses

during reasonable hours on the weekend since a real estate agent’s normal business hours

include weekends. [Dromy v. Lukovsky (2013) 219 CA4th 278]

Case in point

Are weekends

normal business

hours?

Entry by

court order

self-help

A landlord’s own

method of recovering

possession from a

tenant outside the

legal eviction process.

30 Landlords, Tenants and Property Management, Eighth Edition

the law. The landlord obtained a court order (although they knew it was

invalid) and did not personally evict the tenant (they used law enforcement

officers instead).

However, the landlord is liable for forcible entry and detainer. They caused the

tenant to be evicted by using a judgment which they knew to be invalid. The

landlord’s use of uniformed law officials to carry out the entry and removal

of the tenant does not excuse the landlord’s use of a known invalid eviction

order. The landlord is still using self-help methods to regain possession of the

premises since the eviction was not court-ordered.

Now consider a nonresidential landlord who obtains only a money judgment

against their tenant for unpaid rent. The landlord does not obtain an order

authorizing the tenant’s eviction. However, a court clerk erroneously issues

a writ of possession authorizing the landlord’s recovery of the property, via

the sheriff. Consequently, the tenant is evicted by the sheriff.

The tenant now seeks to recover possession. The money judgment did not

award the landlord possession of the premises or include an eviction order.

The court later recalls the writ as having been erroneously issued, but refuses

to order the landlord to surrender possession of the property to the tenant.

The tenant seeks to recover their money losses for the eviction. The tenant

claims the landlord is liable for forcible entry and detainer since the landlord

had the tenant removed under an invalid writ of possession.

The landlord claims they are not liable for forcible entry or detainer since

they relied on court authorization to evict the tenant and recover possession

of the premises.

Here, the landlord is not liable for the tenant’s money losses. Imposing

liability on landlords who, in good faith, rely on erroneous court orders

would undermine the public policy favoring orderly judicial process (instead

of self help).

Rental and lease agreements occasionally contain an unenforceable

provision stating the landlord has the right to enter and retake possession

of the premises upon a tenant’s breach of the rental or lease agreement.

However, the tenant’s default does not alone constitute a forfeiture or convey

the leasehold and its possessory rights to the landlord.

To terminate the tenant’s right of possession after a breach, the landlord serves

the tenant with a three-day notice to cure the breach, pay rent or quit. The

notice includes a declaration of lease forfeiture if the landlord is to terminate

the tenant’s right of possession on expiration of the notice.

16 Bedi v. McMullan (1984) 160 CA3d 272

17 Glass v. Najafi (2000) 78 CA4th 45

Good faith

reliance on

erroneous

court orders

Tenant’s right

to privacy on

default

Chapter 3: Landlord’s right to enter 31

If the landlord attempts self-help and takes possession without the tenant’s

consent, the landlord is committing a forcible entry. The landlord thus

becomes liable for the tenant’s money losses.

A tenant’s right of possession arises out of their ownership of a leasehold

estate in the property.

The tenant retains the right of possession unless and until it is terminated by

proper notice or the expiration of a lease agreement. The only other enforceable

transfer of the right of possession is through voluntary conveyance.

To recover the property after the tenant’s breach, the landlord either serves

the tenant with the required notice or the tenant voluntarily conveys the

right of possession back to the landlord. Again, the landlord’s self-help is not

an enforceable transfer of the tenant’s right of possession.

In exchange for voluntarily giving up possession, the tenant usually seeks a

cancellation of the lease agreement (or some other consideration).

Consider an owner who goes on an extended overseas vacation. The owner

rents out their home to a tenant for the duration of their trip. The rental

agreement provides for the tenant to vacate on the owner’s return.

The owner returns from their trip, but the tenant refuses to relinquish

possession of the house. While the tenant is at work, the owner enters

the house, removes the tenant’s belongings and retakes possession of the

property based on a provision in the rental agreement stating they have the

right of re-entry.

Can the owner use self-help to dispossess the tenant?

No! So long as the tenant’s right of occupancy remains unterminated by

notice or agreement, the tenant has the right to exclude others, including

the fee owner, from possession. This right is created by all rental or lease

agreements since they grant an exclusive right of possession.

An owner, even though entitled to possession by agreement, cannot re-enter

the premises without first obtaining a court order.

Forcible entry by a landlord or property manager is an unlawful activity

consisting of:

• peaceable entry by open doors, windows or other parts of the premises

without permission, prior notice or justification;

• entry by any kind of violence or threat of terror; or

• peaceable entry after which threats, force or menacing conduct is used

to dispossess the tenant.

18 Lamey v. Masciotra (1969) 273 CA2d 709

19 CC §1953(a)(l)

20 Calif. Code of Civil Procedure §1159

No self-help

to dispossess

a tenant

Forcible

entry by

management

forcible entry

The unlawful entry

of any individual

into a rented property

without permission,

prior notice or

justification.

32 Landlords, Tenants and Property Management, Eighth Edition

Actions by a landlord, property manager or resident manager construed as

an illegal forcible entry include:

• entry resulting from any physical acts of force or violence;

• entry through a window and removal of the tenant’s belongings in the

occupant’s absence;

• entry under the false pretense of making an inspection and then taking

possession from the tenant;

• entry by unlocking the door of the unit in the tenant’s absence;

• entry accomplished by a locksmith who opens the door during the

tenant’s absence;

and

• entry by breaking locks.

For instance, consider an occupant whose rent is paid by their employer under

a lease agreement entered into solely by the employer and the landlord. It

names the employer as the tenant on the lease.

Later, the occupant’s employment is terminated and the employer informs

the occupant and the landlord that the employer will no longer pay the

rent. Upon a request from the employer, the landlord enters without the

occupant’s permission, changes the locks and forces the occupant to vacate

the premises. No notice is served on the occupant and no UD action is filed.

Is the landlord guilty of forcible entry even though the occupant was no

longer employed by the tenant, and was not named as the tenant on the

lease?

Yes! While the occupant’s employment was terminated and the employer

informed the landlord they would no longer pay rent, the occupant was in

possession under a lease agreement which had not been terminated. The

landlord’s attempt to oust the occupant by entering against the occupant’s

will and changing the locks on the employer’s breach of the lease is an

example of both forcible entry and self-help.

Some lease agreements contain an unenforceable clause purporting to

give the landlord the right to take or hold the tenant’s personal property as

security upon the tenant’s default on the lease.

For example, a tenant enters into a lease agreement and occupies the unit.

The agreement authorizes the landlord to re-enter the unit on the tenant’s

default in the payment of rent and take the tenant’s personal possessions as

security until the rent is paid.

21 Bank of California v. Taaffe (1888) 76 C 626

22 White v. Pfieffer (1913) 165 C 740

23 Winchester v. Becker (1906) 4 CA 382

24 Karp v. Margolis (1958) 159 CA2d 69

25 Pickens v. Johnson (1951) 107 CA2d 778

26 Spinks v. Equity Residential Briarwood Apartments (2009) 171 CA4th 1004; CCP §§1159, 1160

Tenant’s

possessions

as security

Forcible entry

and self-help

Chapter 3: Landlord’s right to enter 33

The tenant fails to pay rent and the payment becomes delinquent. To enforce

the security provision in the lease, the landlord uses their key to enter the unit

in the tenant’s absence and remove the tenant’s possessions. The landlord

then refuses to allow the tenant to re-enter the unit until the rent is paid.

Here, the landlord may not enter and interfere with the tenant’s continued

access to the premises based on the tenant’s default on the lease agreement.

The landlord needs to first obtain a court order. It does not matter how

peaceably the landlord accomplished the entry, since without a court order

they are guilty of forcible entry and detainer.

Forcible entry into premises leased to a tenant occurs whenever anyone

enters the tenant’s premises without the tenant’s present consent.

Consider a hotel operator who as a tenant encumbers their leasehold interest

in a hotel with a trust deed to provide security for a loan. The trust deed

states the lender may appoint a trustee to take possession of the real estate

and operate and manage the hotel when the hotel operator defaults on

repayment of the loan.

The operator defaults on the loan. The lender appoints a trustee in compliance

with the trust deed provisions. The trustee goes to the hotel to remove the

hotel operator from the premises as agreed by the provision in the trust deed.

The trustee, although not entering the premises by force, breaks and replaces

locks on the storage cabinets. The trustee raids cash registers and threatens to

harm the hotel operator if they refuse to relinquish possession of the hotel.

Is the trustee guilty of forcible entry onto the property even though the

trustee was appointed under a trust deed provision agreed to by the operator

and used non-violent means to enter the premises?

Yes! The trustee holds the same status as the secured lender. They have no

more right of possession than the lender. This is in spite of prior agreements

granting authority to the trustee to take possession on default.

The trustee’s right of possession, like that of a landlord, may only be lawfully

obtained by a UD action against the interest in the property encumbered by

the trust deed. After obtaining ownership of the tenant’s rights by holding a

trustee’s sale of the tenant’s rights under the leasehold interest securing the

loan, the trustee or the lender (or other highest bidder) is then required to

serve the appropriate notice to vacate. Only upon the expiration of the notice

to vacate would they be able to file a UD action and obtain possession.

Even a tenant can be guilty of a forcible entry.

Consider a prospective tenant who enters into a rental agreement without

inspecting the premises.

27 Jordan v. Talbot (1961) 55 C2d 597

28 Calidino Hotel Co. of San Bernardino v. Bank of America Nat. Trust & Savings Ass’n (1939) 31 CA2d 295;

Forcible entry

by others

Forcible entry

by the tenant

34 Landlords, Tenants and Property Management, Eighth Edition

When they inspect just before taking possession, they discover the physical

condition of the premises is unacceptable and refuse to take possession. As

a result, the landlord does not give the tenant a key or any other means of

access to the premises.

The landlord, realizing they will not be able to rent the property until the

premises is restored, renovates the property. Upon the landlord’s completion

of the renovations, the would-be tenant climbs through an open window in

the landlord’s absence and takes possession of the premises. They claim the

rental agreement the landlord and tenant entered into grants them the right

of possession of the unit.

Here, the tenant did not have authority from the landlord to occupy the

premises. The rental agreement was canceled by the tenant’s conduct when

they refused to accept delivery of possession and was not given access to the

premises. The tenant’s occupancy was gained only by their unauthorized

and peaceful entry, legally called forcible entry.

Consider the owner of a single family residence who rents rooms to

individuals, called roommates. Soon, the owner spends less and less time

residing on the property. However, the owner continues to maintain their

mailing address at the residence.

After a week-long absence, the owner returns and discovers the locks on all

the doors have been changed. They break a window and enter the property.

The roommates claim the owner is guilty of forcible entry since they broke

into the property.

Did the owner’s roommates have the exclusive right of possession barring

the owner from entering the property without prior notice?

No! The owner was not attempting to regain lost possession. Rather, they

were a co-occupant in actual possession of the premises with others at the

time of their entry.

The owner and their roommates had joint possession. No one roommate

had been given exclusive possession against any other roommate. As a joint

possessor with the right to occupy the premises concurrently with others, the

owner is not liable for forcible entry.

A tenant wrongfully removed from their rented premises by a landlord or

property manager is entitled to a return of their possession of the premises for

the duration of the lease. This is called restitution.

In addition to recovery of possession, a tenant may recover all money losses

caused by the landlord’s wrongful entry. The tenant may only collect losses

29 McNeil v. Higgins (1948) 86 CA2d 723

30 Bittman v. Courington (1948) 86 CA2d 213

31 CCP §§1174(a)

Losses due

to wrongful

dispossession

restitution

The return of

possession of the

rented premises to a

wrongfully removed

tenant.

Landlord as

co-tenant with

roommates

Chapter 3: Landlord’s right to enter 35

incurred while they were dispossessed of the property, but retained a legal

right of possession. Thus, they are not entitled to any losses incurred after the

expiration or termination of their tenancy under a rental or lease agreement.

For example, a nonresidential tenant is served a 30-day notice to vacate to

terminate their month-to-month tenancy.

Then, the tenant defaults on the rental agreement. Prior to the expiration

of the notice to vacate and due to the default, the landlord bars the tenant

from entering the premises. The tenant is unable to continue operating their

business from the property. The tenant does not regain possession of the

premises before their right of possession is terminated by expiration of the

notice to vacate.

Is the tenant entitled to recover business income losses due to the landlord’s

unlawful detainer of the property?

Yes! A tenant whose possession is interfered with can recover their money

losses due to:

• lost profits, limited to the net operating income (NOI) they failed to

earn during the balance of the unexpired term;

• rental value of the lost use of the premises;

• emotional distress caused by the landlord or property manager’s

conduct towards the tenant;

and

• loss of business goodwill (earning power of the business).

If the tenant has built up goodwill with the customers of their business, the

remaining days of their period of tenancy are used to advise customers of

their expired lease and new location. The landlord who forcibly enters the

leased premises during the remaining period of the tenancy is liable for the

tenant’s money losses due to loss of business goodwill.

A landlord who willfully or maliciously takes possession from the tenant is

liable to pay up to three times the tenant’s actual money losses to the tenant.

These treble damages are inflicted as a judicial punishment to deter bad acts,

and are known as punitive damages.

For example, a landlord seeking to collect a debt owed by their tenant bars

the tenant’s employees from the leased premises by changing the locks and

refusing the tenant access to records and personal property.

Here, the landlord is acting with malice and the tenant may recover treble

the amount of their actual money losses.

32 CCP §1174(b); Orly v. Russell (1921) 53 CA 660

33 Orly, supra

34 Stillwell Hotel Co., supra

35 Newby v. Alto Riviera Apartments (1976) 60 CA3d 288

36 Schuler v. Bordelon (1947) 78 CA2d 581

37 Schuler, supra

38 Civic Western Corporation v. Zila Industries, Inc. (1977) 66 CA3d 1

punitive damages

Monies awarded in

excess of actual money

losses in order to deter

unlawful actions.

business goodwill

The earning power of a

business.

Putative

damages for

malicious

acts

36 Landlords, Tenants and Property Management, Eighth Edition

A landlord may enter a rented premises:

• in an emergency;

• to make repairs or improvements;

• to complete a pre-expiration inspection;

• to show the unit to prospective buyers, tenants, lenders, repairmen

or contractors;

• when the tenant has vacated the premises and their right to

occupy has been terminated by surrender or abandonment; or

• under a court order allowing entry.

In most circumstances, prior notice of the entry is to be given to the

tenant.

A landlord (or any other person) who enters the property without

permission is guilty of unlawful forcible entry.

business goodwill ...........................................................................pg. 35

forcible entry ...................................................................................pg. 31

notice of entry .................................................................................pg. 24

punitive damages ...........................................................................pg. 35

restitution .........................................................................................pg. 34

self-help .............................................................................................pg. 29

Chapter 3

Key Terms

Chapter 3

Suumary

A landlord or property manager using actual force or violence to enter a

leased unit is guilty of a misdemeanor crime.

39 Calif. Penal Code §418

Chapter 4: Tenant leasehold improvements 37

A retail business owner enters into a nonresidential lease agreement to

occupy commercial space as a tenant. The leased premises do not contain

tenant improvements since the building is nothing more than a shell.

The tenant agrees to make all the tenant improvements needed to occupy the

premises and operate a retail business (i.e., interior walls, flooring, ceilings, air

conditioning, electrical outlets and lighting, plumbing, sprinklers, telephone

and electronic wiring, etc.).

The lease agreement provides for the property to be delivered to the landlord

on expiration of the lease “in the condition the tenant received it,” less

normal wear and tear.

No other lease provision addresses whether tenant

improvements will remain with the property or the property is to be restored

to its original condition when the lease expires.

Tenant leasehold

improvements

After reading this chapter, you will be able to:

• identify the different types of tenant improvements;

• understand the landlord’s rights regarding tenant improvements

on the termination of a lease; and

• determine the landlord or tenant’s obligation to complete or pay

for the construction of tenant improvements.

Chapter

further-improvements

provision

mandatory improvement

mechanic’s lien

notice of nonresponsibility

permissive improvement

real estate fixture

reversion

tenant improvements

trade fixtures

Key Terms

Learning

Objectives

Ownership

rights when

a tenant

vacates

tenant

improvements

Improvements made

to a rented property to

meet the needs of the

occupying tenant. [See

ft Form 552 §11]

38 Landlords, Tenants and Property Management, Eighth Edition

On expiration of the lease, the tenant strips the premises of all of the tenant

improvements and vacates. The building is returned to the landlord in

the condition it was found by the tenant: an empty shell, less wear and

tear. In order to relet the space, the landlord replaces nearly all the tenant

improvements that were removed.

Is the tenant liable for the landlord’s costs to replace the tenant improvements

removed by the tenant on vacating?

Yes! Improvements made by a tenant that are permanently affixed to real

estate become part of the real estate to which they are attached. Improvements

remain with the property on expiration of the tenancy, unless the lease

agreement explicitly requires the tenant improvements to be removed and

the property to be restored to its original condition.

However, the landlord’s right to improvements added to the property or paid

for by the tenant depends upon whether:

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

standing); and

• the lease agreement requires the tenant to remove improvements and

restore the premises.

All improvements attached to the building become part of the real estate,

except for trade fixtures (discussed later in this chapter).

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

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

stairwells);

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

• walls, doors and dropped ceilings; and

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

Nonresidential lease agreements typically contain a further-improvements

provision allowing the landlord to either:

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

• require restoration of the property to its original condition on

expiration of the lease. [See first tuesday Form 552 through 552-5]

Further-improvement provisions usually include clauses stating:

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

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

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

improvements;

1 Calif. Civil Code §1013

2 CC §660

Leasehold

improvement

provisions

Landlord’s

right to

improvements

further-improvements

provision

A nonresidential lease

provision which allows

a landlord to retain

tenant improvements or

require the restoration

of the property to its

original condition upon

expiration of the lease.

[See ft Form 552 §11.3]

Chapter 4: Tenant leasehold improvements 39

• any mechanic’s liens due to improvements contracted by the tenant

will be removed;

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

• whether the improvements are to remain or be removed on expiration

of the lease. [See first tuesday Form 552 §11]

A landlord under a lease agreement who agrees to make improvements to the

rented premises needs to complete the improvements in a timely manner. If

the landlord fails to make timely improvements, the tenant may cancel the

lease agreement. [See first tuesday Form 552 §3.3]

For example, a landlord agrees to make all the improvements necessary to

convert a ranch into a dairy farm for a tenant who operates a dairy.

The landlord is obligated to construct a barn and several sheds that are

essential to the operation of the tenant’s dairy business.

The tenant moves into the property before the improvements begin. Several

months pass and the landlord does not begin construction on the promised

improvements. The tenant vacates the property since it is impossible to

conduct a dairy business without the dairy barn.

Here, the landlord’s failure to make the promised improvements is a breach

of the lease agreement.

Since the landlord has breached an essential provision of the lease, the tenant

may vacate the property and cancel the lease agreement without obligation

to pay further rent.

Conversely, lease agreement provisions can obligate a tenant to construct

or install improvements on the rented property, whether improved or

unimproved. The time period for commencement and completion needs to

be provided for in the lease agreement. If not agreed to, a reasonable period

of time is allowed.

However, a tenant may fail to make or complete mandated improvements

prior to expiration of the lease. If the improvements are to remain with the

property, the tenant is liable to the landlord for the cost the landlord incurs to

complete the agreed-to improvements.

For example, a tenant agrees to construct additional buildings on a leased

property in lieu of paying rent for one year. When the lease expires, the

improvements will remain with the property since the lease agreement does

not call for restoration of the premises.

3 Souza v. Joseph (1913) 22 CA 179

4 CC §1657

Failure

to make

improvements

Improvements

promised by

the tenant

40 Landlords, Tenants and Property Management, Eighth Edition

The tenant fails to construct the buildings during the term of the lease. The

tenant claims the obligation to build was not a mandatory improvement,

but permissive. According to the tenant, the obligation to build only existed

if it was necessary for the operation of the tenant’s business.

Here, the improvements were agreed to in exchange for rent. Accordingly, the

tenant was required to make the improvements since the landlord bargained

for them in the lease agreement. Thus, the landlord is entitled to recover an

amount equal to the cost of the improvements the tenant failed to construct.

Additionally, if the tenant agrees to but does not complete the construction

of improvements that are to remain with the property on expiration of the

lease, the landlord may complete those improvements. The tenant is then

financially responsible for the landlord’s expenditures to construct the

improvements.

Even after the expiration of the lease, a landlord is entitled to recover lost

rent and expenses resulting from the tenant’s failure to construct the

improvements as promised.

Consider a landlord who enters into a lease agreement calling for the

landlord to construct a building on the leased property. After the foundation

is laid, the landlord and tenant orally modify the construction provisions.

The tenant agrees to finish construction of the building in exchange for the

landlord forgoing their construction profit.

The tenant then breaches the oral modification of the written lease agreement

by failing to complete the construction. The breach places the landlord in

financial jeopardy as they now needs to complete the building. The landlord

terminates the tenant’s right to occupancy, evicts the tenant and completes

the construction promised by the tenant.

5 Simen v. Sam Aftergut Co. (1915) 26 CA 361

6 Sprague v. Fauver (1945) 71 CA2d 333

A landlord agrees to construct the shell of a building for a tenant. The tenant agrees to

install all other improvements and fixtures required to occupy and use the property.

Before the building is completed by the landlord, the building code is changed to require

the installation of a sprinkler system. The tenant demands the landlord pay the cost of

installing the sprinkler system since the tenant cannot occupy the premises without the

sprinkler system.

The landlord refuses to pay the additional cost to install the sprinkler system, claiming the

lease agreement calls for them to build the structure, not to make it ready for occupancy.

Is the tenant responsible for the costs to install the sprinkler system?

Yes! The tenant is responsible for making the alterations or improvements required to

bring the building into compliance with use ordinances. The tenant had agreed in the lease

agreement to make all improvements within the structure needed to take occupancy.

[

Wong v. diGrazia (1963) 60 C2d 525]

Case in point

The controlling

lease agreement

mandatory

improvement

An improvement

required to be made

under the terms of

the lease or rental

agreement.

Tenant’s

failure to

construct

improvements

Chapter 4: Tenant leasehold improvements 41

Here, the tenant is not only responsible for the landlord’s costs of construction,

they are also liable for future rents under the lease agreement. In addition,

they are liable for any expenses the landlord incurs to relet the property since

the landlord’s conduct did not cancel the lease agreement.

[See Case in point,

“The controlling lease agreement”]

Lease provisions often allow a tenant to make improvements to the leased

premises. However, further-improvement provisions typically call for

the landlord to approve the planned improvements before construction is

commenced.

For example, a tenant wishes to add additional space to the premises

they leased for use in the operation of their business. The tenant begins

construction without obtaining the landlord’s prior approval as required

by the lease agreement. Further, the addition is located outside the leased

premises, an encroachment on other land owned by the landlord.

In the past, the landlord had approved tenant improvements. This time,

however, the landlord refuses to give consent and complains about the

construction and the encroachment.

The landlord continues to accept rent while the landlord and tenant negotiate

the approval of the additional improvements and the modification of the

lease agreement to include use of the area subject to the encroachment.

After a few years of negotiations without resolution, the landlord declares

a forfeiture of the lease. The forfeiture is based on both the breach of the

provision requiring the landlord’s prior consent to construction and the

encroachment of the unapproved improvements.

The tenant then claims the landlord waived their right to declare a forfeiture

of the lease since the landlord continued to accept the rent from the tenant

after the breach of the tenant- improvement provision and encroachment.

However, as long as negotiations to resolve the breach continue, a landlord

may accept rent from the tenant without waiving their right to consent to

additional improvements.

Likewise, consider a tenant with an option to buy the property they rent. The

tenant makes improvements with the expectation of ultimately becoming

the owner of the property by exercising the option to buy.

Here, the tenant is not entitled to reimbursement for the cost of improvements

if the fail to exercise their purchase option. Holding an option to buy is not

fee ownership and the improvement becomes part of the real estate. Thus,

the improvements will not belong to the tenant unless the tenant exercises

their option to buy and becomes the owner of the property.

7 Sanders Construction Company, Inc. v. San Joaquin First Federal Savings and Loan Association (1982) 136 CA3d 387

8 Thriftimart, Inc. v. Me & Tex (1981) 123 CA3d 751

9 Whipple v. Haberle (1963) 223 CA2d 477

Landlord’s

consent to

improvements

42 Landlords, Tenants and Property Management, Eighth Edition

Some lease agreement provisions allow a tenant to make necessary

improvements without the landlord’s further consent. These improvements

are not specifically mandated, or required to be completed in exchange for

a reduction in rent. Recall that this nonmandatory type of improvement is

called a permissive improvement.

For example, a landlord and tenant sign a long-term lease agreement. Its

further-improvements provision authorizes the tenant to demolish an

existing building located on the property and construct a new one in its place

without first obtaining the landlord’s consent. The rent is based solely on the

current value of the premises.

The further-improvements provision does not state a specific time period for

demolition or construction.

The tenant makes no effort to tear down the old building or erect a new one.

Ultimately, the landlord claims the tenant has breached the lease agreement

for failing to demolish the existing building and construct a new one.

Here, the tenant has not breached the lease agreement. The agreement

contained no promise by the tenant to build and the rental amount was

not based on the construction. The tenant was authorized to build without

need for the landlord’s approval, but was not obligated to do so. Thus, the

improvements on the tenant’s part were permissive, not mandatory.

A further-improvements provision that requires a tenant to construct

improvements at a rent rate reflecting the value of the land, has different

consequences.

If a date is not specified for completion of the improvements, the tenant

needs to complete construction within a reasonable period of time since

construction of improvements is mandated to occur.

For example, a landlord leases unimproved land to a developer who is

obligated to build improvements, contingent on obtaining a construction

loan. A time period is not set for commencement or completion of the

construction. However, a cancellation provision gives the tenant/developer

the right to cancel the lease agreement within one year if financing is not

found to fund the construction. No provision authorizes the landlord to

terminate the lease if the required construction is not completed.

Due to the onset of a recession, the tenant is unable to arrange financing

within the one-year period. However, they do not exercise their right to

cancel the lease agreement and avoid payment of future rents. Instead, the

tenant continues their good faith effort to locate and qualify for construction

financing. Ultimately, financing is not located and construction is not

commenced.

10 Kusmark v. Montgomery Ward and Co. (1967) 249 CA2d 585

Mandatory

improvements

Permissive

improvements

by the tenant

permissive

improvement

A nonmandatory

improvement

authorized to be

completed by the

tenant without further

landlord consent.

Chapter 4: Tenant leasehold improvements 43

A few years later, as the economy is showing signs of recovery, the landlord

terminates the lease. The landlord claims the lease agreement has been

breached since the promised construction was not completed.

The tenant claims the landlord cannot terminate the lease as long as the

tenant continues their good faith effort to locate financing and remains

solvent to qualify for the financing.

Here, the tenant has breached the lease agreement. They failed to construct

the intended improvements within a reasonable period of time. The original

purpose of the lease was to have buildings erected without specifying a

completion date. Following the expiration of the right to cancel, the landlord

gave the tenant a reasonable amount of time in which to commence

construction before terminating the lease.

When the original purpose for the lease was the construction of a building by

the tenant, a landlord cannot be forced to forgo the improvements bargained

for.

All tenant improvements are to remain with the leased property on

termination of a lease unless the lease agreement permits or mandates their

removal by the tenant as a restoration of the premises.

Most lease agreements merely provide for the property to be returned in

good condition, minus ordinary wear and tear for the years of the tenant’s

occupancy. Thus, the tenant is not required to restore the property to its

actual condition when they took possession since tenant improvements are

part of the real estate.

A provision calling for the tenant’s ordinary care of the premises does not also

require the tenant to remove their improvements or renovate the premises to

eliminate deterioration, obsolescence or normal wear and tear caused by the

tenant’s permitted use of the property.

Now consider a landlord and tenant who enter into a lease of nonresidential

property. The lease agreement contains a provision requiring the tenant,

at the landlord’s demand, to restore the premises to the original condition

received by the tenant, less normal wear and tear.

The tenant makes all the tenant improvements necessary to operate their

business, such as installation of a concrete vault, the removal of partitions

and a stairway, and the closing of two entrances into the premises.

On expiration of the lease, the tenant vacates the premises. The landlord

exercises their right to require removal of tenant improvements by making

a demand on the tenant to restore the premises. The tenant rejects the

landlord’s demand.

The landlord incurs costs to restore the premises for reletting to a new tenant.

11 City of Stockton v. Stockton Plaza Corporation (1968) 261 CA2d 639

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

Surrender of

improvements

44 Landlords, Tenants and Property Management, Eighth Edition

The landlord claims the tenant is liable for the landlord’s costs incurred to

restore the premises since the tenant’s improvements radically altered the

premises and made it unrentable to others.

The tenant claims they are not liable for the landlord’s costs to restore the

premises to its original condition since the alterations became part of the real

estate and were beneficial to the property.

Is the tenant liable for the landlord’s costs to restore the premises to a rentable

condition?

Yes! Here, the landlord exercised their option to call for removal of the

improvements under the lease agreement provisions. The lease provisions

called for restoration of the premises to its original condition on a demand

from the landlord.

On the tenant’s failure to restore the premises, the landlord was forced to incur

restoration costs to relet the premises. The tenant is liable for the landlord’s

expenditures to restore and relet the premises to a new tenant.

If a lease does not require the tenant to restore the property to the condition

it was in when received, the tenant may only remove their personal

improvements, called trade fixtures.

Two types of fixtures exist distinguishing improvements installed in a

building:

• real estate fixtures; and

• trade fixtures.

A real estate fixture is personal property that is attached to the real estate.

It becomes part of the real estate it is attached to and is conveyed with the

property.

For example, if a tenant rents an office and builds bookshelves into the wall

rather than merely anchoring them to the wall, the bookshelves become part

of the improvements located on the real estate.

When the lease expires, real estate fixtures become the landlord’s property.

The landlord takes possession of the real estate fixtures as part of the real

estate forfeited or surrendered to the landlord, unless the lease agreement

provides for restoration or permits removal by the tenant. The conveyance of

real estate fixtures from tenant to landlord on expiration of the lease is called

reversion.

Conversely, trade fixtures do not revert to the landlord on expiration of the

lease. A trade fixture is an improvement that is attached to the real estate by

the tenant and is unique to the operation of the tenant’s business, not the use

of the building.

13 Masonic Temple Ass’n. of Sacramento v. Stockholders Auxiliary Corporation (1933) 130 CA 234

14 CC §§660; 1013

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

Real estate

fixtures vs.

trade fixtures

real estate fixture

Personal property

attached to the

real estate as an

improvement, which

becomes part of the

conveyable real estate.

trade fixture

Fixtures used to render

services or make

products for the trade

or business of a tenant.

reversion

The conveyance of real

estate fixtures from a

tenant to landlord on

expiration of a lease.

Chapter 4: Tenant leasehold improvements 45

Consider a tenant who leases property to operate a beauty salon. The tenant

moves in work-related furnishings (i.e., mirrors, salon chairs, wash stations

and dryers), necessary to run the business. The items are attached to the floor,

walls, plumbing and electrical leads.

On expiration of the lease, the tenant removes the fixtures that were used to

render the services offered by the business. The landlord claims the fixtures

are improvements to the property and cannot be removed since they became

part of the real estate when installed.

However, furnishings unique to the operation of a business are considered

trade fixtures even though the furnishings are attached and built into the

structure. Trade fixtures are removable by the tenant.

A tenant may, at the end of or anytime during the lease term, remove any

fixture used for trade purposes if the removal can be done without damaging

the premises.

Fixtures that have become an integral part of the building’s structure due

to the way they are attached or the general purpose they serve cannot be

removed. Examples of fixtures which cannot be removed include toilets, air

conditioners, vent conduits, sprinkler systems and lowered ceilings.

What compensation may be due to a tenant who has improved the property

and is wrongfully evicted prior to expiration of a lease?

A tenant who is wrongfully evicted is entitled to the rental value of their

improvements for the remainder of their unexpired lease term. Without

reimbursement, the landlord receives a windfall profit for their use of the

tenant’s improvements until they revert to the landlord on expiration of the

original lease.

The tenant is not, however, entitled to reimbursement for the market value

or cost of the improvements.

Thus, a wrongfully evicted tenant is limited to collecting the reasonable

value for the landlord’s use of the improvements during the remainder of

the term on the original lease.

Lease agreements often contain a default provision prohibiting the tenant

from removing the trade fixtures when the agreement is breached. The

tenant (and their unsecured creditors) no longer has a right to the trade

fixtures under a default provision.

Consider a tenant who signs a commercial lease agreement to use the

premises to operate a frozen packaging plant. The lease agreement states all

fixtures, trade or leasehold, belong to the landlord if the lease is terminated

due to a breach by the tenant.

16 Beebe v. Richards (1953) 115 CA2d 589

17 CC §1019

18 Asell v. Rodrigues (1973) 32 CA3d 817

Reimbursement

for tenant

improvements

on wrongful

eviction

Trade fixtures

as security

46 Landlords, Tenants and Property Management, Eighth Edition

The tenant later encumbers the existing trade fixtures by borrowing money

against them. The tenant then defaults on their lease payments. While

in default on the lease, the tenant surrenders the property to the landlord,

including all trade fixtures.

Does the lender on the loan secured by the trade fixtures have a right to

repossess them?

No! The tenant lost their ownership right to remove the trade fixtures

under the terms of the lease agreement that was entered into before they

encumbered the trade fixtures. Any right to the fixtures held by the secured

lender is similarly lost since the lender is junior in time and thus subordinate

to the landlord’s interest in the fixtures under the lease agreement.

However, if the trade fixtures installed by the tenant are owned by a third

party, or if a third party had a lien on them at the time of their installation,

the landlord has no more right to them than the tenant.

Tenants occasionally contract for improvements to be constructed on

the premises they have leased. Any mechanic’s lien by a contractor for

nonpayment initially attaches to the tenant’s leasehold interest in the

property.

However, the mechanic’s lien for unpaid labor and materials may also

attach to the fee simple interest held by the landlord if the landlord or the

landlord’s property manager:

• acquires knowledge the construction is taking place; and

• fails to post and record a Notice of Nonresponsibility. [See Form 597

accompanying this chapter]

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

• posted in a conspicuous place on the premises within ten days after

the landlord or their property manager first has knowledge of the

construction; and

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

period.

However, the landlord who becomes aware of the construction and fails to

post and record the Notice of Nonresponsibility is not personally liable to

the contractor. Rather, the contractor can only lien the landlord’s interest in

the real estate and foreclose on their mechanic’s lien to collect for unpaid

labor and materials delivered to improve the property under contract with

the tenant.

19 Goldie v. Bauchet Properties (1975) 15 C3d 307

20 CC §8442(a)

21 CC §8444

22 Peterson v. Freiermuth (1911) 17 CA 609

Notice of

non-

responsibility

mechanic’s lien

A lien attached to

property to secure

payment for unpaid

labor and materials

used to improve the

property.

notice of

nonresponsibility

A notice used by a

landlord to declare

that they are not

responsible for any

claim arising out of the

improvement being

constructed on their

property. [See ft Form

597]

Chapter 4: Tenant leasehold improvements 47

Further, if the lease requires the tenant to make mandatory improvements,

a mechanic’s lien attaches to the landlord’s interest even when the landlord

has posted and recorded a Notice of Nonresponsibility.

For example, a lease states the tenant is to make certain improvements as a

condition of renting the property. Since the improvements are mandatory

improvements rather than permissive improvements, the tenant is deemed

to be the landlord’s agent. The tenant is contracting for the construction of

the mandated improvements on behalf of the landlord.

Form 597

Notice of

Nonresponsibility

DATE: _____________, 20______, at ______________________________________________________, California.

NOTICE IS HEREBY GIVEN:

1. _________________________________________________________________ is the vested and legal owner of

real property located in the County of ___________________________________, State of California, identified as

1.1 Common address _______________________________________________________________________

1.2 Legal description

2. ____________________________________________________ is:

2.1

The Buyer of the property under a purchase agreement, option or land sales contract, or

2.2 The Tenant under a lease of the property.

3. Within 10 days before the posting and recording of this notice, the undersigned Owner or Agent of Owner obtained

knowledge that a work of improvement has commenced on the site of the property involving

construction, alteration, or repair.

4. Owner will not be responsible for any claim arising out of this work of improvement.

5. I declare under penalty of perjury under the laws of the State of California that the foregoing is true and correct.

D at e: _ _ _ __ __ _ _ _ __ _, 2 0_ __ _ _ _ S ig n a t ur e: _________________________________________________

Owner, or Agent of Owner.

STATE OF CALIFORNIA

COUNTY OF_______________________________________________

On ______________________________________________ before me,

__________________________________________________________

(Name and title of officer)

personally appeared _________________________________________

_________________________________________________________,

who proved to me on the basis of satisfactory evidence to be the

person(s) whose name(s) is/are subscribed to the within instrument and

acknowledged to me that he/she/they executed the same in his/her/their

authorized capacity(ies), and that by his/her/their signature(s) on the

instrument the person(s), or the entity upon behalf of which the person(s)

acted, executed the instrument.

I certify under PENALTY OF PERJURY under the laws of the State of

California that the foregoing paragraph is true and correct

WITNESS my hand and official seal.

Signature __________________________________________________

(Signature of notary public)

(This area for official notarial seal)

RECORDING REQUESTED BY

AND WHEN RECORDED MAIL TO

 

Name

Street

Address

City &

State

 

SPACE ABOVE THIS LINE FOR RECORDER’S USE

NOTICE OF NONRESPONSIBILITY

From Landlord (California Civil Code §3094)

Prepared by: Agent ____________________________

Broker ____________________________

Phone ______________________

Email _______________________

Name: ___________________________________________________

Nonrespon-

sibility on

mandatory

improvements

48 Landlords, Tenants and Property Management, Eighth Edition

Figure 1

Form 436-1

UCC-1 Financing

Statement

Thus, the mechanic’s lien incurred by the tenant will attach to both the

tenant’s and the landlord’s interest in the property, despite any posted and

recorded Notice of Nonresponsibility.

Had the lease merely authorized the tenant to make nonmandatory

(permissive) improvements, the tenant will not be acting as an agent for the

landlord. In that case, the landlord’s interest in the property is not subjected

to a mechanic’s lien if the Notice of Nonresponsibility is timely posted and

recorded on discovery of the tenant improvements.

23 Los Banos Gravel Company v. Freeman (1976) 58 CA3d 785

24 Baker v. Hubbard (1980) 101 CA3d 226

Chapter 4: Tenant leasehold improvements 49

Additionally, a mechanic’s lien cannot be recorded against the landlord if

the improvements are removed by the contractor recording the lien.

For example, a tenant contracts to have air conditioning installed in

the building the tenant rents. The contractor sells the equipment to the

tenant under a conditional sales contract. The contractor retains title to the

equipment as security until the sales contract debt is paid.

The landlord’s consent to the improvements is not obtained by the tenant,

but the landlord has knowledge the work has commenced. The landlord does

not post a Notice of Nonresponsibility.

Later, after the air conditioning units are installed, the tenant vacates the

property.

The contractor is not paid and files a mechanic’s lien against the landlord’s

fee interest in the property. Further, the contractor repossesses the air

conditioning units and resells them at a loss. The contractor then seeks to

recover their losses under the mechanic’s lien.

However, by electing to repossess the units, the contractor waived their right

to pursue the mechanic’s lien to foreclosure.

Whether the air conditioning units are considered a removable fixture due

to the financing, or a property improvement permitting the recording of a

mechanic’s lien, is no longer an issue after their removal. The contractor

removed the units and chose to treat the units as personal property. Thus, the

contractor lost their lien rights for nonpayment.

Consider the tenant who leases a property containing tanks for holding

gasoline. The tenant negotiates a reduced rental payment in exchange for

installing fuel pumps free of any liens.

The tenant purchases the pumps on credit and the pumps are installed.

The supplier of the pumps does not receive a Uniform Commercial Code

(UCC-1) financing statement from the tenant. Thus, the supplier does not file

a UCC-1 with the Secretary of State, a requisite to perfecting the supplier’s

lien on the pumps. [See Figure 1, Form 436-1]

Later, the pump supplier claims title to the pumps due to the unpaid

installation debt and seeks to repossess them.

However, the landlord owns the pumps as fixtures which became part of the

real estate. The landlord gave consideration in the form of reduced rent to

acquire the pumps. More importantly, the pump supplier failed to perfect its

lien on installation of the pumps.

25 Cornell v. Sennes (1971) 18 CA3d 126

26 Southland Corp. v. Emerald Oil Company (9th Cir. 1986) 789 F2d 1441

Removal of

fixtures by

contractor

Failure to

perfect a lien

50 Landlords, Tenants and Property Management, Eighth Edition

Tenant improvements are improvements made to a rented property to

meet the needs of the occupying tenant. The landlord’s right to tenant

improvements depends upon whether the tenant improvements

are a real estate fixture or a trade fixture, and whether the further-

improvements provision in the lease agreement requires the tenant to

remove improvements and restore the premises.

A tenant’s or landlord’s liability for failing to construct or pay for tenant

improvements depends on whether the tenant improvements are

mandatory or permissive.

further-improvements provision...............................................pg. 38

mandatory improvement .............................................................pg. 40

mechanic’s lien ...............................................................................pg. 46

notice of nonresponsibility .........................................................pg. 46

permissive improvement .............................................................pg. 42

real estate fixture ............................................................................pg. 44

reversion ...........................................................................................pg. 44

tenant improvements ...................................................................pg. 37

trade fixture .....................................................................................pg. 44

Chapter 4

Key Terms

Chapter 4

Summary

Chapter 5: Options and the right of first refusal to buy 51

After reading this chapter, you will be able to:

• identify the various agreements granting a tenant the right to buy;

• differentiate between an option to renew and an option to extend;

• understand how different lease provisions impact the right to

buy; and

• advise tenants how to properly exercise their right of first refusal

to buy a leased premises.

Options and the right

of first refusal to buy

Chapter

Tenants often need to invest substantial dollar amounts in tenant

improvements to tailor newly leased premises to their needs. Whether

contracted for by the tenant or the landlord, the tenant pays for the

improvements in:

• a lump sum;

• upfront expenditures; or

• payments amortized over the initial term of the lease, calculated by the

landlord and included in the monthly rent.

