Feature

by Ted Kimball

Newly Enacted Legislation for 2002
Every prudent rental property owner and manager must comply with all new landlord/tenant laws enacted, effective 2002. For instance, you must now identify the telephone number, street address and name of every person authorized to manage the premises and accept service of process on behalf of the owner. The alternative is to provide this same type of information about the owner of the property. This information can either be posted in designated areas of the premises or contained in the tenant’s lease. Tenants must also be given copies of their lease if requested, at least once a year.

Another new requirement for 2002 is that the lease identifies the name, address and telephone number of the person or entity to which rent payments are to be paid, as well as the form of acceptable payment. In addition, if rent is paid personally, the hours and days the office is open to accept payment must be listed. Likewise, a Three-Day Notice to pay rent or quit must state the name, address and telephone number of the person to whom the rent payment should be made and the hours and days available for personal delivery. If the rent can only be paid by mail, the rent is deemed paid on the third day of the notice, even though it is received after the Three-Day Notice expires. Also, if the tenant convinces the judge that he/she mailed the rent to the landlord within the three-day period of the notice, there is a conclusive presumption that the landlord received it. These are important changes in the law and may cause some managers and owners to allow tenants to personally deliver their rent payments.

Security Deposit Litigation
Throughout 2000 and 2001, private law firms and government agencies filed class action type lawsuits against residential landlords for alleged unfair and unlawful business practices occurring in the disposition of security deposits. These suits, based on the California Business and Professions Code (Section 17200 et. seq.), practically speaking allow any California resident the right to file suit against any business alleging it is conducting unfair or unlawful business practices. These suits seek the return of withheld security deposits on behalf of all tenants residing in properties owned and/or managed by the defendants and also an award of attorneys’ fees provided under the statute.

Litigation surrounding California’s security deposit law, which is found in the Civil Code (Section 1950.5), is not rare especially because the statute is so poorly written. As many as one-third to one-half of small claims cases in some jurisdictions are estimated to involve security deposit disputes.

We strongly recommend you take a look at your documents, policies and procedures regarding the accounting and disposition of your residents’ security deposits to determine if they are in compliance with current interpretations of California’s security deposit laws.

Application Fee Litigation
California Civil Code (Section 1950.6 [d]) governs the laws surrounding the ability of residential landlords to charge application fees. This law also requires that the tenant receives a receipt “ … which receipt shall itemize the out-of-pocket expenses and time spent by the landlord or his or her agent to obtain and process the information about the applicant.” The limit is $30 per person but can be increased annually based on the Consumer Price Index beginning January 1, 1998. There have been recent legal challenges to managers’ properly accounting for the hard and soft costs incurred during the application fee process. Therefore, you must conduct a time and cost analysis to determine the amount of actual costs incurred in processing the applications of prospective tenants. Documentation of this analysis is important in the defense of a potential claim about charges in excess of actual costs.

Termination Fees
Many leases state that in the event the tenant breaches the lease by vacating before the date that the fixed term expires, the tenant must pay a lease cancellation fee. This fee could be considered what the law calls a “liquidated damage provision” because it is a predetermined amount to be paid in the event of a future breach of lease. Under California Civil Code (Section 1671), the burden of proof is on the owner or manager to uphold the validity of liquidated damage clauses. By this statute, they are void unless “it would be impracticable or extremely difficult to fix the actual damage.” California courts also require a finding that the amount of the charge should be reasonable and that it should not be intended as a “penalty” or inducement to coerce the tenant not to break the lease. Instead, the fee must be an accurate calculation of the lessor’s actual losses.

A court of law would likely interpret the fee as a penalty and declare it unenforceable. Illustrative is a case decided in August 1997 by a California Court of Appeals, which struck down a termination fee as a penalty and declared that termination or cancellation fees are unlawful as liquidated damage clauses. The court also found the residential lessor had engaged in unlawful business practices and was ordered to give up all termination fees collected for the past four years. This case, Krause v. Trinity Management Services, was appealed to the California Supreme Court (our firm provided an Amicus Brief for the court’s review on behalf of the California Apartment Association). The court then reversed this case based on other issues.

However, if the tenant has an option to either pay a cancellation or termination fee or be liable through the end of the lease, the provision may not be interpreted as a liquidated damage clause but merely an option. At the tenants’ option, he/she may either 1) remain liable for rent until the lease term expires or the premises are re-let, whichever happens first, or 2) pay the fee and no longer be liable under the lease for future rent. Although California courts have not interpreted such a provision in a residential landlord/tenant context and, thus, the law is unclear, a strong argument can be made for the enforceability of such a provision, if it is in fact voluntary.

Toxic Mold
Currently no state or federal guidelines regarding toxic mold exist, although California approved toxic law legislation effective January 1, 2002. The new law does not provide any standards of care for identification, extent of harm and remediation of toxic mold. The new law also fails to provide for any mandatory notice requirements. All of these issues will be addressed after a task force studies this issue and presents its report by July 2003. Until then, a claim of simple negligence on the landlord’s part is all that is needed to file a lawsuit. Claims for personal injury and property damage caused by mold growing inside apartments are therefore on the rise. Toxic mold cases will be the next big tort wave to hit California’s rental housing industry following lead-based paint and asbestos. Just a few weeks ago, a Sacramento court awarded defendants over $2.7 million for toxic mold-based injuries and property damage. A recent Los Angeles case that involved eight families in federally subsidized housing settled for several million dollars.

