Property

Management
Realty Publications, Inc.
 CITE THIS READING MATERIAL AS:

Realty Publications, Inc.

Property
Management
Sixth Edition
 Cutoff Dates:

Legal editing of this book was

completed October 2020.

Copyright © 2020 by Realty Publications, Inc.

P.O. Box 5707, Riverside, CA 92517

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Legal Editor/Publisher:
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Carrie B. Reyes
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 Table of Contents i

Table of Forms.....................................................................................................................v
Glossary..............................................................................................................................627
Table of
Quizzes..............................................................................................................................643
Contents
Chapter 1 Fee vs. leasehold
A matter of possession. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Ownership
Chapter 2 License to use land and
A personal right to use another’s property . . . . . . . . . . . . . . . . . . . 9
Possession
Chapter 3 The tenancies in real estate
Know your tenancy or lose time. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Chapter 4 Landlord’s right to enter

Conflict with occupant’s right to privacy. . . . . . . . . . . . . . . . . . . . 31

Chapter 5 Tenant leasehold improvements

Ownership rights when a tenant vacates . . . . . . . . . . . . . . . . . . . 47

Chapter 6 Options and the right of first refusal to buy

Tenants with rights to acquire the premises. . . . . . . . . . . . . . . . . 61

Chapter 7 Property management licensing Property

When is a DRE license required?. . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Management
Chapter 8 Property management agreement
Authority to operate a rental property. . . . . . . . . . . . . . . . . . . . . . . 79
and Agency
Chapter 9 A property manager’s responsibilities
An evolving standard of conduct. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87

Chapter 10 Resident managers

Employees: not independent contractors, not tenants . . . . 105

Chapter 11 Identification of property manager or owner

Notice to tenant of agent-for-service . . . . . . . . . . . . . . . . . . . . . 117

Chapter 12 Exclusive authorization to lease

Leasing agent’s bargain for fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . 123

Chapter 13 Exclusive authorization to locate space

A leasing agent and the commercial tenant. . . . . . . . . . . . . . . 133

Chapter 14 Cost of operating leased space

Disclosures by leasing agents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143
ii Property Management, Sixth Edition

Chapter 15 Tenant profiles

Get the negotiations rolling. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151

Chapter 16 Offers to lease

Negotiating the commercial lease . . . . . . . . . . . . . . . . . . . . . . . . . 161

Chapter 17 Residential tenant credit checks

Rents Protection for landlords and brokers. . . . . . . . . . . . . . . . . . . . . . . . 169
and
Chapter 18 Commercial tenant screening
Deposits Qualified to stay and pay. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177

Chapter 19 Security deposits and pre-expiration inspections

Cover for a tenant’s nonperformance . . . . . . . . . . . . . . . . . . . . . 183

Chapter 20 Residential turnover cost recovery

Rent is set to include all operating expenses. . . . . . . . . . . . . . . . 197

Chapter 21 Accepting partial rent

Residential and commercial landlord rights. . . . . . . . . . . . . . . 205

Chapter 22 Changing terms on a month-to-month tenancy

Landlord’s notice to tenant. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213

Chapter 23 Lease guarantees and small claims actions

Recovery amount limited. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223

Enforcing Chapter 24 Forfeiture of the lease

Lease agreement obligations survive . . . . . . . . . . . . . . . . . . . . . . 231
Rents;
Chapter 25 Delinquent rent and the three-day notice
Forfeiting Pay or forfeit the right of possession . . . . . . . . . . . . . . . . . . . . . . . 243
Tenancies
Chapter 26 Three-day notices to quit nonmonetary breaches
Curable and incurable nonmonetary breaches . . . . . . . . . . . . 255

Chapter 27 Just Cause Evictions under the Tenant Protection Act

Introducing the Tenant Protection Act (TPA). . . . . . . . . . . . . . . 273

Chapter 28 Proof of service

Diligence not required to locate the tenant. . . . . . . . . . . . . . . . . 281

Chapter 29 Other amounts due under three-day notices

Know what the judge will allow. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 289

Chapter 30 Notices to vacate

Termination of periodic tenancies. . . . . . . . . . . . . . . . . . . . . . . . . . 299
 Table of Contents iii

Chapter 31 Surrender cancels the lease agreement

Lost ability to recover future rents. . . . . . . . . . . . . . . . . . . . . . . . 313

Chapter 32 Notice of belief of abandonment

An alternative forfeiture. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 323

Chapter 33 Personal property recovered by tenant

Reclaim it on notice or lose it . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 333

Chapter 34 Constructive eviction cancels the lease

Interference forces the tenant to vacate. . . . . . . . . . . . . . . . . . . . 345

Chapter 35 Retaliatory eviction defence

Shackling vengeful wayword landlords. . . . . . . . . . . . . . . . . . . . 355

Chapter 36 Defective building components

Liability for neglect, no strict liability. . . . . . . . . . . . . . . . . . . . . . 363 Maintenance
Chapter 37 Care and maintenance of property and
Tenant obligations and remedies. . . . . . . . . . . . . . . . . . . . . . . . . . . . 367 Security
Chapter 38 Implied warranty of habitability
Safe and sanitary living conditions. . . . . . . . . . . . . . . . . . . . . . . . . 379

Chapter 39 Fire safety programs

Smoke detectors, security bars and safety information. . . 393

Chapter 40 Security to prevent crimes

Protective measures and warnings . . . . . . . . . . . . . . . . . . . . . . . . . 399

Chapter 41 Dangerous on-site and off-site activities

Duty to all to remove on-site dangers . . . . . . . . . . . . . . . . . . . . . . . 405

Chapter 42 Commercial lease agreements

The conveyance of a leasehold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 417
Commercial
Lease
Chapter 43 Rent provisions in commercial leases
Setting the rent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 437 Provisions
Chapter 44 Adjustable rent provisions
Economic goals of commercial landlords . . . . . . . . . . . . . . . . . . 445

Chapter 45 Rent increases and C

Coping with inflation through rent . . . . . . . . . . . . . . . . . . . . . . . . 455

Chapter 46 Percentage lease rent provisions

Rental income driven by gross sales. . . . . . . . . . . . . . . . . . . . . . . . 465

Chapter 47 Commercial use-maintenance provisions

Shifting ownership obligations to tenants. . . . . . . . . . . . . . . . . 471
 iv Property Management, Sixth Edition

Chapter 48 Lease renewal and extension options

Don’t forget to exercise. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 485

Chapter 49 Lease assignments and subleases

Consent conditioned on exactions . . . . . . . . . . . . . . . . . . . . . . . . . . 497

Chapter 50 Commercial rent control prohibited

Legislative purpose. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 509

Chapter 51 Residential rental and lease agreements

Residential A review of periodic vs. fixed-term tenancies. . . . . . . . . . . . . . 515
Lease and Chapter 52 Foreign-language residential leases
Rental A written translation addendum. . . . . . . . . . . . . . . . . . . . . . . . . . . . 525

Agreements Chapter 53 Lead-based paint disclosures

Crystal clear transparency. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 529

Chapter 54 Permitting pets and waterbeds

Role of the security deposit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 535

Chapter 55 Civil rights and fair housing laws

Property rights and an individual’s status. . . . . . . . . . . . . . . . . . 543

Chapter 56 Adults-only policies prohibited in housing

Familial status is protected social activity. . . . . . . . . . . . . . . . . . 559

Chapter 57 Seniors-only housing

California’s fair housing laws. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 567

Chapter 58 Residential rent control

Police power and rent control. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 573

Chapter 59 Leaseholds as security for mortgages

Lender Financing business expansions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 581
Considerations Chapter 60 Attornment clauses in commercial leases
Altering priorities for lenders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 589

Chapter 61 Tenant estoppel certificate

Protection for buyers and lenders. . . . . . . . . . . . . . . . . . . . . . . . . . . 603

Chapter 62 Due-on leasing regulations

Rising interest rates bring lender interference. . . . . . . . . . . . 611

Chapter 63 Gaining possession after foreclosure

Notice required to remove occupants. . . . . . . . . . . . . . . . . . . . . . . 619
 Table of Contents v

For a full-size, fillable copy of any form cited in this book plus our entire Table of
Forms
library of 400+ legal forms, go to www.realtypublications.com/
forms.

No. Form Name Page

Full
111 Exclusive Authorization to Locate Space ��������������������������������������������137
113 Schedule of Leasing Agent’s Fee ������������������������������������������������������������428
Forms
116 Right to Enter and Exhibit Unit to Buyers for Residential and
Commercial Rentals ���������������������������������������������������������������������������������������� 36
116-1 Notice to Occupant of Entry and Completion of Showing —
For Residential and Commercial Rentals �������������������������������������������� 37
161 Standard Option to Purchase Irrevocable Right-to-Buy ���������������� 64
180 Counteroffer ������������������������������������������������������������������������������������������������������166
209-2 Profit and Loss Statement����������������������������������������������������������������������������180
302 Credit Application — Individual ������������������������������������������������������������171
552-7 Commercial Lease Agreement Addendum —
Alienation of Leasehold������������������������������������������������������������������������������507
553-1 Guarantee Agreement — For Lease ������������������������������������������������������224
554 Change of Owner or Property Manager — ­ Addendum to Rental
or Lease Agreement ��������������������������������������������������������������������������������������120
555 Tenant Lease Worksheet ��������������������������������������������������������������������������� 154
556 Offer to Lease ����������������������������������������������������������������������������������������������������163
558 Partial Payment Agreement — Commercial ������������������������������������207
559 Partial Payment Agreement — Residential ��������������������������������������210
560 Condition of Premises Addendum ��������������������������������������������������������368
561 Condition of Furnishings Addendum — and Inventory ������������370
562 Tenant’s Property Expense Profile ����������������������������������������������������������146
563 Pet Addendum ������������������������������������������������������������������������������������������������538
564 Waterbed Addendum������������������������������������������������������������������������������������540
565 Option to Renew/Extend Lease ��������������������������������������������������������������487
566 Exercise of Option to Renew/Extend Lease����������������������������������������491
567 Notice of Intent to Enter Dwelling ��������������������������������������������������������� 35
567-1 Notice of Right to Request a Joint Pre-Expiration
Inspection ����������������������������������������������������������������������������������������������������������188
567-3 Statement of Deficiencies on Joint
Pre-Termination Inspection ����������������������������������������������������������������������190
vi Property Management, Sixth Edition