Installation of racks, cabinets, shelving, trade fixtures, lighting and other

interior tenant improvements will also be paid for by the tenant. Further, the

business builds up a significant degree of goodwill with customers due to the

fixed location over a number of years. Thus, the location and improvements

become part of the income generating value of the tenant’s business.

call option

option period

option to buy

option to extend

option to renew

right of first refusal

Learning

Objectives

Key Terms

Tenants with

rights to

acquire the

premises

52 Landlords, Tenants and Property Management, Eighth Edition

All these expenditures will be lost if the landlord refuses to extend the lease,

or if their demands for increased rent under an option to extend compel

the tenant to relocate. A retail tenant with even a small degree of insight into

their future operations at the location will attempt to negotiate some sort of

option to purchase the property.

The tenant who has paid rent that includes the amortization of TIs paid by

the landlord needs to negotiate an option to extend at a lesser rental rate

than during the initial term. Here the tenant has already paid for the tenant

improvements on the property, a monthly payment that is not paid again

under an option to extend or renew the lease.

An option to purchase included in a lease agreement is distinct from:

• the purchase rights held by a tenant under a right of first refusal; or

• the ownership rights held by a buyer under a lease-option sales

arrangement. [See first tuesday Form 163]

A landlord grants a tenant an option to purchase by entering into either:

• an irrevocable right to buy the property within a specific time period,

called an option to buy; or

• a pre-emptive right to buy the property if the landlord later decides to

sell the property, called a right of first refusal.

The option to buy is typically evidenced by a separate agreement attached

to the lease agreement. An option to buy includes terms of purchase, none of

which are related to the lease of the property. The option to buy is to always

be referenced in the lease agreement and attached as an addendum.

An option to buy contains all terms needed to form an enforceable purchase

agreement for the acquisition of the real estate. The tenant holding an option

to buy has the discretionary right to buy or not to buy on the sales terms stated

in the option. To exercise the option, the tenant does so within an agreed-

to time period. No variations are allowed. Thus, the option is a purchase

agreement offer irrevocably agreed to by the seller to sell, but the buyer has

not agreed to buy. [See Form 161 accompanying this chapter]

To actually buy the property under an option, the tenant exercises their

right to buy through acceptance of the irrevocable offer to sell granted by

the option. Conversely, the right of first refusal is a short agreement with

its provisions either included in the body of the lease agreement or by an

addendum. Unlike the option to buy, the right of first refusal provisions

rarely contain any terms of a sale.

Under an option to buy agreement, the tenant is not obligated to buy the

leased property. The tenant is merely given the right to buy if they so choose.

This is a type of call option. [See first tuesday Form 161]

option to extend

An agreement granting

a tenant the right to

extend possession

under the original

lease agreement on

terms set out in the

option to extend. [See

ft Form 565]

option to buy

An agreement granting

an irrevocable right to

buy property within

a specific time period.

[See ft Form 161]

right of first refusal

A pre-emptive right to

buy a property if the

owner decides to sell.

[See ft Form 579]

Option to buy

vs. right of

first refusal

The option

agreement

Chapter 5: Options and the right of first refusal to buy 53

For the option to be enforceable, the purchase price of the property and terms

of payment on exercise of the option are included in the option agreement.

If the dollar amount is not set as a specific amount in the option agreement,

the purchase price may be stated as the fair market value of the property at

the time the option is exercised.

The right to buy is exercised by the tenant within a specified time period,

called the option period. The option period typically runs until the lease

expires, including extensions/renewals, or is terminated. [See Form 161 §4]

If the option is not exercised precisely as agreed during the option period, the

option period expires of its own accord. On expiration, the option no longer

exists and the tenant is without an enforceable right to acquire the property.

When options to renew or extend leasing periods are negotiated as part

of the leasing arrangements, the expiration of the option to buy is tied by

agreement to either:

• the expiration of the initial lease term; or

• the expiration of any renewal, extension or continuation of the tenant’s

lawful possession.

For example, a tenant rents space under a ten-year lease with an option to

extend the term of the lease. The tenant also holds an option to buy the leased

property. The option references the lease term as the period for exercise of the

option to buy.

If the lease is later extended, the option period is automatically extended

with the extension of the lease. Here, the option to buy allows the tenant to

exercise the option during the lease term which includes any extensions.

1 Bekins Moving & Storage Co. v. Prudential Insurance Company of America (1985) 176 CA3d 245

2 In re Marriage of Joaquin (1987) 193 CA3d 1529

call option

An agreement giving

a buyer the right to

buy property within a

specified time or upon

an event at a specified

price with terms for

payment. [See ft Form

161]

option period

The specified time

period during which

the tenant has the

right to buy under an

option agreement. [See

ft Form 161 §4]

Facts: A tenant enters into a commercial lease agreement. The agreement provides for the

tenant to renew the lease, though it does not specify how many times the tenant is able to

exercise the option to renew, and includes provisions indicative of a short-term lease. The

tenant renews the lease at the end of the first term, then attempts to renew again at the end

of the second term which the landlord rejects.

Claim: The landlord seeks to terminate the lease, claiming they were not obligated to

provide another renewal since the original lease did not explicitly offer an unlimited number

of renewals, and the lease was consistent with a traditional, short-term lease, rather than

a perpetual lease.

Counter claim: The tenant claims the original lease allows for an unlimited number of

renewals since it does not directly state it allows only one lease renewal.

Holding: A California appeals court held the landlord may terminate the lease since

unlimited renewals may only be enforced if the lease demonstrates the landlord’s intent to

offer unlimited renewals, which it did not as the lease included provisions typical of a short-

term lease. [Ginsberg v. Gamson (2012) 205 CA4th 873]

Case in point

Is an option

to renew

unlimited?

54 Landlords, Tenants and Property Management, Eighth Edition

Now consider a lease agreement which contains an option to renew the

lease agreement instead of an option to extend. This is a distinction with a

complication. The renewal option requires the preparation and signing of

a new lease agreement on identical terms to the original lease agreement.

The initial lease agreement, by way of a referenced attachment, provided the

tenant with an option to buy which can be exercised prior to the expiration

of the lease.

Form 161

Standard Option

to Purchase

Page 1 of 2

option to renew

An agreement granting

an irrevocable right to

buy property within

a specific time period.

[See ft Form 161]

Chapter 5: Options and the right of first refusal to buy 55

On renewal of the lease agreement, the tenant needs to ensure the option

to buy is not left to expire at the end of the initial lease term. The new lease

agreement is a different contract and needs to also reference the option to

buy (as part of the identical terms of the original lease) since a new lease is

not an extension of any of the terms of the original lease.

3 In re Marriage of Joaquin, supra

Form 161

Standard Option

to Purchase

Page 2 of 2

56 Landlords, Tenants and Property Management, Eighth Edition

A tenant’s right to buy under a right of first refusal agreement can be triggered

by any indication of the landlord in a decision to sell the property, including:

• listing or advertising the property for sale;

• offering the property for sale to a buyer;

• accepting an offer or making a counteroffer involving a sale to a buyer;

and

• granting a purchase option.

As shown, the landlord does not need to first agree to sell the leased property

by entering into a purchase agreement with another person to trigger the

right of first refusal.

For example, a buyer contacts the landlord of leased commercial property

to make an offer to purchase the property. The buyer is informed the major

tenant holds the right to buy the property under a right of first refusal

provision in the lease.

The buyer attempts to circumvent the right of first refusal by negotiating an

option to buy the property, exercisable only after the tenant’s right of first

refusal expires. The landlord grants the buyer an option to buy the property.

The granting of the option — an irrevocable offer to sell — now binds the

landlord unconditionally to sell the property if the option is exercised.

Here, the landlord’s granting of the option to sell the property is a clear

indication of their intention to sell, triggering the right of first refusal.

The tenant is now allowed to purchase the property on the same terms as

contained in the buyer’s option.

Editor’s note — The right of first refusal is not triggered by conveyance of

the property to the landlord’s heirs on the landlord’s death. The heirs take

title subject to the right of first refusal. However, the right of first refusal is

triggered by a sale of the property ordered by the probate court or entered

into by the heirs. To exercise the right of first refusal, the tenant matches the

highest offer submitted in open bidding and approved by the court, or the

listing or sale of the property by an executor.

Once notice of the landlord’s decision to sell is delivered to the tenant, the right

of first refusal is transformed into an option to buy. Control of the transaction

then passes to the tenant holding the right of first refusal. The tenant’s

position under the right of first refusal is converted to that of an optionee on

terms set by the landlord, unless the right of first refusal provisions set some

or all of the terms.

The landlord may not now retract their decision to sell the property without

breaching the right of first refusal provision.

The landlord subject to a right of first refusal held by a tenant is obligated

to notify the tenant of the terms of any sales listing, option to buy, offer to

4 Rollins v. Stokes (1981) 123 CA3d 701

5 Estate of Patterson (1980) 108 CA3d 197

The right of

first refusal

to buy

Matching the

back-up offer

Chapter 5: Options and the right of first refusal to buy 57

purchase, counteroffer or acceptance of an offer to purchase which triggers

the tenant’s right to buy under the right of first refusal provision. [See Form

579 accompanying this chapter]

The tenant who decides to purchase the property agrees to match the sales

terms within the time period set in the right of first refusal provision. Failure

to do so is a failure to exercise their right of first refusal, resulting in a loss of

their right to buy.

Form 579

Right of First

Refusal to Buy

58 Landlords, Tenants and Property Management, Eighth Edition

Consider a tenant who holds a right of first refusal on the industrial property

they lease. A buyer makes an offer to purchase the property. The terms for the

payment of the price in the buyer’s offer include cash and an assumption of

the existing first trust deed on the property.

The property is also encumbered with a nonrecourse second trust deed to

be paid off and reconveyed on closing under the terms of the buyer’s offer.

The landlord accepts the offer and notifies the tenant, giving the tenant

the opportunity to match the buyer’s offer under the right of first refusal

provision in the lease agreement.

The tenant exercises their right of first refusal by agreeing to purchase the

property at the same price. However, the tenant alters the terms for payment

of that price as they will assume both the existing first trust deed and

nonrecourse second, paying the remainder of the price in cash.

The landlord rejects the tenant’s conditions and refuses to sell to the tenant.

Here, the landlord is to comply with the tenant’s terms for payment of the

price since they are the financial equivalent of the proposed sale. The tenant

need merely provide the same net financial result to the landlord as the offer

being matched — a cash-out of the landlord’s equity in the property.

The tenant’s performance under the right of first refusal does not need to be

identical in all aspects to the buyer’s offer.

Thus, the landlord is to perform and deliver title to the tenant. Here the

landlord’s net proceeds, economic benefits and liabilities resulting from the

terms for performance set by the tenant are the same as those the landlord

experiences under the purchase offer which triggered the right of first refusal.

Consider a buyer who offers to purchase property leased to a tenant who

holds a right of first refusal. The terms in the buyer’s purchase agreement call

for a cash down payment and a note executed by the buyer for the balance

of the landlord’s equity. The note is to be secured by a trust deed on other

property with adequate value as security.

The landlord accepts the offer and notifies the tenant, who agrees to match

the buyer’s offer. However, the value of the property offered by the tenant as

security is inadequate, causing the landlord to refuse to accept it.

Here, the tenant’s offer is not financially equivalent to the buyer’s offer since

the value of the security offered by the tenant is inadequate, even if the note

is identical. In the tenant’s offer, the risk of loss on default has been increased.

The landlord is not obligated to accept the tenant’s deficient exercise of

their preemptive right to buy. Here, the tenant’s deficient offer constitutes a

waiver of the tenant’s right to buy. The landlord may now sell the property

to the buyer — but only on the terms initially agreed to with the buyer or the

right of first refusal is reinstated.

6 C. Robert Nattress & Associates v. CIDCO (1986) 184 CA3d 55

7 McCulloch v. M & C Beauty Colleges (1987) 194 CA3d 1338

Deficient offer

constitutes a

waiver

Chapter 5: Options and the right of first refusal to buy 59

A right of first refusal provision is automatically reinstated when:

• the landlord agrees to sell the property on terms different from those

terms offered to the tenant; or

• the property remains unsold after the running of an agreed-to period

of time following the tenant’s waiver of the right to buy. [See Form 579

§4]

Consider a landlord who, under a right of first refusal, notifies their tenant

of the purchase terms on which they have listed the property for sale. The

Figure 1

Form 163

Lease-Option

– Contract for

Deed

For a full-size, fillable copy of

this, or any other form in this

book, please see the Forms-on-

CD accompanying this course.

Reinstatement

of the right of

first refusal

60 Landlords, Tenants and Property Management, Eighth Edition

A landlord gives a tenant the right to buy rented property by granting

either:

• an option to buy, which is an irrevocable right to buy the property

within a specific time period; or

• a right of first refusal, which is a pre-emptive right to buy the

property if the landlord later decides to sell the property.

The right to buy under an option to buy will be exercised by the tenant

within the option period. The option period typically runs until the

lease term expires or is terminated.

A tenant’s right to buy under a right of first refusal agreement is

triggered by any indication of the landlord’s decision to sell the property,

including:

• listing or advertising the property for sale;

• offering the property for sale to a buyer;

• accepting an offer or making a counteroffer involving a sale to a

buyer; and

• granting a purchase option.

To exercise the right of first refusal to buy, the tenant needs to agree to

match the sales terms set by the landlord within the time period set in

the right of first refusal provision.

call option ...................................................................................... pg. 53

option period ................................................................................ pg. 53

option to buy

................................................................................ pg. 52

option to extend .......................................................................... pg. 52

option to renew ............................................................................ pg. 54

right of first refusal ..................................................................... pg. 52

tenant chooses not to exercise their option to buy at the price and on the

terms offered. The landlord later modifies the listing by lowering the sales

price or altering the terms for payment of the price.

The price reduction or modification of terms automatically reinstates the

tenant’s right of first refusal obligating the landlord to re-notify the tenant of

new terms for purchase of the property. The tenant only waived their right

of first refusal for a sale based on the terms originally given to them by the

landlord, not on the different price or set of terms.

When a buyer purchases the property on terms other than those offered to the

tenant, the buyer takes title subject to the tenant’s preemptive right to buy.

This right is reinstated due to the sale on different terms. Thus, the buyer is

to resell to the tenant on the same price and terms the buyer paid. The buyer

had either actual or constructive notice of the tenant’s unrecorded right to

acquire the property due to the tenant’s possession of the property.

Chapter 5

Key Terms

Chapter 5

Summary

Chapter 6: Property management licensing 61

An individual owns and operates income-producing real estate. As the

owner-operator, they locate and qualify tenants, prepare and sign occupancy

agreements, deliver possession, contract for property maintenance, collect

rent, pay expenses and mortgages, serve any notices and file 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?

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 an agent when managing their own property.

Editor’s note — Here, the generic term “agent” refers to anyone who acts

on behalf of another. Confusingly, the term “agent” is also used in the real

1 Calif. Business and Professions Code §10131(b)

Property management

licensing

After reading this chapter, you will be able to:

• identify licensing requirements 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

designations.

Chapter

certified CID manager

contingency fee

power of attorney

Key Terms

Learning

Objectives

When is

a CalBRE

license

required?

62 Landlords, Tenants and Property Management, Eighth Edition

estate industry to refer to a CalBRE-licensed sales agent, or salesperson. To

simplify, the rest of this chapter will only use the term “agent” to refer to a

CalBRE-licensed individual.

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 needs to under most circumstances be

licensed by the CalBRE as a California real estate broker.

Editor’s note — A broker has the authority to act as a property manager

by virtue of their CalBRE license alone. There is no special “property

management” license or endorsement required under California law.

Optional designations are discussed later in this chapter.

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.

An individual employed by a broker to perform any of the above services

needs to also be licensed by the CalBRE, either as a broker or sales agent,

unless exempt.

2 Bus & P C §10131(b)

The California Department of Consumer Affairs (DCA) publishes a booklet titled: California

Tenants: A Guide to Residential Tenants’ and Landlords’ Rights and Responsibilities. The

purpose of the booklet is to equip tenants with the knowledge to act as savvy consumers

during lease negotiations and to protect themselves from ignorant or unethical landlords

during tenancy.

It also includes valuable information for landlords and property managers.

California Tenants solely address residential tenancies and includes practical information

on topics including:

• security deposits;

• habitability of rented or leased premises;

• disclosure requirements; and

• fair housing laws.

This publication is updated regularly by the DCA and is available from their website and on

first tuesday’s Forms-on-CD 4.3 in the “FARM Letters and Other Publications” section.

Sidebar

DCA Guide for

Landlords and

Tenants

Chapter 6:Property management licensing 63

Administrative and non-discretionary duties performed by an employee of a

broker 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.

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 may perform tenant-related negotiations in

apartment and vacation rentals, such as:

• showing rental units and facilities to prospective tenants;

• providing prospective tenants with information about rent rates and

rental and lease agreement provisions;

• providing prospective tenants with rental application forms and

answering questions regarding their completion;

• accepting tenant screening fees;

• accepting signed lease and rental agreements from tenants; and

• accepting rents and security deposits.

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 only licensed employees may perform include:

• landlord-related solicitations;

• entering into property management or leasing agent agreements with

the landlord;

• listings and rental or lease negotiations;

• care and maintenance of the property;

• marketing of the listed space; and

• accounting.

Also exempt from licensing is an individual who has been given authority

to act as an “attorney in fact” under a power of attorney to temporarily

manage a landlord’s property.

[See first tuesday Form 447]

However, a power of attorney may not be used as authority to continuously

manage real estate and does not substitute for a broker license.

3 Bus & P C §10131.01(a)

4 Bus & P C §10131.01(a)(1)

5 Bus & P C §10133(a)(2)

License

required

Power-of-

attorney

exemption

power of attorney

A temporary authority

granted to an

individual to perform

activities during a

period of the owner’s

incapacity or travel.

[See ft Form 447]

Unlicensed

vs. licensed

activities

64 Landlords, Tenants and Property Management, Eighth Edition

Consider a landlord who can no longer handle the responsibilities of

managing their property due to illness. The landlord grants a power of

attorney to a friend to manage the property. The landlord pays their friend

for performing property management tasks, including locating tenants,

negotiating leases and collecting rent.

After the landlord’s recovery from their illness, they continue to employ their

friend to perform these management tasks.

Does the landlord’s friend need a real estate broker license to perform property

management tasks on a regular, on-going basis in exchange for a fee, even

though the landlord has given them a power of attorney?

Yes! The power-of-attorney exemption may only be used in situations where

the landlord is compelled by necessity, such as a vacation or illness, to

authorize another person to complete a specific or isolated transaction.

A person receiving a fee for the continuous performance of property

management tasks requiring a broker license may not rely on the power-of-

attorney exemption to avoid licensing requirements.

Apartment building management has special licensing rules distinguishing

resident managers from nonresident property managers.

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 and their employees do not need a real estate license to

manage the apartment complex.

However, a resident manager of one apartment complex is barred from

being the property manager of a separate apartment complex unless they

are licensed. In managing two complexes, the resident manager becomes

a nonresident property manager of one complex. Thus, they need to be

licensed.

Apartment complexes with 16 or more units are required to have a resident

manager.

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

;

• under court appointment, such as a receiver or bankruptcy trustee.

6 Sheetz v. Edmonds (1988) 201 CA3d 1432

7 Bus & P C §10131.01(a)(1)

8 Bus & P C §10131(b)

9 25 Calif. Code of Regulations §42

10 Bus & P C §10133(a)(3)

11 Bus & P C §10133(a)(4)

Apartment

resident

manager

exemption

Other

licensing

exceptions

Chapter 6:Property management licensing 65

These exceptions are usually short-term and refer to specific properties.

A person whose business is advertised or held out as including property

management for others needs to comply with the licensing laws.

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.

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.

For example, a corporation owns a shopping mall managed by an officer

of the corporation. The officer’s duties include maintaining the premises,

locating tenants and collecting rents.

As the manager, the corporate officer is paid an annual salary as a base

pay. Whenever a vacancy occurs in the mall, the manager locates a new

tenant and negotiates the lease for the corporation. For each new tenant, the

manager receives an incentive fee over and above their corporate salary.

This acts as a bonus for their successful efforts.

Here, the manager needs to be licensed as a broker even though they are

an officer and employee of the corporation that owns the property. The

manager’s earnings include extra compensation based on their performance

of real estate management activities requiring a license.

The manager’s receipt of an incentive bonus payment for leasing space

establishes that the manager is acting as a broker, not merely as a salaried

officer of the corporate owner. If the corporation holds a CalBRE corporate

license, then the employed individual only needs to be a licensed salesperson.

The exclusion of employees from licensing in residential rental complexes

for tenant-related contacts does not apply to nonresidential leasing.

Similarly, where an LLC owns the property, the manager of the LLC need not

be licensed to manage the property — provided fees are not paid based on the

quantity of leases negotiated or the LLC’s rental income.

If the LLC manager receives a percentage of gross rents as compensation, the

compensation is considered a contingent fee unless all the members of the

LLC receive the same percentage.

A property manager paid on a contingency fee basis, or any other employee

or officer whose pay is structured as a contingency fee, of an office building,

12 Bus & P C §10137

13 Bus & P C §10133(a)(1)

14 Bus & P C §10133(a)(1)

Contingent

fees and

bonus awards

No license for

LLC manager

contingency fee

An incentive bonus

paid upon successfully

completing or hitting

certain benchmarks,

or received as

compensation on the

occurrence of an event.

66 Landlords, Tenants and Property Management, Eighth Edition

shopping center, industrial park, apartment building or other income

property will need a broker license if their duties include recruiting tenants,

negotiating leases or collecting rents. However, employees of a broker dealing

exclusively with prospective tenants for units in apartment complexes or

vacation rentals are not required to possess a license.

Bonus, award, commission, incentive or contingency fee programs in excess

of a base salary require the person receiving them to be licensed by the

CalBRE, whether they are resident managers, assistant resident managers or

maintenance personnel. Examples of these programs include:

• a flat dollar fee for each new tenant;

• a monthly flat dollar fee for each new tenant;

• a percentage fee based on increases in rents; and

• a percentage of monthly gross rents if rents collected for the month

exceed a percentage of scheduled income.

A broker license does not automatically confer on the broker the designation

of certified common interest development (CID) manager. Also, it is

not mandatory for a broker to be “certified” to manage a common interest

development, but some employers may request it. [See Chapter 7]

The benchmark professional certification is the Certified Community

Association Manager. This certification is issued by the California Association

of Community Managers. This designation is not an activity involving the

CalBRE. However, the minimum educational criteria for becoming a certified

CID manager are set by California law.

When earning a designation as a certified CID manager, the manager is tested

for competence in CID management in the following areas:

• all subjects covered by the Davis-Stirling Common Interest

Development Act

;

• personnel issues related to independent contractor or employment

status, laws on harassment, the Unruh Civil Rights Act, The California

Fair Employment and Housing Act and the Americans with Disabilities

Act;

• risk management, including insurance coverage and residential

hazards; and

• federal, state and local laws governing the affairs of CIDs.

Any program claiming to certify CID managers will also instruct and test

managers for competency in general management and business skills, such

as:

• trust fund handling, budget preparation, and bankruptcy law;

• contract negotiation;

15 Bus & P C §10131(b)

16 Bus & P C §§11502. 11503

17 CC § 4000

certified CID manager

A non-required

professional designation

certifying an individual

has met legislated

educational

requirements specific

to managing common

interest developments.

Certification

to manage a

CID

Chapter 6:Property management licensing 67

• supervision of employees and staff;

• management and administration of maintenance, and CC&R’s

• owner/resident relations and conflict resolution and avoidance

mechanisms;

• architectural standards;

• how to implement association CC&Rs; and

• ethics, professional conduct and standards of practice for CID

managers.

It is considered an unfair business practice for a broker to label or advertise

themselves as “certified” to manage CIDs if the broker has not completed

such a course.

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 a certain number of

years of property management experience.

Other non-required third-party property management designations include:

• the certified apartment manager (CAM) designation;

• the accredited resident manager (ARM) designation;

• the registered in apartment management (RAM) designation; and

• the certified apartment supervisor (CAPS) designation.

Like the certified CID manager designation, the CPM designation is not

required to be employed. Unlike the CID manager designation, the criteria

for obtaining these designations are entirely determined by private

organizations.

The designations are often costly, and do not guarantee employment in

property management. Some employers may favor such designations, while

others may not recognize them at all.

18 Bus & P C §11502

19 Bus & P C §11504

A common

“licensing”

misconception

68 Landlords, Tenants and Property Management, Eighth Edition

Chapter 6

Key Terms

An individual or corporation need 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 also needs to

hold a broker or sales agent license.

However, several licensing exemptions exist. A broker who manages

apartment complexes and vacation properties may hire unlicensed

staff to perform administrative and non-discretionary duties. Resident

managers, attorneys, bankruptcy trustees, and (to a limited extent) those

who hold power of attorney are not required to be licensed.

Third-party property management designations exist, but are not

required for employment.

certified CID manager ...................................................................pg. 66

contingency fee ...............................................................................pg. 65

power of attorney ...........................................................................pg. 63

Chapter 6

Summary

Chapter 7: Property management agreement 69

After reading this chapter, you will be able to:

• understand the function of a property management agreement

to grant authority to operate a rental property and specify the

performance expectations of the landlord and the manager;

• handle rental payments received from tenants and operating

expenses, and provide periodic trust fund accounting to the

landlord;

• distinguish the different ways a property manager may structure

their fee schedule for their management of a property;

• perform duties specific to a common interest development (CID)

upon entering into a property management agreement with the

homeowners’ association (HOA) controlling the CID; and

• identify and apply the landlord’s and property manager’s rights

and responsibilities under the management agreement.

Property management

agreement

Chapter

A property manager’s authority to take possession and control of income-

producing real estate and manage its leases, rents, expenses, mortgage

payments and accounting in expectation of a fee is established in a property

management agreement. The property management agreement sets out

the specific rights, responsibilities and expectations of the property manager

and the landlord, including authorized activities, performance standards

and expense limitations. [See Figure 1, Form 590]

Key Terms

common interest

development

managing agent

property management

agreement

Authority to

operate a rental

property

Learning

Objectives

70 Landlords, Tenants and Property Management, Eighth Edition

Landlord responsibilities include providing the property manager with the

information and items necessary to manage the property and its tenants,

such as:

• lease/rental agreements;

• service and maintenance contracts;

• utilities information;

• keys and security devices;

• security deposits; and

• information on hazard and worker’s compensation insurance for the

property and employees.

The property management agreement authorizes the property manager to:

• locate tenants;

• enter into rental and lease agreements, including leases for a term of

over one year;

• deliver possession of units or space;

• collect rents;

• incur operating expenses; and

• disburse funds to pay expenses, loan payments and management fees.

Brokers who manage property need to enter into highly detailed

property management agreements, not generalized “short-form” property

management agreements.

Short-form agreements neither specifically identify nor clarify the

performance and expectations of either the property manager or the landlord.

Instead, short-form agreements imply industry customs will be followed —

whatever those unregulated customs might be or become.

These implied standards, while familiar to the broker, are often misunderstood

or unknown to the landlord. Disputes usually result when landlords have

high expectations and then receive less than they believe they bargained for

when they employed the property manager.

Management obligations detailed in a long-form agreement provide greater

protection for a broker from claims they have breached their duties to the

landlord. Surprises are eliminated and client expectations are more realistic.

Some landlords want their property maintained at a below-standard level. A

broker taking on the management of a property from such a landlord needs

to document the maintenance they recommend. This can be accomplished

by adding an addendum to the property management agreement or by

1 Calif. Civil Code §1624(a)(3)

Short-form

vs. long-form

agreements

property

management

agreement

An employment

agreement setting the

rights, responsibilities

and expectations of

both the property

manager and the

landlord. [See ft Form

590]

Property

managed

“as is”

Chapter 7: Property management agreement 71

sending estoppel letters to the landlord stating the maintenance situation,

the broker’s recommendations, and a request for authority to act on the

recommendations.

For example, a property manager needs to document a landlord’s refusal to

maintain landscaping, as overgrown or top-heavy landscaping can result in

structural damage, injury to the tenants or a failure of proper security.

Figure 1

Form 590

Property

Management

Agreement

For a full-size, fillable copy of

this, or any other form in this

book, please see the Forms-on-

CD accompanying this course.

72 Landlords, Tenants and Property Management, Eighth Edition

Also, a property manager needs to note any advice given, explained and

then rejected by the landlord regarding the installation or maintenance of

security systems, lighting or other improvements or maintenance needed to

eliminate dangerous conditions.

Property management agreements authorize the property manager to act on

behalf of the landlord to handle all income received and incur expenses in

the operation of the property.

The property manager’s responsibilities regarding the property’s income and

expenses include:

• collecting rents and other amounts due, such as common area

maintenance charges (CAMs) and assessments for property insurance

and real estate taxes;

• collecting, accounting for and refunding security deposits;

• paying expenses and loans payments from rents received from tenants;

and

• complying with any local rent control ordinances.

A property management agreement spells out which maintenance expenses,

insurance premiums, utilities, loan payments, management fees and

property taxes are to be disbursed by the property manager, and which are to

be separately paid by the landlord.

The receipt and accounting for cash reserves, security deposits, rent and

other sums received from tenants, coin-operated machines and concessions

will be handled as trust funds owned by the landlord. Trust funds by their

nature need to be deposited into a trust account in the name of the property

manager as trustee.

Accounting provisions in the property management agreement:

• authorize the property manager to pay, out of the income and reserve

funds held in the trust account, obligations incurred in the management

and ownership of the property;

• specify the bank to be used; and

• call for remaining funds held on behalf of the landlord to be disbursed

to the landlord periodically and on termination of the property

management agreement.

The property management agreement sets the amount of cash reserves the

landlord will deposit in the property manager’s trust account as a minimum

balance for payment of operating expenses and fees.

A landlord is entitled to a statement of accounting:

•

at least once a quarter; and

Handling

rents and

expenses

Trust

accounts for

the landlord’s

funds

Periodic

accounting by

the manager

Chapter 7: Property management agreement 73

• when the property management agreement is terminated.

The property management agreement sets forth the time periods within

which the property manager needs to deliver the statement of accounting to

the landlord. While not required on a monthly basis, it is most efficient for a

property manager to provide a monthly statement to the landlord since they

need to reconcile trust account balances for each client once a month. [See

Chapter 7]

The accounting provisions also indicate the property manager will disburse

to the landlord, with each accounting, any funds exceeding the minimum

balance to be held for reserves. The property manager’s authority to withdraw

their management fee from the trust account is included.

A property manager who fails to give the landlord a timely and accurate

accounting faces loss of their real estate broker license on a complaint from

the landlord.

Property managers cannot enforce collection of their management fees

without a written agreement with the person agreeing to the payment,

typically the landlord.

A prudent property manager will not orally agree with the landlord to the

payment of management fees. If the landlord fails to pay fees or interferes

with the manager’s disbursement of fees, without a signed writing the

property manager is unable to enforce their collection.

Thus, the property management agreement sets forth the fees due the

property manager.

The property manager needs to also keep all documents connected with

any transaction requiring a real estate broker license for three years. These

documents include property management and accounting files.

Property managers structure management fee schedules in several different

ways:

1. A percentage of the rents collected.

The property manager is entitled to charge a set percentage of the rents

collected as a fee. Customarily, the fee is typically 5% to 10% of the rents

collected and is payable monthly. A percentage fee is a proper method

for establishing the amount of fees.

2. Fixed fee.

The property manager and landlord agree in advance to a set dollar

amount – a fixed fee – to be charged monthly for management services.

2 Calif. Business and Professions Code §10146

3 Apollo Estates Inc. v. Department of Real Estate (1985) 174 CA3d 625

4 Phillippe v. Shapell Industries Inc. (1987) 43 C3d 1247

5 Bus & P C §10148

Broker fee

enforcement

for

management

services

Structuring

management

fees

74 Landlords, Tenants and Property Management, Eighth Edition

The amount stays constant whether or not the units are rented. This

method, while proper, lacks the motivational incentive to induce the

property manager to generate maximum rental income.

3. Fixed fee per unit.

Usually applied to large apartment complexes or condominium

associations, a set dollar amount is charged for each unit the property

manager manages. In addition to the basic fee, property managers

often charge a one-time fee each time a unit is re-rented.

4. A percentage of the first month’s rent.

Figure 2

Form 135

(Partial)

Request for

Homeowner

Association

Documents

Chapter 7: Property management agreement 75

A front-end fee paid to the property manager is called a leasing or

origination fee. If the landlord agrees, a fee can be charged when any

tenant exercises an option to renew or extend, or when the premises is

relet to an existing tenant.

Fees are negotiated and set between each individual property manager and

landlord.

However, no matter how customary and prevalent it is in the real estate

industry to collectively and conscientiously charge a particular percentage

fee, fees may not be set by collusion between brokers, or as a result of peer

pressure among brokers to maintain equivalent fees. Unfortunately, this

conduct still permeates the brokerage industry as a violation of antitrust

laws in the form of conscious parallelism.

Developments consisting of condominiums, cooperatives or single family

residences (SFRs) in a planned unit development (PUD) are projects called

common interest developments (CIDs). Brokers may be retained by the

homeowners’ associations (HOAs) of CIDs to manage membership, exercise

control over the common areas and structures and account for assessment

revenues, expenses and reserves. A broker who acts as a CID manager is

called a managing agent.

Before a broker enters into a property management agreement to act as a

managing agent for a CID, the broker needs to disclose:

• the names and addresses of the owners of the their employing brokerage

company if it is an entity;

• the relevant licensing of the owners, such as for architectural design,

construction, engineering, real estate or accounting, and the effective

dates of the licenses;

• the relevant professional designations held by the owners, what

organizations issued the designation, the issuance dates and any

expiration dates;

• fidelity insurance sufficient to cover the current year’s operating and

reserve funds of the association;

• the possession of any real estate license and whether or not the license

is active; and

• if certified to manage CIDs, the name, address and telephone number

of the organization issuing the certification, the date the broker was

certified and certification status.

[See Chapter 6]

Funds received by the managing agent belong to the HOA. If the HOA does

not have a bank account, the managing agent will maintain a separate trust

fund account as trustee for the HOA funds. Extensive statutory controls are

placed on the handling of the trust fund account held for CIDs.

6 Bus & P C §10147.5

7 People v. National Association of Realtors (1984) 155 CA3d 578

8 CC §5375

9 Bus & P C §11504

10 CC §5380

common interest

developments

Condominiums

projects, cooperatives

or single family

residences in a

planned unit

development. [See ft

Form 135]

managing agent

A broker who manages

membership, common

areas and accounting

for a common interest

development.

Management

of CIDs

76 Landlords, Tenants and Property Management, Eighth Edition

Upon the sale of any unit in a CID, the managing agent may be required to

supply a prospective buyer with documentation of CID covenants, conditions

and restrictions (CC&Rs) as well as accounting, insurance information and

any fees, fines or levies assessed against the seller’s interest in the property.

Also liens against the seller’s interest in the CID unit for any unpaid late fees

or accrued interest are disclosed by the managing agent on request prior to

the transfer of title.

[See Figure 2, Form 135]

11 CC § 4525

A property management agreement sets out the specific rights,

responsibilities and expectations of both the property manager and the

landlord. Property management agreements authorize the property

manager to handle and account for all income received and expenses

incurred in the operation of the property.

Property management agreements also set the fees paid to the property

manager, structured as:

• a percentage of the rents collected;

• a fixed fee for the manager’s monthly management services;

• a fixed fee per unit; or

• a percentage of the first month’s rent.

Brokers retained to manage common interest developments (CIDs) are

called managing agents. A managing agent needs to perform duties

specific to CIDs upon entering into a property management agreement

with the homeowners’ association controlling a CID.

common interest developments ............................................. pg. 75

managing agent ........................................................................... pg. 75

property management agreement ......................................... pg. 70

Chapter 7

Summary

Chapter 7

Key Terms

Chapter 8: A property manager’s responsibilities 77

After reading this chapter, you will be able to:

• recognize and act on a property manager’s responsibilities and

obligations owed the landlord;

• generate a reasonable income from a rental property while

maintaining its safety, security and habitability;

• conduct property operations in compliance with the prudent

investor standard;

• diligently manage trust accounts for funds received while

managing a property; and

• implement a property manager’s best practices in fulfilling the

responsibilities of their employment.

A property manager’s

responsibilities

Chapter

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 an interest in residential sales to the

specialized and more disciplined industry of property management.

A broker’s primary objective as a property manager operating a rental

property is to:

• fill vacancies with suitable tenants;

•

collect rent;

• incur and pay expenses; and

• account to the landlord.

Key Terms

commingling

property profile

prudent investor standard

start-up fee

trust account

trust funds

Learning

Objectives

An evolving

standard of

conduct

78 Landlords, Tenants and Property Management, Eighth Edition

Thus, a property manager needs to have spent time accumulating experience

by actively overseeing and operating like-type rental properties before being

entrusted to their management.

Recall that in California, an individual who acts as a property manager

on behalf of another for a fee needs to hold a valid California Bureau of

Real Estate (CalBRE) broker license. Any licensed agent or broker associate

employed by the broker acts on behalf of their broker, not independent of

their broker.

[See Chapter 6]

The duty of care a property manager owes a landlord is the same duty of care

and protection 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. Agents acting on behalf of the broker perform property

management services as authorized by the broker.

A property manager’s real estate broker license may be revoked or suspended

if the property manager demonstrates negligence or incompetence in

performing their management tasks. This includes negligent supervision of

their employees, be they licensed or unlicensed employees.

To be successful in the property management field, a broker initially acquires

the minimum knowledge and experience through training sufficient to

adequately perform their tasks.

A broker acquires property management expertise through:

• courses required to qualify for and maintain a real estate license;

• on-the-job training as an agent;

• experience as a landlord;

• practical experience in the business management field; and/or

• exposure to related or similar management activities.

Owners 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

responsive staff who will perform to the landlord’s expectations.

Other indicators that a property manager will 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.

1 Calif. Business and Professions Code §§10130, 10131(b)

2 Bus & P C §§10177(g), 10177(h)

3 Bus & P C §§10153.2, 10170.5

trust account

A bank account used to

hold trust funds.

Requisite

competence

to manage

Chapter 8: A property manager’s responsibilities 79

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;

• 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:

• confirms the existence of or obtains general liability and workers’

compensation insurance sufficient to protect the landlord, naming the

property manager as an additionally insured;

• obligates the landlord to only those agreements authorized by the

landlord;

• maintains the property’s earning power, called goodwill;

• hires and fires resident managers and other on-site employees as

needed;

• complies with all applicable codes affecting the property; and

• notifies 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 expected of

a property manager by a landlord, whether or not the landlord is familiar

with it.

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.

The prudent

investor standard

Management

obligations

owed the

landlord

80 Landlords, Tenants and Property Management, Eighth Edition

In contrast, the expectations of resident and non-resident landlords may not

necessarily be based on obtaining the maximum rental income or incurring

only those minimal expenses needed to maintain the long-term income flow

of rents from tenants.

Resident owners are more apt to maintain property in a condition which they

find personally satisfying, not necessarily in accord with sound economic

principles. Often they are not concerned about the effect of the marketplace

on their property’s value until it is time to sell or refinance.

Likewise, the landlord may not have the knowledge or expertise to effectively

manage the property. Most owners of rental income property pursue

unrelated occupations which leave them very little time to concentrate on

the management of their properties.

However, property managers are employed to manage property as their

primary occupation, one in which they have developed an expertise. A

landlord’s primary reason for hiring a property manager is to have the

property manager maintain the condition of the property at the least cost

necessary and keep the rental income stable and as high as the market

permits at a reasonable vacancy rate.

Thus, the property manager bases decisions on the need to generate the

maximum income from the property and incur only those expenses necessary

to maintain the property’s good will and preserve the safety, security and

habitability of the property.

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 manager’s ability to locate tenants willing and able to pay the rent

rate sought by the landlord depends on the competition in the area of the

property.

For example, when more tenants seek space than there are units available to

rent, the property manager may be able to increase the rent (excluding units

covered by rent control ordinances) and still maintain occupancy levels.

Conversely, if the number of rental units or spaces available exceeds the

quantity of tenants available to occupy them, a property manager has less

pricing power. Special programs to better retain tenants and attract new,

long-term ones may be necessary to keep the units at optimum levels of

occupancy.

Property

analysis to

understand

the tasks

Chapter 8: A property manager’s responsibilities 81

The current physical condition (particularly 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 to improve the property’s visual appearance and ambiance. Then,

they are able to determine the amount of cost involved for any upgrade

and the amount of rent increase the upgrades will bring in. The analytical

property manager works up a cost-benefits analysis and reviews it with the

landlord to consider what will or will not be done.

A prospective tenant’s immediate concern when viewing rental property

will be the lure of the landscaping, the freshness of exterior finish and the

overall care and tidiness of the premises. More importantly, existing tenants

stay or leave based on these observances.

Along with the condition of the property, a property manager operating

nonresidential property reviews the status of trust deed liens on the landlord’s

property. Both the property manager and the tenants are ultimately affected

by the burden existing financing places on the landlord’s cash flow, and

possibly the landlord’s ability to retain ownership.

A property manager cannot perform economic miracles for a landlord when

payments on the financing encumbering the property are inconsistent with

the property’s capacity to generate sufficient rents to produce a positive cash

flow after mortgage payments. Worse yet, in some cases mortgage payments

may consume such a high percentage of rents as to obstruct payment of

maintenance or property management fees.

Also, a thoughtful property manager will apprise the landlord when the

opportunity arises in the mortgage market to refinance the property with

more advantageously structured financing. The property manager may

charge an additional fee for soliciting or arranging financing. [See first

tuesday Form 104]

The tenant’s right to possess the property is usually subject to an existing

lender’s right to foreclose and terminate the tenancy. A nonresidential

tenant’s move-in costs and tenant improvements are at risk of loss if the pre-

existing lender forecloses.

It is good practice, and in the property manager’s best interest, 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 information for the area.

property profile

A report from a title

company providing

information about a

property’s ownership,

encumbrances, use

restrictions and

comparable sales data.

Liens affect

nonresidential

tenants

Title profile

analysis avoids

surprises

82 Landlords, Tenants and Property Management, Eighth Edition

Any discrepancy between information provided by the landlord and a

property profile report is resolved 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

and maintenance 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 need

to focus on and clearly identify the property to be rented. When the

advertisement identifies the property, the landlord is 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 or computer generated 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.

Failing to set or keep appointments to meet with prospective tenants is

inexcusable neglect. Prospective tenants do respond to an advertisement.

Thus, the property manager or an office employee needs to be available

to show them the property, unless the property has a resident or on-site

manager.