Varieties of mold such as aspirgillus, penicillium, stachybotrys and arimonium are water loving, and excessive growth can prove harmful. Molds need warmth, water and a food source. Some of the claimed injuries involve respiratory problems, skin rashes, headaches, lung disease, cognitive memory loss and brain damage.

Generally, insurance carriers argue that if the infestation of mold was due to a lack of routine maintenance, the owner is most likely not protected. Therefore, the most important issue is for you to determine what is causing the mold problem. If a roof leak due to a windstorm or a broken pipe due to a tree root caused the toxic mold, your claim is more likely to be covered by your insurance policy. You would be wise to check with your insurance broker to examine the extent of your coverage. We also recommend that you address mold in your lease. Document and clearly outline what the tenant’s responsibilities in are regard to maintaining the premises in a manner that will not attract mold. Also, lay out the tenant’s responsibility for notification to the landlord about mold and removal procedures.

Proposition 65
Proposition 65 prohibits any business that employs more than 10 employees from knowingly and intentionally exposing any individual to a chemical known to the state of California to cause cancer or reproductive toxicity without giving a specified warning. Proposition 65 requires any person who brings an action under its provisions, to give at least a 60-Day Notice of the violation to the alleged violator, the California Attorney General, the district attorney and the city attorney. The plaintiff must also inform the Attorney General of any settlement or judgment and the final disposition of the case.

Under the “right to know” warning requirement, the law only applies to “knowing and intentional” exposures. However, “knowledge” can be constructive where it is proved that the owner/manger should have known of the existence of second-hand smoke or other chemical exposure. The measure of care is what a reasonably prudent property manger would have done in similar circumstances.

There has been a recent proliferation of Proposition 65 lawsuits filed against California residential landlords. A private party who was not even affected by the exposure can bring enforcement actions, and as a “bounty” they can collect 25 percent of the penalty for being successful. Several law firms specialize in the private enforcement of Proposition 65 violations, and they have specifically targeted the rental housing industry. The penalty for non-compliance with Proposition 65 is up to $2,500 a day for each violation. On October 5, 2001, Governor Davis signed legislation effective January 1, 2002, that attempts to slow down the bounty hunter atmosphere surrounding the enforcement of Proposition 65.

The new law contains two additional protections for defendants. Previously, when the court determined penalties, it would consider the number of persons exposed each day, times the number of chemicals to which they were exposed, in order to calculate fines. Now, the court is also required to consider the economic effect of the penalty on the violator by determining whether the violator took good-faith measures to comply with the act, the willfulness of the defendant’s misconduct, and the deterrent effect that the penalty would have on the violator and community at large.

Second, the notice to the California Attorney General must now contain a certificate of merit stating that the person signing the certificate has consulted with one or more persons with relevant and appropriate experience or expertise who has reviewed the facts, studies, or other data regarding the exposure. This certificate must also state that the person believes there is a reasonable and meritorious case for private action.

Sex Offenders Dilemma
California Penal Code (Section 290) requires past convicted sex offenders, for the rest of their lives, to register with the chief of police of the city in which he or she is domiciled. If a peace officer reasonably suspects that a child or other person may be at risk from a registered sex offender, Section 290 provides for the appropriate agency to provide relevant information to protect the public. The Penal Code (Section 290.4) warns that it is illegal to access data and/or obtain information to commit a crime against or to engage in illegal discrimination or harassment against any registered offender, including the denial of housing accommodations. Further, the code provides penalties for violations of the statute, including actual damages, treble damages with a minimum of $250, attorneys’ fees, exemplary damages, or a civil code penalty not to exceed $25,000 if the court decides that the use of the information was a violation of California law.

On the other hand, there has been a relatively recent dramatic shift in common law tort liability for landlords, which has re-conceptualized owner responsibility for criminal acts on leased premises. Residential and commercial tenants have offered a variety of theories to justify owner liability in tort for criminal activities on and off the premises including actions for negligence, constructive eviction, implied warranty of habitability, breach of contract and misrepresentation.

The broadening of landlords’ responsibilities for criminal acts on and off leased premises places an extraordinary burden on owners and managers to be able to carefully screen applicants while walking the tightrope of avoiding laws designed to protect tenants from discrimination and invasion of privacy. Additionally, increased liability along with costs associated with heightened regulation is likely to reduce the availability of quality affordable housing. Of course if there is an incident or reasonable suspicion of illegal activity, the owner or manager could elect to terminate the tenancy with sufficient proof or elect not to renew the current lease and/or serve a Thirty-Day Notice of Termination (rent-controlled jurisdictions excepted).

The use of past convicted sex offender information in screening and evicting residential tenants in California is at best unclear and unresolved. California owners and managers face risks in paying penalties and fines as well as actual damages, attorneys’ fees and costs if the court ultimately decides that the use of this information was a violation of California law. There is, therefore, potential liability for owners and managers of rental property who either evict or fail to evict known registered sex offenders residing at the rental property.

Fair Housing
Fair housing continues to be the number one threat against residential landlords. When you consider that over 50 percent of our population in California are renters, the majority of California’s population are members of one or more “protected classes,” and a plaintiff does not spend any out-of-pocket expenses to file a fair housing complaint, you can understand why the number of filings in California are at an all time high. Prudent managers and owners should make sure that their management staff and onsite personnel are annually trained in fair housing laws.

The opinions expressed in this article are those of the author and do not necessarily reflect the viewpoint of the SFAA or the SF Apartment Magazine. Ted Kimball is with Kimball,Tirey&St.John, specializing in landlord/tenant, collections and business and real estate, representing clients throughout California. 800-338-6039. © Copyright 2002.