Feature
By Ted Kimball
In our constantly changing world, legal challenges facing our industry are at an all-time high. Consequently, residential property management has become an extremely challenging business to operate successfully. Some of the most common types of lawsuits filed against California rental property owners and managers in 2003 focused on fair housing violations, toxic mold, unlawful lease provisions, illegal collection practices, and illegal credit application or credit reporting practices. There were also lawsuits pertaining to liability for third-party criminal conduct, identity theft and security deposits as well as premises liability. In addition, there were lawsuits concerning violations of specific regulations pertaining to environmental hazards, labor law and anti-terrorism.
After reviewing this array of recent lawsuits, I consider that four of them stand out as the top legal challenges for residential property owners and managers for 2004. Today, the number one challenge to the rental housing industry in California is what attorneys describe as “17200 cases,” based on Section 17200 of the Business & Professions Code. This law allows anyone or any law firm to bring a suit against any business by claiming that they are engaged in unfair or unlawful business practices. All states have some version of this law, but California’s is the worst.
For instance, in California the plaintiff does not have to be affected by the alleged unlawful or unfair practice or even be a customer of the business. In essence, the law deputizes everyone as a private attorney general. If the plaintiff prevails, not only does he/she recover attorney’s fees and costs, but also the court requires that the offending business “disgorge its ill-gotten gain” by returning any monies or profits it received as a result of the unfair or unlawful practice.
The statute of limitations is four years. This means that inappropriate late charges, application fees, transfer fees or termination fees can be subject to these types of lawsuits, with the outcome that these fees must be returned to every tenant who paid them during the past four years. Even more aggravating is the fact that since these actions are for restitution, not for damages, insurance coverage is very questionable and probably not available in most cases.
In late 2002, a “17200 case” aimed at termination fees went all the way to the California Supreme Court, which agreed with the tenant’s position that termination fees are unlawful if automatically charged. Instead, the tenant must be given the option to pay the fee or remain liable through the end of the lease or until the time the property is rented again. However, this can also become a problem if not implemented correctly by on-site staff. Keep in mind the importance of drafting these provisions carefully so you can implement them in accordance with a true option. Don’t ever automatically charge a termination fee.
In this same case, the court ironically upheld the practice of charging tenants upfront move-in fees and transfer fees. These fees were charged to all new tenants to defray the upfront costs incurred by landlords. However, in response to the court’s decision, the state legislature quickly passed a bill that declared them illegal as of January 1, 2003.
Number two on my list of challenges to residential landlords is alleged fair housing law violations. This is not surprising when over 50 percent of California’s population consists of renters, and the majority of our state’s population is a member of one or more protected classes. Most cases for intentional discrimination are not insurable, for you cannot insure against an intentional wrongdoing.
Furthermore, there is no out-of-pocket cost for a plaintiff to file a fair housing complaint if he/she files through an agency such as U.S. Department of Housing and Urban Development or the California Department of Fair Employment and Housing. Therefore, prudent managers and owners should make sure that their 2004 management staff and on-site personnel are thoroughly trained in fair housing laws.
Also new this year and all across the nation, fair housing shoppers or testers are using linguistic profiling through prospective tenant telephone conversations as an easier and additional method to find illegal discrimination in the application process.
Number three on my list of top challenges to residential property owners are lawsuits based on toxic mold. Claims for personal injury and property damage caused by the growth of mold inside apartments are still at a crisis level. The problem is that there are currently no federal or state guidelines regarding exposure limits for toxic mold. Last year, the state of California passed legislation to study the issue but fell short on funding the study because of the budget crisis this year.
A claim of simple negligence on the landlord’s part is all that is needed to file a lawsuit. Therefore, toxic mold cases have become the next big tort wave to hit the rental housing industry, following lead-based paint and asbestos.
A little over a year ago, a Sacramento court awarded the plaintiffs over $2.7 million for toxic mold-based injuries and property damage. The significance of this case is not just the amount of the award, but for the first time in the nation a verdict was awarded for the plaintiff based on the alleged personal injury as a result of toxic mold. Before this case, all previous judgments and settlements involved only property damage.
In late 2002, a Los Angeles case involving eight families in federally subsidized housing was settled for several million dollars. And just recently, a Fullerton tenant won a $900,000 settlement against an apartment complex for damages resulting from exposure to mold.
Some of the claimed injuries are respiratory problems, skin rashes, headaches, lung disease, cognitive memory loss and brain damage. Litigation has also been fueled by confusion in the scientific world, and the fact that mold is a visible indoor problem. There are currently over 10,000 pending cases in the U.S., a 300 percent increase in mold cases since 1999. California, of course, leads the pack.
The good news is that more and more scientific experts are concluding that a typical amount of household mold does not adversely affect the health of the occupants. This is extremely valuable because there is an evidence code section that precludes scientific evidence from being introduced if mold or mold infestation is not generally recognized by the scientific community as being the cause of the injury.
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. In addition, many insurance companies claim exclusions through their pollution-exclusion exception, and many more are adding specific riders excluding coverage for mold claims.
Therefore, one of the most important issues in this type of case is what caused the loss. Documentation of the cause of the mold growth is extremely important, as well as the methods for how to handle the tenant’s continued occupancy of the unit. Each case is unique and deserves its own analysis and recommended procedures.
You should also address mold in the lease for each of your tenants. Document and clearly outline what the tenant’s responsibilities are regarding maintaining his/her premises in a manner that will not attract mold. Also, the lease should lay out the tenant’s responsibilities for notification to the landlord, mold removal procedures, and the process for the tenant’s temporary vacancy from the apartment if the mold is found to be toxic. If you follow these steps, you have a much better chance of holding the tenant responsible for any mold growing inside the unit, and he/she will at least share some of the legal responsibility.
Number four on my top list of challenges for California landlords is Proposition 65. This law, which requires all businesses that employ more than 10 persons to warn individuals before exposing them to even very small amounts of over 700 listed chemicals, has found its way into the courts through private attorneys who are taking advantage of the bounty-hunter provisions of its regulations. Attorneys’ fees and costs, as well as a bounty fee of 25 percent of any assessed penalties or fines can be recovered if the suit prevails. The proposition allows for penalties of up to $2,500 per day.
The act specifically prohibits any person, in the course of doing business, 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. Substances that contain chemicals on the list include lead-based paint and common substances such as second-hand smoke, barbecue smoke and automobile exhaust fumes.
As a result of the dramatic increase in the number of Proposition 65 cases, the legislature has taken a hard look at the proposition as well and, in the process, passed laws effective this year that place further restrictions on plaintiffs. For instance, self-styled enforcers must now provide a certificate of merit to show some scientific basis to their suits before filing. Another new provision provides for increased court oversight of settlements.
The opinions expressed in this article are those of the author and do not necessarily reflect the viewpoint of the SFAA or the San Francisco Apartment Magazine. Ted Kimball is a partner of Kimball, Tirey & St. John. This article is for general information purposes only. Before acting, make sure to receive legal advice from an attorney with expertise in this area of law. If you have any questions regarding this article, please call 800-338-6039. For articles on other related topics, please consult the resource library online. Copyright © 2004.