When the property manager cannot timely perform or complete the

management tasks undertaken, they need to delegate some of this work

load to administrative employees or resident managers. This delegation

is permitted since the property manager is charged with oversight as the

responsible supervisor and employer.

A property manager may file a small claims action on behalf of the landlord

to recover amounts due and unpaid under a lease or rental agreement if:

• the landlord has retained the property manager under a property

management agreement ;

• the agreement was not entered into solely to represent the landlord in

small claims court; and

•

the claim relates to the rental property managed.

4 Calif. Code of Civil Procedure §116.540(h)

Handling UD

actions in

small claims

Due diligence

and the paper

trail

Chapter 8: A property manager’s responsibilities 83

A property manager may also file small claims actions to collect money on

behalf of a homeowners’ association (HOA) created to manage a common

interest development (CID).

However, for the property manager to represent the landlord in a small

claims action, the property manager is required to file a declaration in the

action stating the property manager:

• is authorized by the landlord to appear on the landlord’s behalf under

a property management agreement; and

• is not employed solely to represent the landlord in small claims court.

Consider a licensed real estate broker who operates a property management

business as a sole proprietorship under their individual CalBRE broker

license. The broker manages an apartment complex for a landlord under a

property management agreement.

The property management agreement gives the broker all care and

management responsibilities for the complex, including the authority to:

• enter into leases and rental agreements as the landlord;

• file UD actions; and

• hire an attorney to handle evictions, if necessary.

The broker signs all lease and rental agreements in their own name as the

landlord under the authority given them in the management contract.

The landlord’s name does not appear on any lease or rental agreement as

authorized by the terms of the property management agreement.

A tenant of the complex fails to pay rent under a rental agreement entered

into with the broker. The broker serves a three-day notice to pay rent or quit

the premise on the tenant. [See first tuesday Form 575]

The tenant does not pay the delinquent rent within three days and remains

on the premises. The broker files a UD action to recover possession by an

eviction of the tenant, appearing as the named plaintiff on the UD complaint.

The tenant defends against the eviction by claiming the broker may not

maintain a UD action to evict the tenant since the broker is not the owner of

the real estate or the owner’s attorney.

May the broker file and maintain a UD action against the tenant in their

own name?

Yes! The broker may file and persecute the UD action even though they are

not the true landlord (owner). The broker entered into the lease agreement

and delivered possession as the named lessor on the rental or lease agreement,

and is now recovering possession from the tenant in their own name as the

lessor.

5 CCP §116.540(i)

6 CCP §116.540(j)

7 Allen v. Dailey (1928) 92 CA 308

A party other

than the

landlord files

the UD

84 Landlords, Tenants and Property Management, Eighth Edition

As the lessor under the lease, the property manager has the greater right of

possession of the premises than the tenant, even though the owner is known

by the court to be the true landlord.

Thus, as the lessor named on the lease, the property manager may maintain

the UD action against the tenant and recover possession of the premises.

A property manager’s frequent and 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.

When a property manager conducts an inspection of the property, they do so

for one of several key situations:

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.” However, conditions which

might endanger the health and safety of tenants and their guests may

not 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 first tuesday Form

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 a residential tenant vacating.

Residential property is inspected prior to termination of possession if

the tenant requests a joint pre-expiration inspection on receipt of the

mandatory notice of right to a wear and tear analysis to be sent by the

landlord or the property manager. [See Chapter 14]

5. When the tenant vacates.

The property’s condition is compared against its condition documented

when first occupied by the tenant. Based on any differences in the

property’s condition, a reasonable amount may be deducted from

Property

inspections

by the

manager

Chapter 8: A property manager’s responsibilities 85

the tenant’s security deposit for the cost of corrective repairs. Cost

deductions are to be documented when accounting for the return of

the deposit.

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 first tuesday Form 304]

Inspections that coincide with key events help establish who is responsible

for any deferred maintenance and upkeep or 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.

The amount of rental income receipts is directly related to the property

manager’s evaluation of the rents charged and implementation of any

changes. A re-evaluation of rents includes the consideration of factors which

influence the amount to charge for rent. These factors include:

• market changes, such as a decrease or increase in the number of tenants

competing for a greater or lesser availability of units;

• the physical condition and appearance of the property; and

• the property’s location, such as its proximity to employment, shopping,

transportation, schools, financial centers, etc.

A property manager’s duty includes keeping abreast of market changes

which affect the property’s future rental rates. With this information,

they are able to make the necessary changes when negotiating leases and

rental agreements. The more curious and perceptive the property manager

Periodic

review of the

leases

86 Landlords, Tenants and Property Management, Eighth Edition

is about tenant demands and available units/spaces as future trends, the

more protection the landlord’s investment will likely receive against loss of

potential income.

Obtaining the highest rents available requires constant maintenance and

repair of the property. Possibly, this includes the elimination of physical

obsolescence brought on by ageing. 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.

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

• advising the landlord about the status of repairs and replacements in a

monthly report.

Different types of property require different degrees of maintenance and

upkeep. For instance, a commercial or industrial tenant who occupies the

entire (nonresidential) property under a net lease agreement will perform

all maintenance and upkeep of the property. [See first tuesday Form 552-2

and 552-3]

The broker, as the property manager, then has a greatly reduced role in the

care and maintenance of the property under a net lease agreement. The

property manager simply oversees the tenant to confirm they are caring for

the property and otherwise fully performing the terms of the lease agreement.

On the other hand, consider an HOA requirement that maintains common

areas for the benefit of the homeowners within a CID. The HOA hires a

property manager to undertake these duties. A property manager acting on

behalf of an HOA exercises a high degree of control over the maintenance and

upkeep of the property and the security of the occupants. The management

of a CID is nearly comparable to the management of any other multi-tenant

structure, such as an apartment building which has not been converted to a

CID.

Usually, landlords set a ceiling on the dollar amount of repairs and

maintenance the property manager has authority to incur on behalf of the

landlord. The property manager does not exceed this dollar ceiling without

the landlord’s consent even though the landlord receives a benefit from the

expenditure.

Maintenance

and repairs

as a

responsibility

Chapter 8: A property manager’s responsibilities 87

A property manager discloses 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.

When benefiting from repairs, the property manager prepares a repair

and maintenance disclosure addendum and attaches it to the property

management agreement. This addendum covers information such as:

• the types of repairs and maintenance the manager’s staff will perform;

• hourly charges for jobs performed;

• costs of workers’ compensation and method for charging the landlord;

• any service or handling charges for purchasing parts, materials or

supplies (usually a percentage of the cost);

• whether the staff will perform work when they are available and

qualified, in lieu of contracting the work out (i.e., no bids will be taken);

and

• to what extent repairs and maintenance will generate net revenue

for the management company, constituting additional income to the

property manager.

To eliminate the risk of accepting undisclosed earnings, 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.

Undisclosed earnings received by the property manager for work performed

by the property manager or others on the landlord’s property are improperly

received and can be recovered by the landlord. [See first tuesday Form 119]

Additionally, the landlord may recover any other brokerage fees they have

already paid when the property manager improperly or intentionally takes

undisclosed earnings while acting as the landlord’s agent.

The way a property is operated develops a level of 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, and hopefully increased, 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.

8 Jerry v. Bender (1956) 143 CA2d 198

Goodwill

is value

maintained or

lost

Earnings from

all sources

disclosed

88 Landlords, Tenants and Property Management, Eighth Edition

A prudent property manager makes recommendations to the landlord about

maintaining the property to eliminate any accumulated wear and tear,

deterioration or obsolescence. Thus, they help enhance the property’s “curb

appeal.”

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.

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 rental income

receipts. Security deposit amounts are separate from the client’s cash reserves.

The prudent property manager insists that all security deposits previously

collected from existing tenants are deposited into the property manager’s

trust account.

The security deposits need to be accounted for separately from other client

funds in the trust account, though this separation of a client’s funds is not

required. Security deposits belong to the tenant, though the landlord and the

property manager have no obligation to handle them differently than funds

owned by the landlord.

On a tenant vacating, their deposit is returned, less reasonable deductions. For

a residential tenant, an accounting is mailed within 21 days of the tenant’s

departure. For nonresidential properties, the security deposit accounting is

mailed 30 days after a nonresidential tenant’s departure.

[See Chapter 14]

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;

9 10 Calif. Code of Regulations §2830

10 Calif. Civil Code §1950.5(g)(1); 1950.7(c)(1)

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.

trust funds

Items which have or

evidence monetary

value held by a broker

for a client when

acting in a real estate

transaction.

Reserves

and deposits

in the trust

account

Chapter 8: A property manager’s responsibilities 89

• rents;

• cash reserves; and

• start-up fees.

Again, trust accounts are maintained in accordance with standard accounting

procedures. These standards are best met by using computer software

designed for property management.

Also, withdrawals from the trust fund account may not be made by the

landlord, only by the property manager.

However, a property manager may give written consent to allow a licensed

employee or an unlicensed employee who is bonded to make withdrawals

from the trust account.

No matter who the property manager authorizes to make the withdrawal, the

property manager alone is responsible for the accurate daily maintenance of

the trust account.

The property manager’s bookkeeping records for each trust account

maintained at a bank or thrift include entries of:

• the amount, date of receipt and source of all trust funds deposited;

• the date the trust funds were deposited in the trust account;

• the date and check number for disbursements of trust funds previously

deposited in the trust account; and

• the daily balance of the trust account.

Entries in the general ledger for the overall trust account are kept in

chronological order and in a column format. Ledgers may be maintained in

a written journal or one generated by a computer software program.

In addition to the general ledger of the entire trust account, the property

manager maintains a separate subaccount ledger for each landlord they

represent. Each subaccount ledger accounts for all trust funds deposited into

or disbursed from a separate landlord’s trust account.

Each separate, individual subaccount ledger identifies the parties to each

entry and include:

• the date and amount of trust funds deposited;

• the date, check number and amount of each related disbursement from

the trust account;

• the date and amount of any interest earned on funds in the trust fund

account; and

11 Bus & P C §10145(a); California Bureau of Real Estate Regulations §2832

12 CalBRE Reg. §2831

13 CalBRE Reg. §2834(a)

14 CalBRE Reg. §2834(c)

15 CalBRE Reg. §2831(a)

16 CalBRE Reg. §2831(c)

Separate

ledger for

each landlord

90 Landlords, Tenants and Property Management, Eighth Edition

• the total amount of trust funds remaining after each deposit or

disbursement from the trust account.

Like the general ledger for the entire trust account, entries in each client’s

subaccount record are kept in chronological order, in columns and on a

written or computer journal/ledger.

If a property manager or their employees delay the proper maintenance

of a trust account, the property manager is in violation of their duty to the

landlord to maintain the trust account. This violation places the broker’s

license at risk of loss or suspension.

To avoid mishandling of the trust account, the property manager:

• deposits the funds received, whether in cash, check or other form of

payment, within three business days;

• keeps trust fund account records for three years after the transaction;

• keeps a separate ledger or record of deposits and expenditures itemized

by each transaction and for each landlord;

and

• keeps accurate trust account records for all receipts and disbursements.

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;

• 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 hands the landlord a full accounting when the

property management agreement expires or is terminated. Any discrepancy

17 CalBRE Reg. §2831.1

18 CalBRE Reg. §2831.1(b)

19 CalBRE Reg. §2832

20 Bus & P C §10148

21 CalBRE Reg. §2831.1

22 CalBRE Reg. §2831

Accounting to

the landlord

Manager’s

trust account

supervision

Chapter 8: A property manager’s responsibilities 91

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.

Although the property manager is required to account to the landlord no less

than once each calendar quarter, best practices call for a monthly accounting.

They may then rightly collect their fee at the end of each month after they

have fully performed and their fee is due. In this way, the property manager

avoids the receipt of advance fees. Accounting for the collection of advance

fees requires a CalBRE-approved form.

Again, a property manager on the receipt of monies while acting on behalf of

the landlord places them into a trust account. As trust funds, these monies need

to be diligently managed to avoid claims of mishandling, misappropriation

or the commingling of the landlord’s funds with the property manager’s

personal funds.

Consider a landlord who hires a broker to act as a property manager. In

addition to paying for expenses and costs incurred, the property manager is

instructed and authorized to pay the monthly mortgage payments.

The property manager locates a tenant and collects the initial rent and

security deposit. After depositing the funds in the property manager’s trust

account, but prior to disbursing the mortgage payment, the property manager

withdraws:

• the leasing fee for locating the tenant; and

• the monthly property manager’s fee.

Both fees are due the property manager for work completed under the

property management contract.

However, the withdrawal of the property manager’s fees leaves insufficient

funds in the trust account to make the authorized mortgage payment. The

property manager then issues a check on funds held in one of the property

manager’s personal accounts to make the landlord’s mortgage payment.

However, this account also has insufficient funds.

Meanwhile, the lender sends the landlord a late payment notice for the

mortgage delinquency. The landlord immediately contacts the property

manager regarding the delinquent payment. The property manager says

they will cover it and does so.

More than three months later, the landlord terminates the property

management agreement.

23 Bus & P C §10146

commingling

The mixing of personal

funds with client or

other third-party funds

required to be held in

trust.

Handling of

trust account

funds

92 Landlords, Tenants and Property Management, Eighth Edition

Continuing the previous example, the property manager sends a closing

statement on the account containing some erroneous deductions. The closing

statement is the only accounting the property manager ever prepared for the

landlord.

After discussion with the landlord, the property manager corrects the errors in

the closing statement, issues the landlord a check for the remaining balance,

closes the account and destroys the landlord’s file.

Later, the landlord files a complaint with the CalBRE regarding the property

manager’s conduct while under contract.

The CalBRE investigates and concludes the property manager breached their

agency duties. The property manager issued a check for a mortgage payment

from an account other than the trust account, an activity that automatically

constitutes commingling of the property manager’s personal funds with

trust funds.

Also, the property manager knew they had insufficient funds when they

issued the check. This constituted a dishonest act.

In addition, the property manager failed to accurately account for funds

taken in or expended on behalf of the landlord. Worse, the property manager

neglected their duty to provide an accounting at least every quarter.

Finally, the property manager destroyed the records prior to the expiration of

the three-year minimum record keeping requirement. Based on these many

violations, the CalBRE properly revokes the property manager’s real estate

broker license.

A broker who operates a real estate sales office, in conjunction with a property

management operation, has a potential conflict of interest that may need to

be disclosed to their clients.

For example, a creditworthy prospective tenant responding to a rental

advertisement might be swayed by the broker’s sales staff to purchase a

residence instead of renting. Sales fees are typically greater than leasing fees

for the time spent. Conversely, sales fees are one-shot fees, not continuously

recurring fees.

Any active attempt to convert a prospective tenant to a buyer when the

prospect has responded to a rental advertisement paid for by a landlord or

provided as part of the property management services, suggests improper

conduct. The broker’s conduct may range from “bait and switch” techniques

with prospective tenants to diverting the landlord’s existing tenants through

efforts purportedly expended on the landlord’s behalf or interfering with the

landlord’s best interests.

A property manager takes care to keep their sales and management operations

sufficiently separate from one another. When in contact with a creditworthy

24 Apollo Estates Inc. v. Department of Real Estate (1985) 174 CA3d 625

Management

conflicts

with sales

operations

Failure to

account for

funds

Chapter 8: A property manager’s responsibilities 93

A property manager employs a higher standard of conduct regarding

their operation of a property than a typical landlord might, referred to as

a prudent investor standard. The property manager applies this higher

standard of conduct when:

• overseeing the maintenance of rental property;

• filling vacancies with suitable tenants;

• collecting rents;

• handling trust funds; and

• accounting to the landlord.

All trust accounts are to be maintained in accordance with standard

accounting procedures. A property manager needs to be diligent in the

management of their trust accounts to avoid claims of mishandling,

misappropriation or commingling of funds. The property manager is

also required to provide the landlord they represent with a statement of

their separate account.

commingling ................................................................................ pg. 91

property profile ............................................................................ pg. 81

prudent investor standard ....................................................... pg. 79

start-up fee .................................................................................... pg. 88

trust account ................................................................................ pg. 78

trust funds .................................................................................... pg. 88

Chapter 8

Summary

Chapter 8

Key Terms

prospective tenant applying to rent a property they manage, the manager

needs to diligently pursue rental or lease agreements with them. The conflict

of interest arising when a client seeks the same or different purposes does not

bar a broker from conflicting activities so long as the conflict has been timely

and properly disclosed. [See first tuesday Form 527]

The landlord comes first. The broker’s concern for greater fees comes second.

Notes:

Chapter 9: Resident managers 95

A broker, retained to manage a residential income property, enters into

an employment agreement with a resident manager to oversee the daily

management of the property. This employment agreement is called a

resident manager agreement. [See Form 591 accompanying this chapter]

Under the resident manager agreement, the resident manager:

• acknowledges employment by the property manager;

• accepts the occupancy and use of an apartment unit rent-free as

compensation for the employment; and

• agrees to vacate the property on termination of employment.

The resident manager’s job is to show vacant units, run credit checks,

negotiate and sign leases, collect rents, supervise repairs and maintenance,

serve notices and perform other non-discretionary administrative activities.

Resident managers

After reading this chapter, you will be able to:

• use a resident manager agreement to employ a manager to

oversee the daily management of a property;

• describe the duties generally performed by a resident manager,

such as screening tenants, negotiating leases, collecting rents and

serving notices;

• comply with minimum wage requirements for resident managers;

and

• properly terminate a resident manager’s employment and

occupancy.

Chapter

resident manager resident manager agreement

Key Terms

Learning

Objectives

Employees: not

independent

contractors,

not tenants

96 Landlords, Tenants and Property Management, Eighth Edition

Later, the property manager terminates the resident manager’s employment.

The property manager demands the resident manager immediately vacate

the premises and relinquish possession of the unit.

However, the resident manager claims to be a tenant, entitled to a notice and

time to vacate, not just a notice terminating employment and their right of

possession of the unit. [See Chapter 23]

Is the resident manager entitled to a notice and time to vacate on termination

of employment?

No! A resident manager who continues to occupy a unit after their

employment is terminated becomes a holdover tenant. They unlawfully

detain the unit and have no right to a notice other than the notice terminating

their employment. A resident manager’s occupancy is fixed, not periodic. It

is established in the resident manager agreement that the resident manager’s

tenancy ends on the date their employment is terminated.

[See Form 591

§§4.2 and 4.9]

Also, the resident manager’s eviction by an unlawful detainer (UD) action is

not protected by rent control ordinances. Further, they may not defend their

continued possession by demanding the property manager or landlord show

good cause for terminating their employment.

If the resident manager does not relinquish possession on termination of the

resident manager’s employment, the property manager may immediately

file a UD action, without further notice, to have the resident manager evicted.

However, a resident manager agreement may provide for the creation of a

tenancy following the termination of a resident manager’s employment.

When a tenancy is agreed to, the resident manager’s right of possession is not

terminated on termination of the resident manager employment, but under

landlord-tenant rules of notice before eviction.

A resident manager is an individual employed by the property manager

or landlord to live on-site at the managed complex and see to its daily

operations. A resident manager’s duties may include:

• screening tenants and negotiating leases;

• cleaning vacated units;

• supervising landscaping, maintenance and repairs;

• serving notices; or

• attending to tenant inquiries.

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

2 Tappe v. Lieberman (1983) 145 CA3d Supp. 19

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

resident manager

An individual

employed by the

property manager

or landlord to live

onsite at the managed

complex property

and handle its daily

operations. [See ft

Form 591]

Resident

manager

activities

Chapter 9: Resident managers 97

Both residential income property and nonresidential property may have

resident managers. However, apartment buildings with 16 or more units are

required to have a landlord, resident manager or responsible caretaker living

on the premises to manage the property.

Resident managers do not need to be licensed as a real estate broker or agent to

negotiate leases or collect rents. However, if a nonresident property manager

is not the landlord, the nonresident property manager needs to be licensed

by the California Bureau of Real Estate (CalBRE) as a real estate broker.

[See

Chapter 6]

A property manager who employs a resident manager is responsible for the

following brokerage activities:

• selecting and hiring the resident manager;

• maintaining worker’s compensation, liability insurance and any

bonding requirements of the landlord or property manager;

• keeping payroll records, including information about withholding

and employer contributions;

• supervising the resident manager; and

• terminating the resident manager’s employment.

The resident manager’s status as an employee is established in an employment

agreement called the resident manager agreement. [See Form 591]

Family members who live with the resident manager are listed in the resident

manager agreement. Further, a statement noting these family members are

not tenants is to be included. Thus, the family members’ right to occupy the

property terminates with the resident manager’s right to occupy the property

(e.g., the termination of the resident manager’s employment).

References to the parties in the resident manager agreement need to identify

the property manager/landlord as “employer” and the resident manager as

“employee.” [See Form 591 §4.9]

Depending on the size of the complex, the resident manager may receive

occupancy of a unit in the complex as compensation for their services based

on:

• a rent reduction given in exchange for the dollar value of the resident

manager’s services;

• no rent charge, the rental value given in exchange for services; or

• no rent charge, plus an additional monthly salary paid in further

exchange for services.

The resident manager agreement states the salary paid to the resident

manager is a monthly amount. The fair rental value of the resident manager’s

4 25 Calif. Code of Regulations §42

5 Calif. Business and Professions Code §10131.01

Hiring a

resident

manager

resident manager

agreement

An employment

agreement which

establishes the rights

and duties of a resident

manager and the

obligations of the

property manager and

landlord. [See ft Form

591]

Payment for

services,

withholding,

benefits

98 Landlords, Tenants and Property Management, Eighth Edition

Form 591

Resident

Manager

Agreement

Page 1 of 2

DATE: _____________, 20______, at ______________________________________________________, California.

Items left blank or unchecked are not applicable.

1. RETAINER PERIOD:

1.1 Employer hereby employs __________________________________________________, as the Employee,

1.2 as Resident Manager of the rental property commonly referred to as ________________________________

_____________________________________________________________________________________,

1.3 located at _____________________________________ in ___________________________, California,

1.4 commencing ____________, 20______ and continuing until terminated.

2. EMPLOYEE AGREES TO:

2.1 Collect all rents, security deposits or other charges due Owner and maintain collection records.

2.2 Advertise available rental units.

2.3 Screen and select tenants.

2.4 Show rental units to prospective tenants.

2.5 Negotiate, execute or cancel rental or lease agreements with tenants. No lease is to exceed ______ months.

2.6 Serve three-day notices as needed.

2.7 Clean, repair and maintain the rental real estate, inside and outside, as needed to promote the occupancy of

the units.

2.8 Daily inspect the structure, grounds, parking lots, garages, and vacant units of the rental property for

cleanliness and repairs.

2.9 Maintain receipt books, key racks and petty cash records in good order.

2.10 Conduct all minor maintenance and repairs not exceeding $_______________ in cost. All materials to be

purchased out of petty cash.

2.11 Contact the material and labor suppliers retained by the Employer to conduct all major repairs and

maintenance. Employer to approve all repairs in excess of $_______________.

2.12 Notify Employer immediately of any potential hazards to the tenants or property. Should an emergency

situation arise placing tenants or property in jeopardy, Employee may immediately take action without further

authority from Employer.

2.13 Conduct no other business on the premises nor solicit the tenants for any business other than the rental of

the property. ___________________________________________________________________________.

3. BANKING:

3.1 Employee will place all rents, security deposits, and other funds received for the benefit of the Owner into

an account maintained by Employer with ____________________________________________________

at their ___________________________________ branch.

3.2 On depositing funds into the Employer’s account, Employee shall deliver to Employer a copy of the bank

deposit identifying the itemized deposits by the unit from which they were collected.

4. COMPENSATION OF EMPLOYEE AND HOURS WORKED:

4.1 As compensation for services, Employee shall be paid a total monthly salary, from all sources, of

$_______________.

4.2 In part, Employee’s salary shall be in the form of possession to rental unit ______, which must be occupied

as a condition of employment. The rental credit toward the monthly salary is $_______________. The fair

monthly rental value of the unit is $_______________. The utilities including gas, electricity, and trash

removal

are, are not, included with the occupancy.

— — — — — — — — — — — — — — — PAGE ONE OF TWO — FORM 591 — — — — — — — — — — — — — — — —

RESIDENT MANAGER AGREEMENT

Prepared by: Agent ____________________________

Broker ____________________________

Phone _______________________

Email _______________________

unit is deducted from their salary. After the rent deduction, the resident

manager is paid any balance of their salary. Utilities may also be included as

part payment for the resident manager’s services or treated separately from

the agreed-to salary. [See Form 591 §4]

As an employer, the property manager or landlord is responsible for

withholding and forwarding federal and state income taxes. The property

manager also makes all required payments for social security, unemployment

insurance and disability insurance.

6 Calif. Unemployment Insurance Code §13020

Chapter 9: Resident managers 99

Form 591

Resident

Manager

Agreement

Page 2 of 2

4.3 The balance of the Employee’s salary shall be paid monthly, semi-monthly, on the _____________

of each calendar month.

4.4 Employee will not work more than ________ hours per day and _______ hours per week.

4.5 Employee to have ________ days off weekly being the weekdays of ______________________________.

4.6 Employee agrees to obtain Employer’s consent if the hours required to carry out duties exceeds

the agreed-to hours.

4.7 Employee will notify Employer within 48 hours of additional hours worked in an emergency situation.

4.9 Employee acknowledges he is not a tenant, but is an employee for purpose of occupancy of the unit

provided for his on-site residency.

4.10 ______________________________________________________________________________________

______________________________________________________________________________________

5. EMPLOYER AGREES TO:

5.1 Hand Employee all keys and entry codes to the property, and copies of rental and lease agreements with

existing tenants.

5.2 Provide public liability, property damage and workers' compensation insurance sufficient in amount to protect

the Employee and Employer.

5.3 Hand to Employee $_______________ to be accounted for as petty cash to pay costs incurred in performing

Employee’s duties, and to replenish this amount on Employee’s request.

5.4 Withhold all Employee’s social security, federal and state income taxes, and disability insurance from cash

salary paid.

5.5 Pay all federal and state unemployment insurance, workers' compensation and Employer’s social security

payments.

6. GENERAL PROVISIONS:

6.1 Before any party to this agreement files an action on a dispute arising out of this agreement which remains

unresolved after 30 days of informal negotiations, the parties agree to enter into non-binding mediation

administered by a neutral dispute resolution organization and undertake a good faith effort during mediation

to settle the dispute.

— — — — — — — — — — — — — — — PAGE TWO OF TWO — FORM 591 — — — — — — — — — — — — — — — — —

EMPLOYEE:

I agree to perform on the terms stated above.

Date: _____________, 20______

Employee: _____________________________________

Address: ______________________________________

______________________________________________

Phone: _______________________________________

Cell: __________________________________________

Email: ________________________________________

By: __________________________________________

EMPLOYER:

I agree to employ on the terms stated above.

Date: _____________, 20______

Employer: _____________________________________

Address: ______________________________________

______________________________________________

Phone: _______________________________________

Cell: __________________________________________

Email: ________________________________________

By: __________________________________________

The property manager or landlord is required to carry workers’ compensation

insurance to cover resident manager injuries on the job. Providing workers’

compensation coverage is imperative for any persons who employ

individuals other than for casual labor.

The degree of control the property manager or landlord retains over a resident

manager classifies the resident manager as an employee. A resident manager

simply will not qualify as an independent contractor. Thus, the landlord

or property manager who hires a resident manager may not avoid tax

withholding, employer contributions or workers’ compensation premiums.

100 Landlords, Tenants and Property Management, Eighth Edition

Consider a property manager who hires a resident manager to run a large

apartment complex. As part of their salary, the resident manager receives a

unit rent-free plus a fixed monthly salary.

Is the value of the unit occupied by the resident manager considered income

for state or federal tax reporting?

No! Taxwise, the value of the apartment is not reportable income for the

resident manager. The reduction or elimination of rent is not declared as

income when the unit occupied by the resident manager is:

• located on the premises managed;

• a convenience for the property manager or landlord; and

• occupied by the resident manager as a condition of employment.

A resident manager’s employment is subject to minimum wage laws even

though the portion of the wages paid by a reduction or elimination of rent is

not taxable as personal income.

Minimum wage requirements apply to resident managers. Resident

managers carry out the instructions of the property manager or landlord.

They do not have the authority to independently make their decisions on

their own management policies. They are functionaries who carry out the

decisions made at the discretion of the landlord or property manager.

Even though the rent-free compensation is not taxed as income, the rent

credit is included and considered when determining the resident manager’s

pay for minimum wage requirements. The rent credit is used as all or part

of the wages received per hour of work performed by a resident manager,

limited by caps on the rent credit.

Two “caps” limit minimum wage calculations to control the amount of the

rent credit. The caps limit the rent credit to two thirds of the fair rental value

of the unit and to an amount no greater than $508.38 per month (in 2014).

For a couple employed as resident managers, the rent credited toward hourly

pay may not exceed $752.02 per month in 2014.

For example, a broker employs an individual as a resident manager of a

20-unit apartment complex. Later, the resident manager marries and their

spouse moves into the resident manager’s unit. The spouse is not employed

to manage the residential property.

The following month, the broker subtracts $752.02 from the resident manager’s

salary (for the free rent allocation) to calculate the manager’s hourly pay. The

broker claims they are now able to deduct the maximum amount for couples

since two people inhabit the resident manager’s unit.

7 26 CFR §1.119-1(b)

8 Calif. Labor Code §1182.8

9 8 CCR §11050(1)(B)(1)

10 8 CCR §11050(10)(C)

Married

resident

managers

Rental value

is not taxable

income

Minimum

wage

requirements

apply

Chapter 9: Resident managers 101

The resident manager claims the maximum amount used to calculate their

hourly pay is the individual maximum of $508.38 since the spouse was not

also employed by the broker.

May the broker use the maximum allowable rent credit for a couple employed

as resident managers when the broker employs only one of them?

No! The broker may only calculate the minimum hourly rate based on a

total monthly rental credit of $508.38. Only one of the two people residing

in the rental unit is employed as a resident manager, the resident manager

agreement not modified to also employ the spouse.

To keep wages per hour from dropping below the minimum dollar amount

capped by the government, the property manager requires the resident

manager to:

• prepare time cards;

• limit the number of hours per week the resident manager may work so

wages per hour do not drop below the minimum dollar amount; and

• make provisions for the payment of any overtime permitted.

By requiring and reviewing these weekly work reports, the property manager

may confirm the hours worked by the resident manager and that pay is in

line with minimum wage requirements.

These reports will shield the property manager from a resident manager’s

claim that they worked excessive hours in relation to their salary and the

maximum rent credit allowed. [See Form 591 §4]

Thus, all work requiring additional hours, except emergency work, is to be

approved by the property manager as a matter of management policy.

For example, consider a resident manager who is provided with a unit and

a base salary. The resident manager is required to remain on the premises at

all times. However, they are only authorized to perform required work for a

limited number of hours per day. The number of hours is set by the resident

manager agreement. [See Form 591 §4.4]

The resident manager claims to be entitled to overtime pay for the hours they

are required to remain on the premises even though they are not working.

However, the resident manager is only entitled to receive compensation for

the time they actually performed work agreed to in the resident manager

agreement. No compensation is due for the time they were required to

remain on call, but were not working.

11 8 CCR §11050(10)(C)

12 Brewer v. Patel (1993) 20 CA4th 1017

13 Isner v. Falkenberg (March 18, 2008) 160 CA4th 1393

Compliance

with minimum

wage

requirements

102 Landlords, Tenants and Property Management, Eighth Edition

A resident manager has managed a large complex for many years as an agent for the

property manager. The resident manager is over 62 years of age.

The property manager hires a new, younger resident manager and relegates the old

resident manager to a lesser position. The property manager constantly suggests to the

older resident manager that they retire. Further, the property manager demotes the older

resident manager to even lesser positions while dramatically reducing their compensation.

Has the property manager discriminated against the older resident manager?

Yes! The property manager’s basis for demoting the older resident manager was age,

criteria placing the older resident manager in a protected class.

As a result, the property manager is responsible for monetary losses suffered by the employee

for emotional distress and attorney fees. [

Stephens v. Coldwell Banker Commercial Group,

Inc. (1988) 199 CA3d 1394]

A resident manager is an employee of the property manager or the landlord

who hires them. As an employer, the property manager or landlord is liable

to others injured due to the resident manager’s negligence.

To avoid liability for negligent violations of law or personal injuries to others,

the conduct of resident managers needs to be closely supervised by the

property manager or landlord. Business liability insurance is a necessity for

the landlord and the property manager. This insurance covers the landlord

and the property manager for the liability exposure created by their own

conduct or by the resident manager’s actions.

A resident manager agreement creates an at-will employment between the

resident manager and the employing property manager or landlord. Thus,

the resident manager’s employment may be terminated at any time and

without prior notice.

While a landlord or property manager does not need to have a good reason

to terminate a resident manager, they may not have an improper reason for

terminating the resident manager. A property manager or landlord may not

terminate the resident manager or otherwise harass them based on:

• disability;

• race;

• creed;

• color;

• gender; or

• age.

An improper termination exposes the employing property manager or

landlord to liability.

[See Case in point, “An improper termination”]

14 Calif. Civil Code §2338

15 Stephens v. Coldwell Banker Commercial Group, Inc. (1988) 199 CA3d 1394

Mismanaged,

negligent

resident

managers

Termination

of the

resident

manager

Case in point

An improper

termination

Chapter 9: Resident managers 103

Recall from the opening scenario that the resident manager agreement

controls the resident manager’s right to occupy their unit as an employee.

No separate lease or rental agreement is entered into or required (unless the

property manager or landlord specifically intend to create a tenancy).

The resident manager agreement also controls when that right to occupy the

unit is terminated. If a resident manager agreement requires the resident

manager to surrender their unit upon termination of employment, the

resident manager is not entitled to any notice to quit. The termination of

employment is sufficient to terminate the resident manager’s occupancy.

If the terminated resident manager remains in possession of the property

after their employment is terminated, they are unlawfully detaining the

property and may be evicted.

Editor’s note — Under rent control ordinances, a holdover tenant needs

to receive a notice to vacate to terminate the tenancy. However, courts

in rent-controlled areas have exempted employee-tenants from rent

control protection by classifying them, for purposes of rent control only,

as licensees rather than tenants. They are not considered licensees for any

other purposes.

To avoid creating a tenancy that continues on termination of the resident

manager’s employment, the resident manager agreement will state:

• possession is incidental to employment;

• possession automatically ends concurrent with termination of

employment; and

• failure to perform managerial duties constitutes a breach of the resident

manager agreement and is grounds for immediate termination and

eviction.

However, a caution: a property manager or landlord’s conduct can change

the resident manager’s right of occupancy.

Consider the landlord of an apartment complex who hires a resident manager

to run the complex. In exchange for their services, the resident manager

receives a monthly salary and an apartment, rent-free.

Under the resident manager agreement, the resident manager is to vacate

the apartment unit on termination of their employment. Thus, the right of

possession is extinguished when employment is terminated.

The landlord terminates the resident manager’s employment. The landlord

then decides to serve the resident manager with notice to:

• immediately vacate and relinquish possession of the unit; or

• stay and pay monthly rent.

16 Chan v. Antepenko (1988) 203 CA3d Supp. 21

Conduct

changes

manager’s

occupancy

rights

Terminating

a resident

manager’s

occupancy

104 Landlords, Tenants and Property Management, Eighth Edition

The resident manager remains in possession of the apartment, but fails to also

pay the monthly rent called for in the notice to quit. Without further notice,

the landlord begins UD proceedings to regain possession of the apartment

from the terminated resident manager.

The resident manager claims that due to the notice they are now a tenant and

the landlord needs to serve them with a notice to quit before the landlord

may evict the resident manager in a UD action.

The landlord claims the resident manager is a holdover tenant unlawfully

detaining the premises since the termination of their employment.

Is the resident manager entitled to a notice to vacate?

Yes! By serving the resident manager with a notice to quit which included an

offer to remain in possession, the property manager converted the resident

manager’s occupancy as an employee to a month-to-month tenancy.

Here, the resident manager’s continued occupancy of the apartment

constituted acceptance of the new tenancy offered by the landlord. The

failure to pay rent is merely a breach of the new tenancy agreement noted in

the notice to stay and pay.

Thus, the landlord’s UD action may not be filed until proper notice to vacate

is given to terminate the resident manager’s new tenancy.

17 Karz. supra; CC §1946

Facts: A residential tenant of an apartment complex is employed as a resident manager. For

managerial services, payment of the monthly rent is waived and applied as a credit toward

wages due the resident manager. During the manager’s employment, rental rates for all

tenants in the complex are increased to the maximum amount permitted by rent control

annually. [See Chapter 37]

Several years later, the landlord terminates the resident manager and the manager continues

in occupancy of the unit as a tenant. Later, the landlord serves the former manager with a

notice of a rent increase, adjusting the rental rate upward to include all of the past annual

adjustments permitted by rent control during the period of employment as the resident

manager. The former manager refuses to pay the adjusted rental rate.

Claim: The former manager claims the landlord may not calculate the new rental rate

based on all annual adjustments which occurred during the employment period since the

increased rental rate violates the Rent Stabilization Ordinance (RSO) which does not permit

retroactive or cumulative annual adjustments.

Counter claim: The landlord claims entitlement to a rental rate based on all previous

adjustments is permitted by rent control since under local RSO a landlord may adjust the

rent due from a resident manager who on termination remains as a tenant by calculating

for all annual adjustments allowed during their employment.

Holding: The California Supreme Court held the landlord was entitled to base the rental rate

increase on all past annual adjustments permitted by rent control since the RSO allows a

landlord to adjust a former resident manager’s rental rate to include any annual adjustments

implemented during the manager’s employment when they remain as a tenant. [1300 N.

Curson Investors, LLC v. Drumea (April 4, 2014)_C4th_]

Case in point

How does

a landlord

calculate

the rental

payments of a

former resident

manager who

remains as a

tenant?

Chapter 9: Resident managers 105

A resident manager is an individual employed by a property manager

to live on-site at the managed property and see to its daily operations. A

property manager and a resident manager have an employer/employee

relationship. A resident manager’s duties include:

• screening tenants and negotiating leases;

• cleaning vacated units;

• supervising landscaping, maintenance and repairs;

• serving notices; or

• attending to tenant inquiries.

The resident manager may receive rent-free occupancy of a unit in the

complex as compensation for their services. Taxwise, the value of the

apartment is not reportable income for the resident manager. In contrast,

a resident manager’s employment is subject to minimum wage laws.

The property manager is liable to others injured due to the resident

manager’s negligence. The resident manager’s employment may be

terminated at any time and without prior notice. A resident manager

agreement may require the resident manager to surrender their unit

upon termination of employment.

resident manager ............................................................................pg. 96

resident manager agreement ......................................................pg. 97

Chapter 9

Key Terms

Chapter 9

Summary

Notes:

Chapter 10: Identification of property manager or owner 107

Identification of property

manager or owner

After reading this chapter, you will be able to:

• authorize brokers under an agent-for-service clause in

management agreements to act on behalf of an owner to accept

service of legal documents and notices from tenants;

• appoint an agent-for-service; and

• determine the disclosures to be given to residential tenants

identifying the owner, the property manager and the owner’s

agent-for-service.

Chapter

An owner of a residential income property employs a broker to manage the

property. The broker will operate the property acting as the landlord under

the property management agreement, which includes all contact with the

tenants on behalf of the owner. [See Chapter 7]

One of the owner’s objectives is to become as anonymous as possible and

avoid giving tenants any personal information or otherwise interacting with

them.

The owner is advised they can avoid being identified to the tenants by

appointing another individual to act as their agent-for-service of process,

such as the broker or the owner’s attorney. The agent-for-service of process,

acting on behalf of the owner, will accept service of legal documents and

notices initiated by tenants.

1 Calif. Civil Code §1962(a)(1)(B)

agent-for-service clause agent-for-service of process

Key Terms

Learning

Objectives

Notice to

tenant of

agent-for-

service

agent-for-service of

process

An individual who

acts on behalf of the

owner, accepting

service of legal

documents and notices

initiated by tenants.

108 Landlords, Tenants and Property Management, Eighth Edition

Here, when the owner appoints an agent-for-service of process, the owner’s

name and address need not be disclosed to any tenant, even if the tenant

demands the information so they can sue the owner. Serving the agent-for-

service with the lawsuit is the same as serving the owner.

Editor’s note — The identity of an owner is easily located by a search of the

county records. If title to the property is vested in the name of a limited

liability company (LLC), corporation, or other entity, a review of other

records with the Secretary of State will identify and locate the manager of

the entity.

An owner is the object of the service of notices and legal documents by a

tenant. However, a residential income property owner may appoint any

individual, including their property manager or attorney, to be their agent-

for-service. Importantly, this appointment allows the owner to avoid

personal service on themselves.

The property manager may be appointed as the owner’s agent-for-service

by including an agent-for-service clause in the property management

agreement employing the broker. [See first tuesday Form 590]

As the owner’s agent-for-service, the broker accepts personal service of legal

documents on behalf of the owner, such as notices and lawsuits initiated

by tenants. However, both the broker and the owner need to first consider

whether it is prudent for the broker to act as the owner’s agent-for-service.

The broker’s additional responsibility of accepting service of tenant complaints

on the owner’s behalf conflicts with the broker’s main responsibility as a

property manager. An owner might prefer to appoint an attorney as their

agent-for-service to avoid the broker’s potential conflict of interest.

The names and addresses of the following individuals will be disclosed to all

residential tenants:

• the owner or other individual appointed by the owner as their agent-

for-service;

• any property manager; and

• any resident manager.

The addresses provided for the property manager, resident manager and

agent-for-service are street addresses where legal notices can be personally

served. A post office box will not suffice.

The individual responsible for making the disclosures is:

• the owner; or

• the individual authorized to enter into rental and lease agreements on

behalf of the owner, such as the property manager or resident manager.

2 CC §1962(a)(1)(B)

3 CC §1962(a)

4 CC §1962(a)(1)

5 CC §1962(a)

Appointing

the agent-for-

service

agent-for-service

clause

A section in the

property management

agreement which

appoints the owner’s

agent-for-service. [See

ft Form 590 §11.3]

Who is

identified to

the tenant?

Chapter 10: Identification of property manager or owner 109

The names and addresses of the owner’s property manager, the resident

manager and agent-for-service are disclosed in:

• the rental and lease agreements entered into with each tenant; or

• a notice posted on the property.

When the disclosure notice is posted, the notice will be posted in two

conspicuous places on the property.

If the rental property contains elevators, the written notice will be posted in:

• every elevator in the building; and

• one other conspicuous place on the property.

