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 Prole .................................... 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 Deciencies 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 T h ree - Day N o tic e t o Pa y Ren t o r Qu i t —
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
1
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
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.
2
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.
3
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.
4
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.
5
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.
6
The holder of a life estate may not impair the fee interest.
7
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
2
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.
1
A fixed-term tenancy, also called a lease or estate for years, is the result of
an agreement between the landlord and the tenant for a fixed rental period.
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.
2
[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.
3
If a renewal or extension option exists, the lease is renewed or extended by
the tenant’s exercise of the option or the landlord’s acceptance of rent called
for in the option.
4
[See Case in point, “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.
5
[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.
6
[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];
7
• 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;
8
or
• when a tenant is given possession of the property while lease
negotiations regarding the rent amount are still in progress and rent is
not accepted.
9
For a tenancy-at-will, a written notice to pay rent or quit is required to
implement any change in the right to continue to occupy the premises, e.g.,
change it to a different kind of tenancy or terminate the tenancy. However, the
parties can always agree to a shorter or longer notice period to accommodate
the change.
10
[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
or
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.
11
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.
12
Also, a tenancy-at-will terminates on the death of either the landlord or
tenant, unless an agreement to the contrary exists.
13
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.
14
[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.
15
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.
16
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.
17
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.
18
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.
19
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.
20
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.
21
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.
22
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.
23
[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.
24
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.
25
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.
26
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.
27
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
3
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.
1
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.
2
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.
3
[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).
4
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.
5
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.
6
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.
7
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.
8
[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.
9
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.
10
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.
11
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]
FORM 567 03-11 ©2011 first tuesday, P.O. BOX 20069, RIVERSIDE, CA 92516 (800) 794-0494
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
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.
6.
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]
FORM 116 03-11 ©2011 first tuesday, P.O. BOX 20069, RIVERSIDE, CA 92516 (800) 794-0494
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.
13
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.
14
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)]
FORM 116-1 03-11 ©2011 first tuesday, P.O. BOX 20069, RIVERSIDE, CA 92516 (800) 794-0494
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.
15
[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.
16
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).
17
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.
18
A tenant’s right of possession arises out of their ownership of a leasehold
estate in the property.
19
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.
20
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;
21
• entry under the false pretense of making an inspection and then taking
possession from the tenant;
22
• entry by unlocking the door of the unit in the tenant’s absence;
23
• entry accomplished by a locksmith who opens the door during the
tenant’s absence;
24
and
• entry by breaking locks.
25
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.
26
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.
27
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.
28
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.
29
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.
30
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.
31
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.
32
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;
33
• rental value of the lost use of the premises;
34
• emotional distress caused by the landlord or property manager’s
conduct towards the tenant;
35
and
• loss of business goodwill (earning power of the business).
36
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.
37
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.
38
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
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
4
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.
1
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).
2
Examples of improvements that become part of the real estate include:
• built-ins (i.e., central air conditioning and heating, cabinets and
stairwells);
• fixtures (i.e., electrical and plumbing);
• walls, doors and dropped ceilings; and
• attached flooring (i.e., carpeting, tile or linoleum).
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.
3
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.
4
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.
5
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.
6
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.
7
[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.
8
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.
9
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.
10
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.
11
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.
12
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.
13
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.
14
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.
15
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.
16
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.
17
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.
18
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.
19
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.
20
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.
21
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.
22
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)
FORM 597 10-12 ©2012 first tuesday, P.O. BOX 5707, RIVERSIDE, CA 92507 (800) 794-0494
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.
23
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.
24
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.
25
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.
26
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
5
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.
1
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.
2
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
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.
4
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.
5
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.
6
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.
7
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.
1
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
6
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.
2
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.
3
Thus, an employee hired to assist the broker in the rental and leasing of
residential complexes, other than single family units, may be either:
• licensed; or
• unlicensed.
Unlicensed employees 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.
4
Licensed employees may perform any activities unlicensed employees
perform. However, licensed employees are additionally able to perform
activities relating to contacts with the landlord, as opposed to the tenant,
about the leasing, care of the property and accounting.
Activities which 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.
5
[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.
6
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.
7
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.
8
Apartment complexes with 16 or more units are required to have a resident
manager.
9
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
10
;
or
• under court appointment, such as a receiver or bankruptcy trustee.
11
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.
12
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.
13
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.
14
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.