569 30-Day Notice to Vacate —

For Use by Residential Landlord ������������������������������������������������������������301
569-1 60-Day Notice to Vacate – For Use by Residential Landlord����� 302
570 30-Day Notice of Change in Rental Terms ������������������������������������������215
572 30-Day Notice to Vacate — From Tenant ��������������������������������������������216
573 90-Day Notice to Quit Due to Foreclosure —
To Holdover Residential Tenant ������������������������������������������������������������622
575 Three-Day Notice to Pay Rent or Quit —
With Rent-Related Fees ������������������������������������������������������������������������������245
575-1 Three-Day Notice to Pay Rent or Quit —
Without Rent-Related Fees ����������������������������������������������������������������������293
576 Three-Day Notice to Perform or Quit ����������������������������������������������������257
577 Three-Day Notice to Quit ����������������������������������������������������������������������������259
579 Right of First Refusal to Buy — Addendum ���������������������������������������� 67
580 Proof of Service �������������������������������������������������������������������������������������� 267, 286
581 Notice of Belief of Abandonment —
Residential and Commercial Property ������������������������������������������������329
582 Notice to Landlord to Surrender Personal Property —
For Use by Residential Tenants Only ����������������������������������������������������337
582-1 Costs Payable To Reclaim Personal Property ������������������������������������343
584 Notice of Right to Reclaim Personal Property —
To Residential Tenant After Termination of Tenancy������������������� 335
584-1 Notice of Right to Reclaim Personal Property — To Others with
an Interest in Property Left by Residential Tenant ������������������������339
585 Security Deposit Deposition On Vacating
Residential Premises ������������������������������������������������������������������������������������192
587 Notice of Right to Reclaim Personal Property — To Others with
an Interest in Property Left by Residential Tenant ����������������������� 316
591 Resident Manager Agreement ����������������������������������������������������������������108
596 Assignment of Lease��������������������������������������������������������������������������������������330
597 Notice of Nonresponsibility – From Landlord ���������������������������������� 57
598 Tenant Estoppel Certificate ������������������������������������������������������������������������606

110 Exclusive Authorization to Lease Property����������������������������������������125

Partial 135 Request for Homeowner Association Documents �������������������������� 84
Forms 163 Lease-Option — Contract for Deed������������������������������������������������������������ 69
 Table of Contents vii

185 Letter of Intent ������������������������������������������������������������������������������������������������147

352 Annual Property Operating Data Sheet (APOD)������������������������������203
436-1 UCC-1 Financing Statement������������������������������������������������������������������������ 58
550 Residential Lease Agreement ������������������������������������������������������������������517
552 Commercial Lease Agreement — Gross — Single Tenant�������������������
6, 419, 442, 446, 447, 450, 451, 460, 462, 473-475, 479-482, 498, 506,
586, 599, 605
552-4 Commercial Lease Agreement — Percentage Lease����������������������467
552-8 Lender Subordination and Attornment Provisions�������������� 591, 597
590 Property Management Agreement ���������������������������������������������������������� 81
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 Chapter 1: Fee vs. leasehold 1

Chapter
1
Fee vs. leasehold
Click to watch

After reading this chapter, you will be able to: Learning

•  identify the different possessory interests held in real estate, and
the rights and obligations associated with each;
Objectives
•  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.

estate life estate Key Terms

fee estate master lease
fixed-term tenancy parcel
ground lease profit a prendre
impairment sublease
leasehold estate tenancy-at-sufferance
legal description tenancy-at-will

Real estate, sometimes legally called real property or realty, consists of:  A matter of
•  the land;  possession 
•  the improvements and fixtures attached to the land; and 
•  all rights incidental or belonging to the property.1

1 Calif. Civil Code §658

2 Property Management, Sixth Edition

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

A three-dimensional the “face of the earth.” Based on the legal description, a surveyor locates and
portion of real estate sets the corners and surface boundaries of the parcel. The legal description is
identified by a legal
description. contained in deeds, subdivision maps or government surveys relating to the
property.
legal description All permanent structures, crops and timber are part of the parcel of real estate.
The description used
to locate and set
The parcel of real estate also includes buildings, fences, trees, watercourses
boundaries for a parcel and easements within the parcel’s boundaries.
of real estate.
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).

Possessory The ownership interests a person may hold in real estate are called estates.
Four types of estates exist in real estate: 
interests in
•  fee estates, also known as fee simple estates, inheritance estates,
real estate  perpetual estates, or simply, the fee; 
•  life estates; 
estate
The ownership interest •  leasehold estates, sometimes called leaseholds, or estates for years; and 
a person may hold in
real estate.
•  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
Fee estates: landlord/tenant context, the fee owner is the landlord.
unbundling
Editor’s note — If a sublease exists on a commercial property, the master
the rights  tenant is the “landlord” of the subtenant.
fee estate A fee owner has the right to possess and control their property indefinitely.
An indefinite, exclusive
and absolute legal
A fee owner’s possession is exclusive and absolute. Thus, the owner has the
ownership interest in a
parcel of real estate.
2 CC §761
 Chapter 1: Fee vs. leasehold 3

Consider a fee owner who grants separate fee interests in their property to two Case in point
individuals. One individual receives the land’s surface and air space rights. The other
individual receives the subsurface oil and mineral rights. Separation of
The surface owner claims title to the entire parcel of real estate should be vested — fee interests
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]

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 Separate
interests. One person may own the mineral rights beneath the surface,
another may own the surface rights, and yet another may own the rights interests
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 profit a prendre
can convey a leasehold estate in the oil and minerals while retaining their The right to remove
fee interest. The drilling rights separated from the fee ownership are called minerals from
another’s real estate.
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
4 Property Management, Sixth Edition

Life estates 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
and the life entered into by the fee owner, an executor under a will or by a trustee under
tenant  an inter vivos trust.

Life estates are commonly established by a fee owner who wishes to provide
life estate a home or financial security for another person (the life tenant) during that
An interest in a parcel
of real estate lasting
person’s lifetime, called the controlling life.
the lifetime of the life
tenant. 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 life estate The holder of a life estate may not impair the fee interest.7

improves or 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
impairs the plants or demolishing portions of the improvements or land.
fee Conversely, the owner of the life estate has the right to lease the property to
impairment others and collect and retain all rents produced by the property during the
The act of injuring or term of the life estate.
diminishing the value
of a fee interest.
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
 Chapter 1: Fee vs. leasehold 5

Leasehold estates, or tenancies, are the result of rights conveyed to a tenant Leasehold
by a fee owner (or by the life estate tenant or master lessee) to possess a parcel
of real estate. estates held
Tenancies are created when the landlord and the tenant enter into a rental by tenants 
or lease agreement that conveys a possessory interest in the real estate to the
leasehold estate
tenant.  The right to possess
a parcel of land,
The tenant becomes the owner of a leasehold with the right to possess and conveyed by a fee
use the entire property until the lease expires. The ownership and title to owner (landlord) to a
tenant.
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 Types of
are classified by the length of their term: 
leaseholds
•  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;  fixed-term tenancy
A leasehold interest
•  a tenancy-at-will, previously introduced as an estate at will; and which lasts for
the specific lease
•  a tenancy-at-sufferance, commonly called a holdover tenancy. period set forth in a
lease agreement. A
A fixed-term tenancy lasts for a specific length of time as stated in a lease fixed-term tenancy
 
agreement entered into by a landlord and tenant. On expiration of the lease automatically
terminates at the end
term, the tenant’s right of possession automatically terminates unless it is of the lease period. [See
extended or renewed by another agreement, such as an option agreement. RPI Form 550 and 552]
[See Figure 1, Form 552 §2]

Periodic tenancies also last for a specific length of time, such as a week, tenancy-at-will
A leasehold interest
month or year. Under a periodic tenancy, the landlord and tenant agree granted to a tenant,
to automatic successive rental periods of the same length of time, such as with no fixed duration
in a month-to-month tenancy, until terminated by notice by either the or rent owed. A
tenancy-at-will can be
landlord or the tenant.   terminated at any time
by an advance notice
In a tenancy-at-will (also known as an estate at will) the tenant has the from either party.
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 tenancy-at-sufferance
A leasehold interest
a fixed duration, are usually not in writing and a rent obligation generally held by a tenant who
does not exist.  retains possession of
the rented premises
after the termination of
A tenancy-at-sufferance occurs when a tenant retains possession of the the tenancy. [See RPI
rented premises after the tenancy granted terminates. [See Chapter 3] Form 550 §3.3]
6 Property Management, Sixth Edition

Figure 1

Excerpt from
Form 552

Commercial
Lease
Agreement

Gross — Single
Tenant

Leaseholds In addition to the typical residential and commercial leases, you will find
special use leases. 
conveying
Oil, gas, water and mineral leases convey the right to use mineral deposits
special uses  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
Click to watch 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
ground lease of the land in the parcel, whether the parcel is vacant or improved. Fee
A leasehold interest
in which rent is based
owners of vacant, unimproved land use leases to induce others to acquire
on the rental value an interest in the property and develop it. 
of the land, whether
the parcel is vacant or Ground leases are common in more densely populated areas. Developers
improved.
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 mortgage.

master lease Master leases benefit fee owners who want the financial advantages of
A leasehold interest renting fully improved property, but do not want the day-to-day obligations
which grants a master
tenant the right to
and risks of managing the property.
sublease a property in
exchange for rent paid For instance, the fee owner of a shopping center and a prospective owner-
to the fee owner. operator agree to a master lease. 
 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, commercial lease agreement form with the
clauses prohibiting subletting removed. A sublease is also a regular, sublease
A leasehold interest
commercial lease agreement with an additional clause referencing the subject to the terms of
attached master lease and declaring the sublease subject to the terms of the a master lease.
master lease. [See Figure 1, 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:
Chapter 1
•  fee estates; Summary
•  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.
8 Property Management, Sixth 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
Chapter 1 fee estate..............................................................................................pg. 2
Key Terms 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

Quiz 1 Covering Chapters 1-4 is located on page 643.

 Chapter 2: License to use land 9

Chapter

2
License to use land

After reading this chapter, you will be able to: Learning

•  identify the limited rights to use another person’s real estate that
comprise a license to use land; and
Objectives
•  distinguish a license to use land from the use of property under a
leasehold or due to an easement.

dominant tenement license Key Terms

irrevocable license servient tenement

By granting a license, a property owner transfers rights to use the property A personal
to another. A license is similar to an easement and a lease since it transfers
a right to use a property, yet it is neither. The use granted by a license is a right to use
personal right, not a right held due to ownership of another property.
another’s
Similar to an easement or a lease, a license is an agreement. However, a property
license is often oral instead of written. Unlike an easement, a license does not
have a perpetual life, nor need it have a specific expiration date like a lease. 
servient tenement
As with an easement, a property burdened with a license is referred to as the A property burdened
servient tenement. Unlike an easement, a license is a personal right and by a license or
thus has no dominant tenement (another property) which benefits from easement.
the license. Accordingly, a license is not appurtenant to any property. 

Unlike an easement or a lease, a license is a personal privilege held by an dominant tenement

The property
individual, not an appurtenant right belonging to another property for its benefitting from an
future owners to receive and use. Since a license is not an appurtenant right easement on a servient
tenement.
10 Property Management, Sixth Edition

but is a personal right, called in gross, and thus does not benefit another
property, the right given by the license cannot be conveyed to another
individual as there can be no successors or assigns to the interest.

As with an easement, the holder of a license does not usually pay rent for the
right to use the burdened property. When consideration for the license exists,
it is typically in the form of an expenditure of time and money by the licensee
to improve or maintain the use authorized on the burdened property, such as
an irrigation ditch, roadway, fence, recreational activity, etc. 

No right to exclusive possession of a burdened property (the servient

tenement) for an authorized use exists. Therefore a license — like an easement
and unlike a lease — permits only the nonexclusive use of the property by
the licensee. The licensee may not exclude others from the property.