If the residential rental or lease agreement is oral, a written statement

containing the names and addresses of the property manager, resident

manager and agent- for-service will be provided to all tenants.

The owner, property manager or resident manager responsible for entering

into rental and lease agreements is to notify all tenants of the name and

address for service on the owner of a notice or complaint initiated by the

tenant. This information is handed to the tenants within 15 calendar days

after any change in:

• the manager of the property;

• the owner of the property, unless the new owner appoints an agent-

for-service; or

• the owner’s agent-for-service.

[See Form 554 accompanying this

chapter]

To disclose a change in ownership or management, the property manager

or resident manager responsible for leasing is to:

• prepare the notice of change of ownership or property management as

an addendum to each existing rental or lease agreement and hand it to

each tenant to sign and return [See Form 554]; or

• post on the property the names and addresses of the property manager,

resident manager and owner’s agent-for-service.

The notice also includes information regarding how and when rent will be

paid. A successor owner or property manager may not serve a tenant with a

notice to pay rent or quit, or file an unlawful detainer action based on rent

unpaid and due during the period in which the successor owner or property

manager failed to provide rent payment information.

However, the owner or property manager’s failure to timely provide rent

payment information does not excuse a tenant of their obligation to pay rent.

6 CC §1962(a); CC §1962.5(a)

7 CC §1962.5(a)(2)

8 CC §1962.5(a)(1)

9 CC §1962(b)

10 CC §1962(c)

11 CC§1962(c)

Delivery of

the notice

Change in

ownership

and

management

110 Landlords, Tenants and Property Management, Eighth Edition

Form 554

Change of Owner

or Property

Manager

Page 1 of 2

DATE: _____________, 20______, at ______________________________________________________, California.

To Tenant: _____________________________________________________________________________________

Items left blank or un checked are not ap pli ca ble.

FACTS:

1. This is an addendum to the

lease, rental agreement,

dated __________________, 20______, at _______________________________________________, California,

1.1 entered into by _______________________________________________________, as the Landlord, and

1.2 _______________________________________________________________________, as the Tenant(s),

1.3 recorded on __________________________, as Instrument No. ______________________________,

in the records of ________________________________________________________ County, California,

1.4 regarding real estate referred to as _________________________________________________________

_____________________________________________________________________________________.

AGREEMENT:

2. This notice is to advise you of a change in ownership or management of the premises you occupy as indicated

below:

2.1

The ownership of the real estate you lease or rent has been transferred.

2.2 The new property management broker is ____________________________________________________

Address ______________________________________________________________________________

Phone ________________________________________________________________________________

2.3 The new resident manager is _____________________________________________________________

Address ______________________________________________________________________________

Phone ________________________________________________________________________________

3. Beginning _____________, 20______, your monthly rent due is to be paid by

check,

credit card,

cash, or

cashier’s check, made payable to __________________________________________________________.

3.1 Rent may be tendered by

personal check, or ____________________________________________.

___________________________________________________

(Name)

___________________________________________________

(Address)

___________________________________________________

(Phone)

a. Personal delivery of rent will be accepted during the hours of ______ a.m. to ______ p.m.

on the following days ________________________________________________________________.

3.2 Rent may also be paid by deposit into account number ________________________________________

___________________________________________________

(Financial Institution)

___________________________________________________

(Address)

___________________________________________________

3.3 If rent is to be paid by credit card, the credit card number is ________/_________/_________/_________,

exp. date _____________, 20______ issued by ______________________________________________,

which Landlord will charge each month for the rent due.

3.4 Your current monthly rent is $_______________.

3.5 Your rent has been paid up to and including _____________, 20______.

— — — — — — — — — — — — — — — PAGE ONE OF TWO — FORM 554 — — — — — — — — — — — — — — —

CHANGE OF OWNER OR PROPERTY MANAGER

Addendum To Rental Or Lease Agreement

Prepared by: Agent ____________________________

Broker ____________________________

Phone _______________________

Email _______________________

A residential property manager (or resident manager) in charge of leasing

who fails to provide the name and address of the owner or their agent-for-

service:

• automatically becomes the owner’s agent-for-service of process and

agent for receipt of all tenant notices and demands

; and

12 CC §1962(d)(1)

Chapter 10: Identification of property manager or owner 111

• is treated as the owner, not the owner’s agent, and liable for performing

all obligations described under rental and lease agreements with

tenants.

When the person signing the lease or rental agreement for the owner fails to

make the disclosures, the tenant may have no indication the person signing is

not the owner. However, this does not relieve the owner of liability to tenants.

It merely extends liability to the property manager or resident manager who

failed to give the required agency notice identifying themselves as agent for

the owner.

13 CC §1962(d)(2)

14 CC§1962(e)

Form 554

Change of Owner

or Property

Manager

Page 2 of 2

4. Your security deposit of $_______________

4.1

has been transferred to the new owner.

4.2

has been transferred to the new property manager.

5. No breach of your lease or rental agreement by Landlord or Tenant currently exists, except

___________________________________________________________________________________________

6. Any notices or demands on Owner by Tenant, including service of process, may be served on

Name _____________________________________________________________________________________

Address ___________________________________________________________________________________

Phone ____________________________________________________________________________________

7. All terms and conditions of your lease and rental agreement remain in effect.

— — — — — — — — — — — — — — — PAGE TWO OF TWO — FORM 554 — — — — — — — — — — — — — — —

I agree to the terms stated above.

Date: _____________, 20______

Landlord: _____________________________________

Agent: ________________________________________

Agent's DRE #: ________________________________

Signature: _____________________________________

Address: ______________________________________

_____________________________________________

Phone: ____________________ Cell: ______________

Fax: _________________________________________

Email: ________________________________________

I agree to the terms stated above.

Date: _____________, 20______

Tenant: _______________________________________

Signature: _____________________________________

Tenant: _______________________________________

Signature: _____________________________________

Address: ______________________________________

_____________________________________________

Phone: ____________________ Cell: ______________

Fax: _________________________________________

Email: ________________________________________

112 Landlords, Tenants and Property Management, Eighth Edition

An agent-for-service of process may act on behalf of the owner, accepting

service of legal documents and notices initiated by tenants. The agent-

for-service provision in a property management agreement identifies

the individual acting in this capacity.

The owner, property manager and resident manager on any change in

ownership or management disclose their addresses to all residential

tenants and how and when rent is to be paid in notices handed to the

tenants.

Failure to disclose imposes liability for tenant claims on the property

manager and the resident manager.

agent-for-service clause ............................................................. pg. 108

agent-for-service of process ...................................................... pg. 107

Chapter 10

Key Terms

Chapter 10

Summary

Chapter 11: Exclusive authorization to lease 113

Exclusive

authorization to lease

After reading this chapter, you will be able to:

• understand the broker’s right to compensation for services

when employed by a nonresidential owner under an exclusive

authorization to lease;

• use a fee schedule to establish the broker’s right to a fee for

future extensions, renewals and other continuing leasehold and

purchase arrangements which might be later entered into by the

tenant and the owner;

• distinguish the various provisions in an authorization to lease

which protect the leasing agent’s fee; and

• identify situations in which the leasing agent/broker has earned

a fee.

Chapter

A nonresidential property is offered for lease by the owner. A broker makes

an appointment with the owner to discuss the possibility of becoming their

leasing agent.

During the discussion, the broker explains they can best help lease the

property when operating under an exclusive authorization to lease, also

called a listing or employment agreement.

Learning

Objectives

Key Terms

Leasing agent’s

bargain for fees

leasing agent

A broker who markets

the availability of

space to rent and

locates and negotiates

the terms of a lease

with suitable tenants.

contingency fee clause

early termination clause

exclusive authorization to

lease

exclusive right-to-collect

clause

full listing offer to lease

leasing agent

open listing

safety clause

114 Landlords, Tenants and Property Management, Eighth Edition

Under the listing, the broker, on the owner’s behalf, will be able to:

• market the space and locate prospective tenants [See Figure 1, Form

110 §1];

• publish the terms under which a tenant can lease and occupy the space

[See Figure 1, Form 110 §8];

• share fees with brokers representing the tenants [See Figure 1, Form

110 §4.2];

• conduct negotiations with tenants or their brokers [See Figure 1, Form

110 §4.3] ; and

• accept deposits with offers to lease the space.

A broker who acts solely as a leasing agent does not manage or operate the

property for the owner. The duties of a leasing agent are limited to locating

prospective tenants and negotiating a lease agreement for their occupancy

of the space.

An exclusive authorization to lease entered into by the owner assures the

leasing agent they will be paid a fee for their efforts if anyone procures a

tenant for the identified space during the listing period, either on:

• the leasing terms sought in the listing; or

• any other terms accepted by the owner.

However, an owner may be reluctant to give up the ability to lease the

property independently. Further, an owner may want to avoid employing

a leasing agent and paying a brokerage fee if the owner locates the tenant.

On the other hand, an owner has a better chance of finding a tenant on

acceptable terms if they employ a leasing agent that is known in the

community of local leasing agents. An effective leasing agent takes the

owner’s “rough edges” out of negotiations and is constantly involved in

leasing discussions with others in the trade.

Consider an owner who prefers to orally agree to employ a broker to find

tenants for the owner’s property. The owner confirms they will work

exclusively with the leasing agent to market the space and locate a user.

The owner does not, however, believe it is necessary to commit all these

arrangements to a written agreement.

The broker explains an exclusive authorization to lease must be written

and signed by the owner for the broker to be entitled to collect a fee. No

signed writing, no services.

Is the broker correct?

Yes! A written agreement signed by the client is the only way a broker can

protect their right to compensation for services. More importantly, a written

Right to

compensation

for services

Written

authorization

to lease

exclusive

authorization to

lease

A written agreement

between a broker

and client employing

the broker to render

services in exchange

for a fee on the

leasing the property

to a tenant located by

anyone. Also known as

a listing. [See ft Form

110]

Chapter 11: Exclusive authorization to lease 115

agreement memorializes the leasing agent’s obligation to conscientiously

and continuously work to meet the client’s objectives, whether representing

a tenant or an owner.

An oral fee agreement between a broker and their client is unenforceable by

the broker and leaves the broker without evidence of the agency created. This

is true even when the broker documents the existence of an oral agreement

Figure 1

Form 110

Exclusive

Authorization to

Lease Property

DATE: _____________, 20 ______, at _____________________________________________________, California.

Items left blank or unchecked are not applicable.

1. RETAINER PERIOD:

1.1 Landlord hereby retains and grants to Broker the exclusive and irrevocable right to solicit prospective

tenants and negotiate for the lease of the property for the period

beginning on _____________, 20 ______ and terminating on _____________, 20 ______.

1.2 Broker to use diligence in the performance of this agreement.

2. ADDENDUMS to this agreement include:

Title Report, or Title Policy

Work Authorization [See ft Form 108]

Occupant's Operating Expense Profile [See ft Form 562]

Criminal Activity and Security Disclosure Statement [See ft Form 321]

Agency Law Disclosure [See ft Form 305]

(Mandated for one-to-four residential units if lease exceeds one year.)

Lead-Based Paint Disclosure [See ft Form 557]

(Mandated for one-to-four residential units constructed before 1978.)

__________________________________________________________________________________

h. __________________________________________________________________________________

3. BROKERAGE FEE:

NOTICE: The amount or rate of real estate fees is not fixed by law. They are set by each Broker individually

and may be negotiable between the Client and Broker.

3.1

Landlord agrees to pay Broker

see attached fee schedule [See ft Form 113], or

____________________________________________________ as compensation for services rendered, IF:

a. Anyone procures a tenant on the terms stated in this agreement, or any other terms acceptable to

Landlord, during the period of this agreement.

b. The property is withdrawn from the rental market or made unmarketable by Landlord during the period of

this agreement.

c. The Landlord terminates this employment of the Broker during the period of this agreement.

d. Within one year after termination of this agreement, Landlord or his agent commences negotiations which

later result in a transaction contemplated by this agreement with a tenant with whom Broker, or

a cooperating broker, negotiated during the period of this agreement. Broker to identify prospective tenants

by written notice to the Landlord within 21 days after termination of this agreement. [See ft Form 122]

3.2 Should this agreement terminate without Landlord becoming obligated to pay Broker a fee, Landlord to pay

Broker the sum of $_______________ per hour of time accounted for by Broker, not to exceed

$_______________.

3.3 If Broker procures a tenant who purchases the property during the term of Tenant’s lease or

any modification, extension or renewal of the lease or other continuing occupancy of leased property,

Landlord agrees to pay Broker a fee of

see attached fee schedule [See ft Form 113], or

______________________________________________________________________________________.

4. GENERAL PROVISIONS:

4.1 Broker is authorized to place a For Lease sign on the property and publish and disseminate property

information to meet the objectives of this employment.

4.2 Landlord authorizes Broker to cooperate with other agents and divide with them any compensation due.

4.3 Broker is authorized to receive, on behalf of any tenant, an offer and deposit.

4.4 The Landlord’s acceptance of any tenant’s offer to lease to be contingent on approval of the tenant’s

creditworthiness and management capabilities.

EXCLUSIVE AUTHORIZATION TO LEASE PROPERTY

— — — — — — — — — — — — — — — PAGE ONE OF THREE — FORM 110 — — — — — — — — — — — — — — —

Prepared by: Agent ____________________________

Broker ____________________________

Phone _______________________

Email _______________________

8.5 A late charge of $_______________ to be incurred ______ days after the rent is due, plus interest at

______% per annum beginning from the due date for the delinquent rent.

8.6 Tenant to pay for and maintain:

Water

Gas

Electricity

Heat/Air Conditioning

Public liability insurance

Property damage insurance

Plate glass insurance

____________________________________________________________________________________

8.7 Landlord to maintain ______________________________________________________________________

______________________________________________________________________________________.

8.8 Tenant may not assign, lease or sublet any portion of the property without written consent of the Landlord.

8.9 The lease form sought to be used by Landlord is form #______ published or drafted by _______________.

8.10 Other terms _____________________________________________________________________________

_______________________________________________________________________________________

— — — — — — — — — — — — — — — — — — PAGE THREE OF THREE — FORM 110 — — — — — — — — — — — — — — —

I agree to render services on the terms stated above.

Date: _____________, 20______

Broker's Name: ________________________________

Broker's DRE Identification #: ____________________

Agent's Name: _________________________________

Agent's DRE Identification #: ____________________

Signature: _____________________________________

Address: ______________________________________

_____________________________________________

Phone:________________________________________

Cell: __________________________________________

Fax: _________________________________________

Email: ________________________________________

I agree to employ Broker on the terms stated above.

See attached Signature Page Addendum. [ft Form 251]

Date: _____________, 20______

Landlord: _____________________________________

Signature: _____________________________________

Address: ______________________________________

______________________________________________

Phone: _______________________________________

Cell: __________________________________________

Fax: _________________________________________

Email: ________________________________________

4.5

Broker may have or will contract to represent Owners of comparable properties or represent Tenants

seeking comparable properties during the retainer period. Thus, a conflict of interest exists to the extent

Broker's time is required to fulfill the fiduciary duty owed to others he now does or will represent.

4.6 Before any party to this agreement files an action on a dispute arising out of this agreement which remains

unresolved after 30 days of informal negotiations, the parties agree to enter into non-binding mediation

administered by a neutral dispute resolution organization and undertake a good faith effort during mediation

to settle the dispute.

4.7 The prevailing party in any action on a dispute shall be entitled to attorney fees and costs, unless they file

an action without first offering to enter into mediation to resolve the dispute.

4.8 This agreement will be governed by California law.

5. REAL ESTATE:

5.1 Type __________________________________________________________________________________

Address _______________________________________________________________________________

Referred to as __________________________________________________________________________

_______________________________________________________________________________________

______________________________________________________________________________________

Vesting ________________________________________________________________________________

5.2. Encumbrances of record:

a. A first loan in the amount of $_______________, payable $_______________ per month until paid,

including interest at ______%,

ARM, type ____________, impounds being $_______________ monthly.

Lender_______________________________________________________________________________

b. A second loan in the amount of $_______________, payable $_______________ per month, including

interest at ______%, due _____________, 20______.

Lender ______________________________________________________________________________

c. Other encumbrance, bond, assessment or lien in the amount of $_______________

d. Any defaults __________________________________________________________________________

6. PERSONAL PROPERTY INCLUDED:

6.1 Referred to as ___________________________________________________________________________

_______________________________________________________________________________________

______________________________________________________________________________________.

7. CONDITION OF TITLE:

7.1 Landlord’s interest in the property is:

Fee simple

Leasehold

________________________________________________

7.2 Landlord warrants there are no unsatisfied judgments or actions pending against him, no

condemnation/eminent domain proceedings or other actions against the property, and no unrecorded deeds

or encumbrances against the property.

8. LEASE TERMS:

8.1 The lease term sought is for a period of ____________________________________________________.

8.2 Occupancy to be available _____________, 20______.

8.3 Initial rent shall be $_______________, payable on the ______ day of each month, with annual adjustments

based on ______________________________________________________________________________.

8.4 A total deposit of $_______________, being $_______________ advance rents and $_______________

security deposit.

— — — — — — — — — — — — — — — — — — PAGE TWO OF THREE — FORM 110 — — — — — — — — — — — — — — —

For a full-size, fillable copy of

this, or any other form in this

book, please see the Forms-on-

CD accompanying this course.

116 Landlords, Tenants and Property Management, Eighth Edition

by referencing the fee and terms of payment in written correspondence sent

to and acted on by the client. Without the client’s signature promising to pay,

the broker cannot enforce collection of the orally promised fee.

Thus, a broker protects their right to collect a fee by entering into a form

exclusive authorization to lease, signed by the owner, before performing any

services.

Editor’s note — If a broker is employed under an oral agreement to

renegotiate an existing lease, the employment agreement does not need

to be in the form of a signed written agreement to collect the promised fee.

Fees promised a broker for negotiating of modifications, space expansions,

extensions or renewals of existing leases are not required to be written to

be enforceable. Here, the lease has already been created, taking the further

employment out from under the statute requiring a writing to enforce fee

agreements.

An exclusive authorization to lease operates like an exclusive right-to-sell

listing agreement.

The leasing agent is employed to “sell the use,” a leasehold interest with

the right of possession, by locating a user for the owner’s property. This is

comparable to employment of a seller’s agent to “sell the ownership” by

locating a buyer for a property.

The broker owes the same obligations and duties to the owner under an

exclusive authorization to lease as they owe a seller under an exclusive

right-to-sell listing. As a leasing agent, the broker’s primary obligation owed

an owner seeking tenants is to diligently, consistently and conscientiously

market the property and locate qualified tenants.

Conversely, a leasing agent’s performance under a written open listing

requires only the broker’s best efforts to locate a tenant, not constant diligence.

An open listing sets the leasing agent in competition with the owner and

other brokers to locate a tenant and collect a fee.

An exclusive authorization-to-lease calls for the preparation of a fee

schedule. The fee schedule is attached to the exclusive authorization and

references leasing situations which trigger the broker’s right to be paid a fee

when earned. The fee schedule includes fees for future extensions, renewals

and other continuing leasehold and purchase arrangements which might be

entered into in the future by the tenant and the owner. [See first tuesday

Form 113; see Chapter 30]

The amounts established in the fee schedule are earned and due to the broker

when:

•

an exclusive right-to-collect clause assures payment of the agreed-to

fee if anyone procures a tenant on the terms in the listing, or on any

other terms accepted by the owner [See Figure 1, Form 110 §3.1a];

1 Phillippe v. Shapell Industries, Inc. (1987) 43 C3d 1247

2 Shell v. Darneille (1984) 162 CA3d 957

Exclusive

authorization to

locate a user

Fee schedule

establishes

broker’s right

to a fee

open listing

An employment

entered into by a

broker to render real

estate services on

a best-efforts basis

under which a fee

is due to the broker

if they achieve the

client’s objective of the

employment before

the client or another

broker separately first

meet the objective,

such as the sale or

locating of a property.

Chapter 11: Exclusive authorization to lease 117

• an early termination clause assures payment of the fee if the owner

withdraw the property from the rental market during the listing period

[See Figure 1, Form 110 §3.1b];

• a termination-of-agency clause assures payment of the fee if the

owner cancels the employment without cause before it expires under

the listing, whether or not the owner intends to continue to market the

property for sale [See Figure 1, Form 110 §3.1c]; and

• a safety clause assures payment of the fee if, within one year after

termination of the exclusive authorization to lease, the owner enters

into negotiations resulting in a leasing or sale of the property to a

prospective tenant the broker negotiated with during the listing period.

[See Figure 1, Form 110 §3.1d]

Now consider a broker who is employed by an owner under an exclusive

authorization to lease.

The authorization states the owner will pay the broker a fee if the broker, or

anyone else, produces a tenant ready, willing and able to lease the property

on the same terms specified in the exclusive authorization to lease. [See

Figure 1, Form 110 §3.1a]

The broker produces a creditworthy tenant who is financially capable of

leasing the premises on the terms set forth in the exclusive authorization to

lease. [See Figure 1, Form 110 §8]

The broker prepares and submits the tenant’s offer to lease on terms

substantially identical to the leasing terms in the authorization, called a full

listing offer to lease. [See first tuesday Form 556]

The owner then demands higher rental rates and refuses to accept the offer.

The broker claims to be entitled to a fee since they produced a tenant who

was ready, willing and able to lease the property on the terms stated in the

exclusive authorization to lease.

The owner claims the broker is not entitled to a fee since the property was

never leased.

Here, the broker has earned their fee. The exclusive authorization to lease

included a written fee agreement obligating the owner to pay the broker a fee

once the broker located a tenant ready, willing and able to lease the property

on the terms set forth in the exclusive authorization to lease.

3 Twogood v. Monnette (1923) 191 C 103

termination-of-

agency clause

A provision which

assures payment of

the broker’s fee if the

owner cancels the

employment without

cause before the listing

expires. [See ft Form

110 §3.1c]

Ready,

willing and

able tenant

condition

full listing offer to

lease

A tenant’s offer to lease

on terms substantially

identical to the

leasing terms in the

authorization to lease

property agreement.

[See ft Form 556]

118 Landlords, Tenants and Property Management, Eighth Edition

Now consider a broker whose exclusive authorization to lease contains

a fee provision that states they are entitled to a fee if the owner rents the

space during the listing period. This clause is called the exclusive right-

to-collect clause. It is the exclusive right-to-collect clause which makes a

listing exclusive. The clause states “a fee is due if anyone procures a tenant.”

[See Figure 1, Form 110 §3.1a]

The broker, as part of their efforts to locate a tenant, places a “For Lease” sign

on the premises. The sign is seen by a prospective tenant.

The prospective tenant contacts the owner of the premises directly.

Before the exclusive authorization to lease period expires, the prospective

tenant and owner enter into a lease agreement. The terms of the lease

agreement are different from those specified in the broker’s exclusive

authorization to lease.

Even though the owner’s broker had no contact with the prospective tenant

(other than the sign exposure) and the terms are different from the listing, the

broker has earned a fee. A tenant’s offer to lease was accepted by the owner

during the exclusive authorization period.

A typical exclusive authorization to lease contains boilerplate wording in

the fee provision stating the owner will pay the broker the agreed-to fee if

the property is:

• withdrawn from the rental market;

• transferred or conveyed;

• leased without the broker’s consent; or

• otherwise made unrentable by the owner. [See Figure 1, Form 110

§3.1b]

Collectively, this boilerplate provision is known as the early termination

clause. An early termination clause protects the broker from loss of time and

money spent in a diligent effort to locate a tenant when the owner’s conduct

effectively removes the property from the rental market before the listing

expires. When the owner interferes with the broker’s objective — to produce

a ready, willing and able tenant on the terms stated — a fee has been earned

and is immediately due.

Consider a broker and owner who enter into an exclusive authorization to

lease that expires in six months. The agreement contains a fee provision with

an early-termination clause.

The broker diligently attempts to locate a tenant for the owner’s property.

During the listing period, the owner notifies the broker the property is no

longer for lease. The broker is instructed to stop marketing the property. In

compliance with the owner’s instructions, the broker takes the property off

the market.

4 Carlsen v. Zane (1968) 261 CA2d 399

Early

termination

by owner

triggers fee

early termination

clause

A provision which

assures payment of

the broker’s fee if the

owner withdraws the

property from

the market during the

listing period. [See ft

Form 110 §3.1c]

An exclusive

right-to-

collect clause

exclusive right-to-

collect clause

A provision which

assures payment of the

broker’s fee if anyone

procures a tenant

on the terms in the

listing, or on terms the

landlordowner accepts.

[See ft Form 110 §3.1a]

Chapter 11: Exclusive authorization to lease 119

The broker then makes a demand on the owner for a full listing fee. The

broker claims the early termination clause provides for payment of the

broker’s fee by the owner when the owner withdraws the property from the

rental market before the listing period expires.

The owner claims the broker cannot collect a fee under the early termination

clause since it is an unenforceable penalty provision.

Is the broker entitled to a fee on the client’s termination of the broker’s

employment?

Yes! The broker is entitled to a fee. The early termination clause is not a

penalty provision since the owner has an alternative. It simply gives

the owner the option to cancel the exclusive authorization agreement

in exchange for paying the broker a fee instead of allowing the listing to

expire without interference with the broker’s marketing efforts. The owner

exercises the right to cancel by conduct which interferes with the broker’s

ability to lease the property, such as taking the property off the market. Thus,

the owner is required to pay the fee on exercise of their option to cancel the

listing agreement.

Editor’s note — See first tuesday Form 121 for an agreement to cancel an

exclusive authorization to lease during the listing period.

A safety clause protects a leasing agent’s fee when their efforts produce

results during the year after the listing expires. This one-year period is known

as the safety clause period. [See Figure 1, Form 110 §3.1d]

Under the safety clause, the owner owes the leasing agent the scheduled fee

if:

• during the safety clause period, the owner enters into negotiations

with a tenant located by the leasing agent during the listing period;

and

• the negotiations result in a lease agreement.

The safety clause includes a provision which calls for the leasing agent as a

condition precedent to collecting a fee to provide the owner with a list of the

prospective tenants located by the leasing agent during the listing period.

[See first tuesday Form 122]

Consider a broker and an owner who enter into an exclusive authorization

to lease. The exclusive authorization to lease contains a fee provision with a

safety clause.

On expiration of the listing period, the broker supplies the owner with

the names of prospective tenants they have contacted and who received

information regarding the property. Thus, each of these prospective tenants

is “registered” with the owner.

5 Blank v. Borden (1974) 11 C3d 963

Safety clause

covers

prospects

who lease

safety clause

A provision which

assures payment of

the broker’s fee if the

owner withdraws the

property from

the market during the

listing period. [See ft

Form 110 §3.1c]

120 Landlords, Tenants and Property Management, Eighth Edition

After the listing expires, the owner employs a second broker without

discussing the terms of the prior listing.

Within the safety period of the first broker’s listing, the second broker leases

the premises to a tenant registered by the first broker. The lease is arranged

without the first broker’s participation in negotiations or the fee paid on the

transaction.

Here, the owner owes the first broker the entire amount of the agreed-to fee

even though the property was leased while listed exclusively with another

broker.

The exclusive authorization to lease entered into by the owner and the first

broker promised the first broker a fee if, within one year after expiration of

the listing, the owner enters into negotiations which result in a lease with a

prospective tenant registered with the owner by the first broker.

As a “safety net” for brokerage services rendered, the clause discourages the

owner from attempting to avoid payment of a leasing agent’s fee by:

• waiting until the exclusive authorization agreement expires and then

directly or indirectly approaching a prospective tenant located and

solicited by the leasing agent; or

• making special fee arrangements with a second leasing agent which

re-ignite negotiations with a prospective tenant located and exposed

to the property by the first leasing agent broker.

An offer-to-lease form is used by prospective tenants to begin negotiations

with the owner to lease a property. Along with a prospective tenant’s

desired lease terms, offer-to-lease forms typically contain a provision stating

the broker’s fee is payable on the transfer of possession to the tenant. This

provision is called a contingency fee clause. [See first tuesday Form 556]

Consider an owner who accepts an offer to lease submitted by a broker

on behalf of a prospective tenant. The signed offer to lease contains a fee

provision which states the broker’s fee is payable by the owner on change of

possession. [See first tuesday Form 556]

Later, the owner wrongfully refuses to enter into a lease agreement and

convey the leasehold interest as agreed in the offer to lease. The broker makes

a demand on the owner for payment of a fee.

The owner claims the broker is not entitled to receive a fee since the leasehold

was never conveyed to the prospective tenant.

Is the broker entitled to their fee?

Yes! The owner cannot avoid paying the fee the broker has already earned by

claiming a lease was never signed. Here, the owner’s breach of the agreement

to lease prevented the transfer of occupancy to the tenant. The owner failed

6 Leonard v. Fallas (1959) 51 C2d 649

contingency fee

clause

A provision in an

offer-to-lease which

states the broker’s fee is

payable on the transfer

of possession to the

tenant. [See ft Form

556 §15]

Contingency

fees due

on owner’s

breach

Chapter 11: Exclusive authorization to lease 121

to deliver the lease agreement and possession as agreed in the offer to lease.

Thus, the failure to enter into the lease triggers payment of the fee previously

earned when the owner accepted the tenant’s offer to lease.

The contingency fee clause included in the offer to lease merely designates

the time for payment of a fee the broker previously earned on locating a

tenant or the acceptance of the tenant’s offer. The contingency fee clause in

the offer does not defeat the broker’s right to compensation simply because

the owner later wrongfully refused to enter into the lease.

The contingency fee clause in an offer to lease shifts the time for payment

of the fee from the time the fee is earned under an exclusive authorization

agreement to the time a lease is entered into in the offer to lease.

Also, unless the leasing agent approves, the owner cannot include and

enforce a fee provision in the offer to lease that is unacceptable to the broker

or contrary to the terms of the fee schedule in the exclusive authorization to

lease.

Exclusive authorizations to lease have fee schedules attached which contain

formulas for calculating the brokerage fee earned based on the length of the

lease negotiated with the tenant. Further, they usually state the broker will

receive an additional fee for any extension, renewal or modification of the

tenant’s occupancy under the original lease. [See Chapter 30]

For example, a broker operating under the authority of a written exclusive

authorization to lease procures a tenant who signs a ten-year lease. The

broker is paid the fee called for in the listing agreement fee schedule.

The fee schedule also provides for a percentage fee to be paid if the owner and

tenant enter into an agreement for the tenant’s continued occupancy of the

premises on expiration of the original lease.

On expiration of the original lease, the owner and tenant negotiate a new

lease for the tenant’s continuing occupancy and use of the premises. A

brokerage fee is not paid for the tenant’s continued occupancy.

The broker makes a demand for an additional fee under the original listing

agreement. The broker claims the new lease, which the broker did not

negotiate, earned the broker a fee.

The owner claims they do not owe the broker a fee since the new lease is a

separate agreement, not an extension, renewal or modification of the original

lease.

However, the broker is due an additional fee from the owner as agreed in the

original listing since the new lease constitutes an extension of the original

possession.

7 Steve Schmidt & Co. v. Berry (1986) 183 CA3d 1299

8 Seck v. Foulks (1972) 25 CA3d 556

Additional

fees on

extension of

lease

122 Landlords, Tenants and Property Management, Eighth Edition

An exclusive authorization to lease entered into by the owner assures

the leasing agent will be paid a fee for their efforts if anyone procures a

tenant for the identified space during the listing period, either on:

• the leasing terms sought in the listing; or

• any other terms accepted by the owner.

An exclusive authorization-to-lease calls for the preparation of a fee

schedule. The fee schedule is attached to the exclusive authorization and

references leasing situations which trigger the broker’s right to be paid

a fee when earned. The fee schedule includes fees for future extensions,

renewals and other continuing leasehold and purchase arrangements

which might later be entered into by the tenant and the owner.

Numerous provisions exist in the exclusive authorization to lease

which protect a leasing agent’s right to a fee, including the:

• exclusive right-to-collect clause;

• early termination clause;

• safety clause; and

• contingency fee clause.

contingency fee clause .............................................................. pg. 120

early termination clause ........................................................... pg. 118

exclusive authorization to lease ............................................. pg. 114

exclusive right-to-collect clause ............................................. pg. 118

full listing offer to lease ............................................................. pg. 117

leasing agent ................................................................................. pg. 113

open listing ................................................................................... pg. 116

safety clause .................................................................................. pg. 119

termination-of-agency clause .................................................. pg. 117

Chapter 11

Key Terms

Here, the tenant located by the broker continued in possession and use of the

premises on expiration of the original lease. The listing agreement stated the

broker was to be paid a fee on this event. The form of documentation used to

permit the continued occupancy of the premises is of no importance.

9 John B. Kilroy Company v. Douglas Furniture of California, Inc. (1993) 21 CA4th 26

Chapter 11

Summary

Chapter 12: Exclusive authorization to locate space 123

Exclusive authorization

to locate space

After reading this chapter, you will be able to:

• use an exclusive authorization to locate space to assure payment

of a fee for assisting prospective tenants;

• determine a tenant’s needs and expectations for leasing a property

using a tenant lease worksheet; and

• understand the benefits for prospective tenants and brokers

employed under an exclusive listing agreement.

Chapter

A landlord of a nonresidential property holds an open house attended by

leasing agents. The purpose of the open house is to induce the leasing agents

to locate tenants for the landlord’s vacant space.

Leasing agents attending the open house are handed the landlord’s brochure

on available space and lease terms. The information includes an unsigned

schedule of broker’s fees the landlord will pay if a broker procures a tenant

who leases space in the property. The informational handout also includes

a tenant registration form for brokers to fill out when showing the space to

prospective tenants.

One of the brokers who received a brochure inspects the property with their

client, a prospective tenant.

Learning

Objectives

Key Terms

A leasing

agent and the

nonresidential

tenant

agency duty

consultation fee

dual agency

exclusive authorization to

locate space

general duty

124 Landlords, Tenants and Property Management, Eighth Edition

Tenant needs and expectations

To effectively negotiate a nonresidential lease arrangement on behalf of a tenant, a leasing

agent needs to possess a high level of knowledge and expertise regarding the alternative

terms of a lease agreement. Further, to select qualifying space and negotiate the best terms

for a tenant, the agent first identifies the tenant’s needs and expectations for leasing a

property.

When gathering leasing information from a tenant, the agent needs a checklist of pertinent

items to consider. This objective is best met by using a

tenant lease worksheet. [See first

tuesday Form 555]

In the process, the leasing agent needs to uncover the tenant’s precise reasons for moving

to be better equipped to find a suitable new location and premises, or possibly negotiate a

renewal or extension of the tenant’s existing lease.

Know the tenant’s business projections

When a prospective tenant is starting a new business, the leasing agent initially needs

information on the tenant’s business projections, which may be overly optimistic. The

tenant may want space that is simply too large or in too expensive a location. The tenant

may have to settle for incubator space in a less desirable location which accepts “start-up”

business tenants.

Conversely, a tenant may underestimate the potential future growth of their business. The

premises they favor may be too small to accommodate their short-term growth, hindering

attempts to expand. The tenant will be forced to relocate again prematurely. To ensure room

for future growth, the leasing agent considers:

• options to lease space;

• the right of first refusal on additional space; or

• a lease cancellation or buyout provision to vacate the premises.

Case in point

To know

the tenant’s

expectations

The broker completes the tenant registration form identifying the broker

and prospective tenant. The registration form itself does not reference the fee

schedule or any amount payable to the broker as a fee.

The registration form is handed to the landlord, or the landlord’s employee,

who signs it and returns a copy to the broker.

Later, the broker prepares an offer to lease, which is signed by the tenant and

submitted to the landlord. The offer to lease form contains a provision calling

for the landlord to pay a broker’s fee. [See Form 556 §15 in Chapter 11]

The offer to lease is not accepted or rejected by the landlord. The landlord

does not make a counteroffer. However, without contacting the broker, the

landlord and the tenant engage directly in lease negotiations. Later, they

enter into a lease which does not provide for a fee to be paid to the broker.

In the lease, the landlord agrees to be responsible for payment of any broker’s

fee due as a result of the lease.

Chapter 12: Exclusive authorization to locate space 125

Also, over projection of the potential income of a tenant’s business under a percentage-

rent lease agreement will reduce the landlord’s projected rental income. Unless the leasing

agent considers the space needs and gross income of the tenant, the leasing agent’s long-

term service to either the landlord or tenant is limited. Thus, the leasing agent needs to

consider a system to help them match up the right landlord with the right tenant.

Using a tenant lease worksheet

The tenant lease worksheet covers three key areas the leasing agent is to consider:

• the tenant’s lease agreement obligations for their existing space;

• the tenant’s present and future needs for leased space; and

• the tenant’s financial condition and creditworthiness for ability and capacity to

make rent payments. [See

first tuesday Form 555]

Regarding the tenant’s space requirements, the leasing agent considers:

• current square footage needs;

• future square footage needs;

• phone, utilities, computer and information technology (IT) needs;

• heating and air conditioning requirements;

• parking, docking, turn-around and shipping requirements;

• access to freeways, airports and other public transportation;

• access to civic, financial, legal, governmental or other “downtown” facilities;

• response time for police and fire departments;

• access to housing areas; and

• any needs peculiar to the tenant.

Some tenants focus on specific

geographic locations among businesses or in population

centers. Others may need the lowest rent possible, regardless of location.

Case in point

To know

the tenant’s

expectations

cont’d

On discovering the tenant’s occupancy, the broker seeks payment of their fee

from their client the tenant, not the landlord. The broker claims the tenant

interfered with or breached the broker’s fee provision in the offer to lease

(which was signed by the tenant) by failing to provide for payment of the fee

the broker earned when the tenant leased the property.

The tenant claims they are not liable for payment of the broker’s fee since the

offer to lease called for the landlord to pay the broker’s fee.

Can the broker recover their fee from the tenant?

Yes! The offer to lease signed by the tenant contains a fee provision which

states the broker will receive compensation for their efforts if the tenant

leases the premises. It is not important that the tenant’s offer called for the

landlord to pay the fee.

Thus, the broker is able to enforce collection of a fee from the tenant. The

tenant signed an offer to lease the property, which contained a provision

126 Landlords, Tenants and Property Management, Eighth Edition

calling for the broker to be paid a fee. The tenant breached that fee provision

by failing to provide for payment of that broker’s fee. In doing so, the tenant

incurred liability for the fee.

Conversely, a broker locating space for a client puts their fee orally promised

by the landlord at risk if the prospective tenant does not sign an agreement

— such as an exclusive authorization to locate space or offer to lease —

containing provisions for the payment of a broker’s fee if the tenant leases

property. An oral agreement to pay a broker’s fee is unenforceable against the

person making the oral promise.

A leasing agent has the opportunity to enter into a written fee agreement

signed by either the tenant or the landlord on at least four occasions during

lease negotiations:

• when the leasing agent solicits a nonresidential landlord for

authorization to represent the landlord to locate users and negotiate

acceptable leasing arrangements; [See Form 110 in Chapter 11]

• when the leasing agent solicits (or is solicited by) a nonresidential

tenant for authorization to represent the tenant to locate suitable space

and negotiate leasing arrangements acceptable to the tenant; [See

Form 111 accompanying this chapter]

• when the leasing agent prepares a tenant’s offer to lease by including a

broker’s fee provision within the body of the offer signed by the tenant;

and

• when the leasing agent prepares the lease agreement by including

provisions for fees.

A broker needs to enter into an employment agreement with a tenant

before extensively analyzing the tenant’s needs for space the broker intends

to locate. The employment agreement is entered into and signed prior to

locating space or exposing the tenant to available space not listed with the

broker. [See Form 111]

This employment agreement, called an exclusive authorization to locate

space, assures the broker a fee will be received if the tenant ultimately leases

space of the type and in the area noted in the authorization. Through the

exclusive authorization, the tenant commits to work with the broker to

accomplish the objective of the employment — to rent space. The leasing

agent’s commitment to the tenant under the employment is a promise to

use diligence and care in locating suitable space on terms acceptable to the

tenant.

The exclusive authorization to locate space form is similar in structure and

purpose to a exclusive authorization to lease entered into by a landlord and

includes:

•

the term of the retainer period;

1 Rader Company v. Stone (1986) 178 CA3d 10

2 Phillippe v. Shapell Industries, Inc. (1987) 43 C3d 1247

exclusive

authorization to

locate space

An employment

agreement by a broker

and a prospective

tenant which

authorizes the broker

to act as the tenant’s

leasing agent to

locate suitable space

and negotiate a lease

agreement. [See ft

Form 111]

Various

written fee

agreements

Employment

agreements

with a user

Chapter 12: Exclusive authorization to locate space 127

• the formula for calculating the broker’s compensation and who will

pay the fee [See Form 113 in Chapter 30];

• a description of the type and location of space or property sought by

the tenant; and

• identification of the broker as the agent and the tenant as the client.

Form 111

Exclusive

Authorization to

Locate Space

DATE: _____________, 20______, at ______________________________________________________, California.

Items left blank or un checked are not ap pli ca ble.

1. RETAINER PERIOD:

1.1 Tenant hereby retains and grants to Broker the exclusive right to locate space of the type described below

and to negotiate terms and conditions for its rental acceptable to Tenant, for a retainer period beginning on

_____________, 20______, and terminating on ____________, 20______.

2. BROKER’S OBLIGATIONS:

2.1 Broker to use diligence in the performance of this employment.

2.2

Attached is the Agency Law Disclosure. [See ft Form 305]

3. GENERAL PROVISIONS:

3.1 Tenant authorizes Broker to cooperate with other agents and divide with them any compensation due.

3.2 Broker may have or will contract to represent Owners of comparable properties or represent Tenants

seeking comparable properties during the retainer period. Thus, a conflict of interest exists to the extent

Broker's time is required to fulfill the fiduciary duty owed to others he now does or will represent.

3.3 Before any party to this agreement files an action on a dispute arising out of this agreement which remains

unresolved after 30 days of informal negotiations, the parties agree to enter into non-binding mediation

administered by a neutral dispute resolution organization and undertake a good faith effort during mediation

to settle the dispute.

3.4 The prevailing party in any action on a dispute shall be entitled to attorney fees and costs, unless they file

an action without first offering to enter into mediation to resolve the dispute.

3.5 This agreement will be governed by California law.

4. BROKERAGE FEE:

NOTICE: The amount or rate of real estate fees is not fixed by law. They are set by each broker individually

and may be negotiable between the Tenant and the Broker.