15
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.
16
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
17
;
• 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.
18
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.
19
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
7
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.
1
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.
2
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.
3
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.
4
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.
5
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.
6
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.
7
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;
8
• 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.
9
[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.
10
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.
11
[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
8
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.
1
[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.
2
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;
3
• 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
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).
5
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.
6
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.
7
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.
8
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.
9
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.
10
[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.
11
Again, trust accounts are maintained in accordance with standard accounting
procedures. These standards are best met by using computer software
designed for property management.
12
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.
13
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.
14
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.
15
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.
16
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.
17
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.
18
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;
19
• keeps trust fund account records for three years after the transaction;
20
• keeps a separate ledger or record of deposits and expenditures itemized
by each transaction and for each landlord;
21
and
• keeps accurate trust account records for all receipts and disbursements.
22
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.
23
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.
24
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
9
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.
1
[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.
2
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.
3
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.
4
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.
5
[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
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.
FORM 591 03-11 ©2011 first tuesday, P.O. BOX 20069, RIVERSIDE, CA 92516 (800) 794-0494
— — — — — — — — — — — — — — — 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.
7
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.
8
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.
9
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.
10
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.
11
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.
12
13
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.
14
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.
15
[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.
16
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
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
10
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
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.
2
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.
3
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.
4
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.
5
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.
6
When the disclosure notice is posted, the notice will be posted in two
conspicuous places on the property.
7
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.
8
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.
9
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.
10
[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.
11
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 ____________________________________________.
to
___________________________________________________
(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 ________________________________________
at ___________________________________________________
(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
12
; 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.
13
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.
14
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 — — — — — — — — — — — — — — —
FORM 554 03-11 ©2011 first tuesday, P.O. BOX 20069, RIVERSIDE, CA 92516 (800) 794-0494
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
11
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:
a.
Title Report, or Title Policy
b.
Work Authorization [See ft Form 108]
c.
Occupant's Operating Expense Profile [See ft Form 562]
d.
Criminal Activity and Security Disclosure Statement [See ft Form 321]
e.
Agency Law Disclosure [See ft Form 305]
(Mandated for one-to-four residential units if lease exceeds one year.)
f.
Lead-Based Paint Disclosure [See ft Form 557]
(Mandated for one-to-four residential units constructed before 1978.)
g. __________________________________________________________________________________
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 — — — — — — — — — — — — — — —
FORM 110 03-11 ©2011 first tuesday, P.O. BOX 20069, RIVERSIDE, CA 92516 (800) 794-0494
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 — — — — — — — — — — — — — — —
— — — — — — — — — — — — — — — — — — 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.
1
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.
2
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
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.
4
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.
5
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.
6
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.
7
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.
8
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
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
12
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.
1
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.
2
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: ________________________________________
FORM 111 03-11 ©2011 first tuesday, P.O. BOX 20069, RIVERSIDE, CA 92516 (800) 794-0494
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.
3
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.
4
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.
5
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
13
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.
1
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.
2
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.
3
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:
a.
current expenses of occupancy.
b. 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 __________________________ .....................$_______________
3.8
Total Deposits ......................................................$_______________
FORM 562 10-12 ©2012 first tuesday, P.O. BOX 20069, RIVERSIDE, CA 92516 (800) 794-0494
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
0.00
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.
FORM 185 03-11 ©2011 first tuesday, P.O. BOX 20069, RIVERSIDE, CA 92516 (800) 794-0494
— — — — — — — — — — — — — — — — — — — 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.
4
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
14
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.
1
[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.
2
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.
3
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.
4
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.
5
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.
6
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.
7
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.
8
[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.
9
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.
10
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.
11
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.
12
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.
13
[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: ______________________________________________________
FORM 567-3 03-11 ©2011 first tuesday, P.O. BOX 20069, RIVERSIDE, CA 92516 (800) 794-0494
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.
14
[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) ..............$_______________
by Landlord/Agent’s check #_____________.
5. AMOUNT DUE LANDLORD:
5.1 The amount due Landlord after deductions (line 2 less line 3.5) .....................$_______________
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.
FORM 585 03-11 ©2011 first tuesday, P.O. BOX 20069, RIVERSIDE, CA 92516 (800) 794-0494
SECURITY DEPOSIT DISPOSITION
ON VACATING RESIDENTIAL PREMISES
Prepared by: Agent ____________________________
Broker ____________________________
Phone _______________________
Email _______________________
0.00
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.