Possessory Unlike either a rental or lease agreement or an easement deed, which are
conveyances of possessory interests in real estate, a license agreement conveys
interests no interest in real estate. The right to use a property granted by a license is a
conveyed mere personal privilege. It is held by an individual under an agreement with
the owner of the burdened property. The license is revocable by the owner of
the burdened property at any time, unless revocation is deemed unfair to the
licensee. 

A license agreement often arises from an informal agreement between a

property owner and a neighbor or friend. For example, a property owner
may accept of an informal offer by their neighbor to jointly or separately
make use of the owner’s property for hunting activities. Thus, the neighbor is
given a license to use the property. The individual given the license agrees to
maintain or improve the property for the agreed-to hunting privileges. 

A license is the nonexclusive right to use a space or area within a parcel

A license to of real estate (or its improvements) which is owned by another person. The
use individual who holds the right to use by agreement does not receive any
rights to assign the right or to privacy. A license is subject to termination at
will by the owner of the burdened property, unless it has become irrevocable. 

license Consider a property owner who contracts for development work to be done
The personal,
unassignable right
on their property. The owner allows the construction company to store excess
held by an individual excavated dirt on one of the owner’s adjacent lots until the construction
to the non-exclusive company can haul it away. 
use of property owned
by another.
While the dirt remains on the vacant lot, an adventurous dirt biker enters
the property and is injured. The injured dirt biker claims the construction
company is a licensee who is not in possession of the real estate and thus
is liable for their injuries. The construction company claims they have a
recreational use immunity since they have an interest in the property as a
licensee with a right to use it for the agreed-to purpose. 
 Chapter 2: License to use land 11

A broker wants to increase the exposure of their business to the public by billboard Case in Point
advertising.
Use as a
The broker has a friend and business acquaintance who owns vacant property adjacent
to a highway. The property owner is willing to allow the broker to place a billboard on
personal
their vacant land. privilege
The broker and property owner enter into an oral understanding allowing the broker to
put up a billboard for the broker’s use only. It is agreed the broker may enter and exit
the property at will to install and maintain the billboard.
A time limitation is not specified for maintaining the billboard on the property, nor
is any fee or other compensation established. Critically, the property owner does not
relinquish any control over the real estate since they do not give the broker any other
right to use the property.
Have the broker and property owner established a landlord/tenant relationship or an
easement?
Neither! The broker has only been given a license to use the owner’s property.
Unlike a landlord/tenant relationship or an easement, a license to use real estate is a
personal privilege, unattached to any property owned by the broker. Thus, the use is
non-assignable to others by the broker and, unless agreed to the contrary or is unfair,
is revocable by the property owner at any time.

In this example, the holder of any interest in the property is exempt from
liability for injuries incurred by others arising out of their recreational use
of private property. The property interest exempt from liability may be either
possessory or nonpossessory. 

Since a licensee has a nonpossessory interest in the property, they also have
recreational use immunity even though the owner remains in possession
and control of the land and the licensee has only a nonexclusive personal
right to use the property.1

Thus, the construction company is not liable for injuries which occur
during the dirt biker’s recreational use of the property since the construction
company holds an interest in the property under their license to use. 

A license is often confused with a lease. A lease conveys a possessory interest License vs.
in real estate which allows the tenant to exclude others from occupying the
leased premises. This possessory interest is called a leasehold estate or a lease.2 lease
A license-to-use another person’s real estate is a personal privilege held by an
individual. However, a license is neither personal property nor real property.
Also, a license is neither owned by a person nor is it an appurtenance
to adjoining real estate. Thus, a license, not being property or capable of
ownership, cannot be transferred to the licensee’s successors or assigns.3

1 Calif. Civil Code §846

2 CC §761
3 Beckett v. City of Paris Dry Goods Co. (1939) 14 C2d 633
12 Property Management, Sixth Edition

License vs. Characteristics which distinguish a license from a lease include: 

lease, cont’d •  no writing to formalize the agreement; 

•  no rental payments; 
•  no specific location on or within the property where the use will occur; 
•  no intent to convey a leasehold estate; 
•  no right to exclude others; 
•  no termination date; and 
•  termination at the owner’s will, unless the license is irrevocable. 
In our previous example, the broker may use their business acquaintance’s
property to set up their billboard and leave it in place on the property. Also,
the broker (or their representative) has the right to go back and forth across the
property to maintain or repair the billboard. Thus, the property is a servient
tenement subject to the terms of the license held by the broker. However, no
dominant tenement exists since no other property benefits from the license;
only the broker individually benefits as the licensee. 

Thus, the owner of the property may demand removal of the broker’s
billboard from the property at any time, and the broker needs to immediately
remove it. 

A common thread which runs through both a lease and license is the right to
use the property. The glaring distinction between the two is that the license
does not include the right to exclude any other person from possession, as
does a lease. 

Continuing with our example, the broker may not fence off, lock out or
quarantine in any way the ground under or around their billboard from
the property owner or any other person. The license affords the broker no
greater right to be on the property than anyone else the owner might allow
to concurrently use the property. 

When an agreement with a property owner gives another person an exclusive

License right to possess the property against all others, including the owner, it is a
distinguished leasehold estate — not a license. 
from a lease Conversely, when the agreement confers only the privilege to use property
which remains under the owner’s day-to-day control, it is a license.4

For example, an owner of a packing company enters into an agreement to

purchase raw materials from a wholesale merchant. The wholesale merchant
supplies the packing company with raw materials over a three-year period.
In exchange, the packing company pays the agreed-to price for the materials
and allows the wholesale merchant the right to use an unlocked storage unit
to temporarily stockpile their materials. The packing company also allows
the merchant to use desk space in an office at the packing facility to conduct
business. 

4 Von Goerlitz v. Turner (1944) 65 CA2d 425

 Chapter 2: License to use land 13

The agreement does not designate the exact spaces to be used by the merchant.
Also, the packing company concurrently uses the same space used by the
merchant. 

Two years into the arrangement, the packing company is sold. The new owner
demands the wholesale merchant move out immediately. The wholesale
merchant claims a lease existed between himself and the previous owner,
allowing him to remain on the property until the lease expires. 

However, no dollar rental amount had been established. Importantly, the

wholesale merchant did not have exclusive possession of the spaces they
occupied. 

Instead of a lease, the wholesale merchant held a license agreement to use

space under which the packing company had a superior possessory right
to the premises. Thus, the wholesale merchant’s use of unlocked space,
concurrently occupied by the original owner, was not a lease. 

The mere permission of an owner to let someone use and occupy non-specific
space in a structure in a non-exclusive manner when the owner retains
possession and total control over the premises constitutes a license.5

Even if a written agreement identifies the interest given as a license, the

actual language and provisions of the agreement may render it a lease which
Terms
is improperly titled and referred to as a license.  implying a
For example, an optometrist enters into a written agreement with an operator lease
of a box store to establish an optical department on the premises. The written
agreement is entitled a license. 

The agreement allows the store to determine the space the optometrist
will occupy, set the rent at a percentage of the optometrist’s total sales and
require the optometrist to make nightly deposits of receipts with the store’s
cashier. Also, the optometrist has the exclusive right to manage and operate
their trade within their space. The agreement prohibits the optometrist from
assigning their business and the occupancy to another without the store’s
prior consent. 

The agreement is for a term of three years, at which time the optometrist
agrees to surrender the premises in good condition. 

Two years after commencement of the agreement, the store hands the
optometrist a notice of cancellation of their agreement (rather than a three-
day notice to perform or quit) for the optometrist’s failure to deposit their
daily cash receipts with the store cashier. 

The optometrist refuses to vacate, claiming they are a tenant of the store
under the written agreement. The store contends the agreement was a
license, terminable at any time and the optometrist must leave. 

5 Caldwell v. Gem Packing Co. (1942) 52 CA2d 80

14 Property Management, Sixth Edition

Case in Point Consider a corporation which owns 150 units in a resort condominium and sells time-
share memberships in the resort. A member may purchase up to four one-week time
What steps share interests.
does a landlord However, a member is not entitled to reserve any particular unit in advance of occupancy.
take to serve The assignment of units for actual occupancy during the time period selected is left up
an unlawful to the discretion of the corporation’s board of directors.
detainer on The Department of Real Estate (DRE) issues a restraining order, stopping sales of these
a holdover time-share memberships because the corporation failed to first obtain a permit and a
tenant? public report from the DRE to sell fractional interests in real estate.
Editor’s note — This case was decided before the DRE changed its name to the California
Bureau of Real Estate (CalBRE) in 2013.
The corporation contends the memberships are mere licenses held by the members
to use unidentified space and are not a lease or other conveyance of space to the
members which require a permit and public report. The corporation further contends
the members do not hold an interest in the real estate since they do not have exclusive
right to the possession of any specific unit.
Here, the occupancy rights held by the members constitute a lease. The units to be
occupied are identical, the duration of occupancy is specific and each member has the
right to exclusive occupancy of a unit. [Cal-Am Corporation v. Department of Real
Estate (1980) 104 CA3d 453]

However, the terminology in their agreement and the payment of rent

is more in line with a lease than a license, indicating the parties created a
landlord/tenant relationship by their arrangements. 

Similar to a lease, the provision prohibiting assignment is only applicable to

the ownership of an interest in real estate since a license is non-assumable as
nothing is actually owned for the licensee to assign. Also, the optometrist was
given exclusive possession of a designated space within the store for a fixed
period of time which eliminates the owner’s right to enter the optometrist’s
space at any time. 

Thus, the arrangement by the content of the written agreement was a

lease. The right to exclude others from entry for a stated term, coupled
with assignment rights and rent, are characteristics of a landlord/tenant
relationship, not a license.6

If an occupancy agreement contains words or phrases like “lease,” “rental,”

“demise” or “good tenantable condition,” the agreement will be construed to
be a lease rather than a license. 

A license is usually oral with very few terms agreed to except the permission
Know your to use or conduct an activity on a property. All the while, the owner remains
tenancy or in actual possession and retains the right to exclude others, including the
licensee. Above all else, a license does not carry with it the right to exclude
lose time anyone from the property. 

6 Beckett, supra
 Chapter 2: License to use land 15

However, with every additional condition agreed to between an owner and

user, a license begins to recharacterize itself more and more into a lease. 

For example, a broker has an office with unoccupied desks. The broker wants
to operate alone and avoid commitments to manage and supervise associate
licensees. However, the broker is willing to share space in the office with
other brokers. 

The broker offers another broker the use of an office, desk space, a telephone
line and secretarial services. The brokers orally agree each will pay their own
proportionate share of utilities, secretarial services and rent. 

A time period for the use is not specified. The office space selected by the other
broker is unlocked and open to the entire office. 

In this instance, the original broker may terminate this “rent-a-space”

relationship at any time without prior notice or cause since the other broker
has been given no more rights than a licensee to use office space. 

Conversely, when a broker offers space in their office under a written

agreement providing for lockable office space and a specific period for
occupancy, the agreement is a lease. With a lease (or a month-to-month
rental agreement) in hand, the broker creates a landlord/tenant relationship,
not a license. 