4.1 Tenant agrees to pay Broker

see attached fee schedule [See ft Form 113], or __________________

____________________________________________________ of the rental price of the space located, IF:

a. Tenant, or any person acting on Tenant’s behalf, leases space located during the retainer period;

b. Tenant terminates this employment of Broker during the retainer period; or

c. within one year after termination of this agreement, Tenant or his agent commences negotiations which

later result in a transaction contemplated by this agreement with a landlord with whom Broker, directly or

indirectly, negotiated during the period of this agreement. Broker to identify prospective properties by

written notice to Tenant within 21 days after termination of this agreement. [See ft Form 123]

4.2 Should this agreement terminate without Tenant becoming obligated to pay Broker a fee, Tenant to pay

Broker the sum of $_______________ per hour of time accounted for by Broker, not to exceed

$_______________.

4.3 Should Landlord of space leased to Tenant agree to pay a fee acceptable to the Broker, Tenant’s

obligation to pay a brokerage fee will be satisfied.

EXCLUSIVE AUTHORIZATION TO LOCATE SPACE

TYPE OF SPACE SOUGHT:

GENERAL DESCRIPTION ________________________________________________________________________

LOCATION ______________________________________ SIZE ________________________________________

RENTAL AMOUNT / TERM ________________________________________________________________________

I agree to render services on the terms stated above.

Date: _____________, 20______

Broker's Name: _________________________________

Broker's DRE Identification #: _____________________

Agent's Name: ________________________________

Agent's DRE Identification #: ____________________

Signature: _____________________________________

Address: ______________________________________

______________________________________________

Phone: __________________ Cell: ________________

Email: ________________________________________

I agree to employ Broker on the terms stated above.

See attached Signature Page Addendum. [ft Form 251]

Date: _____________, 20______

Tenant: _______________________________________

Signature: _____________________________________

Address: ______________________________________

______________________________________________

Phone: _________________ Cell: _________________

Email: ________________________________________

Prepared by: Agent ____________________________

Broker ____________________________

Phone _______________________

Email _______________________

128 Landlords, Tenants and Property Management, Eighth Edition

The description of the property in the exclusive authorization to locate space

specifies the space requirements, location, rental range, terms and other

property conditions sought by the tenant.

Based on the fee provisions in an exclusive authorization to locate space,

the broker earns a fee when the tenant enters into a lease agreement for

space similar to the space sought under the exclusive authorization. The

fee is collectible no matter who locates acceptable space or negotiates the

lease agreement, established by the exclusive clause in the employment

agreement. [See Form 111 §4.1a]

Also, fee provisions containing a safety clause allow the broker to collect a

fee if property located by the broker and disclosed to the tenant during the

retainer period is later leased by the tenant in negotiations commenced

during the one-year period after the exclusive authorization expires. [See

Form 111 §4.1c]

If the tenant decides not to lease space during the exclusive authorization

period, the fee provision is structured so the broker can include payment of

a consultation fee. A consultation fee is charged on an hourly basis for the

time spent locating rental property. [See Form 111 §4.2]

An exclusive authorization to locate space is mutually beneficial to a

prospective tenant and a broker. The employment commits the nonresidential

tenant and broker to work together to accomplish a single objective — the

leasing of space.

Understandably, an unrepresented tenant is at the mercy of the leasing

agent employed by the landlord. An agent employed by a landlord owes

the employing landlord an agency duty to use diligence in seeking the

most qualified tenant and negotiating terms for a lease most favorable to the

landlord.

Conversely, the landlord’s broker only owes a general duty to a non-client

tenant. The general duty requires the leasing agent to disclose to the tenant

all material facts about the property which might adversely affect its rental

value.

The exclusive authorization to locate space is an employment agreement. It

imposes on the broker an agency duty owed to the tenant, even though the

fee will most likely be paid by the landlord.

The prospective tenant who exclusively authorizes a competent broker to

locate space saves time and money. The licensed advisor conducts the search

and handles negotiations to lease property on the prospective tenant’s behalf.

However, a tenant working directly with a landlord’s broker will initially

(and properly) only be first shown space the broker has been employed by a

landlord to lease.

Exclusive

authorization

ensures

collection of

a fee

Benefits of

exclusive

authorization

consultation fee

A fee the broker

charges for the

time spent locating

rental property if

the tenant decides

not to lease space

during the exclusive

authorization period.

[See ft Form 111 §4.2]

agency duty

The fiduciary duty a

broker owes a client

to use diligence in

attaining the client’s

real estate goals. [See ft

Form 305]

general duty

The duty a licensee

owes to non-client

individuals to act

honestly and in good

faith with upfront

disclosures of known

conditions which

adversely affect a

property’s value. [See ft

Form 305]

Chapter 12: Exclusive authorization to locate space 129

In a rising market, when available space is scarce, landlords have superior

negotiating power. Thus, it is in the tenant’s best interest to employ a different

broker from the landlord’s broker as their exclusive representative.

Curiously, when a rising market allows landlords to control negotiations

in real estate transactions and when prospective tenants most need

representation, brokers tend to avoid entering into employment agreements

with prospective tenants. It seems to be easier, during periods of rapidly

rising prices and rents, to list property and lay back, waiting for the tenant

to contact the landlord’s broker, instead of the reverse activity of an agent

locating property on behalf of a prospective tenant.

However, in a falling market, the opposite happens. Tenants have more

negotiating power than landlords due to the increasing availability of space

and properties. The result is that brokers have more trouble obtaining written

employment agreements from prospective tenants than during periods of

reduced availability of space.

Also, when the market position of landlords weakens, landlords eventually

become more flexible in lease negotiations. During such markets, landlords

are more apt to employ brokers to locate tenants and fill vacant space,

particularly builders and developers.

Consider a nonresidential landlord who orally promises a broker to pay a fee

if the broker locates a prospective tenant. A prospective tenant is located by

the broker. The tenant is orally advised by the broker that the landlord has

agreed to and will pay the broker’s fee. No retainer agreements (listings) are

entered into by the broker.

After seeing the property and before signing an offer to lease (with fee

provisions), the tenant contacts the landlord directly to negotiate a lease.

Ultimately, the tenant and landlord enter into a lease agreement. The

documentation does not contain provisions for a broker’s fee.

Here, the broker cannot enforce collection of their fee from the landlord since

the landlord’s promise to pay was oral.

However, the tenant has a different liability exposure. While the tenant

did not promise to pay a fee, the broker makes a demand on the tenant for

payment of an amount equal to the broker’s fee promised by the landlord. The

broker claims the tenant is liable since the tenant knew about the landlord’s

oral promise to pay the broker’s fee, and interfered with that promise.

The tenant claims the broker is not entitled to recover the fee from them since

a written fee agreement did not exist to evidence the fee agreement with the

landlord.

Is the tenant liable for payment of the broker’s fee?

Pay if you

interfere with

a broker’s

economic

advantage

Who

controls the

negotiations?

130 Landlords, Tenants and Property Management, Eighth Edition

Yes! The tenant is liable for the broker’s fee the landlord promised to pay since

the tenant:

• was aware the landlord had promised to pay the broker a fee if the

tenant leased the property; and

• excluded the broker from lease negotiations with the intent of avoiding

payment of the fee.

When a tenant induces a landlord to deny the broker’s fee agreed to by the

landlord, the tenant becomes liable for the fee. It does not matter whether

the employment agreement between the broker and the landlord is oral or

written.

The broker may not pursue the person who orally agreed to pay the fee.

However, they may pursue a person who interferes with another person’s

oral agreement to pay.

Now consider a broker engaged to locate space on behalf of a prospective

tenant. The broker fails to ask for and is not employed under an exclusive

authorization to locate space. The broker extends the search to space other

than the space they have listed for lease.

The broker locates space acceptable to the tenant. The landlord has not listed

the space for lease with any broker.

To assure payment of a fee, the broker enters into a so called “one-time” or

“one-party” listing agreement with the landlord.

The broker does not advise the landlord about the broker’s working

relationship with the prospective tenant, which was an agency established

by the broker’s prior efforts to locate suitable space on behalf of the tenant.

On receiving the “one-party” listing for the property, the broker presents

the landlord with the tenant’s signed offer to lease or letter of intent (LOI).

The landlord rejects the offer by making a counteroffer. Again, no disclosure

or confirmation of the agency relationship with the tenant is made to the

landlord.

Negotiations conducted by the broker between the tenant and the landlord

ultimately result in an agreement to lease. The agreement also contains a

provision stating the broker’s fee will be paid by the landlord.

Before the tenant takes possession and the broker is paid their fee, the landlord

discovers the broker was also acting as an agent on behalf of the tenant. This

dual agency relationship was not disclosed to the landlord when they

were induced to employ the broker under the listing. The landlord delivers

possession to the tenant, but refuses to pay the broker’s fee.

The broker makes a demand on the landlord for payment of the fee. The

broker claims they acted as the exclusive agent of the tenant at all times. The

3 Buckaloo v. Johnson (1975) 14 C3d 815

4 Della Penna v. Toyota Motor Sales, U.S.A., Inc. (1995) 11 C4th 376

dual agency

The agency

relationship that

arises when a broker

represents both

parties in a real estate

transaction. [See ft

Form 117]

Understanding

dual agency

Chapter 12: Exclusive authorization to locate space 131

In a rising market when available space is scarce, landlords have

superior negotiating power. Thus, it is in the tenant’s best interest to

employ a different broker from the landlord’s broker as their exclusive

representative. In a falling market, tenants have more negotiating

power than landlords due to the increasing availability of space and

properties. The result is that brokers have more trouble obtaining written

employment agreements from prospective tenants than during periods

of short supply of space.

broker further claims they undertook no agency duty to act on behalf of the

landlord in entering into the “one-party” listing to document collection of a

fee from the landlord.

The landlord claims the broker is not entitled to a fee since the broker failed to

disclose they were representing both parties as a dual agent prior to entering

into the employment agreement.

Can the broker enforce collection of the fee?

No! The broker is not entitled to a fee. They were an undisclosed dual agent

in the transaction.

The broker became the tenant’s agent when they undertook the task of

locating and submitting all available suitable space to the tenant, particularly

space not listed with the broker.

The broker also became employed as the landlord’s agent upon entering

into the listing agreement with the landlord. The result was a conflicting

employment. Upon entering into the employment with the landlord, the

broker had a duty to disclose the resulting dual agency to both the landlord

and tenant.

Continuing the previous example, to avoid losing the right to collect a fee

on the transaction, the proper practice for the broker is to negotiate with the

tenant, not the landlord, to enter into a written employment agreement.

Also, an agency relationship with the landlord is unnecessary when the

broker prepares and submits the tenant’s offer to lease to the landlord. The

landlord may agree to pay the fee in an offer to lease or the lease agreement

without ever becoming the employer of the broker as their agent. Thus, the

issue of a dual agency does not arise.

5 L. Byron Culver & Associates v. Jaoudi Industrial & Trading Corporation (1991) 1 CA4th 300

Need for a

written

employment

agreement

Chapter 12

Summary

132 Landlords, Tenants and Property Management, Eighth Edition

Chapter 12

Key Terms

An exclusive authorization to locate space entered into by a prospective

tenant assures the broker a fee if the tenant ultimately leases space

of the type and in the area noted in the authorization. An exclusive

authorization to locate space is mutually beneficial to a prospective

tenant and a broker since it commits a nonresidential tenant and broker

to work together to accomplish a single objective — the leasing of space.

A leasing agent is to investigate and confirm why the tenant wants

to move if they are to understand the tenant’s needs. When gathering

information from a tenant, a diligent agent prepares a tenant lease

worksheet to assess the tenant’s space requirements and the financial

strength of the tenant’s business. By uncovering the precise reasons

for moving, the agent is best able to find a suitably located space, or

negotiate a renewal or extension of the tenant’s existing lease.

agency duty ................................................................................... pg. 128

consultation fee ........................................................................... pg. 128

dual agency ................................................................................... pg. 130

exclusive authorization to locate space ................................ pg. 126

general duty .................................................................................. pg. 128

Chapter 13: Cost of operating in leased space 133

Cost of operating in

leased space

Chapter

Today, property operating data is readily available as property management

services have become computerized. As a result, prospective tenants making

decisions about leasing property have greater awareness and higher

expectations when seeking a broker’s advice.

Disclosures

by leasing

agents

After reading this chapter, you will be able to:

• use the property expense profile to disclose to prospective tenants

the costs they will likely incur to use and maintain a property;

• understand the duties owed a tenant by the landlord’s leasing

agent to disclose facts about the property that adversely affect the

tenant’s use of the property;

• distinguish the additional duties owed a tenant by their agent

to advise on the consequences of the property operating facts

disclosed by the landlord’s agent; and

• apply property operating data to assist prospective tenants in the

selection of suitable space.

common area maintenance

charge

comparative cost analysis

further-approval

contingency

letter of intent

nonrecurring deposits or

charges

operating costs

property expense profile

property operating data

recurring operating expenses

Key Terms

Learning

Objectives

134 Landlords, Tenants and Property Management, Eighth Edition

Yet, brokers have not delivered more information in response to tenant

demand. Rather, tenants continue to suffer adverse results when renting

for failure to receive property information known and undisclosed by the

brokers and agents involved. [See Form 562 accompanying this chapter]

This failure has prompted the legislature to take action, expanding a broker’s

duty to disclose known and knowable facts which might adversely affect a

property’s value. Brokers are charged with knowing readily available facts

affecting the rental pricing and utility of the property they are marketing.

Furthermore, when representing a prospective tenant, a broker and their

agents need to take reasonable steps to care for and protect the client’s

interest.

Peer pressure among leasing agents to remain silent about conditions, such as

local governmental use requirements for occupancy certificates, often keeps

prospective tenants unaware of property-related issues that will adversely

affect their use of the property.

A broker representing tenants bears a greater burden to investigate and

advise their client about property conditions than does the landlord’s broker.

Knowing the tenant’s needs and capacities is also essential to properly

managing the broker-tenant agency relationship as well as the broker’s

selection of suitable space.

Upon locating a qualifying property, the tenant’s broker needs to base their

property disclosures on their own investigations, not conjecture before

executing leases. Earlier property representations credited to another source

and not known or believed to be false by the broker are acceptable to get

negotiations underway. Eventually, when commitments are to be made by

the tenant, the property information from others needs to be confirmed or

corrected.

As couriers of information and the “gatekeepers” for almost all real estate

transactions, brokers are retained by consumers (prospective tenants and

buyers) to inform them of relevant conditions surrounding a property. Brokers

and their agents are the presumed experts, licensed and trained in the issues

that affect pricing and users of property. Relevant information includes the

costs of occupying and ongoing operations within a space, collectively called

operating expenses.

As for a landlord and their leasing agent, their role in marketing space is

limited to:

• disclosing facts about the property that adversely affect the value and

use of the property; and

• avoiding misleading disclosures.

1 Jue v. Smiser (1994) 23 CA4th 312; Calif. Civil Code §2079

2 Easton v. Strassburger (1984) 152 CA3d 90

3 Field v. Century 21 Klowden-Forness Realty (1998) 63 CA4th 18

Tenant’s cost

of occupancy

and ongoing

operations

operating expenses

The total annual cost

incurred to maintain

and operate a property

for one year. [See ft

Form 352 §3.21]

Chapter 13: Cost of operating in leased space 135

The duty the landlord’s broker owes tenants does not require them to advise

tenants about any adverse consequences the disclosed facts might have on

the tenant. Advice on the consequences of the facts disclosed is the duty

owed to the tenant by the tenant’s broker.

The tenant needs to seek out this advice from an agent so they can make an

informed decision when selecting among all available properties.

It is the role and burden of the tenant’s leasing agent to fully ascertain the

consequences of a property’s essential facts, or see to it the tenant investigates,

and make relevant recommendations to assist the tenant to meet their goals.

The factual information and assistance which a landlord’s broker can offer

prospective tenants falls into one of three general categories for analysis:

1. The property’s physical aspects, including square footage, shipping

facilities, utilities, HVAC units, tenant improvements, sprinkler

system, condition of the structure, soil, geologic hazards, toxic or noise

pollution, parking, etc.;

2. The conditions of occupancy affecting the use and enjoyment of the

property, i.e., facts available on request from title companies (CC&Rs,

trust deeds and vesting), planning departments (uses permitted),

redevelopment agencies, business tax rates, police and fire department

response times, security, natural hazards and conditions of the

neighborhood surrounding the location; and

3. The cost of operating the leased premises when put to the expected

use.

A property’s operating costs include business taxes local agencies charge

a tenant for locating and conducting business in their jurisdiction. Taxes

weigh on the selection of available space, as does access to highways and

the client’s market. Business taxes vary greatly from city to city, as do police

response time and criminal activity.

A property’s operating expenses are part of its signature, distinguishing

it from other available properties. Data on a property’s operating costs are

gathered and set forth on the property expense profile which is handed

to prospective tenants. These profiles are used by leasing agents to induce

tenants to rent their landlord-client’s space rather than other comparable

space. [See Form 562]

Property-related expenditures incurred by a tenant of a specific property

during the leasing period are classified as:

• recurring operating expenses;

• nonrecurring deposits or charges [See Chapter 14]; or

•

rent and payments on loans secured by the tenant’s leasehold.

nonrecurring

deposits or charges

One-time costs for

which the tenant is

responsible. [See ft

Form 550 §2]

recurring operating

expenses

The regular and

continuing costs of

using and maintaining

a property.

Operating

costs

disclosed to

tenants

Tenant’s

expected costs

as part of a

marketing

package

136 Landlords, Tenants and Property Management, Eighth Edition

Tenants, their leasing agents, and property managers compare the costs a

tenant will incur to occupy and operate in a particular space against the costs

to operate in other available space, a type of comparative cost analysis.

Tenant improvements are a type of acquisition cost that the tenant has to

contend with (paid for up front or over the initial term of the lease), whether

constructed by the landlord or the tenant.

The tenant’s comparative cost analysis is even more relevant to negotiations

during periods of economic slowdown. Overbuilding or a decline in the

number of nonresidential tenants increases vacancy levels. When this

Form 562

Tenant’s

Property

Expense Profile

DATE:_____________, 20______, at ______________________________________________________, California.

PROSPECTIVE TENANT__________________________________________________________________________

1. PROPERTY TYPE ___________________________________________________________________________

1.1 Location ________________________________________________________________________________

1.2 Expense figures are estimates reflecting:

current expenses of occupancy.

forecast of anticipated expenses of occupancy.

2. MONTHLY OPERATING EXPENSES:

2.1 Electricity ..........................................$_______________

2.2 Gas...............................................$_______________

2.3 Water .............................................$_______________

2.4 TV (cable/satellite) ....................................$_______________

2.5 Phone .............................................$_______________

2.6 Internet ............................................$_______________

2.7 Trash .............................................$_______________

2.8 Sewage............................................$_______________

2.9 General obligation bonds ...............................$_______________

2.10 Lawn/Gardening .....................................$_______________

2.11 Maid/Housekeeping ...................................$_______________

2.12 Pool/Spa ...........................................$_______________

2.13 Homeowners' Association (HOA) .........................$_______________

2.14 Maintenance and repair ................................$_______________

2.15 Property Management Services ..........................$_______________

2.16 Insurance _______________________.....................$_______________

2.17 Taxes __________________________ .....................$_______________

2.18 Other __________________________ .....................$_______________

2.19

Total Operating Expenses.............................................$_______________

2.20

Monthly Lease Payment ...............................................$_______________

2.21

Total Monthly Expenses ..............................................$_______________

3. DEPOSITS:

3.1 Rental Security Deposit ................................$_______________

3.2 Electricity Deposit ....................................$_______________

3.3 Water Deposit .......................................$_______________

3.4 Sewage and Rubbish Deposit............................$_______________

3.5 Gas Service Deposit ..................................$_______________

3.6 Phone Service Deposit.................................$_______________

3.7 Other __________________________ .....................$_______________

3.8

Total Deposits ......................................................$_______________

TENANT'S PROPERTY EXPENSE PROFILE

Prepared by: Agent _____________________

Broker_____________________

Phone________________________________

Email ________________________________

LANDLORD: I have read and approve this information.

Date: _____________, 20______

Owner's Name: _________________________________ Owner's Name: __________________________________

Signature: _____________________________________ Signature: ______________________________________

Date Prepared: _____________, 20______

Broker: _______________________________________

DRE #: _______________________________________

Agent: ________________________________________

DRE #: _______________________________________

Phone: ___________________ Cell: ________________

Fax: _________________________________________

Email: ________________________________________

PROSPECTIVE TENANT:

I have received and read a copy of this estimate.

Date: ____________, 20______

Name: _______________________________________

Signature: ____________________________________

Name: _______________________________________

Signature: ____________________________________

Phone: ___________________ Cell: ________________

Email: _______________________________________

0.00

comparative cost

analysis

A comparison of the

costs a tenant will

incur to occupy and

operate in a particular

space against the costs

to operate in other

available space. [See ft

Form 562]

Chapter 13: Cost of operating in leased space 137

occurs, the economic function of the marketplace will dictate a reduced rent

rate until demand for space fills up the present supply of available space and

rental rates rise.

When tenants search for space without the pressure of high occupancy

levels and the attendant scarcity of space, they are more likely to compare

properties. They are also more likely to select a property based on operating

costs or the cost of tenant improvements (TIs), rather than rent alone.

Figure 1

Form 185

Letter of Intent

DATE: ____________, 20______, at _______________________________________________________, California.

Items left blank or un checked are not ap pli ca ble.

FACTS:

1. This letter of intent is entered into by ____________________________________, as the prospective Buyer, and

______________________________________________________________________________, as the Owner,

regarding real estate situated in the city of ________________________________________________________,

County of ___________________________________, State of _______________________________________,

referred to as _______________________________________________________________________________

__________________________________________________________________________________________.

2. REVIEW PERIOD: This letter is submitted by prospective Buyer calling for Owner to cooperate with prospective

Buyer for the duration of a review period.

2.1 During the review period, Owner will provide the information called for as itemized in this letter so

Buyer can perform a due diligence investigation of the property to determine its suitability for acquisition.

2.2 Should prospective Buyer determine the property is suitable for acquisition on completion of Buyer's

review, Buyer will commence purchase negotiations with Owner by preparing and submitting

a written purchase offer for Owner’s review and acceptance, counteroffer, or rejection.

3. NEGOTIATIONS: Prior to entering into a binding purchase agreement, either Owner or prospective Buyer may

propose different pricing, terms or conditions than contained in this letter, may enter into negotiations and

agreements with other parties in complete conflict with this proposal, or unilaterally cancel this letter without further

obligation to the other party.

4. RIGHTS AND OBLIGATIONS: Owner and prospective Buyer agree this letter is not an offer to enter into

a written purchase agreement to sell the property, it is not a written purchase agreement for the sale of

the property, and it is not the grant of an option to buy the property.

4.1 This letter places no obligation or duty on Owner or prospective Buyer to act in good faith or to deal fairly,

until a written purchase agreement has been entered into by both Owner and prospective Buyer.

4.2

Before any party to this agreement files an action on a dispute arising out of this agreement which

remains unresolved after 30 days of informal negotiations, the parties agree to enter into non-binding

mediation administered by a neutral dispute resolution organization and undertake a good faith effort

during mediation to settle the dispute.

AGREEMENT:

5. The proposal in this letter is to be deemed revoked unless agreed to by Owner within ______ days after date by

delivery of a copy of this Letter of Intent, signed by Owner to prospective Buyer or prospective Buyer’s broker.

6. As a preliminary expression of Buyer’s intent to purchase the property, the written purchase agreement to be

negotiated is to provide:

6.1 The unrestricted right for either party to assign their interest in the purchase agreement and agree to

cooperate in effecting an Internal Revenue Code §1031 transaction prior to the close of escrow on either

party’s written notice. [See ft Forms 171 and 172-2]

6.2 For Buyer’s monetary liability to Owner, limited to $_______________, should it be determined

Buyer breached the written purchase agreement.

6.3 The execution of estoppel certificates by each tenant affirming the terms of their tenancy.

6.4 Owner to furnish a structural pest control inspection report and certificate of clearance of corrective

conditions.

6.5 The transaction to be escrowed with _______________________________________________________,

and provide for a closing date ______ days after entering into a written purchase agreement.

6.6 A good-faith deposit into an escrow account in the amount of $_______________.

7. Prospective Buyer proposes to pay a purchase price for the property of ................$

8. The terms for payment of the proposed purchase price to include:

8.1 Cash through escrow including funds from any purchase-assist financing . ........ $_______________

— — — — — — — — — — — — — — — — — — PAGE ONE OF THREE — FORM 185 — — — — — — — — — — — — — — — — — —

LETTER OF INTENT

Prospective Buyer’s Proposal for Due Diligence Investigations

Prepared by: Agent ____________________________

Broker ____________________________

Phone _______________________

Email _______________________

statements of premiums, and any claims made under any insurance policy covering the property during

the past ______ years, including claims made against building contractors.

10.21

The note, trust deed or related documents for each monetary lien on the property to include any

restrictions, limitations or conditions on occupancy, rents, use, encumbrance, conveyance or

reconveyance.

10.22

Disclosure by Owner of any other conditions not here itemized and known to Owner which might

adversely affect the value, use and operations of the property.

10.23 Any other items prospective Buyer may reasonably request to complete his due diligence investigation

and review of the property and records.

10.24

See attached Addendum – General Use for additionally requested documentation and information.

[See ft Form 250]

11. Prospective Buyer, prospective Buyer’s agent and consultants, Owner and Owner’s agent will not disclose to

any third party the existence of this letter, the contents of any documentation provided to prospective Buyer by

Owner or otherwise obtained by prospective Buyer during the term of this letter, or the negotiations for entering

into a written purchase agreement.

12. Owner and prospective Buyer to bear their costs without reimbursement for any preparation of documentation for

the due diligence investigation or for the investigation or any other activities undertaken in conjunction with

this agreement.

13. Owner to pay a brokerage fee of $_______________ on the change of ownership contemplated by

this letter. Owner’s broker and prospective Buyer’s broker, respectively, to share the brokerage fee

_________:_________.

The proposal set forth in this Letter of Intent is respectfully submitted for Owner’s considered attention. We look forward to

a favorable response by agreeing with its terms and conditions.

— — — — — — — — — — — — — — — — — — — PAGE THREE OF THREE — FORM 185 — — — — — — — — — — — — — — — — — — —

Prospective Buyer's/

Selling Broker: _________________________________

Broker's DRE Identification #: ____________________

Selling Agent: ________________________________

Agent's DRE Identification #: ____________________

Signature: __________________________________

Is the agent of:

Prospective Buyer exclusively.

Both Owner and prospective Buyer.

Address: ______________________________________

_____________________________________________

Phone: _________________ Cell: _________________

Fax: _________________________________________

Email: ________________________________________

Owner's/

Listing Broker: ________________________________

Broker's DRE Identification #: ___________________

Listing Agent: ________________________________

Agent's DRE Identification #: ____________________

Signature: ___________________________________

Is the agent of:

Owner exclusively.

Both Owner and prospective Buyer.

Address: ______________________________________

_____________________________________________

Phone: _________________ Cell: _________________

Fax: _________________________________________

Email: ________________________________________

I agree to the terms stated above.

See Signature Page Addendum. [ft Form 251]

Date: _____________, 20______

Prospective Buyer: ______________________________

Signature: _____________________________________

Prospective Buyer: ______________________________

Signature: _____________________________________

I agree to the terms stated above.

See Signature Page Addendum. [ft Form 251]

Date: _____________, 20______

Owner: _______________________________________

Signature: _____________________________________

Owner: _______________________________________

Signature: _____________________________________

8.2 Take title subject to, or Assume, an existing first trust deed loan of ...........$_______________

8.3

Take title subject to, or Assume, an existing second trust deed loan of ........$_______________

8.4 Assume an assessment bond lien of .....................................$_______________

8.5 Execute a note in favor of Owner for the balance due on the purchase price of ......$_______________

to be secured by a trust deed on the property.

REVIEW PERIOD:

9. The review period for prospective Buyer’s due diligence investigation, inspection and testing expires ______ days

after receipt, or access has been made available, of all items checked below for prospective Buyer’s review.

9.1 In the event prospective Buyer does not acquire ownership of the property, prospective Buyer to return to

Owner all items requested which prospective Buyer received from Owner or Owner's representatives.

10. Seller agrees to hand prospective Buyer copies or make available for prospective Buyer's review each of the

following checked items as soon as reasonably practicable after agreeing to this letter:

10.1

A Rental Income Rent Roll statement itemizing, by unit or space, the tenant’s name, monthly rent

amount including CAMs and other additional rent fees, rent due date, delinquencies and the amount in

arrears, rental period and expiration date, any incentive rent-free arrangements and bonuses or discounts,

utilities paid by landlord, security deposits and prepaid rent, furnishings supplied, broker fees due or to

become due under

the leases. [See ft Form 352-1]

10.2

Tenant rental or lease agreements, including any riders, modifications or amendments

and side agreements; any option rights to renew or extend, lease additional space or purchase

the property; and any pre-expiration cancellation rights and penalty amounts. A tenant turn-over report and

an eviction report, by unit or space, for the current and two preceding years.

10.3

Operating income and expense records, the current year-to-date and two preceding years' profit and

loss statements (or schedule E) and capital expenditures for the property, and operating and capital

budgets for this and the following year.

10.4

Property management agreements and a list of employees including their compensation schedules, and

leasing agent listings to locate tenants.

10.5

Maintenance agreements, outstanding work orders and other service or supply agreements related to

the operation of the property.

10.6

Utility, cable/TV, internet and phone bills, property and business tax bills, assessment statements for

any rent control and special district improvement bonds.

10.7

Invoices and copies of advertising and marketing for units or spaces during the past two years, along

with any marketing budget and plans for this year and next.

10.8

Interview of individuals involved in the management and operations of the property and administration

of the property’s financial books and records.

10.9

Natural Hazard Disclosure Statement issued by a geologist and signed by Owner, and any geological

reports relating to the property and possessed or known to Owner. [See ft Form 314]

10.10

Conditions of property disclosures prepared and signed by Owner. [See ft Form 304 and 304-1] Solar

Shade Control Notices sent or received by Seller to be handed to Buyer on acceptance.

10.11

Seller's Neighborhood Security Disclosure prepared by Owner setting forth criminal activity on or about

the property during the past two years relevant to the security of persons and their belongings on

the property, and any security arrangements undertaken or which should be undertaken in response.

[See ft Form 321]

10.12

Appraisals, feasibility studies, and market studies relating to the value and rentability of the properties.

10.13

Soil reports, pest control reports, ADA compliance reports, structural or component reports by architects

or contractors and other similar reports or studies.

10.14

ALTA survey, topographical studies, plans and specification of improvements and engineering of

the site.

10.15

An inspection of the property by prospective Buyer or consultants within ____ days after mutual

agreement to this letter.

10.16

All government related licenses, permits, mapping of the parcel, certificates of occupancy, building

inspections, health and safety reports, environmental impact and conditions reports or studies known to

Owner, and copies of relevant local zoning ordinances affecting the use or operation of the property.

10.17

Warranties or guaranties on fixtures or components of the property improvements.

10.18

Schedule “B” exceptions to Owner’s most recent policy of title insurance and Owner’s knowledge of any

encumbrances not listed on Schedule “B” as an exception.

10.19

Itemized inventory of the personal property, including any trade fixtures, owned or leased by Owner and

used in the operation or maintenance of the property.

10.20

All effective insurance policies relating to the property and liability of Owner for its operations,

— — — — — — — — — — — — — — — — — — PAGE TWO OF THREE — FORM 185 — — — — — — — — — — — — — — — — — —

— — — — — — — — — — — — — — — — — — — PAGE TWO OF THREE — FORM 185 — — — — — — — — — — — — — — — — — — —

For a full-size, fillable copy of

this, or any other form in this

book, please see the Forms-on-

CD accompanying this course.

138 Landlords, Tenants and Property Management, Eighth Edition

Landlords leasing their properties for below-market rents need to be queried

for information and history on the operating costs the tenant will incur

in addition to the rent. Below-market rent raises suspicions of property

obsolescence due to aging and loss of function, or excessive operating

costs such as utility charges, local taxes, security needs, use requirements,

neighborhood issues, crime, etc.

Without knowledge of property operating costs, the prospective tenant is left

to speculate about the costs (other than rent) of leasing the property. For the

tenant, this is a financially unsound starting place for negotiating a lease.

Nondisclosure of operating costs is more likely to occur during tight rental

markets when inventories of leased space are tight. Increased competition

between tenants for available space induces landlords and their brokers to

be less cooperative in the release of adverse property information to tenants

and their agents. This asymmetric condition provides the tenant with less

information than the landlord and the landlord’s broker holds. These market

conditions create a predatory environment which deprives the tenant of

data influencing their choice to rent and ability to negotiate.

At a bare minimum, the tenant’s leasing agent has the obligation to bring

known and readily available data to the tenant’s attention. The tenant may

then obtain additional information during negotiations or by requiring

the information from the landlord through a contingency provision before

taking occupancy.

At their best, the tenant’s leasing agent not only advises, but also investigates

and reports to their client on the data they collect. They provide analysis and

recommendations to their tenant. Landlords’ leasing agents are generally

unhappy about these inquiries, preferring reduced transparency and instant

uninformed action.

The landlord either knows, or can easily obtain from their property manager

or current tenant, the actual costs of operating their property for the intended

use. Thus, property operating data is readily available to the landlord. If

the landlord or the landlord’s broker refuses to supply the data to the tenant,

the tenant’s broker can:

• investigate the expenses the current and prior tenants have experienced;

• make any offer to lease contingent on getting data; or

• use a letter of intent (LOI) to provide a method of getting information.

[See Figure 1, Form 185]

Armed with knowledge of the costs, the tenant’s broker can comfortably

disclose the operating expenses to their client.

property operating

data

The actual costs of

operating a property

for its intended use.

letter of intent

A non-binding

proposal signed

and submitted to a

property owner to start

negotiations.

The duty of a

tenant’s agent

to investigate

and advise

Chapter 13: Cost of operating in leased space 139

Leases on nonresidential properties often include common area

maintenance charges (CAMs). CAMs are intended to be expenses incurred

by the landlord and paid by the tenant as rent additional to the base rent,

adjustments and percentages. However, the use of CAMs set as a percentage

of the base rent are used to effectively increase rental income (and make

the property’s published rental rate appear advantageous) without ever

incurring or accounting to the tenant for amounts spent.

The prospective tenant and their agent need to insist on the seller providing

an operating cost sheet itemizing the monthly CAMs the tenant will incur

for their share of the common area maintenance.

Information about CAMs paid by the prior occupant of the space might affect

the tenant’s negotiations and rental commitment. Thus, such information is

a material fact essential to the tenant’s decision-making process. It’s all part

of the rent payments to the landlord structured essentially as net leasing

arrangements for multi-tenant properties, not single user property. [See first

tuesday Form 552-3]

During a tight leasing market with reduced availability of space, landlords

sometimes deceptively increase their net income by adding fixed amounts

as CAMs instead of directly raising rents. Thus, they fractionalize the rent to

distract the prospective tenant with what initially appears to be a competitive

rent, until the extent of the CAMs are brought up well into negotiations.

The landlord’s broker has a duty to disclose the actual costs which have

been incurred by tenants in the space. If hard numbers are not available, a

landlord’s broker may provide estimates. However, estimates are required to

be reasonably accurate, not the product of guesswork. Further, the landlord’s

broker needs to state they are estimates when they are not data actually

experienced.

Also, the landlord’s broker needs to identify the source of the data provided to

the tenant and rate its reliability as known to the broker. If the data or source

of the data is questioned, the offer to lease (or counter offer) needs to include

a further-approval contingency. [See Figure 1, Form 185 §9]

The further-approval contingency provision allows the tenant time to

investigate and confirm the property information disclosed by the landlord.

If the information cannot be confirmed, or is contrary to the information

disclosed, the tenant their agent may cancel or renegotiate the offer to lease.

Best practices when disclosing operating costs include:

• the preparation of a property expense profile for each available

unit, prepared by the landlord or property manager and signed by the

landlord [See Form 562]; and

• a comparison by the tenant and the tenant’s broker of the economic cost

of rent, and other operating expenses for one space versus operating

costs and rent incurred in other qualifying spaces.

4 Ford v. Cournale (1973) 36 CA3d 172

common area

maintenance charge

Property operating

expenses incurred

by a nonresidential

landlord and paid

by the tenant as rent

additional to the base

rent, adjustments and

percentages.

CAMs

incurred by

the landlord,

paid by the

tenant

Accurate

estimates

by leasing

agents

further-approval

contingency

A provision in an offer

to rent property which

allows the tenant time

to investigate and

confirm the property

information disclosed

by the landlord.

property expense

profile

An itemized analysis

of the costs a tenant or

landlord will incur to

operate and maintain

a particular property.

140 Landlords, Tenants and Property Management, Eighth Edition

With documentation and a comparative analysis of rent and operating costs

complete, the tenant and the tenant’s broker can intelligently negotiate the

best lease arrangements available for the tenant in the local market.

Occasionally, a landlord may want to be “tight-lipped” about the operating

data due to various different arrangements with numerous tenants. In this

case, the landlord may insist on (or be offered by the tenant) a confidentiality

agreement before releasing any data to the prospective tenant.

Tenants who forego representation by an agent lose the benefit of a comparative

analysis. They also incur risk since they will miss out on the experience and

advice of a licensee retained to represent their best interests.

Chapter 13

Key Terms

A property’s operating costs are part of its signature, distinguishing it

from other available properties. Data on a property’s operating costs

are gathered and set forth on the property expense profile which is

handed to prospective tenants. These profiles are used by leasing agents

to induce tenants to rent their landlord-client’s space rather than other

comparable space.

The duty the landlord’s broker owes tenants does not require them to

advise tenants about any consequences the disclosed facts might have

on the tenant. Advice on the consequences of the facts disclosed is

the duty owed to the tenant by the tenant’s broker. Thus, it is the role

and burden of the tenant’s leasing agent to fully ascertain a property’s

essential facts and make relevant recommendations to assist the tenant

to meet their goals.

Without knowledge of property operating costs, the prospective tenant

is left to speculate about the costs (other than rent) of leasing the

property. For the tenant, this is a financially unsound starting place for

negotiating a lease. The tenant’s comparative cost analysis is even more

relevant to negotiations during periods of economic slowdown.

common area maintenance charge ........................................ pg. 139

comparative cost analysis ......................................................... pg. 136

further-approval contingency ................................................. pg. 139

letter of intent............................................................................... pg. 138

nonrecurring deposits or charges ........................................... pg. 135

operating costs ............................................................................. pg. 134

property expense profile ........................................................... pg. 139

property operating data

............................................................. pg. 138

recurring operating expenses .................................................. pg. 135

Chapter 13

Summary

Chapter 14: Security deposits and pre-expiration inspections 141

Security deposits and

pre-expiration inspections

After reading this chapter, you will be able to:

• understand the use of a security deposit as a source of recovery

for money losses incurred by the landlord due to a tenant default

on obligations agreed to in a rental or lease agreement;

• 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 nonresidential 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.

Chapter

Both nonresidential 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 first tuesday Form 550, 551

and 552]

The security deposit provides a source of recovery for money losses incurred

due to a default on obligations agreed to in the rental or lease agreement.

Tenant monetary obligations include:

•

paying rent;

Learning

Objectives

Key Terms

Cover for

a tenant’s

nonperformance

security deposit

Security against the

tenant’s default on

obligations agreed to

in the rental or lease

agreement.

final inspection

itemized statement of

deduction

joint pre-expiration

inspection

rent

security deposit

statement of deficiencies

142 Landlords, Tenants and Property Management, Eighth Edition

• reimbursing the landlord for expenses incurred due to the tenant’s

conduct;

• maintaining the premises during occupancy; and

• 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. 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 required 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, a foreseeable event.

Any monies handed to a residential landlord by a tenant on entering into a

rental or lease agreement are characterized as one of the following:

• rent;

• a security deposit;

• a waterbed administrative fee; or

• a tenant screening fee for processing an application.

[See Chapter 15]

Rent is compensation, usually paid periodically, received by a landlord in

exchange for the tenant’s use, possession and enjoyment of the property.

Editor’s note — Rent by agreement also includes amounts due from a tenant

in payment of late charges on delinquent rent, and bounced check charges.

Residential tenants, unlike nonresidential tenants, lack sufficient bargaining

power when negotiating a rental or lease agreement. To prevent residential

tenants from abuse, California public policy and laws limit 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.

A residential landlord may also collect one month’s advance rent. This

amount is not included in the security deposit limit.

1 Calif. Civil Code §§1940.5(g); 1950.5(b); 1950.6(b)

2 Telegraph Ave. Corporation v. Raentsch (1928) 205 C 93

3 Canal-Randolph Anaheim, Inc. v. Wilkoski (1978) 78 CA3d 477

4 CC §1950.5(c)

Rent is paid

in advance

rent

Compensation

received by a landlord

in exchange for the

tenant’s use, possession

and enjoyment of the

property.

Residential

security

deposits: not

rents, not

fees

Chapter 14: Security deposits and pre-expiration inspections 143

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. [See Case in point, “To defer

the first month’s rent”]

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 of funds in excess of the first month’s

rent, screening fees and waterbed administrative fees, no matter how

characterized by the residential landlord, are classified as security deposits,

subject to the above limits.

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.

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 prospective tenants

needs to be uniform based on either the amount of the rent charged or the

tenant’s creditworthiness.

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.

Further, a landlord cannot require higher security deposits for tenants

with children than for tenants without children as this is a prohibited

discriminatory act. Any increase in a security deposit for larger versus smaller

families is also a prohibited discriminatory practice.

[See Chapter 36]

An additional security deposit may be demanded and collected when

a tenant maintains a waterbed in an unfurnished rental unit. [See first

tuesday Form 564]

This waterbed deposit cannot exceed an amount equal to one-half month’s

rent. This waterbed deposit is in addition to the first month’s rent and the

maximum permissible security deposit.

The landlord may also charge a reasonable fee to cover administrative costs

of processing the waterbed arrangements.

5 CC §§1940.5; 1950.5(b), (c); 1950.6

6 CC §1950.5(c)

7 24 Code of Federal Regulations §100.60(b)(4)

8 Calif. Government Code §12955(a); 24 CFR §100.65

9 CC §1940.5(g)

Uniform

application

of security

deposits

The additional

waterbed

deposit

Nonresidential

security

deposits

144 Landlords, Tenants and Property Management, Eighth Edition

Consider a residential landlord who locates a creditworthy tenant. In addition to the advance

payment of the first month’s rent, the landlord requires a security deposit equal to one

month’s rent.