15
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.
16
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.
17
[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.
18
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.
19
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.
20
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.
21
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.
22
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.
23
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.
24
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]
25
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.
26
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.
27
[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.
28
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.
29
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.
30
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
15
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;
or
• operating costs incurred to eliminate normal wear and tear and
refurbish the unit for the next tenant.
1
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.
2
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.
3
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.
45
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.
6
[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.
7
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
16
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.
1
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
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: ________________________________________
FORM 558 03-11 ©2011 first tuesday, P.O. BOX 20069, RIVERSIDE, CA 92516 (800) 794-0494
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.
3
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.
4
[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.
5
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.
6
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:
1.
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
:
2.
Tenant has not paid the full rent due for the month(s) of ______________________________________________.
3.
Landlord hereby accepts partial payment on the past due rent in the amount of ..........$_______________
4.
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 ...................$_______________
4.3
TOTAL deferred rent due, including additional charges, is the sum of .............$_______________
5.
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,
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)
___________________________________________________________
___________________________________________________________ (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 $_______________
6.
If the deferred rent is not paid when due, a three-day notice to pay rent or quit may be served at any time.
7.
No provision of the rental or lease agreement is affected by this agreement.
8.
___________________________________________________________________________________________
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:________________
FORM 559 03-11 ©2011 first tuesday, P.O. BOX 20069, RIVERSIDE, CA 92516 (800) 794-0494
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
17
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.
1
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.
2
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.
3
A month-to-month tenant has no ability to alter the terms of the rental
agreement, other than to terminate the tenancy and vacate.
4
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,
to ____________________________________________________________________________ (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 _________________________________________,
at ____________________________________________________________________________ (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
5.
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: _______________________________________________________
FORM 570 10-11 ©2011 first tuesday, P.O. BOX 20069, RIVERSIDE, CA 92516 (800) 794-0494
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: ________________________________.
FORM 572 03-11 ©2011 first tuesday, P.O. BOX 20069, RIVERSIDE, CA 92516 (800) 794-0494
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.
5
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
th
is the first day of the 30-day notice period, the rent does not
begin to accrue at the increased rate until July 11
th
— 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.
6
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.
7
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
8
[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.
9
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
18
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.
1
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.
2
[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.
3
“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.
4
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.
5
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.
6
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.
7
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.
8
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.
9
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.
10
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
11
;
• reasonable per diem rent from the termination of the right of possession,
until entry of the judgment for rent
12
;
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
13
;
• costs incurred by the landlord as a result of the tenant’s breach
14
; and
• attorney fees incurred if the lease agreement contains an attorney fees
provision.
15
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.
16
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.
17
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.
18
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%.
19
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.
20
A landlord is entitled to recover all reasonable costs incurred to relet the
property once a tenant has prematurely vacated, or been evicted.
21
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.
22
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
19
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.
1
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.
2
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;
3
or
• 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.
4
[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.
5
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.
6
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
20
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.
1
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.
2
[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 $_______________
_____________, 20______ to _____________, 20______ ......Amount $_______________
_____________, 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. ____________________________________________________________________________________
OR
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)]
FORM 575 01-13 ©2013 first tuesday, P.O. BOX 20069, RIVERSIDE, CA 92516 (800) 794-0494
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.
3
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.
4
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.)
5
3 Keating v. Preston (1940) 42 CA2d 110
4 CCP §1161(4)
5 Calif. Civil Code §10
Three days
between
notice and
UD
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.
6
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.
7
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.
8
[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.
9
[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.
10
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.
11
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.
12
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).
13
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.
14
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.
15
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.
16
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.
17
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.
18
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.
19
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.
20
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.
21
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.
22
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.
23
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.
24
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.
25
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.
26
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
21
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.
1
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.
2
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.
4
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 ____________________________________________________________
______________________________________________________________________________________
______________________________________________________________________________________.
OR
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: _______________________________________________________
FORM 576 01-13 ©2013 first tuesday, P.O. BOX 20069, RIVERSIDE, CA 92516 (800) 794-0494
THREE-DAY NOTICE TO PERFORM OR QUIT
Prepared by: Agent ____________________________
Broker ____________________________
Phone _______________________
Email _______________________
Form 576
Three-Day
Notice to
Perform or Quit
t
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