On some occasions, a license and a lease co-exist and are held by the same A license
person. 
coupled with
A person who is a tenant with exclusive occupancy to part of the space on the
premises of a shopping center also holds a license to use an adjacent portion
a lease
of the premises as well. 

For example, a retail tenant leases space in a shopping center. The tenant
has exclusive possession of their store space controlling who may enter.
However, the tenant shares use of the sidewalks and parking lots with other
shopping center tenants and all the customers of the shopping center. 

The tenant has no right to exclusive possession of the sidewalk and parking
area, only the space enclosed within their unit. Thus, the tenant holds a
license for access and non-exclusive use of the parking area and a lease for
the space within the shopping center. 

Occasionally an individual makes substantial expenditures to improve or

maintain their use of another person’s property. When they do so over a
An
long period of time in reliance on their oral agreement with the owner of irrevocable
the property, the license becomes irrevocable. A property owner may not
terminate an irrevocable license at will.  license
16 Property Management, Sixth Edition

irrevocable license An irrevocable license grants an individual the right to enter and use
The right to enter and property when the specific activity granted by the license remains feasible,
use property when maintained by the licensee’s on-going expenditure of money or equivalent
the specific activity
granted by the license labor. 
is maintained by the
licensee’s on-going Consider the construction of a privacy wall between adjacent lots. The lots
expenditure of money
or equivalent labor,
are located on a hillside, one above the other. Each lot is flat with a graded
and remains feasible. slope between them to adjust for the difference in the elevation. Each lot is
improved with a residence. 

The boundary line between the lots is located at the bottom of the slope.
However, for a wall to give the owner of each lot privacy, the wall needs to
be located at the top of the slope, entirely on the uphill parcel and several feet
from the boundary line. 

The owner of the uphill lot agrees to allow the neighbor below to construct a
masonry wall with its foundation on the top of the slope. The owner and the
neighbor agree on the height of the wall and that the neighbor may use the
slope between the wall and the property line. 

Encroachment The uphill lot owner orally agrees to the wall as an encroachment. However,
they do not reduce the agreement to a writing and thus no easement is
created. 

Continuing the previous example, the neighbor constructs the masonry wall
Irrevocable as agreed at the top of the slope. They also build a gazebo within the slope
by conduct area between the fence and property line.  

The owner of the uphill lot sells the property. The buyer as the new owner
has the lot surveyed and demands the neighbor remove the wall and gazebo
since they encroach on the buyer’s property. 

The neighbor claims they have an irrevocable license to maintain the

encroachments. The neighbor may use the slope since they spent considerable
time and money to construct the encroaching wall and gazebo structures in
reliance on the prior owner’s oral agreement which allowed them to build
the wall and use the slope. 

The buyer claims they cannot be barred from revoking the license since
they had no notice the license existed and the use was not reduced to an
enforceable easement. 

However, the license became irrevocable due to the neighbor’s substantial

effort or expenditures made in reliance on the oral agreement with the
property owner allowing the use. Further, the buyer — as a successor owner
of the property burdened with the use allowed by the oral license agreement
— need not have any knowledge of the irrevocable license to be barred from
denying the neighbor’s continual use to maintain the existing wall and
gazebo under the oral agreement.7

7 Noronha v. Stewart (1988) 199 CA3d 485

 Chapter 2: License to use land 17

Unlike an easement or a lease, a license is a personal privilege held by Chapter 2

an individual, not an appurtenant right belonging to another property
for its future owners to receive and use. Since a license is a personal right Summary
and does not benefit another property, the right given by the license
cannot be conveyed to another individual as there can be no successors
or assigns to the interest.

A holder of a license does not usually pay rent for the right to use the
burdened property. If consideration for the license exists, it is typically
in the form of an expenditure of time and money by the licensee to
improve or maintain the use authorized on the burdened property.

On some occasions, a license and a lease may sometimes co-exist and be

held by the same person. For example, a person who is a tenant with
exclusive occupancy to part of the space on the premises of a shopping
center also holds a license to use an adjacent portion of the premises as
well.

However, with every additional condition agreed to between an owner

and user, a license begins to recharacterize itself more and more into a
lease. Words or phrases like “lease,” “rental,” “demise” or “good tenantable
condition” are characteristic of a lease rather than a license.

dominant tenement..........................................................................pg. 9 Chapter 2

irrevocable license .........................................................................pg. 16
license.................................................................................................pg. 10
Key Terms
servient tenement.............................................................................pg. 9

Quiz 1 Covering Chapters 1-4 is located on page 643.

 Chapter 3: The tenancies in real estate 19

Chapter
3
The tenancies in
real estate Click to watch

After reading this chapter, you will be able to: Learning

•  differentiate between the four distinct possessory types of
tenancies;
Objectives
•  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.

holdover rent reservation agreement Key Terms

holdover tenant transient occupancy
lease agreement trespasser
rental agreement unlawful detainer

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
Know your
expiration of the lease.  tenancy or
Several months before the lease expires, they begin negotiations to enter lose time
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. 
20 Property Management, Sixth 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 RPI Form 571; see Form 569 in Chapter 30] 

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
25, 42 and 51]

Tenancies Recall from Chapter 1 that leasehold estates, or tenancies, are possessory
interests in real estate. Four types of tenancies exist: 
as leasehold •  fixed-term tenancies;
estates  •  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 trespasser. 
A person who occupies
a property without the
landlord’s transfer of
Fixed-term tenancies, periodic tenancies and tenancies at will have agreed-
the right to occupy. 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 unlawful detainer (UD).
The unlawful
possession of a A landlord needs to file a UD action in court to evict a holdover tenant. A
property. [See RPI
Form 575-578]
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.
 Chapter 3: The tenancies in real estate 21

A landlord and tenant orally agree to a six-month lease, with rent payable monthly. At Case in point
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 Second lease
to first serve them with a notice to vacate.  term is not a
Here, the tenant is not entitled to any further notice beyond the agreed-to termination periodic tenancy
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]

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 The
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 fixed-term
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
tenancy
lease agreement. A lease agreement has a commencement date and an
expiration date.2 [See Form 550 in Chapter 51]
lease agreement
During the term of the lease, the tenancy can only be terminated and the The written document
which sets the terms of
tenant evicted for cause. Even then, service of a three-day notice to cure the a fixed-term tenancy.
breach or vacate the property is required. [See Form 576 in Chapter 26] [See RPI Form 550, 552
and 552-4]
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
22 Property Management, Sixth 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 31]; 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. 

The periodic If the landlord finds a fixed-term tenancy too restrictive or inflexible for their
requirements, a periodic tenancy may be more suitable.
tenancy   
A periodic tenancy automatically continues for equal, successive periods
periodic tenancy
of time, such as a week or a month. The length of each successive period of
A leasehold interest time is determined by the interval between scheduled rental payments. A
which lasts for periodic tenancy is automatically renewed when the landlord accepts rent.
automatic successive
rental periods of the
same length of time, Examples of periodic payment intervals include: 
terminating upon
notice from either •  annual rental payments, indicating a year-to-year tenancy; 
party. [See RPI 551 and
552-5]
•  monthly rental payments, indicating a month-to-month tenancy; and 
•  weekly rental payments, indicating a week-to-week tenancy. 

rental agreement A periodic tenancy is intentionally created by a landlord and tenant entering
The written document into a rental agreement. A rental agreement is the agreement which sets
which sets the terms
of a periodic tenancy.
the terms of a periodic tenancy.
[See RPI Form 551 and
552-5] 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 30 and 572 in Chapter 22]

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 30]

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 26] 

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

6 CC §1946.1
 Chapter 3: The tenancies in real estate 23

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

Case in point
lease. At the end of the leasing period, the tenant retains possession and continues to
pay rent monthly, which the property manager accepts. 
Periodic tenancy
Later, the tenant is served with an appropriate notice to vacate. On the running of the or
notice period, the tenant refuses to vacate. The tenant claims the notice to vacate
tenancy-at-will?
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]

The characteristics of a tenancy-at-will include:  The tenancy-

•  possession delivered to the tenant with the landlord’s knowledge and
consent; 
at-will:
•  possession for an indefinite and unspecified period; and  consent but
 
•  no provision for the payment of rent. no 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 10];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 
Click to watch
•  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
Written notice
possession of the property until they can occupy an office building they are required before
constructing. Thus, a tenancy-at-will is created.
any change
in the right to
7 Covina Manor Inc. v. Hatch (1955) 133 CA2d Supp. 790
8 Psihozios v. Humberg (1947) 80 CA2d 215
occupancy
9 Miller v. Smith (1960) 179 CA2d 114
10 CC §§789, 1946
24 Property Management, Sixth Edition

The buyer agrees in the purchase agreement to give the seller a 90-day written
notice to pay rent or vacate the property. 

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

The holdover notice, the tenant who remains in possession unlawfully detains the property
tenancy 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
holdover tenant rent-free. When the landlord terminates the employment and the resident
A tenant who retains
possession of the manager fails to vacate immediately, the resident manager unlawfully
rented premises detains the premises as a holdover tenant.14 [See Form 591 in Chapter 10]
after their right of
possession has been
terminated.
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
holdover rent notice prior to commencing eviction proceedings.15
Rent owed by a
holdover tenant for
the tenant’s unlawful A holdover tenant no longer owes rent under the expired lease or terminated
detainer of the rented rental agreement since they no longer have the right of possession. However,
premises. [See RPI
Form 550 §3.3]

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
 Chapter 3: The tenancies in real estate 25

Facts: An apartment landlord filed an unlawful detainer (UD) against a tenant who Case in point
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
What steps
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. does a landlord
The tenant did not receive or respond to the UD and the landlord took possession of take to serve
the property. an unlawful
Claim: The tenant sought to restore their tenancy claiming the landlord’s attempts to detainer on
serve the UD were deficient since all the attempts were executed at the apartment a holdover
address while the tenant was out of state and no other actions were taken to reach tenant?
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.

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.

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 RPI 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.
26 Property Management, Sixth Edition

Case in point 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
Reasonable period. 
rental value On the tenant’s failure to vacate, the landlord serves the tenant a notice to either pay
in a holdover a rent amount substantially higher than rental market rates, or vacate. The tenant
tenancy 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]

Changing A landlord, by using a proper notice, can create a different tenancy

relationship from the one they initially conveyed to the tenant. A tenant’s
the type of possessory interest in real estate can shift from one type of tenancy to another
tenancy  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. 