The tenant asks the landlord if they can pay half the security deposit in advance and the

other half with the second month’s rent. The tenant is unable to pay the security deposit in

full until they receive their security deposit refund from their current landlord.

The landlord wants this applicant as a tenant and is willing to extend the credit.

To be cautious, the landlord structures receipt of the tenant’s funds as payment of the entire

security deposit and half of the first month’s rent. The tenant will pay the remaining half of

the first month’s rent with payment of the second month’s rent.

Thus, if the tenant fails to pay the second month’s rent and the remainder of the first month’s

rent when due, the landlord may serve the tenant with a three-day notice to pay rent or quit.

Then, if the tenant vacates, the landlord may deduct all rents accrued and due from the

security deposit. The reason: an unpaid portion of the security deposit cannot be collected

by enforcement while unpaid rent can be collected by deduction from the security deposit.

Conversely, consider a landlord who allows a tenant to allocate their initial payment on

the lease to one full month’s rent paid in advance, with payment of the balance due on the

security deposit spread over two or more months.

Here, if the tenant fails to pay the promised installments of the security deposit, the default

is not considered a material breach of the rental or lease agreement. A

material breach is

necessary before an unlawful detainer (UD) action based on service of a three-day notice to

perform can proceed to an eviction. A security deposit is not rent, although it is an amount

“owed” to the landlord.

The landlord is protected by classifying the initial advance payment as fully prepaying the

security deposit. The security deposit then covers any default in the promise to pay deferred

rent.

A tenant’s breach must be material and relate to the economics of the rental agreement

or lease, such as a failure to pay rent, before the landlord can justify service of a three-day

notice. However, while they are considered “rent”, a failure to pay late charges, returned

check charges and deferred security deposit is considered a minor breach. Thus, failure to

pay these amounts does not justify the serving of a three-day notice to quit.

Failure to deliver rent and other amounts regularly paid to the landlord, such as CAMs on

nonresidential leases, is a material breach supporting forfeiture of the tenant’s leasehold

and right of possession of the property. [

Baypoint Mortgage v. Crest Premium Real Estate

Investments Retirement Trust (1985) 168 CA3d 818

Case in point

To defer the first

month’s rent

A nonresidential landlord has the discretion to set security deposit amounts

under a rental or lease agreement. Amounts set for nonresidential deposits

are generally based on the tenant’s type of operations, the accompanying

risks of damage they pose to the leased property and creditworthiness.

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.

Chapter 14: Security deposits and pre-expiration inspections 145

Editor’s note — A photography studio tenant, laundry facility or other users

of chemicals must be required to provide insurance coverage for losses due

to toxic conditions created on the property.

Like all other terms in a nonresidential lease agreement, the amount of the

security deposit is negotiable between the nonresidential landlord and the

tenant prior to entering into the lease.

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.

Nonresidential 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.

Now consider a residential tenant who pays the first month’s rent and a

security deposit equal to one month’s rent.

When the last month’s rent becomes due, the tenant does not pay it. The

tenant knows the defaulted payment of rent will be deducted from his

security deposit. This is a permissible use of the security deposit by the

landlord. The landlord does not attempt to have the tenant evicted since

the tenant will vacate before an eviction under an unlawful detainer (UD)

action is processed.

On expiration of the lease, the tenant vacates the unit. Due to excess wear

and tear on the unit inflicted by the tenant, repairs and replacements are

required before the unit can be re-rented.

However, after deducting the unpaid last month’s rent from the security

deposit, no money remains to reimburse the landlord for the cost of the

repairs.

The recovery of the repair costs is initiated by a demand on the tenant for

payment. If unpaid, a small claims court action may be used to enforce

collection.

If the landlord requires advance payment on the first and last month’s rent

but no security deposit, a similar demand is made on the tenant for payment

of repair costs.

10 CC §1950.5(c)

The

problematic

last month’s

rent

146 Landlords, Tenants and Property Management, Eighth Edition

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.

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.

11 CC §§1950.5(d); 1950.7(b)

12 Korens v. R.W. Zukin Corporation (1989) 212 CA3d 1054

Form 567-1

Notice of Right

to Request

a Joint Pre-

Expiration

Inspection

Page 1 of 2

Landlord

treatment

of security

deposits

Chapter 14: Security deposits and pre-expiration inspections 147

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 interest at or below bank savings account rates to tenants 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

must also contain a statement notifying residential tenants of their right

to reclaim abandoned personal property. [See Chapter 24; see Form 567-1 §5

accompanying this chapter]

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 unlawfully 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.

Form 567-1

Notice of Right

to Request

a Joint Pre-

Expiration

Inspection

Page 2 of 2

Joint pre-

expiration

inspections

and the deposit

joint pre-expiration

inspection

An inspection

conducted by a

residential landlord

to advise a tenant of

the repairs the tenant

needs to perform to

avoid deductions from

the security deposit.

[See ft Form 567-1]

148 Landlords, Tenants and Property Management, Eighth Edition

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 30-day notice to vacate initiated by either the landlord or the tenant.

[See Form 567-1]

13 CC §1950.5(f)(1)

Form 567-3

Statement of

Deficiencies

on Joint Pre-

Expiration

Inspection

Page 1 of 2

DATE: _____________, 20______, at _____________________________________________________, California.

To Tenant: _____________________________________________________________________________________

Items left blank or un checked are not ap pli ca ble.

FACTS:

1. On this date, a pre-expiration inspection was conducted by Landlord on the premises and appurtenances which

are the subject of a rental or lease agreement

1.1 dated __________________, at ___________________________________________________, California,

1.2 entered into by________________________________________________________, as the Tenant(s), and

________________________________________________________________________, as the Landlord,

1.3 regarding real estate referred to as _________________________________________________________

______________________________________________________________________________________.

1.4

Tenant was present and given a copy of this statement prepared and signed by Landlord or

his agent.

1.5

Tenant was not present and a copy of this statement prepared and signed by Landlord or

his agent was left inside the premises.

2. The tenancy under the rental or lease agreement expires on _____________, 20______, by which date you are

to vacate the premises.

3. NOTICE TO TENANT:

3.1 You have until the date for expiration of your tenancy to remedy or eliminate the repairs and cleaning

specified in this Statement of Deficiencies to avoid the deduction from your security deposit of

the cost to repair and clean the identified deficiencies.

3.2 Unobservable conditions or conditions which occur after the pre-expiration inspection requiring repair and

cleaning will be deducted from your security deposit after the final inspection by Landlord or his agent.

STATEMENT OF DEFICIENCIES:

4. The following itemized list of identified deficiencies in repairs and cleaning will be the basis for deductions from

your security deposit, unless remedied or eliminated by you prior to vacating and later confirmed by Landlord or

his agent during a final inspection after you vacate.

4.1 Damage to the premises and appurtenances caused by Tenant or their guests, other than ordinary wear

and tear, which needs to be repaired are listed as follows: _______________________________________

______________________________________________________________________________________

______________________________________________________________________________________.

4.2 Cleaning which needs to be performed to bring the premises up to the level of cleanliness which existed

on commencement of the tenancy is listed as follows: ___________________________________________

______________________________________________________________________________________

______________________________________________________________________________________.

— — — — — — — — — — — — — — — — — PAGE ONE OF TWO — FORM 567-3 — — — — — — — — — — — — — — — —

STATEMENT OF DEFICIENCIES

ON JOINT PRE-EXPIRATION INSPECTION

Prepared by: Agent ____________________________

Broker ____________________________

Phone _______________________

Email _______________________

Chapter 14: Security deposits and pre-expiration inspections 149

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 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.

If the landlord and tenant cannot agree to the date and time of the inspection,

the landlord may set the time. However, if a mutually acceptable time for the

inspection is within 48 hours, a written waiver of the notice of entry is to be

signed by both the landlord and tenant.

Form 567-3

Statement of

Deficiencies

on Joint Pre-

Expiration

Inspection

Page 2 of 2

5. The following recitals are excerpts from Civil Code §1950.5 regarding security deposits:

5.1 1950.5(b) As used in this section, “security” means any payment, fee, deposit or charge, including, but not

limited to, any payment, fee, deposit, or charge, except as provided in Section 1950.6, that is imposed at

the beginning of the tenancy to be used to reimburse the landlord for costs associated with processing

a new tenant or that is imposed as an advance payment of rent, used or to be used for any purpose,

including, but not limited to, any of the following:

(1) The compensation of a landlord for a tenant’s default in the payment of rent.

(2) The repair of damages of the premises, exclusive of ordinary wear and tear, caused by the tenant or by

a guest or licensee of the tenant.

(3) The cleaning of the premises upon termination of the tenancy necessary to return the unit to the same

level of cleanliness it was in at the inception of the tenancy. The amendments to this paragraph enacted

by the act adding this sentence shall apply only to tenancies for which the tenant’s right to occupy begins

after January 1, 2003.

(4) To remedy future defaults by the tenant in any obligation under the rental agreement to restore, replace,

or return personal property or appurtenances, exclusive of ordinary wear and tear, if the security deposit

is authorized to be applied thereto by the rental agreement.

5.2 1950.5(d) Any security shall be held by the landlord for the tenant who is party to the lease or agreement.

The claim of a tenant to the security shall be prior to the claim of any creditor of the landlord.

— — — — — — — — — — — — — — — — — PAGE TWO OF TWO — FORM 567-3 — — — — — — — — — — — — — — — —

Date: _____________, 20______

Landlord/Agent: ____________________________ DRE #: __________

Signature: ____________________________________________________

Address: _____________________________________________________

____________________________________________________________

Phone: __________________________ Cell: ______________________

Email: ______________________________________________________

Notice of entry

and statement of

deficiencies

150 Landlords, Tenants and Property Management, Eighth Edition

When the waiver is signed, the landlord may proceed with the inspection.

[See first tuesday Form 567-2]

Following service on the tenant of the 48-hour notice, the landlord may

inspect the property whether or not the tenant is present, unless the tenant

has previously withdrawn their request for the inspection.

14 CC §1950.5(f)(1)

Form 585

Security Deposit

Disposition

on Vacating

Residential

Premises

DATE: _____________, 20______, at _____________________________________________________, California.

To Tenant: _____________________________________________________________________________________

Items left blank or un checked are not ap pli ca ble.

FACTS:

1. This is notice to Tenant of any Landlord deductions from the security deposit under the following agreement:

Residential lease agreement

Residential rental agreement

1.1 dated ______________, 20______, at ____________________________________________, California,

1.2 entered into by ________________________________________________________, as the Landlord, and

1.3 _________________________________________________________________________, as the Tenant,

1.4 regarding residential premises referred to as __________________________________________________.

DISPOSITION OF DEPOSIT:

2. Under the above referenced agreement, Tenant handed Landlord a security

deposit in the amount of ..................................................$_______________

3. The following deductions have been made by Landlord from the security deposit:

3.1 Repair of damages Cost

a. __________________________________________________ $_______________

b. __________________________________________________ $_______________

3.2 Necessary cleaning of the premises Cost

a. __________________________________________________ $_______________

b. __________________________________________________ $_______________

3.3 Delinquent or holdover rent Amount

a. From ____________________ To _____________________ $_______________

3.4 Replacement/repair of lost or damaged furnishings Cost

a. __________________________________________________ $_______________

3.5

TOTAL deductions from security deposit

(line 3.1 to line 3.4) .....................(-)$_______________

4. BALANCE DUE TENANT:

4.1 Balance of security deposit remaining after deductions

(line 2 less line 3.5) ............$_______________

4.2 Interest on the security deposit from ________________ to ________________

at ______% per annum ............................................ (+)$_______________

4.3 Balance due Tenant is refunded in the amount of

(line 4.1 plus line 4.2) ..............$_______________

by Landlord/Agent’s check #_____________.

AMOUNT DUE LANDLORD:

5.1 The amount due Landlord after deductions (line 2 less line 3.5) .....................$_______________

5.2 Less interest on the security deposit from ________________ to ________________

at _____% per annum ..............................................(-)$_______________

5.3 Tenant to hand or mail Landlord/Agent the balance due of

(line 5.1 less line 5.2) ........$_______________

This statement is true and correct.

Date: _____________, 20______

Landlord/Agent: _________________________ DRE #: __________

Signature: ________________________________________________

Address: _________________________________________________

_________________________________________________________

Phone: __________________________ Cell: ___________________

Email: ___________________________________________________

Occupancy agreement

___________________________________________

NOTE: This itemized statement of the security deposit’s disposition, including documentation of charges deducted,

must be given to the Tenants by the Landlord within 21 days after a Tenant vacates residential property. [California

Civil Code §1950.5(f)]

Use of this form in a timely and proper fashion avoids Landlord liability for a 2% monthly penalty on any portion of

the security deposit wrongfully retained.

SECURITY DEPOSIT DISPOSITION

ON VACATING RESIDENTIAL PREMISES

Prepared by: Agent ____________________________

Broker ____________________________

Phone _______________________

Email _______________________

0.00

Chapter 14: Security deposits and pre-expiration inspections 151

On completion of the joint pre-expiration inspection, the landlord gives 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 is 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.

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 first tuesday Form 525]

Editor’s note — The completion of a pre-expiration inspection statement by

the landlord does not bar the landlord from deducting other costs from the

security deposit for:

• any damages noted in the joint pre-expiration inspection statement

which are not cured;

• any damages which occurred between the pre-expiration inspection

and termination of the tenancy; or

• any damages not identified during the pre-expiration inspection due

to the tenant’s possessions being in the way.

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.

[See Form 585 accompanying this chapter]

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.

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.

15 CC §1950.5(f)(2)

16 CC §1950.5(f)

17 CC §1950.5(g)

18 CC §1950.5(g)(2)

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 ft Form

585]

statement of

deficiencies

A document the

landlord presents to

the tenant specifying

any repairs or

cleaning which need

to be completed by

the tenant to avoid

deductions from the

security deposit. [See ft

Form 567-3]

152 Landlords, Tenants and Property Management, Eighth Edition

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.

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.

It is not necessary for the landlord to provide copies of receipts, bills or

invoices for repair work or cleaning to the tenant if:

• 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.

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.

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.

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

• costs to replace or restore furnishings provided by the landlord if agreed

to in the lease.

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 claims of pre-existing defects, a joint inspection

of the unit and written documentation of any defects is completed before

possession is given to the tenant. [See Form 560 in Chapter 26]

19 CC §1950.5(g)(3)

20 CC §1950(g)(3)

21 CC §1950.5(g)(4)

22 CC §1950.5(g)(5)

23 CC §1950.5

24 CC §§1950.5(b); 1950.7(c)

25 CC §1950.5(e)

No receipt

or invoice

copies

Chapter 14: Security deposits and pre-expiration inspections 153

As previously discussed, when a residential tenant vacates, the landlord

provides the tenant with a security deposit refund accounting. If local rent

control ordinances (or state law) require the landlord to pay interest on

security deposits, the landlord uses the itemized statement of deductions

to account for interest accrued on the security deposit. [See Form 585 §4.3]

A residential landlord who, in bad faith, fails to comply with security

deposit refund requirements is subject to statutory penalties of up to twice

the amount of the security deposit. Additionally, the landlord is liable to the

tenant for actual money losses the tenant incurs for the wrongful retention

of security deposits.

As an aside, on the landlord’s sale of a residential or nonresidential property,

the landlord is to deliver an itemized statement to tenants stating:

• the amount of the tenant’s security deposit;

• any deductions made from the security deposit; and

• the name, address and telephone number of the buyer.

The notice, important for the seller, shifts liability to the buyer of the property

for the future return of the security deposit to the tenant.

[See first tuesday

Form 586]

A nonresidential 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 first tuesday Form 552 through 552-4]

However, a nonresidential 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 nonresidential landlord takes no deductions from the security

deposit.

Permissible deductions from the security deposit include unpaid rent, cost of

cleaning or repairs.

Occasionally, the security deposit exceeds two months’ rent and the only

deduction from the deposit is for delinquent rent. Here, the nonresidential

landlord is to return any remaining amount in excess of one month’s rent

within two weeks after the transfer of possession of the property to the

landlord. The remaining amount of the security deposit is to be returned to

the tenant or accounted for within 30 days after the transfer of possession.

26 CC §1950.5(l)

27 CC §§1950.5(h); 1950.7(d)

28 CC §1950.7(c)

itemized statement

of deductions

A document

accounting for the

tenant’s security

deposit, delivered

by the landlord to a

residential tenant after

the tenant vacates. [See

ft Form 585 §4.3]

Nonresidential

deposit

refund rules

154 Landlords, Tenants and Property Management, Eighth Edition

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 codes. On a nonresidential 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. 151

itemized statement of deductions .......................................... pg. 153

joint pre-expiration inspection ............................................... pg. 147

rent .................................................................................................. pg. 142

security deposit ............................................................................ pg. 141

statement of deficiencies

.......................................................... pg. 151

Chapter 14

Summary

Chapter 14

Key Terms

Unless otherwise stated in the rental or lease agreement, the nonresidential

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.

Unlike the residential landlord, the nonresidential landlord is not required to

provide tenants with an itemized statement of deductions when the security

deposit is refunded. However, a prudent nonresidential 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 nonresidential landlord who, in bad faith, fails to comply with the refund

requirements is liable to the tenant for up to $200 in penalties.

29 CC §1950.8(b)

30 CC §1950.7(f)

Chapter 15: Residential turnover cost recovery 155

Residential turnover

cost recovery

After reading this chapter, you will be able to:

• analyze the landlord’s recovery of residential tenant turnover

costs;

• classify funds received from a tenant by a residential landlord

as either rent, security deposits, waterbed administrative fees or

tenant screening fees;

• avoid liquidated damages and stay-or-pay provisions as

unenforceable; and

• mitigate expenses that reduce the landlord’s net operating income

(NOI) due to tenant turnover.

Chapter

Following a cost-reduction review of management operations, the landlord

of an apartment complex is determined to offset the recent increase in the

cost of tenant turnover by shifting the costs to tenants.

Each tenant turnover requires expenditures to:

• refurbish the unit to eliminate the cumulative effect of normal wear

and tear brought about by the tenant’s use of the unit;

• advertise the unit’s availability to locate a tenant; and

• pay leasing fees to the property manager.

An increasing number of the landlord’s tenants are staying for shorter periods

of time. On vacating, the units are re-renting quickly. Thus, lost rent due to

turnover is kept to a minimum.

However, the landlord cannot raise rents to

cover the increasing annual costs without losing tenants to competing units.

Learning

Objectives

Key Terms

Rent is set

to include

all operating

expenses

liquidated damages provision

net operating income

“stay-or-pay” clause

156 Landlords, Tenants and Property Management, Eighth Edition

At issue is the landlord’s net operating income (NOI). It is being reduced

by the increased frequency of refurbishing and reletting costs. [See Figure 3,

Form 352]

Worse, any reduction in the NOI due to the increasing turnover costs

becomes an equivalent dollar reduction in the landlord’s spendable income

remaining after payment on mortgage financing.

From an accounting point of view, the NOI is calculated by subtracting

operating costs from rental income generated by the property.

Also, the landlord is concerned about the economic impact of the decreased

NOI on the property’s value. The NOI is the basis for establishing the

property’s market value and maximum mortgage amount.

To maintain or increase the property’s NOI and net spendable income (and

the property’s value), the landlord chooses to add a ”stay-or-pay” clause

addendum to the month-to-month rental agreements.

The stay-or-pay clause states the residential tenant foregoes a return of their

security deposit if they move within six months after taking occupancy.

The landlord believes the stay-or-pay clause will dissuade month-to-month

tenants from moving for at least six months.

If a tenant is not persuaded and vacates the premises within the first

six months, the stay-or-pay clause provides for the landlord to recover

“prematurely incurred” turnover costs by retaining the tenant’s security

deposit.

Can the residential landlord enforce a stay-or-pay clause in rental agreements?

No! The stay-or-pay clause is an unenforceable penalty. It is an illegal

forfeiture of the tenant’s security deposit. [See Figure 1]

Editor’s note — first tuesday rental and lease agreements do not include a

stay-or-pay provision.

The security deposit is to be fully refunded, regardless of how long the unit

remains vacant, if:

• the tenant has not breached the rental or lease agreement; and

•

on expiration of proper notice, the tenant has fully paid all rents

accrued and returns the unit in the condition it was received, less

ordinary wear and tear.

(an unenforceable provision)

If the tenancy is terminated during the six-month period following commencement of this

agreement, tenant shall forfeit tenant’s security deposit.

Figure 1

A stay-or-pay

clause minimum

tenancy

Refund of

the tenant’s

security

deposit

“stay-or-pay” clause

An unenforceable

provision calling for

the residential tenant

to forego a return of

their security deposit

if they move before a

set date.

net operating

income

The net revenue

generated by an

income producing

property as the

return on capital,

calculated as the sum

of a property’s gross

operating income

less the property’s

operating expenses.

[See ft Form 352 §4]

Chapter 15: Residential turnover cost recovery 157

The security deposit may not be used to cover either:

• rent lost due to the vacancy following expiration of a notice to vacate;

• operating costs incurred to eliminate normal wear and tear and

refurbish the unit for the next tenant.

Thus, the landlord cannot use a stay-or-pay clause in tandem with a

security deposit to provide more revenue to cover operating costs. Revenue

for operating expenses comes exclusively from rents, a cost-plus pricing

imperative, and not from a one-time lump sum advance payment of any sort.

In review, funds received from a tenant by a residential landlord fall into one

of only four classifications of receipts:

• rent;

• security deposits;

• a waterbed administrative fee [See Chapter 14]; or

• a tenant screening fee for processing an application.

The amount of the tenant screening fee is capped.

Editor’s note — The maximum tenant screening fee can be found on the

California Department of Consumer Affairs website, http://www.dca.

ca.gov.

Further, the tenant screening fee is limited to:

• the out-of-pocket cost for gathering the information; and

• the cost of the landlord’s or property manager’s time spent obtaining

the information and processing an application to rent.

It is common practice for landlords and property managers to request a

tenant to provide them with a copy of the tenant’s credit report. A tenant can

obtain their credit report online from landlord-tenant screening services for

far less than the maximum screening fee, or even free from the major credit

reporting agencies.

In the opening scenario, the landlord is shown to fund the care and

maintenance of a property from rents rather than an up-front lump sum

amount paid by each tenant in addition to rent and a security deposit.

Now consider a residential landlord who requires new tenants to prepay the

first month’s rent and a refundable security deposit in an amount equal to

one month’s rent before entering into a rental or lease agreement.

1 Calif. Civil Code §1950.5(e)

2 CC §§1940.5(g); 1950.5(b); 1950.6(b)

3 CC §1950.6(b)

Classifying

tenant funds

the landlord

receives

Is it extra

rent or a

screening

fee?

158 Landlords, Tenants and Property Management, Eighth Edition

The landlord also charges an additional one-time, nonrefundable, new-

tenant fee, key fee, membership fee, tenant application expense fee or other

named garbage fee.

The stated purpose of the nonrefundable fee is to cover administrative

expenses and services related to processing the tenant’s application to rent

the unit, a sort of “key payment.”

On vacating the unit, the tenant makes a demand on the landlord to return

the one-time extra charge. The tenant claims it is a security deposit since the

one-time, lump-sum charge covers expenses which are properly paid from

rents. This makes the application fee a masked security deposit.

Can the tenant recover the one-time extra charge imposed by the landlord?

Yes, but not as a security deposit! The one-time charge for administrative

costs incurred by the landlord to process the tenant’s rental application is not

a security deposit. A security deposit is imposed and collected to cover the

landlord’s losses due to future tenant defaults on a rental or lease agreement.

However, this “nonrefundable upfront fee” is an administrative fee controlled

by the tenant screening fee statute.

Any overage paid by the tenant above the set limit is refundable as an excess

screening fee charge which is neither rent nor a security deposit.

Consider a residential landlord who includes a liquidated damages provision

in month-to-month rental agreements in an effort to offset tenant turnover

costs. This provisions calls for a penalty payment equal to one month’s rent

to be taken from the security deposit if the tenant returns possession before

six months of occupancy.

In addition to the first month’s rent, the landlord properly collects a security

deposit from the tenant in an amount equal to one month’s rent to cover any

future breach of the rental agreement by the tenant.

Before six months passes, the tenant hands the landlord a 30-day notice to

vacate, then vacates the unit.

4 Krause v. Trinity Management Service, Inc. (2000) 23 C4th 11

5 CC §§1950.5; 1950.6

(an unenforceable provision)

Should the tenant choose to terminate this tenancy during the six-month period beginning

on commencement of this tenancy, the tenant shall pay as liquidated damages, and not as

a penalty or forfeiture, an amount equal to one month’s rent in consideration for exercising

the right to vacate prematurely.

Figure 2

A liquidated

damages

minimum

tenancy

provision

Unenforceable

liquidated

damages

Chapter 15: Residential turnover cost recovery 159

Within 21 days after vacating, the landlord sends the tenant an itemized

accounting for the security deposit. One of the itemized deductions is one

month’s rent as the liquidated damages owed the landlord due to the early

termination of the month-to-month rental agreement.

The tenant makes a demand on the landlord to refund the amount withheld

from the security deposit for early termination of the rental agreement.

The tenant claims a liquidated damages provision in a rental or lease

agreement is unenforceable as it calls for payment of a forfeiture.

Is the liquidated damages provision in a rental or lease agreement

enforceable?

No! A liquidated damages provision is unenforceable in rental and lease

agreements, as it is in most other real estate transactions. Collectible damages

are limited to out-of-pocket money losses.

[See Figure 2]

Editor’s note — A liquidated damages provision creates wrongful

expectations of windfall profits and are nearly always forfeitures and

unenforceable. first tuesday forms do not include liquidated damages

provisions.

A liquidated damages provision may only be enforced in limited

circumstances when accounting conditions make it extremely difficult or

impracticable to determine the amount of actual money losses incurred by

the landlord. This is never the case with real estate rentals as both the costs

and time involved managing the costs are known.

The amount of recoverable losses a residential landlord incurs when a tenant

vacates a unit, such as the lost rent and the maintenance costs of labor and

materials to cover excess wear and tear, is readily ascertainable.

Further, liquidated damages do not represent a recovery of actual money

losses incurred by the landlord. The purpose of the landlord’s liquidated

damages provisions is not to recover money lost due to unpaid rent or

excessive wear and tear, but to increase NOI and spendable income by a

windfall.

Even if the landlord does not deduct the liquidated damages amount from

the security deposit, they will not be able to recover the liquidated damages

from the tenant in a civil action on the rental or lease agreement.

Recovery of a landlord’s turnover costs comes from the rents paid by tenants.

Refurbishing costs are an expense of operations deducted from rental income.

The costs of refurbishing a unit to eliminate normal wear and tear so it can

be re-rented in a “fresh” condition are known, or readily available on inquiry,

in advance. Thus, they are not properly the subject of liquidated damages

provisions.

6 CC §1671(d)

7 CC §1671(d)

liquidated damages

provision

A rental agreement

provision which acts as

a penalty payment for

returning possession

before a set date.

Covering

tenant

turnover

costs

160 Landlords, Tenants and Property Management, Eighth Edition

Financially, the amount of the refurbishing costs is best viewed as amortized

over the length of each tenant’s period of probable occupancy. The costs will

then be properly recovered as a component factored into the periodic rent

charged to a tenant.

However, the local rental marketplace determines rent ceilings, not landlords.

The market limits the amount a landlord can charge for rent and successfully

compete for tenants.

Thus, a landlord’s most logical cost recovery approach is to negotiate with

prospective tenants to stretch out their terms of occupancy to an optimal

minimum number of months. The longer the average occupancy, the less

frequent the tenant turnovers, and the greater the net spendable income.

While the market limits the rent a landlord can charge, different rent rates

exist for month-to-month rental agreements and fixed-term lease agreements.

The landlord’s best method for recovering turnover costs is to rent to

creditworthy tenants on a lease agreement with a one-year term or longer.

Here again, the local rental market sets the maximum rent amount for this

term. Economic conditions may even make six- or nine-month fixed-term

leases feasible objectives.

A fixed-term occupancy allows the landlord to amortize the anticipated

cost of refurbishing the unit over the term negotiated. Tenants under a lease

agreement tend to remain in possession until the lease term expires. Thus,

fixed-term arrangements reduce the frequency of move-outs and provide

a schedule for turnover maintenance — the same objective sought by

exploiting a forfeiture penalty period.

As a result, a landlord usually charges less rent on a lease agreement than

under a month-to-month rental agreement. This lower rent is a reflection

of lower overall refurbishing expenses, reduced annual vacancy rates,

less management time and effort, and less risk of lost rents. Additionally,

the lower rent may result in longer periods of occupancy and stave off the

inevitable turnover.

As compensation, a landlord is able to charge higher rents for month-to-

month tenancies. This higher rent reflects the cost-push of higher and more

frequent turnover expenses per unit than occur under a lease.

A rental or lease agreement can be structured with tiered rents for future

periods of continued occupancy. Tiered rents provide for a slightly higher

rent for initial months included in the first-tier period — such as the first

six months of the periodic tenancy — with lower rent amounts set for the

following months if the tenant remains in possession.

If the month-to-month tenant continues in occupancy after the first-tier

period, the rental agreement calls for a lower rent during a second-tier

To lease for

a fixed term

reduces costs

Tiered rents

for time in

occupancy

Chapter 15: Residential turnover cost recovery 161

period or for the remainder of the occupancy. This encourages tenants to stay

longer since their rent will be lower. Both rental rates are consistent with the

marketplace.

As a result, the landlord’s turnover costs are better amortized, “reserved” from

the higher periodic rent charged during the period of the first tier.

However, tiered rents will only avoid the security deposit limitations if:

•

the security deposit is a customary amount for the credit risk posed by

the tenant;

Figure 3

Form 352

Annual Property

Operating Data

Sheet (APOD)

For a full-size, fillable copy of

this, or any other form in this

book, please see the Forms-on-

CD accompanying this course.

162 Landlords, Tenants and Property Management, Eighth Edition

Each tenant turnover reduces the landlord’s net operating income (NOI)

due to the increased frequency of refurbishing expenses and lost rents

on vacancies. Recovery of a landlord’s turnover costs comes from the

rents paid by tenants. Refurbishing costs are an expense of operations

deducted from rental income.

The security deposit may not be used to cover either:

• rent lost due to the vacancy on expiration after notice to vacate; or

• operating costs incurred to eliminate normal wear and tear and

refurbish the unit for the next tenant.

Financially, the amount of the refurbishing costs is best viewed as

amortized over the length of each tenant’s period of probable occupancy.

The costs are then properly recovered as a component factored into the

periodic rent charged a tenant.

Liquidated damages and stay-or-pay provisions are unenforceable.

However, the local rental marketplace limits the amount a landlord can

charge for rent and successfully compete for tenants. Thus, a landlord’s

best recovery approach is to negotiate with prospective tenants to

stretch out their terms of occupancy to an optimal minimum number

of months.

liquidated damages provision ................................................. pg. 159

net operating income ................................................................. pg. 156

“stay-or-pay” clause .................................................................... pg. 156

Chapter 15

Summary

Chapter 15

Key Terms

• the higher monthly rent is consistently charged over a long enough

period, say six months, to avoid recharacterization as a disguised or

delayed receipt of a security deposit, tenant screening fee or forfeiture;

and

• the tenancy is month-to-month.

The same economics and amortization logic applies to the cost of tenant

improvements made by a nonresidential landlord (or a tenant).

For example, tenant improvements are recovered by a nonresidential

landlord over the initial years of a lease as part of the rent amount. Rent for

an extension (the second tier) is reduced to an amount which reflects the

elimination of the improvement charges. This reduction is used to induce

the tenant to stay for a greater period of time. The tenant improvements are

paid for and now all the landlord needs to collect is rent for the value of the

premises, less the paid-for tenant improvements.

Chapter 16: Accepting partial rent 163

Accepting

partial rent

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

• apply in practice the landlord’s right to receive partial rent under

a partial payment agreement with a tenant;

• distinguish the rights of residential tenants from nonresidential

tenants when paying partial rent; and

• determine when a landlord has the right to file an unlawful

detainer (UD) action after receipt of partial rent.

Chapter

A nonresidential tenant, also called a commercial or industrial tenant,

experiences cash flow difficulties due to a business downturn. As a result, the

tenant becomes delinquent in the payment of rent.

Discussions between the landlord and tenant follow. To enforce collection of

the rent, the landlord eventually serves the tenant with a three-day notice to

pay rent or quit the premises. [See Form 575 in Chapter 20]

Prior to the filing of an unlawful detainer (UD) action, the tenant offers to

make a partial payment of the delinquent rent, if the landlord will accept it.

Further, the nonresidential tenant offers to pay the balance of the delinquent

rent by a specific date if the landlord agrees not to file a UD action called a

partial payment agreement. [See Form 558 accompanying this chapter]

The partial payment agreement states:

•

the amount received as partial rent;

• the amount of deferred rent remaining unpaid;

nonwaiver of rights provision

partial payment agreement

reservation of rights clause

Learning

Objectives

Key Terms

Residential and

nonresidential

landlord rights

partial payment

agreement

An agreement for

receipt of partial

rent, specifying the

amount of deferred

rent remaining unpaid

and the date for its

payment. [See ft Form

558 and 559]

164 Landlords, Tenants and Property Management, Eighth Edition

• a promise to pay the deferred rent;

• the date the payment is due; and

• the consequences of nonpayment.

If the deferred rent is not paid as scheduled, the nonresidential landlord may

file a UD action to evict the tenant without serving another three-day notice.

[See Form 558 §7]

Here, the partial payment agreement only temporarily delays the

nonresidential landlord’s eviction process which commenced with the

previous service of a three-day notice on the tenant.

The tenant fails to pay the deferred balance of the delinquent rent on the date

scheduled for payment. Without further notice to the tenant, the landlord

files a UD action.

The nonresidential tenant seeks to prevent the landlord from proceeding

with the UD action. The tenant claims the landlord’s acceptance of the

partial rent payment invalidated the prior three-day notice since the notice

now states an amount of rent which is no longer due.

Can the nonresidential landlord accept a payment of partial rent after serving

a three-day notice and later file a UD action against the tenant without

serving another three-day notice for the amount remaining due and now

delinquent?

Yes! A nonresidential landlord can accept a partial payment of rent after

serving a three-day notice and before eviction. Without further notice to the

tenant, the nonresidential landlord can proceed with a UD action and evict

the tenant.

Continuing our previous example, on accepting a partial payment of

delinquent rent, a nonresidential landlord does not need to agree to a new

due date for the remaining rent. They also do not need to enter into any

agreement regarding acceptance of the partial payment. However, the

nonresidential tenant needs to be on notice that acceptance of late rent does

not waive the landlord’s right to enforce any remaining breach of the lease.

This notice is called a reservation of rights clause.

The reservation of rights clause is found in the nonwaiver of rights

provision in nonresidential lease agreements as well as in acceptance of

partial rent agreements. [See first tuesday Form 552 §20]

However, the nonresidential landlord who memorializes their acceptance

of the partial rent payment and the due date for payment of the remaining

balance eliminates conflicting claims the tenant may make in a UD action.

The impact of serving a three-day notice, then later accepting partial rent from

a nonresidential tenant is vastly different from the protection a residential

tenant is provided in partial rent situations.

1 Calif. Code of Civil Procedure §1161.1(b)

reservation of rights

clause

A clause in the

nonwaiver of

rights provision in

nonresidential rental

and lease agreements

stating acceptance of

late rent does not waive

the landlord’s right to

enforce remedies for

any remaining breach

of the lease agreement

by the tenant. [See ft

Form 552 §20 and 558

§7]

Landlord’s

reservation of

rights clause

Chapter 16: Accepting partial rent 165

A residential landlord who accepts any amount of rent from a tenant after

serving a three-day notice waives their right to use that notice as the basis for

a UD action. After receiving partial rent, a residential landlord needs to serve

the tenant with another three-day notice for the amount now remaining

unpaid.

2 EDC Associates, Ltd. v. Gutierrez (1984) 153 CA3d 167

Form 558

Partial Payment

Agreement:

Nonresidential

DATE: _____________, 20______, at _____________________________________________________, California.

Items left blank or un checked are not ap pli ca ble.

FACTS:

1. This partial payment agreement pertains to the collection of past due rent under a nonresidential rental or lease

agreement

1.1 dated __________________, at ___________________________________________________, California,

1.2 entered into by _________________________________________________________, as the Tenant, and

1.3 ________________________________________________________________________, as the Landlord,

1.4 regarding leased premises referred to as ____________________________________________________.

AGREEMENT:

2. Tenant has not paid delinquent rent for the period(s) of ______________________________________________.

3. Landlord hereby accepts partial payment on delinquent rent in the amount of ............$_______________

4. The balance of the delinquent rent owed is .....................................$_______________

4.1 Plus late charges for delinquency(ies) of ....................$_______________

4.2 Plus deferred rent processing charges of ....................$_______________

4.3

Total deferred rent due, including additional charges, is the sum of ..............$_______________

5. Tenant to pay the total deferred rent on or before _____________, 20______.

5.1 Rent to be paid by

cash,

check, or

cashier’s check, made payable to Landlord.

5.2 Rent may be tendered by

mail, or personal delivery,

to _______________________________________________________ (

Name)

________________________________________________________ (Address)

________________________________________________________

________________________________________________________ (

Phone)

a. Personal delivery of rent will be accepted during the hours of ______ to ______ on the following days:

___________________________________________________________________________________.

5.3 Rent may also be paid by deposit into account number __________________________________________

at ________________________________________________________ (

Financial Institution)

________________________________________________________ (Address)

________________________________________________________

5.4 No grace period for payment of the deferred rent is granted to Tenant.

5.5 Delinquent payment of the deferred rent incurs a late charge of $_______________.

6. If deferred rent is paid when due, any outstanding three-day notice to pay rent or quit is no longer valid.

7. If the deferred rent is not paid when due, Landlord reserves the right to:

(Check one box only)

7.1

Serve Tenant with a three-day notice to pay the remaining balance of the rent due or quit the premises.

(Check if a three-day notice has not been served

)

7.2

Commence, without further notice, an unlawful detainer action to evict Tenant from the premises.

(Check if a three-day notice has been served)

7.3 Continue with the unlawful detainer action on file to evict Tenant from the premises.

(Check if unlawful detainer action has been filed)

8. No provision of the rental or lease agreement is affected in this agreement.

9. ___________________________________________________________________________________________

I agree to the terms stated above.

See attached Signature Page Addendum. [ft Form 251]

Date: _____________, 20______

Landlord: _____________________________________

Agent: ______________________DRE #: __________

Signature: _____________________________________

Phone: ___________________ Cell: _______________

Email: _______________________________________

I agree to the terms stated above.

See attached Signature Page Addendum. [ft Form 251]

Date: _____________, 20______

Tenant: _______________________________________

Signature: ____________________________________

Tenant: _______________________________________

Signature: _____________________________________

Phone: ___________________ Cell: _______________

Email: ________________________________________

PARTIAL PAYMENT AGREEMENT

Nonresidential

Prepared by: Agent ____________________________

Broker ____________________________

Phone _______________________

Email _______________________

0.00

166 Landlords, Tenants and Property Management, Eighth Edition

Acceptance of a partial payment toward delinquent rent is within the

discretion of the landlord. A landlord might agree to accept partial payments

when:

• the partial payment is at least equal to the rent accrued at the time the

tenant offers the payment;

• the tenant is creditworthy;

• the tenant has an adequate payment history; and

• the tenant is one the landlord wants to retain.

Both residential and nonresidential landlords may accept a partial payment of

delinquent rent. Then, unless they have agreed to the contrary, immediately

serve the tenant with a three-day notice demanding payment of the balance

due or quit. Of course, a landlord may agree in a partial payment agreement

not to serve a three-day notice after receipt of the partial payment of rent on

the condition the balance is received on or before a specified date. [See Form

558 and 559 accompanying this chapter]

If a residential landlord files a UD action and, prior to eviction, accepts a

partial payment of rent, the acceptance of rent nullifies the UD action and

the landlord may not proceed to eviction. The reason the UD action cannot

proceed lies in the difference between:

• the amount of rent demanded in the notice to pay supporting the UD

action; and

• the amount actually remaining unpaid at the time of the UD hearing.

In residential UD actions, the amounts in the three-day notice and the

amount owed by the tenant are required to be the same. Once the residential

landlord accepts a partial payment of delinquent rent, the three-day notice

served on the tenant no longer states the correct amount the tenant is

to pay to avoid losing the right of possession. This rule does not apply to

nonresidential tenancies.

Also, any three-day notice served on a residential tenant which overstates

the amount of delinquent rent due at the time of trial on the UD action is

invalid. The UD action in a residential eviction based on an overstated

amount in the three-day notice fails.

Consider a nonresidential landlord who serves their tenant with a three-day

notice to pay rent or quit. Later, the landlord accepts a partial payment of rent

under an agreement with the tenant containing a nonwaiver of rights

provision. This provision states the acceptance of rent does not waive the

landlord’s right to enforce a breach of the lease. If the nonwaiver notice is not

given, the nonresidential landlord needs to serve the tenant with another

three-day notice for payment of the sums remaining due and unpaid.

3 Jayasinghe v. Lee (1993) 13 CA4th Supp. 33

Residential

vs.

nonresidential

landlords

Residential

rent paid

after notice

Nonresidential

nonwaiver

requirements

Chapter 16: Accepting partial rent 167

An alternative scenario exists since a nonwaiver of rights provision also

exists in the nonresidential lease agreement entered into by the tenant.

As a result, the tenant has received a nonwaiver of rights notice before the

landlord’s acceptance of partial rent. Here, the landlord may take the money

and file or continue with an already filed UD action to recover possession of

the premises.

[See first tuesday Form 552 §20]

For example, a nonresidential tenant defaults on a rent payment called for in

their lease agreement which contains a nonwaiver of rights provision. The

tenant is served with a three-day notice to pay or quit. The tenant fails to pay

the rent before it expires, causing the tenancy to be terminated. The three-

day notice to pay does not contain a provision for nonwaiver of rights on

acceptance of partial rent.

The landlord then accepts a partial payment of rent without entering into

any agreements, except to acknowledge receipt of the amount paid as rent.

The nonresidential landlord files a UD action for the amount remaining due

and unpaid.

The tenant claims the landlord cannot proceed with a UD hearing since

neither the three-day notice nor the landlord’s receipt of the partial rent

payment include a nonwaiver of rights provision.