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
16 Peter Kiewit Sons Co. v. Richmond Redevelopment Agency (1986) 178 CA3d 435
17 Colyear, supra
18 CC §1945
19 CC §1945
 Chapter 3: The tenancies in real estate 27

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 Other
agreement. However, the notice period cannot be less than seven days.
rules for
Other specialized rules exist for different types of properties and situations.
For example, in a rent-controlled tenancy, terminating the right of possession terminating a
is restricted by local ordinances. tenancy 
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 30]

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

discussed in this chapter. Transient occupancy is the occupancy of a
vacation property, hotel, motel, inn, boarding house, lodging house, tourist occupants
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. 
and their
removal
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/ transient occupancy
The occupancy of a
tenant law does not control transient occupancy. vacation property,
hotel, motel, inn,
The guest’s occupancy is labeled a stay, not possession. During a guest’s stay boarding house, lodging
in the lodging, the owner or manager of the property is entitled to enter the house, tourist home
or similar sleeping
unit at check-out time even though the guest may not yet have departed.  accommodation for a
period of 30 days or less.
The contract entered into for the lodging is usually called a reservation [See RPI Form 593]
agreement, but never a rental agreement or lease agreement. [See RPI
Form 593] 
reservation agreement
The written document
Guests pay a daily rate, not a daily or weekly rent. They arrive at a pre-set date which sets the terms of
and time for check-in, not for commencement of possession. Likewise, guests a transient occupancy.
depart at an hour on a date agreed to as the check-out time. Unlike a tenant, [See RPI Form 593]

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

20 CC §798.55(b)
21 CC §1946
 28 Property Management, Sixth Edition

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 RPI Form 593] 

Property 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
manager’s 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
self-help police or the sheriff will assist, without the need for a court order, to remove
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
guests
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. 

Avoidance of 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-to-month month tenancy which would place the occupancy under landlord/tenant
law. A residential hotel operator violating this rule is liable for a $500 civil
status 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. 

22 CC §1940(b)
23 CC §1865
24 Calif. Penal Code §602(s)
25 Calif. Revenue and Taxation Code §7280
26 CC §1940.1
 Chapter 3: The tenancies in real estate 29

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  

27 CC §1864

A fixed-term tenancy is the result of an agreement between the Chapter 3

landlord and the tenant for a fixed rental period. A periodic tenancy
automatically continues for equal, successive periods of time, such as a Summary
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 and the property type and location.

holdover rent....................................................................................pg. 24
holdover tenant...............................................................................pg. 24
Chapter 3
lease agreement...............................................................................pg. 21 Key Terms
periodic tenancy..............................................................................pg. 22
rental agreement.............................................................................pg. 22
reservation agreement...................................................................pg. 27
transient occupancy.......................................................................pg. 27
trespasser...........................................................................................pg. 20
unlawful detainer...........................................................................pg. 20

Quiz 1 Covering Chapters 1-4 is located on page 643.

 Friends don't let friends
read stale real estate news!
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market trends and new housing laws: tell
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Check it out
 Chapter 4: Landlord’s right to enter 31

Chapter
4
Landlord’s right
to enter

After reading this chapter, you will be able to: Learning

•  understand the relationship between a tenant’s right to privacy
and the landlord’s need to access the leased space;
Objectives
•  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.

business goodwill punitive damages Key Terms

forcible entry restitution
notice of entry self-help

Unknown 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
Conflict with
enforcement officers as they step out of their apartment. The tenant is hastily occupant’s
escorted away, leaving lights on and their pet inside, but locking the door.
right to
The landlord becomes aware of the tenant’s dilemma. Fearful the gas stove privacy 
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. 

32 Property Management, Sixth Edition

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.

Landlord may 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
not interfere 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
with tenant’s search warrant to legally authorize them to come onto the premises occupied
possessory by the tenant when the landlord has no right to entry.2

right 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 31 and 32] 

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
 Chapter 4: Landlord’s right to enter 33

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

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 right to enter 
and are no longer held by the landlord, until a reversion of possession occurs
on termination of the tenancy. 
another’s
space
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 19]; 
•  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 commercial lease agreement that prohibits any tenant violations

of government laws and regulations. [See RPI Form 552 §7.3] Entry to
The landlord asks the tenant for permission to conduct tests on the property
conduct a
and investigate whether the leased property contains any contamination hazardous
from hazardous waste. The tenant refuses to give the landlord permission
to conduct the investigation, claiming the landlord does not have a right to
waste
determine whether contamination exists until the lease expires.  investigation
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 Notice of
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 entry for
routine or non-emergency repairs, decorations, alterations, improvements,
replacements or services, whether or not agreed to by the tenant.8 [See Form
repairs 
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
34 Property Management, Sixth Edition

Case in point Facts: A residential landlord owned several rental properties. The city enacted an
ordinance requiring annual inspections of all residential rental properties to identify
Do city substandard properties. The ordinance required inspectors to obtain consent from
inspections 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
violate tenants’
believe a dangerous condition of the property required an immediate inspection for
rights to privacy? 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]

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. 
notice of entry
A written document
giving a tenant Service of a 24-hour notice of entry in advance of the entry is accomplished
advance notice of a by any one of the following methods: 
landlord’s intent to
enter a tenant’s unit to •  handing a written notice to the tenant personally; 
perform maintenance,
make repairs or •  handing the notice to an occupant of the unit who appears of suitable
inspect. [See RPI Form age and discretion to relay the notice to the tenant; or 
567]
•  posting the notice on, near or under the usual entry door so it will be
discovered by the tenant.

Mailed notice 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
of entry
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)
 Chapter 4: Landlord’s right to enter 35

Form 567
notice of intent to enter dwelling

Notice of
note: This form is used by a property manager or landlord when maintenance services need to be provided to an
occupied unit, to provide the tenant a written 24-hour notice of the landlord's intent to enter the premises. Intent to Enter
dAte: , 20 , at
Items left blank or unchecked are not applicable.
, California. Dwelling
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: CalBRE:

Signature:
Address:

Phone:
Fax:
Email:

forM 567 04-16 ©2016 rPi — realty Publications, inc., P.O. BOX 5707, RIVERSIDE, CA 92517

Editor’s note — When a landlord or property manager needs to temporarily

displace a tenant to fumigate or conduct invasive repairs, mutually agreed-
to terms need to be set out in writing by the landlord and tenant. [See Chapter
26; see RPI Form 588]

A residential landlord may enter a tenant’s unit after further notice to Entry for pre-
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 expiration
initial notice mandated to inform the tenant of the tenant’s right to a joint
inspection. [See Chapter 19] 
inspection 
36 Property Management, Sixth Edition

Form 116

Right to Enter
and Exhibit Unit
to Buyers

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  

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

12 CC §1950.5(f)(1)
13 CC §1950.5(f)(1)
 Chapter 4: Landlord’s right to enter 37

Form 116-1

Notice to
Occupant of
Entry and
Completion of
Showing

A residential or commercial property occupied by a tenant is called a rental.

Real estate brokers who list rentals for sale need to inform the seller of the
Entry during
seller’s right to coordinate prospective buyer inspections of the property. “For Sale”
These inspections can be completed using one of two notice procedures.14  
period
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?”]

14 CC §1954
15 CC §1954(d)(2)
38 Property Management, Sixth Edition

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).

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:

Entry on
•  the tenant’s right of possession has been terminated; and
surrender, •  the tenant has vacated the unit.
abandonment  Caution: the tenant vacating the property does not automatically trigger a
or forfeiture 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);
•  a properly-established surrender [See Chapter 31];
•  an abandonment, with a notice of abandonment; or
•  a forfeiture, with a three-day notice containing a declaration of
forfeiture. [See Chapter 24]
 Chapter 4: Landlord’s right to enter 39

Facts: A landlord and tenant enter into a residential lease agreement. The landlord Case in point
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 Are weekends
permit the landlord to hold an open house on the weekend. normal business
Claim: The landlord sues to hold an open house on the weekend, claiming they have the hours?
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]

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
Entry by
agreement. However, a landlord may only enforce their right to recover court order 
possession from a holdover tenant by the legal eviction process. Self-help is
absolutely unacceptable.  self-help
A landlord’s own
For example, in an unlawful detainer (UD) action, a landlord obtains a UD method of recovering
judgment against a tenant when the tenant fails to promptly answer the UD possession from a
tenant outside the
lawsuit. Before the eviction is carried out under the court order, the court legal eviction process.
“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
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

16 Bedi v. McMullan (1984) 160 CA3d 272

40 Property Management, Sixth Edition

Now consider a commercial landlord who obtains only a money judgment

Good faith against their tenant for unpaid rent. The landlord does not obtain an order
reliance on authorizing the tenant’s eviction. However, a court clerk erroneously issues
a writ of possession authorizing the landlord’s recovery of the property, via
erroneous the sheriff. Consequently, the tenant is evicted by the sheriff. 
court orders 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

Tenant’s right provision stating the landlord has the right to enter and retake possession
to privacy on 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
default 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.

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.

17 Glass v. Najafi (2000) 78 CA4th 45

18 Lamey v. Masciotra (1969) 273 CA2d 709
19 CC §1953(a)(l)
 Chapter 4: Landlord’s right to enter 41

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 No self-help
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.  to dispossess
The owner returns from their trip, but the tenant refuses to relinquish a tenant
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 Forcible

consisting of: 
entry by
•  peaceable entry by open doors, windows or other parts of the premises
without permission, prior notice or justification;  management
•  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  forcible entry
The unlawful entry
of any individual
Actions by a landlord, property manager or resident manager construed as into a rented property
an illegal forcible entry include:  without permission,
prior notice or
•  entry resulting from any physical acts of force or violence;  justification.

•  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 
20 Calif. Code of Civil Procedure §1159
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
42 Property Management, Sixth Edition

•  entry accomplished by a locksmith who opens the door during the

tenant’s absence;24 and 
•  entry by breaking locks.25 

Forcible entry 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
and self-help 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

Tenant’s Some lease agreements contain an unenforceable clause purporting to

give the landlord the right to take or hold the tenant’s personal property as
possessions security upon the tenant’s default on the lease. 
as security  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. 

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 

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
27 Jordan v. Talbot (1961) 55 C2d 597
 Chapter 4: Landlord’s right to enter 43

Forcible entry into premises leased to a tenant occurs whenever anyone Forcible entry
enters the tenant’s premises without the tenant’s present consent. 
by others
Consider a hotel operator who as a tenant encumbers their leasehold interest
in a hotel with a trust deed to provide security for a mortgage. 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 mortgage. 

The operator defaults on the mortgage. 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
mortgage, 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.  Forcible entry

Consider a prospective tenant who enters into a rental agreement without by the tenant 
inspecting the premises. 

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. 
28 Calidino Hotel Co. of San Bernardino v. Bank of America Nat. Trust & Savings Ass’n (1939) 31 CA2d 295
44 Property Management, Sixth Edition

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 

Landlord as Consider the owner of a single family residence who rents rooms to
individuals, called roommates. Soon, the owner spends less and less time
co-tenant with residing on the property. However, the owner continues to maintain their
roommates 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

Losses due property manager is entitled to a return of their possession of the premises for
to wrongful the duration of the lease. This is called restitution. 31 

dispossession  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
incurred while they were dispossessed of the property, but retained a legal
restitution right of possession. Thus, they are not entitled to any losses incurred after the
The return of expiration or termination of their tenancy under a rental or lease agreement.32 
possession of the
rented premises to a
wrongfully removed
For example, a commercial tenant is served a 30-day notice to vacate to
tenant. 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. 
29 McNeil v. Higgins (1948) 86 CA2d 723
30 Bittman v. Courington (1948) 86 CA2d 213
31 CCP §§1174(a)
32 CCP §1174(b); Orly v. Russell (1921) 53 CA 660
 Chapter 4: Landlord’s right to enter 45

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  business goodwill
The earning power of a
If the tenant has built up goodwill with the customers of their business, the business.

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.
Punitive
These treble damages are inflicted as a judicial punishment to deter bad acts, damages for
and are known as punitive damages. 
malicious
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
acts  
refusing the tenant access to records and personal property. 
punitive damages
Here, the landlord is acting with malice and the tenant may recover treble Monies awarded in
the amount of their actual money losses.38  excess of actual money
losses in order to deter
unlawful actions.
A landlord or property manager using actual force or violence to enter a
leased unit is guilty of a misdemeanor crime.39

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
39 Calif. Penal Code §418
46 Property Management, Sixth Edition

Chapter 4 A landlord may enter a rented premises:

Suumary •  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.

Chapter 4 business goodwill............................................................................pg. 45

forcible entry....................................................................................pg. 41
Key Terms notice of entry..................................................................................pg. 34
punitive damages............................................................................pg. 45
restitution..........................................................................................pg. 44
self-help..............................................................................................pg. 39

Quiz 1 Covering Chapters 1-4 is located on page 643.

 Chapter 5: Tenant leasehold improvements 47

Chapter
5
Tenant leasehold
improvements Click to watch

After reading this chapter, you will be able to: Learning

•  identify the different types of tenant improvements;
•  understand the landlord’s rights regarding tenant improvements
Objectives
on the termination of a lease; and
•  determine the landlord or tenant’s obligation to complete or pay
for the construction of tenant improvements.

further-improvements permissive improvement Key Terms

provision
real estate fixture
mandatory improvement
reversion
mechanic’s lien
tenant improvements
notice of nonresponsibility
trade fixtures

A retail business owner enters into a commercial lease agreement to occupy Ownership
commercial space as a tenant. The leased premises do not contain tenant
improvements since the building is nothing more than a shell. rights when
The tenant agrees to make all the tenant improvements needed to occupy the
a tenant
premises and operate a retail business (i.e., interior walls, flooring, ceilings, air vacates
conditioning, electrical outlets and lighting, plumbing, sprinklers, telephone
and electronic wiring, etc.).
tenant
The lease agreement provides for the property to be delivered to the landlord improvements
Improvements made
on expiration of the lease “in the condition the tenant received it,” less to a rented property to
normal wear and tear. No other lease provision addresses whether tenant meet the needs of the
occupying tenant. [See
improvements will remain with the property or the property is to be restored RPI Form 552 §11]
to its original condition when the lease expires. 
48 Property Management, Sixth 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 

Landlord’s However, the landlord’s right to improvements added to the property or paid
for by the tenant depends upon whether:
right to •  the tenant improvements are permanent (built-in) or temporary (free-
improvements 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). 

Leasehold Commercial lease agreements typically contain a further-improvements

provision allowing the landlord to either: 
improvement •  retain tenant improvements and alterations made by the tenant; or 
provisions •  require restoration of the property to its original condition on
expiration of the lease. [See RPI Form 552 through 552-5] 

further-improvements Further-improvement provisions usually include clauses stating: 

provision
A commercial lease •  who will make the improvements (landlord or tenant); 
provision which allows
a landlord to retain •  who will pay for the improvements (landlord or tenant); 
tenant improvements or
require the restoration
•  the landlord’s consent is required before the tenant makes
of the property to its improvements; 
original condition upon
expiration of the lease.
[See RPI Form 552 §11.3] 1 Calif. Civil Code §1013
2 CC §660
 Chapter 5: Tenant leasehold improvements 49

•  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 RPI Form 552 §11] 

A landlord under a lease agreement who agrees to make improvements to the Failure
rented premises needs to complete the improvements in a timely manner. If
the landlord fails to make timely improvements, the tenant may cancel the to make
lease agreement. [See RPI Form 552 §3.3] 
improvements
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 Improvements

or install improvements on the rented property, whether improved or
unimproved. The time period for commencement and completion needs to promised by
be provided for in the lease agreement. If not agreed to, a reasonable period
of time is allowed.4
the tenant 
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
50 Property Management, Sixth Edition

Case in point 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. 
The controlling
Before the building is completed by the landlord, the building code is changed to require
lease agreement 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] 

The tenant fails to construct the buildings during the term of the lease. The
mandatory tenant claims the obligation to build was not a mandatory improvement,
improvement but permissive. According to the tenant, the obligation to build only existed
An improvement
required to be made if it was necessary for the operation of the tenant’s business.
under the terms of
the lease or rental Here, the improvements were agreed to in exchange for rent. Accordingly, the
agreement.
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
Tenant’s landlord to construct a building on the leased property. After the foundation
failure to is laid, the landlord and tenant orally modify the construction provisions.
The tenant agrees to finish construction of the building in exchange for the
construct landlord forgoing their construction profit. 
improvements 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
 Chapter 5: Tenant leasehold improvements 51

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 Landlord’s
premises. However, further-improvement provisions typically call for
the landlord to approve the planned improvements before construction is consent to
commenced.
  improvements 
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
52 Property Management, Sixth Edition

Permissive Some lease agreement provisions allow a tenant to make necessary

improvements without the landlord’s further consent. These improvements
improvements are not specifically mandated, or required to be completed in exchange for
by the tenant 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
permissive
improvement further-improvements provision authorizes the tenant to demolish an
A nonmandatory existing building located on the property and construct a new one in its place
improvement without first obtaining the landlord’s consent. The rent is based solely on the
authorized to be
completed by the current value of the premises. 
tenant without further
landlord consent. 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 

Mandatory A further-improvements provision that requires a tenant to construct

improvements at a rent rate reflecting the value of the land, has different
improvements 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
mortgage. 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

 Chapter 5: Tenant leasehold improvements 53

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
Surrender of
removal by the tenant as a restoration of the premises.  improvements 
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 commercial
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
54 Property Management, Sixth 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. 

Real estate Two types of fixtures exist distinguishing improvements installed in a

building: 
fixtures vs. •  real estate fixtures; and 
trade fixtures •  trade fixtures. 
A real estate fixture is personal property that is attached to the real estate.
real estate fixture It becomes part of the real estate it is attached to and is conveyed with the
Personal property property.14 
attached to the
real estate as an
improvement, which For example, if a tenant rents an office and builds bookshelves into the wall
becomes part of the rather than merely anchoring them to the wall, the bookshelves become part
conveyable real estate.
of the improvements located on the real estate. 

When the lease expires, real estate fixtures become the landlord’s property.
trade fixture The landlord takes possession of the real estate fixtures as part of the real
Fixtures used to render
services or make estate forfeited or surrendered to the landlord, unless the lease agreement
products for the trade provides for restoration or permits removal by the tenant. The conveyance of
or business of a tenant.
real estate fixtures from tenant to landlord on expiration of the lease is called
reversion.15 
reversion
The conveyance of real
Conversely, trade fixtures do not revert to the landlord on expiration of the
estate fixtures from a lease. A trade fixture is an improvement that is attached to the real estate by
tenant to landlord on the tenant and is unique to the operation of the tenant’s business, not the use
expiration of a lease.
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
 Chapter 5: Tenant leasehold improvements 55

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 Fixture

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? 
Reimbursement
for tenant
A tenant who is wrongfully evicted is entitled to the rental value of their
improvements for the remainder of their unexpired lease term. Without improvements
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
on wrongful
original lease.  eviction
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
Trade fixtures
tenant (and their unsecured creditors) no longer has a right to the trade as security 
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
56 Property Management, Sixth 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 mortgage 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 

Notice of Tenants occasionally contract for improvements to be constructed on

the premises they have leased. Any mechanic’s lien by a contractor for
nonrespon- nonpayment initially attaches to the tenant’s leasehold interest in the
property.20
sibility
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
mechanic’s lien
A lien entitling landlord’s property manager: 
a contractor or
subcontractor to •  acquires knowledge the construction is taking place; and 
foreclose on a job site
property to recover
•  fails to post and record a Notice of Nonresponsibility. [See Form 597
the amount due and accompanying this chapter] 
unpaid for labor
and materials they A Notice of Nonresponsibility is a written notice which needs to be: 
provided.
•  posted in a conspicuous place on the premises within ten days after
the landlord or their property manager first has knowledge of the
notice of construction; and 
nonresponsibility
A notice used by a •  recorded with the county recorder’s office within the same ten-day
landlord to declare period.21
that they are not
responsible for any However, the landlord who becomes aware of the construction and fails to
claim arising out of the
improvement being
post and record the Notice of Nonresponsibility is not personally liable to
constructed on their the contractor. Rather, the contractor can only lien the landlord’s interest in
property. [See RPI the real estate and foreclose on their mechanic’s lien to collect for unpaid
Form 597]
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
 Chapter 5: Tenant leasehold improvements 57

Form 597
RECORDING REQUESTED BY

AND WHEN RECORDED MAIL TO

Notice of
Nonresponsibility
Name

Street
Address

City &
State

SPACE ABOVE THIS LINE FOR RECORDER'S USE

NOTICE OF NONRESPONSIBILITY
From Landlord (California Civil Code §8444)

NOTE: This form is used by a property manager or income property owner when a tenant commences construction of
improvements on premises leased from the owner, to declare the property owner is not responsible for any claim arising
out of the tenant improvements being constructed on the property.
DATE: _____________, 20______, at _________________________________________________________, California.
NOTICE IS HEREBY GIVEN:
1. ____________________________________________________________________ is the vested and legal owner of Click to watch
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.
Date: ________________, 20________ Name: _______________________________________________________

Signature: ____________________________________________________
� Owner, or � Agent of Owner
A notary public or other officer completing this certificate verifies only the identity of the individual who signed the document to which this certificate is
attached, and not the truthfulness, accuracy, or validity of that document.
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: _________________________________________________
(This area for official notarial seal) (Signature of notary public)

FORM 597 09-16 ©2016 RPI — Realty Publications, Inc., P.O. BOX 5707, RIVERSIDE, CA 92517

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
Nonrespon-
has posted and recorded a Notice of Nonresponsibility. sibility on
For example, a lease states the tenant is to make certain improvements as a mandatory
condition of renting the property. Since the improvements are mandatory improvements
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.
58 Property Management, Sixth 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 5: Tenant leasehold improvements 59

Additionally, a mechanic’s lien cannot be recorded against the landlord if

the improvements are removed by the contractor recording the lien. 
Removal of
fixtures by
For example, a tenant contracts to have air conditioning installed in
the building the tenant rents. The contractor sells the equipment to the contractor
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
Failure to
installing fuel pumps free of any liens.  perfect a lien
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
60 Property Management, Sixth Edition

Tenant improvements are improvements made to a rented property to

Chapter 5 meet the needs of the occupying tenant. The landlord’s right to tenant
Summary 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.

Chapter 5 further-improvements provision...............................................pg. 48

mandatory improvement..............................................................pg. 50
Key Terms mechanic’s lien................................................................................pg. 56
notice of nonresponsibility..........................................................pg. 56
permissive improvement..............................................................pg. 52
real estate fixture.............................................................................pg. 54
reversion............................................................................................pg. 54
tenant improvements....................................................................pg. 47
trade fixture......................................................................................pg. 54

Quiz 2 Covering Chapters 5-8 is located on page 644.