Here, the nonresidential landlord may proceed with the UD action after

receipt of partial rent. The nonwaiver provision in the lease agreement puts

the tenant on notice, allowing the landlord to accept rent without waiving

enforcement rights. One such right is the right to proceed with a UD action.

A nonwaiver of rights provision in a three-day notice or partial payment

agreement provides the landlord with the same right to proceed with the

UD action as though the provision existed in the lease agreement.

On accepting a partial payment of rent after a UD action has been filed, the

nonresidential landlord amends the UD complaint to reflect the partial

payment received and the amount remaining due and unpaid by the tenant.

Without a written partial payment agreement, tenants might claim the

landlord who accepted partial rent:

• treated acceptance of partial rent as satisfaction of all the rent due;

• waived their right to continue eviction proceedings; or

• permanently modified the lease agreement, establishing a semi-

monthly rent payment schedule.

When a residential or nonresidential landlord accepts a partial payment

of rent, the evidence provided by a signed partial payment agreement

overcomes tenant claims that the landlord waived UD enforcement rights

by accepting rent.

4 CCP §1161.1(c)

5 Woodman Partners v. Sofa U Love (2001) 94 CA4th 766

6 CCP §1161.1(c)

nonwaiver of rights

provision

A nonresidential rental

or lease agreement

provision containing

the landlord’s

reservation of rights.

[See ft Form 552 §20]

No waiver of

rights

Get it in

writing

168 Landlords, Tenants and Property Management, Eighth Edition

The partial payment agreement entered into by a tenant and a landlord

accepting partial rent memorializes:

• the landlord’s receipt of partial rent;

• the amount owed on the deferred portion of the delinquent rent;

• the tenant’s promise to pay the remaining rent owed on or before a

specific date; and

• notification of the landlord’s right to serve a three-day notice on failure

to pay the remaining balance. [See Form 559]

Form 559

Partial Payment

Agreement:

Residential

DATE:

_____________, 20______, at _____________________________________________________, California.

Items left blank or un checked are not ap pli ca ble.

FACTS:

This partial payment agreement pertains to the collection of past due rent under a residential rental or lease

agreement

1.1 dated __________________, at ___________________________________________________, California,

1.2 entered into by _________________________________________________________, as the Tenant, and

1.3 ________________________________________________________________________, as the Landlord,

1.4 regarding leased premises referred to as _____________________________________________________

______________________________________________________________________________________.

AGREEMENT

Tenant has not paid the full rent due for the month(s) of ______________________________________________.

Landlord hereby accepts partial payment on the past due rent in the amount of ..........$_______________

The balance of the unpaid rent owed by Tenant is ................$_______________

4.1 Plus a late charges for delinquency of .....................$_______________

4.2 Plus deferred rent processing charges of ...................$_______________

4.3

TOTAL deferred rent due, including additional charges, is the sum of .............$_______________

Tenant to pay the total deferred rent on or before _____________, 20______.

5.1 Rent to be paid by

personal check, or

__________________________________________________.

5.2 Rent may be tendered by

mail, or personal delivery,

________________________________________________________ (Name)

____________________________________________________________ (Address)

___________________________________________________________

____________________________________________________________ (Phone)

a. Personal delivery of rent will be accepted during the hours of ______ to ______ on the following days:

______________________________________________________________________.

5.3 Rent may also be paid by deposit into account number ___________________________

________________________________________________________ (Financial Institution)

___________________________________________________________ (Address)

___________________________________________________________

___________________________________________________________ (Phone)

5.4 No grace period for payment of the deferred rent is granted to Tenant.

5.5 Delinquent payment of the deferred rent incurs a late charge of $_______________

If the deferred rent is not paid when due, a three-day notice to pay rent or quit may be served at any time.

No provision of the rental or lease agreement is affected by this agreement.

___________________________________________________________________________________________

I agree to the terms stated above.

Date: _______________, 20______

Landlord: ______________________________________

Agent: ________________________________________

Signature: _____________________________________

Address: ______________________________________

_____________________________________________

Phone: ____________________Cell:________________

Fax: __________________________________________

I agree to the terms stated above.

Date: _____________, 20______

Tenant: _______________________________________

Signature: _____________________________________

Tenant: _______________________________________

Signature: _____________________________________

Address: ______________________________________

_____________________________________________

Phone: ____________________Cell:________________

PARTIAL PAYMENT AGREEMENT

Residential

Prepared by: Agent ____________________________

Broker ____________________________

Phone _______________________

Email _______________________

0.00

Residential

partial

payment

agreement

Chapter 16: Accepting partial rent 169

Consider a prudent residential tenant who informs the landlord they

will be unable to pay the full monthly rent before the payment becomes

delinquent. The tenant offers to pay part of the rent prior to delinquency and

the remainder ten days later.

Since the tenant is creditworthy, has not been seriously delinquent in the

past and the landlord wishes to retain the tenant, the residential landlord

agrees to accept the partial payment.

However, to avoid disputes regarding the amount of rent remaining due and

when it is to be paid, the residential landlord prepares and the landlord and

tenant sign a partial payment agreement formalizing their understanding.

Now consider a residential landlord who serves a three-day notice and then

accepts a partial payment of rent before completing the eviction process

started by the notice. By accepting a partial payment, the residential landlord

understands the three-day notice had been rendered invalid and no longer

supports a UD action and eviction.

Thus, when the residential landlord accepts payment of partial rent it is on

the condition the tenant enters into a partial payment agreement stating

the date the balance owed is due. The partial payment agreement prevents

disputes with the tenant about when the balance is due or a three-day notice

may be served if the balance is not paid.

170 Landlords, Tenants and Property Management, Eighth Edition

Acceptance of a partial payment toward delinquent rent is within the

discretion of the landlord. Both residential and nonresidential landlords

may accept a partial payment of delinquent rent. Different rules apply

for nonresidential and residential partial rent payments.

A nonresidential landlord may accept a partial payment of rent after

serving a three-day notice and before eviction. Without further notice to

the tenant, the nonresidential landlord may proceed with a UD action

and evict the tenant.

However, a residential landlord who accepts any amount of rent

from a tenant after serving a three-day notice waives their right to use

the notice as the basis for a UD action. After receiving partial rent, a

residential landlord needs to serve the tenant with another three-day

notice for the amount now remaining unpaid.

nonwaiver of rights provision ................................................. pg. 167

partial payment agreement ...................................................... pg. 163

reservation of rights ................................................................... pg. 164

Chapter 16

Key Terms

Chapter 16

Summary

Chapter 17: Changing terms on a month-to-month tenancy 171

Changing terms on a

month-to-month tenancy

After reading this chapter, you will be able to:

• apply the rules to be adhered to when changing the terms of a

month-to-month tenancy;

• determine whether a 30- or 60-day notice is to be used by a

residential landlord based on the percentage change in rent; and

• implement the proper procedure for serving the tenant with a

notice of change in rental terms.

Chapter

A landlord and tenant enter into a month-to-month tenancy under

a rental agreement which grants an option to purchase the property.

The option expires on termination of the tenancy.

Later, the landlord serves the tenant with a 30-day notice of a change

in rental terms. The notice states the option to purchase expires in 30

days, unless exercised by the tenant. [See Form 570 accompanying this

chapter]

After the 30-day notice expires, the tenant, who is still in possession,

attempts to exercise the option. In response, the landlord refuses to sell

the property under the option. The landlord claims the tenant’s right to

exercise the purchase option expired due to the change of rental terms

in the 30-day notice.

notice of change in rental

terms

notice of intent to vacate

pro rata rent

Key Terms

Learning

Objectives

Landlord’s

notice to

tenant

172 Landlords, Tenants and Property Management, Eighth Edition

The tenant claims the option to purchase is binding until the tenancy

is terminated, and the month-to-month rental agreement and

occupancy have not been terminated.

Can the tenant enforce the option to purchase?

No! The option expired, unexercised. The option to purchase was part

of the terms of the rental agreement. Thus, on expiration of the 30-day

notice terminating the option, the option to purchase was eliminated.

Like any other provision contained or referenced in a month-to-

month rental agreement, the option to purchase is part of the tenant’s

rights and obligations comprising the month-to-month tenancy. Thus,

the option was subject to change on 30 days’ written notice from the

landlord.

All conditions in a residential or nonresidential month-to-month rental

agreement or expired lease 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 residential rent

increases greater than 10%. The 60-day notice is reviewed in a later subhead.

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 nonresidential 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. It is also used to change any other terms in a residential month-to-

month tenancy. For nonresidential property, the form is used regardless of

the amount of the rent increase or to change any other terms. [See Form 570]

In addition to referencing the rental or expired lease agreement to be

modified, the 30-day notice of change in rental terms provides for:

• change in the rent amount;

• change in the common area maintenance (CAM) charge;

• change in utility payment responsibility;

• additional security deposit;

• allocation of new or additional non-smoking areas; and

• a space for additional changes in the terms to the rental or expired lease

agreement. [See Form 570]

1 Wilcox v. Anderson (1978) 84 CA3d 593

2 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

ft Form 570 and 574]

Chapter 17: Changing terms on a month-to-month tenancy 173

To be enforceable, a notice of change in rental terms is served in the same

manner as a three-day notice to pay rent or quit. However, only the landlord

may unilaterally change the terms in a rental agreement.

A month-to-month tenant has no ability to alter the terms of the rental

agreement, other than to terminate the tenancy and vacate.

3 CC §827

4 CC §1946

Form 570

30-Day Notice

of Change in

Rental Terms

DATE:_____________, 20______, at ______________________________________________________, California.

To Tenant: _____________________________________________________________________________________

Items left blank or un checked are not ap pli ca ble.

FACTS:

1. You are a Tenant under a rental agreement or expired lease agreement

1.1 dated __________________, at ___________________________________________________, California,

1.2 entered into by _________________________________________________________, as the Tenant, and

1.3 ____________________________________________________________________, as the Landlord,

1.4 regarding real estate referred to as _________________________________________________________

______________________________________________________________________________________.

NOTICE:

Thirty (30) days after service of this notice on you, the terms of your tenancy on the real estate are hereby changed

as indicated below:

2. Rent shall be $_______________ payable

monthly, or ____________________________________________,

in advance, and due on the ____________________ day of the month.

2.1 Rent to be paid by

personal check _____________________________________________________.

2.2 Rent may be tendered by

mail, or personal delivery,

____________________________________________________________________________ (Name)

____________________________________________________________________________ (Address)

____________________________________________________________________________ (Phone, Fax, Email)

a. Personal delivery of rent will be accepted during the hours of ______ to ______ on the following days:

___________________________________________________________________________________.

2.3 Rent may also be paid by deposit into account number _________________________________________,

____________________________________________________________________________ (Financial Institution)

____________________________________________________________________________ (Address)

3. The common area maintenance charge shall be $_______________ per month, payable with each payment of

rent.

4. Utilities now paid by Landlord to be paid by Tenant as checked:

Gas Electricity Sewage and Rubbish Water Cable TV

Tenant to maintain and properly care for the lawns, gardens, trees, shrubs and watering system.

6. An additional security deposit of $_______________ is payable with the next rent payment.

7. Smoking is prohibited in the following area(s) ______________________________________________________

___________________________________________________________________________________________

8. ___________________________________________________________________________________________

___________________________________________________________________________________________

9. This notice affects no other terms of your tenancy.

Date:_____________, 20______

Landlord/Agent: ____________________________DRE #: ____________

Signature:____________________________________________________

Phone: _________________________Cell: ________________________

Fax: ________________________________________________________

Email: _______________________________________________________

NOTE: To change any terms in a month-to-month tenancy, a Landlord must furnish the Tenant with a written 30-day

notice of the change. If rent is raised more than 10% within a 12-month period on a residential Tenant, a 60-day

notice of the increase is required. [Calif. Civil Code §827; see ft Form 574]

30-DAY NOTICE OF CHANGE IN RENTAL TERMS

Prepared by: Agent ____________________________

Broker ____________________________

Phone _______________________

Email _______________________

174 Landlords, Tenants and Property Management, Eighth Edition

In rent control communities, a landlord or property manager needs to comply

with rent control ordinances that affect their ability to alter provisions in

leases and rental agreements, which is reviewed in a later subhead.

A landlord or property manager may serve the tenant in possession under a

periodic rental agreement with a notice of change in rental terms on any day

during the rental period.

Form 572

30-Day Notice

to Vacate: From

Tenant

DATE: _____________, 20______, at ______________________________________________________, California.

To Landlord: __________________________________________________________________________________

Items left blank or un checked are not ap pli ca ble.

FACTS:

1. I am a Tenant under a rental agreement or expired lease agreement

1.1 dated __________________, at __________________________________________________, California,

1.2 entered into by __________________________________________________________, as the Tenant, and

_________________________________________________________________________, as the Landlord,

1.3 regarding real estate referred to as __________________________________________________________

______________________________________________________________________________________.

NOTICE:

2. Within thirty (30) days after service of this notice, I will vacate and deliver possession of the premises to

Landlord or ________________________________________________________________________________.

3. This notice is intended as a 30-day Notice to terminate my month-to-month tenancy.

4. I understand:

4.1 I will owe pro rated daily rent for any days in the 30-day period I have not prepaid rent.

4.2 I have previously given Landlord a security deposit of $_______________.

a. I acknowledge, if I am a residential tenant, that I have the right to request and be present for an inspection

of the premises to be conducted within two weeks of expiration of this notice to vacate for the purposes of

Landlord providing me with an itemized statement of deductible charges for repairs and cleaning to allow

me the opportunity to remedy these deficiencies and avoid a deduction from my security deposit. [Calif.

Civil Code §1950.5(f)(1)]

b. Within 21 days after I vacate, Landlord will furnish me a written statement and explanation of any

deductions from the deposit, and a refund of the remaining amount. [Calif. Civil Code §1950.5(g)(1)]

4.4 Landlord may deduct only those amounts necessary to:

a. reimburse for Tenant defaults in rental payments;

b. repair damages to the premises caused by Tenant (ordinary wear and tear excluded);

c. clean the premises, if necessary;

d. reimburse for loss, damage or excessive wear and tear on furnishings provided to Tenant.

4.5 Landlord may show the premises to prospective tenants during normal business hours by first giving you

written notice at least 24 hours in advance of entry. The notice will be given to you in person, by leaving a

copy with an occupant of suitable age and discretion, or by leaving the notice on or under your entry door.

5. The reason for termination is ___________________________________________________________________.

(Optional)

6. I have served this notice on Landlord or Manager personally, or by certified or registered mail.

NOTE: Unless otherwise agreed, a Tenant may terminate a month-to-month tenancy by giving thirty (30) days' written

notice to the Landlord. [Calif. Civil Code §1946]

This statement is true and correct.

Date: _____________, 20______

Tenant: _______________________________________

Signature: _____________________________________

Forwarding Address: ____________________________

______________________________________________

Phone: ________________ Cell: __________________

Fax: _________________________________________

Email: ________________________________________

For Landlord/Agent’s use:

Date Received: ________________________________.

30-DAY NOTICE TO VACATE

From Tenant

Prepared by: Agent ____________________________

Broker ____________________________

Phone _______________________

Email _______________________

Calculating

rent due after

an increase

Chapter 17: Changing terms on a month-to-month tenancy 175

Once a notice of change in rental terms is served on a tenant, the new terms

stated in the notice immediately become part of the tenant’s rental agreement

or expired lease agreement, both being month-to-month tenancies.

However, the new rental terms stated in the notice do not take effect until

expiration of the 30-day or 60-day period after service of the notice on the

tenant.

For example, a property manager prepares a 30-day notice of change in rental

terms to increase the rent on a month-to-month tenant. The due date for the

payment of rent is the first day of each month.

The tenant is properly served with the 30-day notice on the 10th of June. The

tenant intends to remain in possession at the new rent rate.

Since June 11

is the first day of the 30-day notice period, the rent does not

begin to accrue at the increased rate until July 11

— the day after the 30-day

notice expires. However, rent for all of July is payable in advance on the first

day of the month, including the number of days affected by the rent increase.

To calculate the advance rent due and payable on the first day of July, the

rent is prorated as follows:

• the old daily rate of rent for the first ten days of the month; and

• the new daily rate of rent for the remaining 20 days in the month of

July.

Pro rata rent due on the first is determined based on the number of days

in the calendar month, unless the rental agreement contains a provision

prorating rent on a 30-day basis.

If a residential landlord decides to increase rent on a tenant under a month-

to-month rental agreement, the length of the notice period depends on the

amount of the rent increase. Two notices exist:

• the 30-day notice of change in rental terms [See Form 570]; and

• the 60-day notice of change in rental terms. [See first tuesday Form

574]

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.

When the increase in monthly rent is equal to or less than 10% of the lowest

amount of monthly rent paid during the previous 12 months, the landlord

may serve the tenant with a 30-day notice of change in rental terms.

However, when the increase in rent is more than 10%, the landlord needs to

serve the tenant with a 60-day notice of change in rental terms.

5 CC §827

6 Calif. Civil Code §827

7 CC §827

Notice

periods

176 Landlords, Tenants and Property Management, Eighth Edition

For instance, consider a residential landlord charging a month-to-month

tenant a rent of $1,000 per month. The tenant’s rent has not been increased

during the last 12 months. The landlord now seeks to increase the monthly

rent by $100. Since the total rent increase is not more than 10%, the landlord

may serve the tenant with a 30-day notice to change the terms of the rental

or expired lease agreement.

Now consider a different landlord and tenant situation. Within the past 12

months, the landlord increased the tenant’s monthly rent $50 from $950

to $1,000. The landlord currently seeks to increase the monthly rent by an

additional $100. The anticipated $100 increase is compared to the lowest

amount of rent paid in any month during the past 12 months to determine

the percentage increase — the $950. Here, the increase in rent is 10.5%. Since

the increase in rent is greater than 10%, the landlord needs to serve 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 through the end of the 30-day period to vacate

[See Form 572 accompanying this chapter]; or

• remain in possession, refuse to comply with the rental terms and

raise available defenses, such as retaliatory eviction, in the resulting

unlawful detainer (UD) action. [See Chapter 21]

Consider the tenant who receives the landlord’s notice changing rental terms

to increase the rent. The tenant does not wish to continue in possession at the

increased rent amount. Accordingly, the tenant serves the landlord with a

30-day notice of intent to vacate. [See Form 572]

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.

In communities with low density and rent control, limitations on rent

increases exist for older units.

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.

8 CC §1946

9 CC §14

Tenant

responses to

a change

Rent control

restrictions

pro rata rent

Rental payment

amount due for the

portion of the rental

period remaining after

a change in the rent

amount due. [See ft

Form 552 §4.1]

notice of intent to

vacate

A tenant’s notice to the

landlord signifying

their intent to vacate

the leased property.

[See ft Form 571 and

572]

Chapter 17: Changing terms on a month-to-month tenancy 177

All conditions in a residential or nonresidential month-to-month rental

agreement may be changed on written notice by the landlord, but not

by the tenant. To be enforceable, the notice is served on the tenant in the

same manner as a three-day notice to pay rent or quit.

A landlord or property manager may serve a notice of change in rental

terms on any day during the rental period. The new rental terms stated

in the notice do not take effect until expiration of the notice. The notice

period for most changes is 30 days. For residential rent increases greater

than 10%, a 60-day notice period is required.

notice of change in rental terms .............................................. pg. 172

notice of intent to vacate ........................................................... pg. 176

pro rata rent ................................................................................... pg. 176

Chapter 17

Summary

Chapter 17

Key Terms

Thus, without further authority from the rent control board, a landlord whose

property is subject to rent control 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 (single family

residences/condos) may establish their own rent rates, when they are subject

to rent control ordinances established prior to 1995.

Notes:

Chapter 18: Forfeiture of the lease 179

Forfeiture

of the lease

After reading this chapter, you will be able to:

• distinguish a tenant’s real property right to occupy real estate

versus the landlord’s independent contractual right to collect

future rents;

• understand how a tenant’s right of possession can be terminated

under a declaration of forfeiture provision in a three-day notice;

• appreciate how future rent is collected in a separate money action

after a tenant’s possessory rights have been terminated; and

• instruct a landlord on loss mitigation measures to be implemented

to recover future rents when a tenant vacates or is evicted.

Chapter

A tenant’s right to occupy real estate is a possessory estate in real property. It

is conveyed by the landlord to the tenant by operation of the granting clause

in a rental or lease agreement.

Once conveyed, the right of possession is owned by the tenant separate

from the rental or lease agreement. The rental or lease agreements contain

provisions creating contractual rights and obligations between the landlord

and tenant. However, while the tenant holds the right granted to use and

declaration of forfeiture

provision

default remedies provision

forfeiture of possession

holdover rent provision

loss mitigation

money action

present value

reinstatement period

Key Terms

Learning

Objectives

Lease

agreement

obligations

survive

180 Landlords, Tenants and Property Management, Eighth Edition

occupy the rented property as a separate real property right from contract

rights, the provisions of the rental or lease agreement control the terms and

duration of the use and occupancy of the tenant’s possessory rights.

One contractual provision in rental or lease agreements is the default

remedies provision. The default remedies provision creates the right

for the landlord to collect rents for the full term of the lease. The landlord’s

contractual right to collect future rents is independent of the tenant’s right of

possession, continuing after possession is terminated based on the tenant’s

material breach of the lease agreement. [See first tuesday Form 552]

Consider a tenant who fails to pay rent which becomes delinquent. The

landlord serves the tenant with a three-day notice to pay rent or quit.

The notice contains a declaration of forfeiture provision stating the

tenant’s right of possession — the real estate leasehold interest owned by the

tenant — is forfeited on expiration of the three-day notice unless the tenant

first pays the agreed rent. The declaration of forfeiture provision is also

known as a forfeiture-of-lease clause.

Here, the “lease” subject to forfeiture is the property right of possession

owned by the tenant, not the lease agreement entered into by the landlord

and tenant (which is subject to cancellation, but never a forfeiture since an

agreement is not property as is the right of possession). Confusingly, the lease

agreement document, the paperwork itself, is often also loosely referred to as

the “lease”, such as “this is the lease we signed.”

If the tenant fails to pay rent before the expiration of the notice, their

possessory interest in the real estate is forfeited, as called for in the declaration

or forfeiture provision in the notice. On forfeiture, the tenant voluntarily

vacates. Alternatively, if the tenant remains in possession without the

landlord’s consent, the tenant can be evicted through an unlawful detainer

(UD) action. [See Form 575 §3 in Chapter 20]

However, the landlord does not file a UD action to regain possession of the

property, even though the tenant’s continued possession is now unlawful

and the landlord accepts no further rent.

Editor’s note — The landlord may benefit by choosing not to evict the tenant

when no other tenant is immediately available to occupy the space. If the

lease agreement contains a holdover rent provision setting holdover

rent rates, the landlord can pursue the tenant for holdover rents in a money

action. Holdover rents usually greatly exceed the current rent rate for the

space which is all the courts will award in UD actions. Further, occupancy is

often required by insurance carriers to remain qualified for hazard coverage.

[See Sidebar, “A holdover tenancy”]

The tenant later voluntarily vacates the property prior to expiration of the

lease.

default remedies

provision

A lease agreement

provision authorizing

the landlord on

termination of the

tenant’s lease due to

the tenant’s default

to collect rents for the

remaining unexpired

lease term. [See ft Form

550 §3.1 and 552 §2.1]

declaration of

forfeiture provision

A lease or rental

agreement provision

declaring a tenant’s

failure to cure a breach

of the agreement

constitutes a forfeiture

of the tenant’s right of

possession. [See ft Form

575 §5]

holdover rent

provision

A rental or lease

agreement provision

which sets the rent

rate during a tenant

holdover period. [See ft

Form 550 §3.3 and 552

§2.3]

Forfeiture-of-

lease clause

is about

possession

Chapter 18: Forfeiture of the lease 181

The landlord then files a separate civil action against the tenant to collect

rent for:

• the period prior to termination of the right of possession by forfeiture as

declared in the three-day notice;

• the holdover period after the forfeiture of possession and prior to

vacating; and

• the remaining period under the lease agreement after the tenant

vacated until expiration of the lease.

The tenant claims the landlord cannot collect rent called for in the lease

agreement for any period after expiration of the three-day notice since:

• the election to forfeit the lease contained in the three-day notice to pay

or quit did not just terminate the tenant’s real property right to occupy,

but cancelled the contractual lease agreement; and

• the landlord’s failure to evict the tenant on cancellation of the lease

agreement converted the tenant’s continued occupancy into a periodic

tenancy for which reasonable rent is due, not the holdover rent set in

the lease agreement.

Can the landlord collect all rent unpaid as agreed during the tenant’s

occupancy as well as future rent due for the remaining term of the lease even

though the lease was forfeited in the three-day notice?

Yes! But before proceeding, an extremely important distinction needs to be

made between:

• the tenant’s real property right of possession, called a lease, or a

leasehold interest as an estate in real property [See Chapter 1]; and

A holdover tenancy occurs when a tenant remains in possession of a property without a

valid right of possession. The right of possession expires:

• at the end of the term granted by the lease agreement;

• on expiration of a notice to vacate served by either the landlord of the tenant under

a rental agreement; or

• on expiration of a notice to quit served on a defaulting tenant if the notice contains

a declaration of forfeiture provision.

When the tenant no longer has the right of possession, the landlord may immediately file an

unlawful detainer (UD) action without serving any additional notice. [Calif. Civil Code §1946;

Calif. Code of Civil Procedure §1161(1); see Chapter 29]

When a tenant materially breaches a rental or lease agreement, the breach alone does not

terminate the tenant’s right of possession. A breaching tenant still has a right to possess

the property until the landlord acts to terminate the possessory right in the property held

and owned by the tenant.

Once the tenant no longer has the right of possession on termination of their tenancy in the

real estate, they become a holdover tenant subject to the landlord’s UD action.

forfeiture of

possession

The termination of

the tenant’s right of

possession triggered by a

declaration of forfeiture

in a notice to quit. [See ft

Form 575 §5]

Sidebar

A holdover

tenancy

182 Landlords, Tenants and Property Management, Eighth Edition

• the lease agreement, which grants the landlord a contract right to

collect rents, also commonly referred to as a lease.

A three-day notice to pay or quit that includes a declaration of forfeiture

provision terminates the tenant’s real property right of possession. It does not

also cancel the contract which is the lease agreement. The lease agreement

remains intact on forfeiture of possession.

[See Chapter 1]

Also, a landlord need not first evict the holdover tenant in a UD action

before filing a separate money action to recover rents called for in the lease

agreement. Remember, the right of possession and the contractual rights

and obligations agreed to in the lease agreement are enforced separately,

independent of one another.

Once the tenant’s right of possession has expired or been terminated, the

landlord can demand and recover holdover rents and unearned future rents

remaining under the lease agreement.

“Termination of the lease” by forfeiture refers exclusively to the termination

of the tenant’s right of possession in the real estate. Again, the lease agreement

remains enforceable to collect unpaid past rents and future rents; it was not

cancelled and is unaffected by the termination by forfeiture of the tenant’s

property rights, with or without the tenant being evicted.

With the tenant’s right of possession terminated by the declaration of

forfeiture provision in the three-day notice, the landlord may at any time file

a UD action and recover possession.

In a UD action, the court initially determines whether the termination of

the right of possession under the three-day notice was proper. If proper and

the tenant did not cure the breach before the forfeiture became effective,

the landlord is awarded possession and the tenant evicted. [See Sidebar,

“Abandonment: a passive alternative”]

Rent earned and unpaid up to the time of the UD trial may be awarded in the

UD action along with an eviction order. The UD money award for rent due

applies only to periods before the UD trial, including:

• the period before termination of the lease for delinquent rent at the

rate set by the lease agreement; and

• during the holdover period after termination of the tenant’s right

of possession up to the UD trial for rent of a reasonable amount as

determined by the court.

Editor’s note — Typically, UD courts will only award the landlord reasonable

rent for rent due in a holdover period. If a lease agreement contains a

holdover rent provision, the landlord may consider limiting their recovery

1 Walt v. Superior Court (1992) 8 CA4th 1667

2 Danner v. Jarrett (1983) 144 CA3d 164

3 Walt, supra

4 Calif. Code of Civil Procedure §§1161.1; 1174(c)

First

terminate

the lease on

default

Rent awarded

in a UD

action

Chapter 18: Forfeiture of the lease 183

in the UD action to a simple recovery of possession. Then, the landlord

may file a separate money action to recover the holdover rents due, at the

holdover rent rate set in the lease agreement.

A UD award does not include future, unearned rent. Future rents are collected

through a separate money action on the lease agreement filed after the

tenant has been evicted and mitigation of losses undertaken by the landlord.

To review: a landlord who needs to evict a tenant by a UD action may recover

possession based on either:

• a termination of the tenant’s right of possession under a declaration of

forfeiture provision in a three-day notice; or

• leaving the declaration of forfeiture provision out of the three-day

notice and allowing the court to terminate the lease on expiration of a

five-day reinstatement period following a UD award.

With a declaration of forfeiture provision in the three-day notice, the tenant

who fails to cure the breach has no continuing right to occupy the real estate

after the notice expires.

But what if the three-day notice did not include a declaration of forfeiture

provision, deliberately deleted or not? Without including the declaration of

forfeiture provision in a notice to quit, the right of possession — the lease

— is not terminated until five days has passed after the UD judgment is

entered. During this period, called the reinstatement period, the tenant

may reinstate their yet unforfeited right of possession if they meet the terms

set by the UD judgment. If the terms are not met within the reinstatement

period of five days, the lease is then forfeited and the tenant evicted.

A landlord might deliberately remove the declaration of forfeiture provision

from a three-day notice to give a good tenant extra time to bring overdue

rent current. A landlord who deletes the declaration of forfeiture provision

effectively gives their tenant the three-day notice period, the length of the

UD court process and the five-day reinstatement period to bring the rent

current.

If the tenant is able to bring the rent current, the landlord benefits by keeping

an otherwise suitable tenant and avoiding a vacancy and turnover costs.

A tenant has no ability to unilaterally restore their right of possession after

their leasehold estate in the property has been terminated by forfeiture.

Only a court order, or a mutual agreement with the landlord, can restore the

tenant’s right of possession once terminated.

The relief from forfeiture is sought primarily by nonresidential tenants who

have long-term leases and are prepared to cure any defaults.

5 CCP §1174(a),(c)

6 CCP §1174(a)

7 CC §1174(c)

Three-day

notice without

a forfeiture

reinstatement

period

The period of time

during which

the tenant may

reinstate their right

of possession if they

meet the terms set by

the unlawful detainer

judgment.

Relief from

forfeiture of

possession

184 Landlords, Tenants and Property Management, Eighth Edition

A tenant who wishes to remain in possession after their right of possession

has been forfeited and they have been evicted by UD action may petition the

court to restore their right of possession, if:

• the underlying lease had an original term of more than one year;

• the landlord has not retaken possession of the property;

• the tenant has not been removed by the sheriff; and

• the tenant petitions the UD court for relief.

Whether the court will grant the tenant a relief from forfeiture and a

reinstatement of the lease is based on the degree of hardship the tenant suffers

if evicted. However, if the court does grant the tenant relief from forfeiture, it

will be conditioned on:

• the payment of all amounts, including rents, due the landlord; and

• full performance of all rental or lease agreement conditions, whether

oral or written.

Also, when the right of possession has already been terminated by a

declaration of forfeiture provision in the three-day notice does not concern

the court when hearing the tenant’s petition for relief from forfeiture.

If an attorney appears on behalf of the tenant seeking relief from forfeiture,

a copy of the application for relief and petition for the hearing is to be served

on the landlord or property manager filing the UD action at least five days

prior to the hearing.

Also, at the UD trial, the landlord needs to be prepared to defend the forfeiture

they have declared. This will entail explaining why relief from the forfeiture

is unfair to the landlord. The landlord is also required to detail the amounts

owed and lease/rental conditions to be cured. The court in a UD action may

initiate an inquiry on its own into whether the tenant is entitled to relief

from forfeiture.

Also, the tenant may orally request the court at the UD trial to be relieved of

the forfeiture and allowed (on conditions) to remain in possession.

On termination of the tenant’s possessory right to the property — the

leasehold— under a declaration of forfeiture provision in any three-day

notice or at trial, the landlord is entitled to:

• file a UD action to physically remove the defaulting tenant from actual

possession, called eviction;

• enforce collection of rent earned and unpaid through entry of the UD

judgment; and

• file a separate money action to recover future rents and any prior

unpaid rent earned but not included in the UD judgment.

8 CCP §1179

9 CCP §1179

10 CCP §1179

money action

Litigation which seeks

to recover future rents

and any previously

unpaid rent earned

but not included in

an unlawful detainer

judgment.

The

obligation to

pay future

rent

Chapter 18: Forfeiture of the lease 185

Editor’s note — Of course, double recovery of rent is not allowed. If the

landlord, in their UD action, is awarded (or denied) rents accrued prior to

the UD award, the landlord cannot again seek to recover those amounts in

the separate money action for rents.

In a money action to collect future rents separate from any UD action or

other remedies permitted by the lease agreement, the landlord is entitled to

recover:

• all unpaid rent earned under the lease agreement up until the tenant’s

right of possession is terminated

;

• reasonable per diem rent from the termination of the right of possession,

until entry of the judgment for rent

;

11 CC §1951.2(a)(1)

12 CC §1951.2(a)(2)

Instead of or in addition to beginning the eviction process by serving a three-day notice

with a declaration of forfeiture, a landlord may choose to sever the possession through the

abandonment process. [CC §1951.3; see first tuesday Form 581]

To begin recovering possession through abandonment, a landlord serves a notice of

abandonment on the tenant. This notice is served if:

• rent on the leased property has been due and unpaid for at least 14 days from the

due date;

• the landlord has a reasonable belief that the tenant has abandoned the property.

[Calif. Civil Code §1951.3(b)]

A notice of abandonment declares the tenant’s right of possession (but not the rental or

lease agreement) will be terminated due to abandonment on expiration of the notice. A

tenant may contest the abandonment within:

• 15 days of the tenant receiving personal service of the notice of abandonment; or

• 18 days after the notice is placed in the mail by the landlord. [CC §1951.3.(b)]

If the tenant does not contest the notice of abandonment within the statutory time limit,

the landlord has terminated the tenant’s right of possession. Remember: the rental or lease

agreement remains intact and survives the tenant’s loss of possession. Thus, the landlord

retains the contract right to collect future rents due under the uncancelled rental or lease

agreement.

Serving a notice of abandonment by itself can have significant negative impacts for a

landlord. Firstly, it takes 18 days to terminate a tenant’s right of possession, as opposed to

three days under the three-day notice.

Secondly, the notice of abandonment only addresses a failure to pay rent. It is not triggered

by, nor does it address any material breach by the tenant. A three-day notice to quit is

triggered by a material breach of the rental or lease agreement.

Thirdly, the landlord’s service of an abandonment notice is an inherently passive process.

The landlord serves the notice, and effectively waits for the tenant to contest the landlord’s

notice. The tenant need not take any action to first cure any breach. Contrast this with the

three-day notice and the eviction process, in which the tenant is required to cure the breach,

or the right of possession is terminated.

Sidebar

Abandonment:

a passive

alternative

186 Landlords, Tenants and Property Management, Eighth Edition

• all unearned rent called for in the lease agreement for the remaining

unexpired term of the lease, subject to:

º loss mitigation;

º default remedies in the lease agreement;

º the prior reletting of the premises; and

º the discounted present worth of the future rent

;

• costs incurred by the landlord as a result of the tenant’s breach

; and

• attorney fees incurred if the lease agreement contains an attorney fees

provision.

If the lease agreement included a default remedies provision, the separate

money action to recover future rents can be filed immediately after the

tenant’s right of possession terminated. Recall from the opening scenario

that a default remedies provision reserves the landlord’s right to collect

future rent due after the tenant’s right of possession has been terminated.

[See Figure 1]

If the lease agreement does not contain a default remedies clause, the

landlord’s right to recover future rents is still allowed by statute as laid out

above. This type of recovery of rents is called a statutory recovery. However,

in a statutory recovery the landlord is required to first mitigate their losses by

reletting the premises. Only after reletting the premises may the landlord file

a money action to recover future rents due from the evicted tenant.

With or without a default remedies provision in the lease agreement, the

landlord who seeks to recover future rents is to make a reasonable, good-faith

effort to reduce their loss of rent after the tenant vacates or is evicted. This is

known as loss mitigation, a requisite to recovery of future rents.

If the landlord does not act to reduce loss of future rental income, a tenant

has the right to offset any future rent due by the amount of rent the landlord

could have reasonably collected by reletting the space.

Consider a tenant who fails to pay rent as scheduled in the lease agreement.

Ultimately, a UD judgment is entered in the landlord’s favor. The tenant is

evicted by the sheriff under a writ of possession issued by the court.

The landlord repossesses the property. Then, the landlord takes steps to relet

the property. During the effort to relet, the evicted tenant offers to lease the

property at the old rent rate. The landlord refuses the evicted tenant’s offer,

opting to relet the property to a more creditworthy tenant at a lower rent rate.

13 CC §1951.2(a)(3)

14 CC §1951.2(a)(4)

15 CC §1717

16 CC §1951.2(c)

17 CC §1951.2(c)

Loss

mitigation

offsets future

rents

loss mitigation

The good-faith effort

a landlord who seeks

to recover future rents

makes to reduce their

loss of rent after a

tenant vacates or is

evicted.

Chapter 18: Forfeiture of the lease 187

The landlord then seeks to recover their money losses from the evicted tenant.

The losses equal the difference between:

• the amount of rent agreed to and unpaid through the expiration of the

lease term in the lease agreement; and

• the amount of rent the new tenant has agreed to pay.

The evicted tenant claims the landlord is barred from collecting any unpaid

future rent since the landlord could have recovered the full amount of rental

payments if the landlord had accepted the evicted tenant’s offer to lease.

Is the evicted tenant liable for the deficiency created by the difference

between all rent remaining unpaid on the lease and the amount of rent the

new tenant has agreed to pay?

Yes! The evicted tenant owes the deficiency between the rent owed under

the tenant’s lease agreement and the lower rent to be paid by the new tenant.

Here, the landlord actively sought a new tenant and was unable to get the

full amount of the rent the evicted tenant had agreed to pay through the

expiration of their lease.

The landlord’s effort to mitigate the loss of rents by reletting the property was

in good faith and reasonable. The reasonableness of the landlord’s conduct

undertaken to relet the space is determined based on the actions actually

taken by the landlord. Reasonableness is not determined by evaluating

available alternative courses of action the landlord could have taken to

mitigate damages (such as re-renting to the evicted tenant).

A landlord needs to pursue a course of action that is likely to reduce the

amount of future rent the evicted tenant owes after the tenancy is terminated.

Otherwise, the tenant is permitted to offset future rents by showing the

landlord’s efforts to relet the property were unreasonable efforts to mitigate

the loss of rent.

The landlord who is entitled to recover future rent under an unexpired lease

agreement will only be awarded the present value of the unearned future

rents.

To determine the present value of unearned rent at the time of the court’s

money award, the future rents will be discounted (to their present value) at

the annual rate of 1% over the Federal Reserve Bank of San Francisco (the

Fed)’s discount rate. The Fed’s discount rate used for calculating the present

worth of future rent on an award in 2014 would be 1% over the discount rate

of 0.75%.

From the time the tenant defaults on the payment of rent to the time the

unpaid rent is awarded, the landlord is entitled to recover interest on unpaid

amounts of back rent.

18 Zanker Development Co. v. Cogito Systems, Inc. (1989) 215 CA3d 1377

19 CC §1951.2(b)

Discounted

future rent

and interest

on delinquent

rent

present value

Unearned rent that is

discounted at the time

of the court’s money

award at the annual

rate of 1% over the

Federal Reserve Bank

of San Francisco’s

discount rate.

188 Landlords, Tenants and Property Management, Eighth Edition

A tenant’s right to occupy real estate is a possessory estate in real

property. It is conveyed by the landlord to the tenant by operation of

the granting clause in a rental or lease agreement.

Once conveyed, the right of possession is owned by the tenant separate

from the rental or lease agreement. The rental or lease agreements

contain provisions creating contractual rights and obligations between

the landlord and tenant. However, while the tenant holds the right

to use and occupy a rented property as a separate real property right,

the provisions of the rental or lease agreement control the terms and

duration of the use and occupancy.

A landlord who needs to evict a tenant by an unlawful detainer (UD)

action may recover possession based on either:

• a termination of the tenant’s right of possession under a declaration

of forfeiture provision in a three-day notice; or

• leaving the declaration of forfeiture provision out of the three-day

notice and allowing the court to terminate the lease on expiration

of the five-day reinstatement period following a UD award.

Rent earned and unpaid up to the time of the UD trial may be awarded

in the UD action along with an eviction order. A UD award does not

include future, unearned rent, which is collected through a separate

money action on the lease agreement.

Chapter 18

Summary

The interest accrued prior to judgment is calculated at the rate agreed to in

the lease agreement. If the interest rate is not stated in the lease agreement,

the interest will accrue at 10% per annum from the date of default to entry of

the money judgment. After judgment is awarded for back rent or discounted

future rent, interest accrues at 10% on the money judgment until paid.

A landlord is entitled to recover all reasonable costs incurred to relet the

property once a tenant has prematurely vacated, or been evicted.

Costs incurred to relet the property include:

• costs to clean up the property;

• brokerage and legal fees to find a new tenant;

• permit fees to construct necessary improvements or renovations; and

• any other money losses incurred as a result of the tenant’s breach, such

as a decline in the property’s market value.

20 CC §§1951.2(b), 3289

21 CC §1951.2(a)(4)

22 Sanders Construction Company, Inc. v. San Joaquin First Federal Savings and Loan Association (1982) 136 CA3d 387

Costs to relet

Chapter 18: Forfeiture of the lease 189

The landlord who seeks to recover future rents is to make a reasonable,

good-faith effort to reduce their loss of rent after the tenant vacates or

is evicted, known as loss mitigation. The landlord who is entitled to

recover future rent under an unexpired lease agreement will only be

awarded the present value of the unearned future rents. To determine

the present value of unearned rent, the future rents will be discounted

to their present value at the annual rate of 1% over the Federal Reserve

Bank of San Francisco (the Fed)’s discount rate.

declaration of forfeiture provision ......................................... pg. 180

default remedies provision....................................................... pg. 180

forfeiture of possession .............................................................. pg. 181

holdover rent provision ............................................................ pg. 180

loss mitigation .............................................................................. pg. 186

money action ................................................................................ pg. 184

present value ................................................................................ pg. 187

reinstatement period .................................................................. pg. 183

Chapter 18

Key Terms

Notes:

Chapter 19: Surrender cancels the lease agreement 191

Surrender cancels the

lease agreement

After reading this chapter, you will be able to:

• identify a surrender as a cancellation of the lease agreement by

the landlord when the tenant returns possession of the leased

premises;

• use a written surrender to mutually terminate a lease agreement

and release the tenant and landlord from any further obligations;

and

• distinguish a landlord’s inability to collect future rent on a

surrender from the landlord’s right to collect future rent when

a tenant breaches and the landlord forfeits the tenant’s right to

possession.