 Chapter 6: Options and the right of first refusal to buy 61

Chapter

6
Options and the right
of first refusal to buy

After reading this chapter, you will be able to: Learning

•  identify the various agreements granting a tenant the right to buy;
•  differentiate between an option to renew and an option to extend;
Objectives
•  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.

call option option to extend Key Terms

option period option to renew
option to buy right of first refusal

Tenants often need to invest substantial dollar amounts in tenant Tenants with
improvements to tailor newly leased premises to their needs. Whether
contracted for by the tenant or the landlord, the tenant pays for the rights to
improvements in:
acquire the
•  a lump sum;
premises
•  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.
62 Property Management, Sixth Edition

All these expenditures will be lost if the landlord refuses to extend the lease,
option to extend or if their demands for increased rent under an option to extend compel
An agreement granting the tenant to relocate. A retail tenant with even a small degree of insight into
a tenant the right to
extend possession
their future operations at the location will attempt to negotiate some sort of
under the original option to purchase the property.
lease agreement on
terms set out in the The tenant who has paid rent that includes the amortization of TIs paid by
option to extend. [See
RPI Form 565] 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 RPI Form 163]

Option to buy A landlord grants a tenant an option to purchase by entering into either:

vs. right of •  an irrevocable right to buy the property within a specific time period,
called an option to buy; or
first refusal •  a pre-emptive right to buy the property if the landlord later decides to
sell the property, called a right of first refusal.

option to buy The option to buy is typically evidenced by a separate agreement attached
An agreement granting to the lease agreement. An option to buy includes terms of purchase, none of
an irrevocable right to
buy property within
which are related to the lease of the property. The option to buy is to always
a specific time period. be referenced in the lease agreement and attached as an addendum.
[See RPI Form 161]
An option to buy contains all terms needed to form an enforceable purchase
right of first refusal agreement for the acquisition of the real estate. The tenant holding an option
A pre-emptive right to
buy a property if the
to buy has the discretionary right to buy or not to buy on the sales terms stated
owner decides to sell. in the option. To exercise the option, the tenant does so within an agreed-
[See RPI Form 579] 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
ft Right of first
refusal 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.

The option 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.
agreement This is a type of call option. [See RPI Form 161]
 Chapter 6: Options and the right of first refusal to buy 63

Facts: A tenant enters into a commercial lease agreement. The agreement provides for Case in point
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 Is an option
lease. The tenant renews the lease at the end of the first term, then attempts to renew to renew
again at the end of the second term which the landlord rejects.
unlimited?
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]

For the option to be enforceable, the purchase price of the property and terms
call option
of payment on exercise of the option are included in the option agreement. An agreement giving
If the dollar amount is not set as a specific amount in the option agreement, a buyer the right to
buy property within a
the purchase price may be stated as the fair market value of the property at specified time or upon
the time the option is exercised. an event at a specified
price with terms for
The right to buy is exercised by the tenant within a specified time period, payment. [See RPI
Form 161]
called the option period. The option period typically runs until the lease
expires, including extensions/renewals, or is terminated. [See Form 161 §4]
option period
If the option is not exercised precisely as agreed during the option period, the The specified time
period during which
option period expires of its own accord. On expiration, the option no longer the tenant has the
exists and the tenant is without an enforceable right to acquire the property.1 right to buy under an
option agreement. [See
When options to renew or extend leasing periods are negotiated as part RPI Form 161 §4]
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
64 Property Management, Sixth Edition

Form 161
STANDARD OPTION TO PURCHASE
Irrevocable Right-to-Buy
Standard Option NOTE: This form is used by a leasing or sales agent when offers to rent or buy a property include a purchase option
to Purchase exercisable without extensions, to prepare an option as an irrevocable offer to sell with a price and terms for payment
exercisable during a single period as an attachment to a lease agreement or an offer to grant an option.
DATE: , 20 , at , California.
Page 1 of 2 Items left blank or unchecked are not applicable.
1. OPTION MONEY:
Optionor herewith receives from Optionee option money in the amount of $ , evidenced by:
� cash, � check, or � , given in consideration for this option to purchase real property.
2. REAL PROPERTY UNDER OPTION:
Address
Legal description/Assessor’s parcel number
3. ADDITIONAL CONSIDERATION:
As further consideration for this option, Optionee is to obtain at their expense and deliver to Optionor prior to
expiration % of this option the following checked items regarding the property:
� Property survey report by licensed California surveyors � Off-site improvement plans
� Architectural plans and specifications � Soil engineer’s report
� On-site engineering plans � Land use study
� Zoning ordinance request � Application for a conditional use permit
� Application for a parcel map or waiver �
4. OPTION PERIOD:
Optionor hereby grants to Optionee the irrevocable option to purchase the Optionor’s right, title and interest
in the property on the terms stated, for a period commencing with the acceptance of this option and expiring
, 20 , or � on termination of Optionee's leasehold interest in the property.
5. EXERCISE OF OPTION:
Optionee may exercise this option during the option period by:
5.1 Signing escrow instructions identical in provisions to those attached as Exhibit A and delivering the instructions
to escrow [See RPI Form 401];
5.2 Depositing cash in escrow of $_______________; and
5.3 Delivering an escrow-certified copy of the signed escrow instructions to Optionor within the option period, in
person or by both certified and regular mail.
6. ESCROW CONTRACT:
In the event this option is exercised, the transaction will be escrowed with .
6.1 Escrow will close within ______ days after exercise.
7. DELIVERY OF TITLE:
On Optionee's exercise of this option, Optionor will timely place all documents and instruments into escrow required
of the Optionor as necessary for escrow to close as scheduled.
8. BROKERAGE FEE:
Optionor agrees to pay a brokerage fee of $_____________, or ______% of the selling price, IF:
8.1 This option is exercised;
8.2 Within one year after expiration of option period and any extension or renewal, Optionor enters into an agreement
to option, sell, lease or exchange with Optionee, or their assigns or successors; or
8.3 Optionor wrongfully prevents the exercise of this option:
8.4 Fee payable to Broker(s) ,
8.5 Optionor and Optionee acknowledge receipt of the Agency Law Disclosure. [See RPI Form 305]
9. SALE TERMS:
Price of $ payable as follows:
9.1 � All cash.
9.2 Cash down payment in the amount of $_______________.
9.3 � Take title subject to, or � Assume, an existing first trust deed note held by ,
with an unpaid principal balance of $_______________, payable $_______________ monthly, including interest
not exceeding _____%, � ARM, type _________________________, plus a monthly tax/insurance impound
payment of $______________.
a. At closing, loan balance differences per beneficiary statement(s) to be adjusted into:
� cash, � carryback note, or � sales price. [See RPI Form 415]
b. The impound account to be transferred: � charged, or � without charge, to Optionee.

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Now consider a lease agreement which contains an option to renew the

option to renew
An agreement granting
lease agreement instead of an option to extend. This is a distinction with a
an irrevocable right to complication. The renewal option requires the preparation and signing of
buy property within a new lease agreement on identical terms to the original lease agreement.
a specific time period.
[See RPI Form 565] 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.

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
 Chapter 6: Options and the right of first refusal to buy 65

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Form 161
9.4� Take title subject to, or � Assume, an existing second trust deed note held by _______________________,
with an unpaid principal balance of $_______________, payable $_______________ monthly, including interest

9.5
not exceeding ______%, � ARM, type _____________________________, due , 20______.
A note for the balance of the purchase price in the amount of $_______________ to be executed by Optionee in
Standard Option
favor of Optionor and secured by a trust deed on the property junior to the above referenced financing, payable to Purchase
$_______________ monthly, or more, beginning one month after closing, including interest at ______% per
annum from closing, due ____________ years after closing.
a. This note and trust deed to contain provisions to be provided by Optionor for:
� due-on-sale, � prepayment penalty, � late charges, �
Page 2 of 2
b. � The attached Financial Disclosure Statement is an addendum to this agreement (mandatory on four-or-
less residential units). [See RPI Form 300]
c. � Optionee to provide a Request for Notice of Default and Notice of Delinquency to senior encumbrancers.
[See RPI Form 412]
10. GENERAL PROVISONS:
10.1 � See attached addendum for additional provisions. [See RPI Form 250]
10.2 Attached as addenda are the following checked disclosures mandated on four-or-less residential units:
a. � Condition of Property Disclosure — Transfer Disclosure Statement (TDS) [See RPI Form 304]
b. � Natural Hazard Disclosure Statement [See RPI Form 314]
c. � Disclosure of Sexual Predator Database [See RPI Form 319]
d. � Hazard Disclosure Booklet, and related Optionor disclosures, containing Environmental Hazards,
Lead-based Paint and Earthquake Safety [See RPI Forms 313 and 315]
e. � Documentation on any Homeowners’ Association (HOA) involved. [See RPI Form 309]
f. � Notice of Supplemental Property Tax Bill [See RPI Form 317]
10.3 Possession of the property to be delivered on:
� close of escrow, or � see attached Occupancy Agreement. [See RPI Forms 271 and 272]
10.4 Both parties reserve their rights to assign, and agree to cooperate in effecting an Internal Revenue Code §1031
exchange prior to close of escrow, on either party’s written notice.
11. EXPIRATION OF OPTION:
This offer to sell will be deemed expired if not accepted by exercise during the option period.
11.1 This option contract will automatically terminate by expiration on _____________, 20______.

Optionor's Broker: Optionee's Broker:

Broker's DRE #: Broker's DRE #:
is the broker for: � Seller is the broker for: � Buyer
� both Buyer and Seller (dual agent) � both Buyer and Seller (dual agent)

Seller's Agent: Buyer's Agent:

Agent's DRE #: Agent's DRE #:
is � Optionor's agent (salesperson or broker-associate) is � Optionee's agent (salesperson or broker-associate)
� both Optionee's and Optionor's agent (dual agent) � both Optionee's and Optionor's agent (dual agent)

Signature: Signature:
Address: Address:

Phone: Cell: Phone: Cell:

Email: Email:
I hereby grant this option and agree to the terms stated I hereby accept this option and agree to the terms
above. stated above.
Date: , 20 Date: , 20
Optionor: Optionee:

Signature: Signature:

Signature: Signature:
Address: Address:

Phone: Fax: Phone: Fax:

Email: Email:

FORM 161 01-19 ©2019 RPI — Realty Publications, Inc., P.O. BOX 5707, RIVERSIDE, CA 92517

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

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:
The right of
•  listing or advertising the property for sale;
first refusal
•  offering the property for sale to a buyer; to buy
3 In re Marriage of Joaquin, supra
66 Property Management, Sixth Edition

•  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.

Decision to Consider a buyer who contacts the landlord of leased commercial property
to make an offer to purchase the property. The buyer is informed the major
sell triggers tenant holds the right to buy the property under a right of first refusal
provision in the lease.
option to buy
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.

Matching the 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
back-up offer 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]

4 Rollins v. Stokes (1981) 123 CA3d 701

5 Estate of Patterson (1980) 108 CA3d 197
 Chapter 6: Options and the right of first refusal to buy 67

Form 579

Right of First
Refusal to Buy

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.