Chapter

Before a nonresidential lease expires, the tenant closes out their business

operations and vacates the premises, paying no further rent. The landlord

serves the tenant with a three-day notice to pay rent or quit. [See Form 575

in Chapter 20]

The notice includes a clause declaring a forfeiture of the lease if the tenant

fails to pay rent within three days following service of the notice.

The tenant responds to the notice by letter, stating they elect not to pay future

rent and accept the landlord’s offer to terminate the lease. The key to the

premises is returned to the landlord with the letter.

The landlord responds by letter stating:

• neither the landlord nor the tenant owe each other any further

obligations under the lease; and

early-termination fee surrender

Key Terms

Learning

Objectives

Lost ability

to recover

future rents

192 Landlords, Tenants and Property Management, Eighth Edition

• the tenant is to pay all rent due up to the date the tenant returned the

key to the landlord.

The landlord then attempts to relet the premises, but without success.

Later, the landlord makes a demand on the tenant for payment of rents called

for in the lease agreement for the entire remaining term of the lease. The

landlord claims the forfeiture of the lease in the three-day notice terminated

the tenant’s right of possession but did not cancel the lease agreement.

The tenant claims the landlord is not entitled to any future rents called for in

the lease agreement since the landlord agreed that neither the tenant nor the

landlord owed any further obligation under the lease agreement.

May the landlord recover future rents from the tenant based on the lease

agreement, notices and letters?

No! The lease agreement was cancelled by the communications agreeing

to terminate all obligations under the lease agreement in exchange for

possession. Therefore, the lease agreement was no longer enforceable.

Continuing our previous example, the tenant’s letter “electing to pay no

future rent” coupled with the return of the key to the landlord initiated a

surrender. It signified an implied offer to cancel the lease agreement.

The landlord’s affirmative response to the tenant’s letter foregoing future

rents released the tenant from further liability on the lease agreement. The

landlord’s conduct constituted acceptance of the tenant’s offer to cancel the

lease agreement obligations.

Editor’s Note: the declaration of forfeiture did reserve the landlord’s right to

collect future rents under the lease agreement from the tenant. However,

the landlord later effectively cancelled the lease agreement by their conduct

in agreeing to the tenant’s offer to pay no future rent on return of the keys.

Consider a tenant who breaches a nonresidential lease agreement before the

lease expires and vacates the premises without the landlord’s service of a

three-day notice to quit on the tenant. The landlord may respond by taking

possession in one of four ways:

• terminate the tenant’s right of possession and cancel the lease

agreement by a surrender, then take possession and relet the

premises to others or occupy the premises as the owner [See Form 587

accompanying this chapter];

• terminate the tenant’s right of possession using a three-day notice

containing a declaration of forfeiture (or a notice of abandonment),

1 Desert Plaza Partnership v. Waddell (1986) 180 CA3d 805

2 Calif. Civil Code §1951.2

Surrender

A lease

agreement

breached

and space

vacated

surrender

A mutual cancellation

of a lease agreement

by the landlord and

the tenant, written or

by their conduct, when

the tenant vacates the

leased premises. [See ft

Form 587]

Chapter 19: Surrender cancels the lease agreement 193

take possession and relet the premises to mitigate losses before making

a demand for payment of future rents [See Chapter 18; see first tuesday

Form 575 and 581];

• take possession of the premises and relet it on the tenant’s behalf, then

collect any monthly losses from the tenant; or

• enforce any tenant-mitigation provision in the lease agreement,

leaving possession with the tenant to relet the premises to mitigate the

tenant’s losses. [See Chapter 34]

Only ownership of a real estate interest, such as a leasehold interest, and

personal property may be forfeited. However, a contract, such as a lease

agreement, is not property. A contract is evidence of rights and obligations.

Thus, it may be cancelled, but it cannot be the subject of a forfeiture.

A surrender occurs when:

• a tenant breaches a lease or rental agreement and vacates or intends to

vacate the premises; and

• the landlord agrees to accept a return of possession from the tenant in

exchange for cancelling the lease agreement.

The cancellation of the lease agreement in a surrender situation occurs by

either:

• mutual consent of the landlord and the tenant;

• operation of law, implied due to the conduct of the landlord.

Editor’s note — Avoiding an unintentional surrender is one of the many

reasons why a landlord needs to understand the difference between

terminating a right of possession (the forfeiture of possession aspect) and

the separate act of terminating a lease agreement (the cancellation of the

right to future rents). [See Chapter 18]

For a landlord to avoid adverse legal consequences when a tenant

prematurely vacates, lease agreements contain a remedies provision stating

a surrender occurs only if the tenant enters into a written cancellation and

waiver agreement. [See first tuesday Form 552 §2.4]

The Termination of Lease and Surrender Agreement by first tuesday

provides the writing used to mutually terminate a lease agreement and

release the tenant and landlord from any further obligations and liability

under the lease agreement. [See Form 587]

Lease termination and surrender agreement provisions include:

• the termination date on which the tenant is to quit and surrender

possession of the premises to the landlord [See Form 587 §2];

• a release between the landlord and tenant from all claims and

obligations, known or unknown, arising out of the lease agreement

and possession [See Form 587 §2.1];

3 CC §1933(2)

Termination

of Lease and

Surrender

Agreement

194 Landlords, Tenants and Property Management, Eighth Edition

• any monetary consideration remaining to be paid by the tenant to the

landlord [See Form 587 §2.2];

• a description of any conditions to be performed prior to cancellation,

which may include any payment the landlord will make to the tenant,

such as a return of deposit, prepaid rent or settlement money on a

dispute [See Form 587 §2.3]; and

•

conditions pertaining to a subtenant, if any, that needs to be arranged

and agreed to. [See Form 587 §2.4]

Form 587

Termination

of Lease and

Surrender

Agreement

Chapter 19: Surrender cancels the lease agreement 195

Consider a tenant who makes a written offer to surrender the leased premises

to the landlord.

The landlord believes a new tenant, who will pay more rent for the space

than the current tenant, can be quickly located.

Still, the landlord demands an early-termination fee equal to three

months’ rent to cancel the lease agreement. The tenant pays the fee and

delivers possession, and the acceptance by the landlord cancels the lease. A

surrender has occurred. [See Form 587 §2.2]

Editor’s note — Mid-term leases sometimes contain an early-termination

provision for a surrender. The provision allows the tenant to cancel the

lease agreement on payment of a fee. This termination fee usually is in the

amount of two to six months’ unearned rent. This is a type of prepayment

bonus or liability limitation provision seen in mortgages and purchase

agreements.

Under an early termination provision, a surrender functions like a deed-

in-lieu of foreclosure that conveys the real estate to the lender (possession

returned to the landlord) in exchange for the lender’s cancellation of the note

obligations (cancellation of the lease agreement).

Now consider a tenant on a lease with a ten-year term. A few years after

entering into the lease agreement, the tenant vacates the premises. The

tenant removes all of their personal property and returns the key to the

landlord. The tenant has no intention of returning and has breached the

lease agreement by failing to pay rent.

Since a surrender cancels the landlord’s right to future rents due under the

lease agreement, the landlord refuses to treat the tenant’s return of possession

as a surrender.

To avoid a surrender, the landlord promptly informs the tenant they intend

to enforce collection of future rent due by the terms of the lease agreement.

Without prior notice to the tenant, the landlord retakes possession,

refurbishes the vacated space and leases it to a replacement tenant. The new

lease agreement with the replacement tenant is for a lower rent rate than the

prior tenant paid under the breached lease. The landlord notifies the prior

tenant they have leased the premises to mitigate their loss of rent.

The landlord makes a demand on the prior tenant for the payment of rent.

The rent demanded is the difference between:

• the total amount of rents remaining unpaid over the remaining

unexpired term of the prior tenant’s lease; and

• the amount of rent to be paid during the same period under the new

lease by the replacement tenant.

Can the landlord recover the lost rent from the prior tenant who vacated the

premises and returned possession to the landlord?

Surrender by

operation of

law

Surrender

by mutual

consent

early-termination

fee

A fee paid to the

landlord by the

tenant to cancel the

lease agreement in

exchange for returning

possession. [See ft

Form 587 §2.2]

196 Landlords, Tenants and Property Management, Eighth Edition

No! Before entering the space to prepare for reletting the premises, the

landlord failed to:

• terminate the tenancy by serving a three-day notice with a declaration

of forfeiture (or a notice of abandonment); or

• notify the tenant they were taking possession of the premises as an

agent acting on the tenant’s behalf.

The conduct of the landlord at the time they unilaterally took possession to

relet the premises violated the tenant’s unforfeited and continuing right of

possession. Although the landlord did not intend to accept a surrender, they

did so by taking possession without first forfeiting the tenant’s leasehold (or

advising the tenant of the landlord’s intent to act on the tenant’s behalf to

relet the premises).

Here, a surrender by operation of law occurred. The landlord took possession

while the tenant still retained their possessory interest in the property as

granted by the lease agreement.

Thus, the landlord’s interference with the tenant’s remaining right of

possession constitutes an acceptance by the landlord of an implied offer to

surrender initiated by the tenant’s vacating the premises.

The result is the tenancy is terminated and the lease agreement cancelled

by surrender. This result is avoided when the landlord first serves notice

terminating the tenant’s right of possession with a declaration of forfeiture

provision.

[See Case in point, “Surrender on failure to declare a forfeiture”]

A landlord may not want to terminate the tenancy on evicting the tenant.

The landlord might rather retake possession, acting as the tenant’s agent to

relet the property on the tenant’s (rather than the landlord’s) behalf.

4 Dorcich v. Time Oil Co. (1951) 103 CA2d 677

Repossession

on the tenant’s

behalf

A tenant breaches their lease agreement. Before the landlord may serve the tenant with

a three-day notice containing a declaration of forfeiture provision, the tenant voluntarily

vacates the property. Without serving a three-day notice to quit (or a notice of abandonment)

and terminating the tenant’s right to possession, the landlord takes possession and relets

the premises.

Here, the landlord’s actions are inconsistent with the tenant’s outstanding right of

possession. By acting in a manner inconsistent with the tenant’s right of possession (which

had not been terminated before the landlord retook possession) the underlying lease

agreement no longer is enforceable. The landlord’s conduct established a surrender.

Thus, the landlord’s right to recover future rents under the lease agreement is eliminated by

conduct adverse to their own best interest when they failed to honor the tenant’s continued

right of possession. The lease agreement now is no longer enforceable. Any losses due to

vacancy simply become part of the market risks any landlord assumes as the owner of

vacant rental property on expiration of a lease. [

Desert Plaza Partnership v. Waddell (1986)

180 CA3d 805]

Case in point

Surrender

on failure

to declare a

forfeiture

Chapter 19: Surrender cancels the lease agreement 197

Here, the landlord omits the declaration of forfeiture from the three-day

notice since the landlord intends to leave the tenant’s right of possession

intact.

Although no longer physically occupying the property, the tenant still owns

the leasehold interest in the property and the lease agreement remains

enforceable as it has not been cancelled. However, the use and occupancy of

the premises is now managed by the landlord on the tenant’s behalf.

The landlord who intends to take possession and relet the premises as the

tenant’s agent notifies the tenant about their agency actions twice:

• once before taking possession of the premises; and

• again when the premises is relet.

Even though a tenant fails to pay rent, removes all of their personal property,

vacates the leased premises and has no intention of returning, the tenant

cannot unilaterally terminate their right to continued possession of the

premises, much less escape the obligations to pay future rents called for in

the lease agreement.

Until the tenant’s right of possession is terminated by a three-day notice

containing a declaration of forfeiture provision (or abandonment) served on

the tenant by the landlord, no person other than the tenant has the right to

occupy the premises.

However, the landlord who does not forfeit the tenant’s right of possession

may establish themselves as the agent of the tenant who has vacated. This is

done in an effort to preserve the landlord’s reversionary interest from waste.

Consider a tenant who has breached their lease agreement and vacated the

premises. The landlord notifies the tenant that the landlord will enter the

premises, take possession and relet the premises as the tenant’s agent.

The landlord relets the premises for less rent, but for a period extending

beyond the expiration of the tenant’s lease. The landlord notifies the tenant

they have relet the premises on the tenant’s behalf.

The landlord then makes a demand on the tenant for the loss in rent resulting

from the reletting of the premises at a reduced rent. The tenant refuses to

pay since the terms of the lease granted to the new tenant by the landlord

exceeded the term of the tenant’s remaining right of possession under the

breached lease agreement.

Here, the tenant’s right of possession which remains unterminated runs

only until the expiration of the period fixed by the lease agreement. Had the

vacating tenant sought to sublet the premises, the term of the sublease may

not extend beyond the expiration date of the tenant’s lease.

Inconsistent

behavior

while

reletting

on tenant’s

behalf

198 Landlords, Tenants and Property Management, Eighth Edition

Thus, the landlord who acts to relet the premises as the tenant’s agent for a

longer term than the unexpired term remaining on the lease:

• is not renting the premises on behalf of the tenant; and

• has worked a surrender due to conduct inconsistent with the vacating

tenant’s unexpired and unterminated right of possession.

Now consider a landlord who, on notice to a vacating tenant, takes possession

on behalf of the tenant. The landlord maintains and cares for the vacated

premises while attempting to relet the premises.

The tenant claims the landlord’s care and maintenance of the property

constitutes a surrender since the landlord exercised independent control

over the premises by their maintenance activity.

However, the landlord has not surrendered the property merely by

maintaining it to prevent waste. Acting as the agent of the vacated tenant,

the landlord undertakes an obligation to make a good faith effort to lease

the premises, called loss mitigation. This duty requires the landlord to keep

the premises properly maintained. Care and maintenance of the property is

activity consistent with the landlord’s agency duty owed the tenant when

acting on the tenant’s behalf.

To avoid adverse legal consequences when a tenant prematurely vacates,

lease agreements contain a remedies provision stating a surrender can occur

only if the tenant enters into a written cancellation and waiver agreement.

[See first tuesday Form 552 §2.4]

However, the landlord’s conduct regarding possession in response to a

tenant’s breach of the lease agreement and vacating of the premises can

result in a cancellation of the lease by surrender.

A landlord’s conduct supersedes the lease agreement provisions requiring

a written agreement to cancel the lease. Landlord/tenant law controls the

results of conduct, barring application of contract law principles that ignore

the landlord’s inconsistent conduct.

5 Welcome v. Hess (1891) 90 C 507

6 B.K.K. Company v. Schultz (1970) 7 CA3d 786

Maintenance

to prevent

waste

Chapter 19: Surrender cancels the lease agreement 199

A surrender occurs when:

• a tenant breaches a lease or rental agreement and vacates or

intends to vacate the premises; and

• the landlord agrees to accept a return of possession from the tenant

in exchange for cancelling the lease agreement.

The cancellation of the lease agreement in a surrender situation occurs

by either:

• mutual consent of the landlord and the tenant; or

• operation of law, implied due to the conduct of the landlord.

When a tenant breaches the lease agreement and vacates the premises

without the landlord’s service of a three-day notice to quit on the tenant,

the landlord may respond to possession in one of four ways:

• terminate the tenant’s right of possession and cancel the lease

agreement by a surrender, then relet the premises to others or

occupy the premises as the owner;

• terminate the tenant’s right of possession using a three-day notice

containing a declaration of forfeiture (or a notice of abandonment),

take possession and relet the premises to mitigate losses before

making a demand for payment of future rents;

• take possession of the premises and relet it on the tenant’s behalf,

then collect any monthly losses from the tenant; or

• enforce any tenant-mitigation provision in the lease agreement,

leaving the tenant in possession to relet the premises to mitigate

the tenant’s losses.

early-termination provision .................................................... pg. 285

surrender ........................................................................................ pg. 192

Chapter 19

Summary

Chapter 19

Key Terms

Notes:

Chapter 20: Delinquent rent and the three-day notice 201

Delinquent rent and

the three-day notice

After reading this chapter, you will be able to:

• determine when rent becomes delinquent and a three-day notice

to pay rent or quit may be served on a tenant;

• contrast a material breach with a minor breach which alone does

not justify service of a three-day notice;

• determine when a notice to quit with no alternative performance

is served on a tenant committing an incurable breach; and

• understand the timing, servicing requirements and consequences

of a notice to pay rent or quit served on a tenant.

Chapter

A tenant fails to pay rent on or after the due date and expiration of the grace

period set in the rental or lease agreement. The rent is now delinquent. The

property manager serves the tenant with a three-day notice to pay rent or

quit. [See Form 575 accompanying this chapter]

The three-day notice states the exact amount of:

• delinquent rent unpaid; and

• other delinquent amounts owed to the landlord and unpaid.

delinquency

due date

grace period

incurable breach

late charge provision

material breach

notice to pay rent or quit

Learning

Objectives

Key Terms

Pay or forfeit

your right of

possession

notice to pay rent

or quit

A notice served on a

tenant by the landlord

which states the

amount of delinquent

rent and any other

delinquent amounts

owed the landlord.

[See ft Form 575 and

575-1]

202 Landlords, Tenants and Property Management, Eighth Edition

Editor’s note — Some trial judges declare late charges and rent-related fees

are not rent in residential agreements. Thus, the delinquency of a late charge

payment or rent-related fee properly demanded and unpaid is not properly

included as an amount due a residential landlord to be collected by use of a

three-day notice to pay or quit. Further, they are not a material breach of the

rental or lease agreement

Before a landlord or a property manager includes any late charge (or other

amounts due besides technical rent) in a three-day notice as part of the total

amount due, the wise landlord will determine if the judge presiding over UD

actions in the jurisdiction will allow a demand for late charges. [See Chapter

22; see first tuesday Form 575-1]

The three-day notice also contains a critical declaration of forfeiture

provision. The forfeiture provision states the tenant’s failure to pay the

delinquent rent before the notice expires causes the right of possession of the

property to revert to the landlord by forfeiture.

After the three-day notice expires, the tenant remains in possession. Later, the

tenant tenders payment of the delinquent rent to the landlord. The landlord

refuses to accept the payment. The tenant refuses to voluntarily vacate.

The landlord files an unlawful detainer (UD) action to evict the tenant and

regain possession of the premises. The landlord claims the tenant’s right of

possession was terminated on expiration of the three-day notice due to the

declaration of forfeiture provision it contained. Thus, the tenant cannot

now reinstate their terminated right of possession by paying the delinquent

rent.

Can the landlord evict the tenant even though the tenant tendered the

delinquent rent in full after expiration of the three-day notice?

Yes! The tenant’s right of possession was terminated on expiration of the three-

day notice since the notice contained a declaration of forfeiture provision.

Thus, the tenant’s continued occupancy became unlawful on expiration of

the three-day notice.

On expiration, the landlord is no longer obligated to accept delinquent rent

payments or allow the occupancy to be reinstated. Even though the right to

possession has been terminated by forfeiture, the rental or lease agreement

has not been cancelled (remember, contract rights cannot be forfeited). The

rental or lease agreement remains enforceable to collect future rents as

scheduled.

[See Form 575 §5.1]

A tenant 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

1 Calif. Code of Civil Procedure § 1174(a)

2 CCP §§ 1161(2); 1174(a)

Default,

notice and

cure or

vacate

Chapter 20: Delinquent rent and the three-day notice 203

• perform nonmonetary obligations called for in the rental or lease

agreement.

On a tenant’s default, the landlord may make a demand on the tenant to cure

the default or vacate the premises.

However, only a material breach allows the landlord to forfeit the tenant’s

right of possession. [See Case in point, “When is a failure to perform an

eviction-worthy breach?”’

Form 575

Three-Day

Notice to Pay

Rent or Quit

— With Rent-

Related Fees

DATE:_____________, 20______, at ______________________________________________________, California.

To Tenant: _____________________________________________________________________________________

Items left blank or un checked are not ap pli ca ble.

FACTS:

1. You are a Tenant under a rental or lease agreement

1.1 dated __________________, at __________________________________________________, California,

1.2 entered into by __________________________________________________________, as the Tenant, and

1.3 ________________________________________________________________________, as the Landlord,

1.4 regarding real estate referred to as __________________________________________________________

_____________________________________________________________________________________.

NOTICE:

2. You are in breach of the payment of amounts due under the rental or lease agreement.

3. Within three (3) days after service of this notice you are required to either:

3.1

Pay rent and other amounts now due and unpaid in the Total Amount of ...........$_______________

representing rent for the periods of

_____________, 20______ to _____________, 20______ ......Amount $_______________

and amounts due for

returned check fees of ...................................$_______________

late charge fees of ......................................$_______________

common area maintenance (CAM) of .......................$_______________

association assessments of ...............................$_______________

property taxes of .......................................$_______________

interest on delinquent rent of ..............................$_______________

The Total Amount due may be paid in one of the following manners:

a. By personal delivery to ______________________________________________

(Name)

_________________________________________________________________ (Address)

_________________________________________________________________ (Phone)

Payment of the Total Amount due will be accepted at the above address during

the hours of ______ to ______ on the following days: ____________________________________.

b. By deposit into account number _______________________

at _______________________________________________________________

(Financial Institution)

________________________________________________________________ (Address)

c. By the electronic funds transfer previously established between Landlord and Tenant.

d. ____________________________________________________________________________________

3.2 Deliver possession of the premises to Landlord, or _____________________________________________.

4. If you fail to pay the Total Amount due or deliver possession of the premises within three (3) days, legal

proceedings will be initiated against you to regain possession of the premises and to recover the amounts owed,

treble damages, costs and attorney fees.

5. The Landlord hereby elects to declare a forfeiture of your Right to Possession if you fail to pay the Total Amount

demanded above.

5.1 Landlord reserves the right to pursue collection of any future loss of rent allowed by Civil Code §1951.2.

6. State law permits former Tenants to reclaim abandoned personal property left at the former address of the Tenant,

subject to certain conditions. You may or may not be able to reclaim property without incurring additional costs,

depending on the cost of storing the property and the length of time before it is reclaimed. In general, these costs

will be lower the sooner you contact your former Landlord after being notified that property belonging to you was

left behind after you moved out.

Date: _____________, 20______

Landlord/Agent:______________________________DRE #:____________

Signature: ____________________________________________________

Address: _____________________________________________________

Phone:__________________________ Cell: ________________________

NOTE: A tenant who fails to pay the amounts due under a rental or lease agreement must, within three (3) days after

service of written notice of the breach, either pay the amount due or vacate and deliver possession of the premises to

the landlord. [Calif. Code of Civil Procedure §1161(2)]

THREE-DAY NOTICE TO PAY RENT OR QUIT

With Rent-Related Fees

Prepared by: Agent ____________________________

Broker ____________________________

Phone _______________________

Email _______________________

0.00

material breach

Failure to pay rent

or perform other

significant obligations

called for in the rental

or lease agreement.

[See ft Form 577]

204 Landlords, Tenants and Property Management, Eighth Edition

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 alone do not justify a three-day notice

to cure or quit.

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 ineffective since the

failure cannot be cured and the tenancy cannot be reinstated.

After a landlord serves a tenant with a three-day notice to pay rent or quit,

containing a declaration of forfeiture provision, the tenant is required to cure

the breach in three calendar days to avoid loss of their right to possession

and eventual eviction. (The first day in the three-day period is the day after

service of the notice.)

3 Keating v. Preston (1940) 42 CA2d 110

4 CCP §1161(4)

5 Calif. Civil Code §10

Three days

between

notice and

incurable breach

Nonmonetary defaults

that cannot be cured

by a tenant. [See ft

Form 577]

Facts: A landlord notifies a tenant of a change in the terms of their month-to-month rental

agreement requiring the tenant to obtain personal property insurance. The notice of change

of terms states failure to comply constitutes grounds for the tenant’s forfeiture of the right

of possession of their unit. The tenant does not obtain personal property insurance. The

landlord serves the tenant with a three-day notice to perform or quit. After expiration of

the three-day period, the landlord files an unlawful detainer (UD) action to evict the tenant.

Claim: The landlord seeks to remove the tenant and take possession of the unit, claiming

the tenant’s failure to comply with the new terms of the rental agreement is a material

breach allowing the landlord to terminate the tenant’s right of possession by use of the

declaration of forfeiture provision in the 3-day notice.

Counter claim: The tenant seeks to retain possession of the unit, claiming their failure

to obtain personal property insurance is not a material breach of their rental agreement

warranting termination by forfeiture of their right to possession since personal property

insurance is not significant for the landlord as it primarily benefits the tenant.

Holding: The California Superior Court held the landlord cannot terminate the rental

agreement and remove the tenant for failure of the tenant to obtain the personal property

insurance demanded by the landlord since the requirement primarily benefited the tenant

and thus failure to provide it is not a material breach justifying termination of the rental

agreement. [Nivo 1 LLC v. Antunez (2013) 271 C4th 1]

Case in point

When is a failure

to perform an

eviction-worthy

breach?

Chapter 20: Delinquent rent and the three-day notice 205

The tenant cures the default, retaining the right of possession by paying the

amount stated before the three-day notice expires.

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.

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.

Editor’s note — Under a month-to-month rental agreement, the landlord

may modify the tenant’s method of payment by serving the tenant with a

written 30-day notice of a change in rental terms.

[See Chapter 17]

To cure a delinquency, the tenant’s delinquent rent payment needs to be

received by 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 and it is received by the landlord 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 a UD

action if the tenant remains in possession.

Editor’s note — A landlord can require payment of rent in cash if a

tenant’s check is returned for insufficient funds. However, this cash-only

requirement may not extend longer than three months. After that period,

the landlord is required to again accept alternate forms of payment.

[See

first tuesday Form 552 §3.10]

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, the notice is defective

and will not terminate the right of possession or support a UD action. 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 will fail.

The landlord may recover rents and other amounts more than one year

delinquent by pursuing collection in a money action separate from the UD

action. A landlord is allowed four years to bring a civil action to recover due

and unpaid amounts.

6 CCP §1161.5

7 Strom v. Union Oil Co. (1948) 88 CA2d 78

8 CC §827

9 CC §1947.3

10 Bevill v. Zoura (1994) 27 CA4th 694

11 CCP §337

One-year

delinquent

rent limitation

for UD

delinquency

A tenant’s failure to

pay the agreed rents on

or before the due date

or before the expiration

of the grace period set

forth in the rental or

lease agreement.

206 Landlords, Tenants and Property Management, Eighth Edition

Before serving a tenant with a three-day notice to pay rent or quit, the

landlord or property manager needs to consider the following questions:

• 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.

A grace period is the time period following the due date during which

rent may be paid without incurring a late charge. While rent is past due and

unpaid, it is not delinquent until the grace period expires.

When a grace period exists and the day scheduled for payment of rent falls

on a legal holiday, the payment is not delinquent if it is tendered on the next

business day. For purposes of paying rent, legal holidays include:

• Saturdays;

• Sundays; and

• state or federal holidays.

For instance, the last day of a grace period falls on a Saturday. Payment is not

delinquent if it is received on or before the following Monday (Tuesday if

Monday is a holiday).

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.

Unlike the service of documents in a civil action, service of a three-day notice

by mail following a failed attempt at personal service does not extend the

three-day notice period an additional five days.

12 CCP §§10; 12a

13 CCP §13; Calif. Government Code §6706

14 Lamanna v. Vognar (1993) 17 CA4th Supp. 4; CCP §12a

15 Losornio v. Motta (1998) 67 CA4th 110

Before

serving a

three-day

notice

grace period

The time period

following the due date

for a payment during

which payment

received by the

lender is not

delinquent and a late

charge is not due. [See

ft Form 550 §4.3 and

552 §4.7]

due date

The date provided

in the rental or lease

agreement on which

rental payments are

due. [See ft Form 550

§4.1 and 552 §4.1]

When is

the rent

delinquent?

Chapter 20: Delinquent rent and the three-day notice 207

To initiate the process for collecting delinquent rent from a tenant in

possession the landlord serves the tenant with a three-day notice to pay rent

or quit. The notice may be served on any day after the grace period expires

without prior receipt of the rent.

Consider a landlord and tenant who enter into a rental agreement which sets

the due date for rent on the first day of each month. The rental agreement

also contains a late charge provision imposing an additional charge if rent

payments are not received on or before the 10th of the month. A grace period

is not mentioned in the rental agreement.

Each month, the tenant pays rent after the date for incurring a late charge.

The landlord accepts the tenant’s late rental payments every month, but

makes no written demand for payment of the late charges.

Finally, on receipt of yet another late payment, the landlord informs the

tenant all future rent payments need to be received by the landlord prior to

the date for incurring a late charge.

The next month, the late charge period stated in the rental agreement runs

and rent has not been received. On the day the late charge is incurred, the

11th, the landlord serves the tenant with a three-day notice to pay rent or

quit that includes a declaration of forfeiture provision. The tenant does not

pay rent before the three-day notice expires. The landlord files a UD action.

As in the prior months, the tenant tenders the rent payment to the landlord

after the late charge period has expired. However, unlike in prior months,

the landlord refuses to accept the payment, claiming the tenant is now

unlawfully occupying the premises.

Has the landlord established an unlawful detainer on expiration of the three-

day notice?

No! The three-day notice is premature and useless. The tenant’s rent had

not yet become delinquent. Rent is not delinquent until the grace period —

including extensions authorized by the landlord’s conduct in accepting late

payments — has run without receipt of rent.

When the rental agreement called for a late charge after a day other than the

due date, a grace period was established, even though it was not explicitly

identified as a “grace period.” Further, the landlord extends the grace period

by consistently accepting rent payments after the grace period without

demanding the late charge, a notice required to enforce collection of a late

payment fee.

Thus, the tenant’s tender of rent was timely. It occurred after the written

grace period but on or before the extended date set by the landlord’s conduct.

16 Baypoint Mortgage v. Crest Premium Real Estate Investments Retirement Trust (1985) 168 CA3d 818

late charge

provision

A provision in the

lease agreement which

imposes an additional

administrative charge

if rent payments are

not received before

the date the charge is

incurred. [See ft Form

550 §4.3 and 552 §4.7]

Conduct

extends the

grace period

208 Landlords, Tenants and Property Management, Eighth Edition

To reinstate and enforce the written grace period, a landlord first gives the

tenant a 30-day notice to reinstate the terms for payment stated in the rental

or lease agreement.

The 30-day notice states that all future rent payments becoming due

following the expiration of the 30-day notice need to be received within the

grace period. If future payments (due after the 30 day period) are not timely

received, the landlord will demand the agreed-to late charge and serve a

three-day notice on the tenant.

To be valid, the three-day notice to pay rent or quit served on a residential

tenant needs to state the exact amount of money due and unpaid. Conversely,

a nonresidential landlord may estimate the amount of money due and

unpaid, when the exact amount cannot be accurately ascertained.

A residential tenant need not pay more than the amount due and unpaid to

retain 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.

For both residential and nonresidential 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 nonresidential 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.

Failure to indicate that an estimated amount due is an estimate renders the

three-day notice invalid.

Further, if the landlord knows the exact amount due and states a different

amount due as an “estimate” in the three-day notice, the notice is defective

and the landlord will be unable to terminate the tenant’s right of possession.

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.

17 Jayasinghe v. Lee (1993) 13 CA4th Supp. 33

18 CCP §1161.1(a)

19 CCP §1161.1(e)

Estimated

nonresidential

rent

Accurate

residential

rent demands

Chapter 20: Delinquent rent and the three-day notice 209

An estimate itemizing rent amounts not yet due, such as unbilled common

area maintenance expenses (CAMs), is not considered reasonable. Amounts

due in the future are not yet due or delinquent, and may not be included in

an estimate of delinquent amounts due and unpaid.

Now consider a nonresidential tenant who takes possession of property on

entering into a percentage lease agreement. [See first tuesday Form 552-4]

The rent provisions in the lease agreement state:

• the rent is payable annually on the anniversary of the lease;

• the tenant is to provide the landlord with the amount of the tenant’s

gross sales proceeds; and

• rent is an amount equal to 20% of the gross sales proceeds.

The tenant fails to furnish the landlord with the amount of the gross sales

proceeds or make the annual rental payment. The landlord serves the tenant

with a three-day notice to pay rent or quit. The notice states:

• the amount of rent which is due and unpaid in an amount equal to

20% of the tenant’s gross sales proceeds; and

• only the tenant knows the amount of the sales proceeds.

The tenant does not pay the rent before the three-day notice expires. The

landlord files a UD action. The tenant claims the three-day notice is invalid

since the notice did not state the dollar amount of rent due.

Can the landlord evict the tenant even though the three-day notice did not

state the dollar amount of the delinquent rent?

Yes! A nonresidential tenant cannot prevent the landlord from receiving rent

or recovering possession by failing to provide the landlord with the means

needed to determine the rental amount.

The purpose of a three-day notice is to give a tenant the opportunity to avoid

forfeiture of the leasehold estate by paying the delinquent rent.

On receiving a three-day notice stating the rental amount due is an estimate,

the nonresidential tenant may respond by tendering the amount of rent the

tenant estimates is due.

If the amount the tenant estimates and tenders is equal or greater than

the rent due, the tenant will retain the right of possession in a UD action.

Likewise, when the amount estimated and tendered by the tenant is less than

the amount actually due and was a reasonable estimate, the tenant retains

possession by paying the additional amount and other sums awarded the

landlord within five days after entry of the UD judgment.

20 WDT- Winchester v. Nilsson (1994) 27 CA4th 516

21 Valov v. Tank (1985) 168 CA3d 867

22 CCP §1161.1(a)

23 CCP §1161.1(a)

Estimating

unknown

amounts

Rent

estimates by

nonresidential

tenants

210 Landlords, Tenants and Property Management, Eighth Edition

For an owner to regain possession when the master tenant defaults and a

subtenant occupies the premises, the three-day notice served on the master

tenant needs to also name the subtenant as a tenant in default. Similarly, the

notice is also served on the subtenant

Serving a subtenant with a copy of the three-day notice that only names the

master tenant will result in the subtenant retaining the right of possession.

Conversely, an owner who wishes to evict a defaulting master tenant but

retain the subtenant may do so. The owner is not required to serve the

subtenant with a three-day notice when only the master tenant is being

evicted.

For example, an owner consents to a sublease agreement entered into by

the master tenant and a subtenant which contains an attornment clause. If

the master tenant defaults and fails to cure under a three-day notice to pay

or quit containing a declaration of forfeiture provision, the master tenant

forfeits their right of possession. Here, the owner may enforce the sublease

by exercising the owner’s rights under the attornment clause in the sublease.

[See Chapter 38]

Under the sublease’s attornment provision, the subtenant agrees to recognize

the owner as landlord if the owner:

• elects to forfeit the master tenant’s leasehold; and

• recognizes the subtenant as the owner’s tenant.

However, a subtenant who takes possession of the premises after the master

tenant has been served with a three-day notice will be evicted on the owner’s

successful completion of a UD action.

24 Briggs v. Electronic Memories & Magnetic Corporation (1975) 53 CA3d 900

25 Chinese Hospital Foundation Fund v. Patterson (1969) 1 CA3d 627

26 CCP §1164

Subtenant

evictions by

the owner

Chapter 20: Delinquent rent and the three-day notice 211

A tenant 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.

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.

Only a material breach allows the landlord to forfeit the tenant’s right

of possession, such as the failure to pay rent or perform other significant

obligations. Conversely, minor breaches alone do not justify a three-day

notice to cure or quit.

After a landlord serves a tenant with a three-day notice to pay rent

or quit, containing a declaration of forfeiture provision, the tenant is

required to cure the breach in three calendar days to avoid forfeiture of

the right of possession and eventual eviction.

For an owner to regain possession when the master tenant defaults and

a subtenant occupies the premises, the three-day notice needs to also

name and be served on the subtenant.

delinquency .................................................................................. pg. 205

due date .......................................................................................... pg. 206

grace period ................................................................................... pg. 206

incurable breach .......................................................................... pg. 204

late charge provision .................................................................. pg. 207

material breach ............................................................................ pg. 203

minor breach ................................................................................. pg. 230

notice to pay rent or quit ........................................................... pg. 201

Chapter 20

Summary

Chapter 20

Key Terms

Notes:

Chapter 21: Three-day notices to quit for nonmonetary breaches 213

Three-day notices to quit

for nonmonetary breaches

After reading this chapter, you will be able to:

• differentiate between a curable breach a tenant can resolve and

an incurable breach a tenant cannot correct;

• use a three-day notice to pay or quit when a tenant fails to timely

pay a money obligation;

• serve a three-day notice to perform or quit when the lease

provision breached is not for rent or other money obligation but

can be corrected by the tenant; and

• prepare a three-day notice to quit without an alternative when

the tenant’s breach is incurable or statutory.

Chapter

Curable

and

incurable

nonmonetary

breaches

Key Terms

Learning

Objectives

assignment

curable breach

monetary breach

nonmonetary breach

nonwaiver provision

notice to perform or quit

notice to quit

nuisance

reasonable person test

retaliatory eviction

statutory breach

waste

On a routine inspection of an apartment complex, the property manager

observes a pet in one of the units. All the rental and lease agreements with

tenants in the complex prohibit housing of a pet on the premises.

As a courtesy, the tenant is asked, both orally and by a personal note, to

remove the pet. However, the tenant retains the pet.

214 Landlords, Tenants and Property Management, Eighth Edition

To enforce the provision prohibiting pets in the tenant’s rental or lease

agreement, the property manager prepares a three-day notice to perform

or quit. The notice is served on the tenant. The notice gives the tenant an

ultimatum — either remove the pet (the performance required) or vacate

the unit within three days (the alternative performance). [See Form 576

accompanying this chapter]

The tenant fails to remove the pet from the premises and remains in the unit

after the three-day notice expires.

Can the landlord file an unlawful detainer (UD) action to evict the tenant for

failure to either remove the pet or vacate under the three-day notice?

Yes! On expiration of the three-day notice to perform or quit, the tenant

may be evicted if one of the conditions has not been met. Here, the tenant

breached the provision in their rental or lease agreement prohibiting the

keeping of a pet on the premises. This type of breach, which can be remedied

by the tenant’s action, is known as a curable breach.

However, if the tenant breaches a provision in their rental or lease agreement

that the tenant is unable to perform within three days, the landlord or property

manager may serve a three-day notice to quit the premises, permitting no

alternative action. A breach which cannot be remedied by the tenant during

the notice period is classified as an incurable breach.

The three-day notice served on a tenant needs to be the correct type before

an unlawful detainer, or holdover, of a premises can be established and the

tenant evicted.

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 [See Form 575 in Chapter 20];

• a three-day notice to perform or quit [See Form 576]; or

• a three-day notice to quit. [See Form 577 accompanying this chapter]

When a tenant’s breach is the failure to pay rent or other money obligation

before it becomes delinquent, 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, called

a nonmonetary breach, and the breach can still be quickly corrected by the

tenant, such as the pet situation in the opening scenario, the tenant is served

with a three-day notice to perform or quit. [See Form 576]

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

2 CCP §1161(3)

nonmonetary

breach

A tenant’s breach of

any obligation other

than a monetary

obligation under the

lease agreement.

monetary breach

A tenant’s failure

to pay rent or other

money obligation due.

Types of

three-day

notices for

various

breaches

curable breach

A breach of the lease

agreement which can

be remedied by action

from the tenant.

Chapter 21: Three-day notices to quit for nonmonetary breaches 215

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.

A three-day notice to quit without an alternative requires the tenant to

vacate. The notice to quit is served on a tenant when the tenant’s breach is:

• a breach impossible to cure in three days3; or

• a statutory breach.

3 Matthew v. Digges (1920) 45 CA 561

4 CCP §1161(4)

DATE: _____________, 20______, at _____________________________________________________, California.

To Tenant: _____________________________________________________________________________________

Items left blank or un checked are not ap pli ca ble.

FACTS:

1. You are a Tenant under a rental or expired lease agreement

1.1 dated __________________, at___________________________________________________, California,

1.2 entered into by _________________________________________________________, as the Tenant, and

1.3 ________________________________________________________________________, as the Landlord,

1.4 regarding real estate referred to as __________________________________________________________

______________________________________________________________________________________.

NOTICE:

2. You are in breach of the terms of your rental or lease agreement as follows:_______________________________

___________________________________________________________________________________________

__________________________________________________________________________________________.

3. Within three (3) days after service of this notice, you are required to either:

3.1 Perform or rectify the breach by ____________________________________________________________

______________________________________________________________________________________

______________________________________________________________________________________.

3.2 Deliver possession of the premises to Landlord or ______________________________________________

______________________________________________________________________________________.

4. If you fail to cure the breach or to deliver possession within three (3) days, legal proceedings may be initiated

to regain possession of the premises and to recover the rent owed, treble damages, costs and attorney fees.

5. Landlord hereby elects to declare a forfeiture of your lease if you fail to cure the breach noted above.

5.1 Landlord reserves the right to pursue collection of any future rental losses allowed by Calif. Civil Code

§1951.2.

6. State law permits former Tenants to reclaim abandoned personal property left at the former address of the Tenant,

subject to certain conditions. You may or may not be able to reclaim property without incurring additional costs,

depending on the cost of storing the property and the length of time before it is reclaimed. In general, these costs

will be lower the sooner you contact your former Landlord after being notified that property belonging to you was

left behind after you moved out.

NOTE:

A tenant who fails to perform any terms of the rental or lease agreement which can be performed or rectified must

within three (3) days after service of written notice of the breach, either cure the breach or vacate and deliver possession

of the premises to the landlord. [Calif. Code of Civil Procedure §1161(3)]

Date:_____________, 20______

Landlord/Agent:______________________________DRE #:____________

Signature: ____________________________________________________

Address: _____________________________________________________

____________________________________________________________

Phone: _________________________Cell: _________________________

Fax: _________________________________________________________

Email: _______________________________________________________

THREE-DAY NOTICE TO PERFORM OR QUIT

Prepared by: Agent ____________________________

Broker ____________________________

Phone _______________________

Email _______________________

Form 576

Three-Day

Notice to

Perform or Quit

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