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.
68 Property Management, Sixth Edition

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

Deficient offer holds a right of first refusal. The terms in the buyer’s purchase agreement call
constitutes a 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
waiver 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

Reinstatement A right of first refusal provision is automatically reinstated when:

of the right of •  the landlord agrees to sell the property on terms different from those
terms offered to the tenant; or
first refusal
6 C. Robert Nattress & Associates v. CIDCO (1986) 184 CA3d 55
7 McCulloch v. M & C Beauty Colleges (1987) 194 CA3d 1338
 Chapter 6: Options and the right of first refusal to buy 69

LEASE-OPTION
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7. Maintenance of Premises: Lessee agrees to maintain and perform all necessary repairs to the property during the
Figure 1
Contract for Deed lease term at his sole expense.
8. Insurance: Lessee will maintain at their sole expense, naming Lessor as an additional insured:
Prepared by: Agent Phone

Form 163
8.1 � A standard fire insurance policy with extended coverage, vandalism and malicious mischief endorsements, fully
Broker Email covering the replacement cost of all structures on the property during the entire term of the lease; and
8.2 � Public liability and property damage insurance with a single combined liability limit of at least $300,000 and
NOTE: This form is used by an agent when a seller holds out property for sale under a lease-option sale arrangement, to
property damage limits of at least $100,000, insuring against all liability of Lessee arising out of Lessee’s use or
structure the change in ownership as a lease-option sale with the seller conveying title on the buyer’s full performance of
occupancy of the premises.
the lease and exercise of the option.
9. Use of the Property: The property is to be used only as a private residence occupied by Lessee and for no other
DATE: , 20 , at , California. purpose. Lessee will comply with all laws regarding the use of the property, and will not allow any waste or nuisance to

Lease-Option
Items left blank or unchecked are not applicable. occur on the property.
FACTS: 10. Assignment and Subletting: Lessee will not assign this lease, nor sublet or encumber any interest in the property
1. This lease agreement and option to purchase is entered into by Lessor/Optionor and Lessee/Optionee, regarding without the prior written consent of Lessor. Any transfer of an interest in the property by Lessee without the prior written
1.
consent of Lessor will, at the option of Lessor, terminate this lease and call for payment of all sums due.
property situated in the City of _____________________, County of __________________California, referred to as

– Contract for
_____________________________________________________________________________________________ 11. Waiver of Damage: Lessee releases Lessor from liability for loss or damage to Lessee or any property of Lessee
_____________________________________________________________________________________________. caused by water leakage, breaking pipes, theft, vandalism, or any other cause beyond the reasonable control of Lessor
Personal property, � see attached Personal Property Inventory [See RPI Form 256], ____________________________ 12. Hold Harmless: Lessee will indemnify Lessor from liability, damages, and/or expenses arising from the death or
injury of any person, including Lessee, or from the damage or destruction of any property, including property owned by

Deed
2. This agreement is comprised of this three page form and the following checked attachments:
Lessee, caused or allegedly caused by some condition of the property, or some act or omission of Lessee or any other
� Credit Application [See RPI Form 302] � Natural Hazard Disclosure Statement [See RPI Form 314] person.
� Residential Earthquake Hazards Report [See RPI Form� Financial Disclosure Statement [See RPI Form 309]
OPTION TO PURCHASE:
315] � Brokerage Fee Addendum [See RPI Form 273]
� Occupant’s Operating Expense Sheet [See RPI Form 562] � Lead-Based Paint Disclosure [See RPI Form 313] 13. Option Money: Optionor acknowledges receipt of option money in the amount of $_______________, given in
� Addendum — General Use [See RPI Form 250] � Condition of Property Disclosure [See RPI Form 304] consideration for this option to purchase the property leased.
� Notice of Your Supplemental Property Tax Bill 14. Option Period: Optionor hereby grants to Optionee the irrevocable option to purchase the Optionor’s right, title and
[See RPI Form 317] interest in the property under the sales terms for a period commencing with the acceptance of this option and expiring
on termination of the lease.
15. Exercise of Option: Optionee may exercise this option during the option period by:
3. Term of Lease: 15.1 Preparing and signing escrow instructions with __________________________________________________;
This lease commences _____________, 20______ and continues until _____________, 20______. 15.2 Depositing cash in Escrow of $_______________; and
3.1 The lease terminates on the last day of the term without further notice. 15.3
Delivering a certified copy of the signed escrow instructions to Optionor within the option period in person or by
3.2 If Lessee holds over, Lessee to be liable for rent at the daily rate of $_______________. certified mail.
4. Rent: Lessee to pay, in advance, a base monthly rent of $_______________ due on the ______ day of each calendar 16. Delivery of Title: Within ______ days after exercise, Optionor and Optionee will place in Escrow all documents and
month. instruments necessary to close.
4.1 Rent to be paid by: � personal check made payable to ___________________, or � ____________________. 17. Sale Terms: The purchase price is $______________, payable:
4.2 Rent to be tendered by: � mail, or � personal delivery. 17.1 � In cash.
4.3 Lessee to pay a late charge of six percent of all rent amounts due in the event rent is not received within ten days 17.2 � Down payment in the amount of $_______________.
of the due date.
17.3 The cash price or down payment to be credited for $_______________ of option money paid, and for ______%,
4.4 Lessee to pay $_______________ for each rent check returned for insufficient funds and thereafter pay rent by or $_______________, of each payment of base monthly rent.
cash or cashier’s check.
17.4 � Take title subject to, or � Assume, the existing trust deed note with an approximate unpaid balance of
5. Additional Rent: In addition to the base monthly rent, Lessee to pay additional monthly rent equal to the increased $_____________, currently payable $______________ monthly, including principal and interest at ______%,
costs incurred by Lessor after entering into this lease-option, due to: � adjustable, monthly impounds being an additional $_______________.
a. � variable/adjustable interest rate on existing loans secured by the property; 17.5 � Take title subject to, or � Assume, a trust deed note with a principal balance of $_______________, currently
b. � variable/adjustable monthly principal or acceleration of existing loans secured by the property; payable $_______________ monthly, including principal and interest at ______%, due _____________.
c. � property taxes on the property; 17.6 Loan balance differences to be adjusted in: � cash, � §17.8 Note, or � price.
d. � fire and extended coverage insurance premiums on the property; 17.7 � Assume bonds or assessment liens of record in the approximate amount of $_______________.
e. � any Homeowners’ Association (HOA) assessments; 17.8 A Note for the balance of the purchase price in the amount of $_______________, to be executed by Buyer
f. � any special or improvement assessments on the property; and in favor of Seller and secured by a trust deed on the property, payable $______________ monthly, or more,
g. � any other expenditures required of Lessor to protect his interest. commencing one month after closing, including interest at ______%, due _______________ years after closing.
a. The Note and Trust Deed will not contain provisions for due-on clauses, prepayment penalties, or late
5.1 The additional monthly rent will be the actual monthly cost increase and 1/12th of any annual cost increase
charges.
5.2 The additional monthly rent is due on, or beginning with, the monthly rent payment next due following notice to
Lessee by Lessor. b. � Optionee to provide a Request for Notice of Default and Notice of Delinquency to senior encumbrancers.
[See RPI Form 412]
6. Utilities: Lessee will pay all costs of public utilities to the property, including any required deposits, installation, or
c. � The Note is an All-Inclusive Trust Deed Note.
service fees.

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d. As additional security, Optionee to execute a security agreement and file a UCC-1 financing statement on
any personal property included in the price.
18. General Provisions:
18.1 Lessee/Optionee and Lessor/Optionor acknowledge receipt of the Agency Law Disclosure. [See RPI Form 305]
18.2 Optionee’s transfer of any interest in this option terminates the option.
18.3 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.
18.4
The prevailing party in any action on a dispute will be entitled to attorney fees and costs, unless they file an action
without first offering to enter into mediation to resolve the dispute.
19. Power of Sale: If this document is characterized as a security device, on default of rental payments or failure to
exercise the option, the Lessor/Optionor may call all sums due and elect to proceed with a power of sale by a trustee
substituted under Civil Code §2934(a), noticed and held in accordance with Civil Code §§2924 et seq.
20. Lessor/Optionor Default: If the Lessor/Optionor defaults on any obligation impairing the Lessee/Optionee’s interest
under this agreement, Lessee/Optionee may cure the default and demand reimbursement from the Lessor/Optionor of
the amount advanced, and if not paid, deduct the amount paid from periodic payments and the purchase price due the

For a full-size, fillable copy of this or

Lessor/Optionor.
21. Expiration of Option: This option to purchase will be deemed expired if not exercised during the option period, and if
not previously terminated, will automatically expire/terminate on _____________, 20______.

any other form in this book that may

22. Brokerage Fee: Optionor to pay brokerage fees as follows:
22.1 ______% of the option money on receipt; plus
22.2 ______% of each month’s base rent on receipt; and

be legally used in your professional

22.3 $_______________ on exercise of the option.
22.4 Optionee’s Broker and Optionor’s Broker, respectively, to share the brokerage fee ______:______.
23. _____________________________________________________________________________________________
23.
_____________________________________________________________________________________________
Lessee/
Optionee's Broker:
Lessor/
Optionor's Broker:
practice, go to realtypublications.
By:
Is the agent of: � Lessee/Optionee exclusively; or
By:
Is the agent of: � Lessor/Optionor exclusively; or
com/forms
� Both Parties. � Both Parties.

I agree to the terms stated above. I agree to the terms stated above.
� See attached Signature Page Addendum. [RPI Form 251] � See attached Signature Page Addendum. [RPI Form 251]
Date: , 20 Date: , 20
Lessee/Optionee: Lessor/Optionor:

Signature: Signature:
Lessee/Optionee: Lessor/Optionor:

Signature: Signature:
Address: Address:

Phone: Cell: Phone: Cell:

Email: Email:

FORM 163 02-16 ©2016 RPI — Realty Publications, Inc., P.O. BOX 5707, RIVERSIDE, CA 92517

•  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
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.
70 Property Management, Sixth Edition

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 6 A landlord gives a tenant the right to buy rented property by granting
either:
Summary •  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. 63

Chapter 6 option period ................................................................................. pg. 63
Key Terms option to buy ................................................................................. pg. 62
option to extend ........................................................................... pg. 62
option to renew ............................................................................. pg. 64
right of first refusal ...................................................................... pg. 62

Quiz 2 Covering Chapters 5-8 is located on page 644.

 Chapter 7: Property management licensing 71

Chapter
7
Property management
licensing

After reading this chapter, you will be able to: Learning

•  identify licensing requirements for property managers and their
employees;
Objectives
•  differentiate between activities which require a license and
activities which do not require a license; and
•  distinguish state-mandated licensing from third-party
designations.

certified CID manager power of attorney Key Terms

contingency fee

An individual owns and operates income-producing real estate. As the When is a

owner-operator, they locate and qualify tenants, prepare and sign occupancy
agreements, deliver possession, contract for property maintenance, collect DRE license
rent, pay expenses and mortgages, serve any notices and file any unlawful required? 
detainer (UD) actions to evict tenants. 

Does the owner-operator need a Department of Real Estate (DRE) broker

license to perform these activities?1

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.2 

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 The Department of Real Estate (DRE) was referred to as the California Bureau of Real Estate (CalBRE) between July1st, 2013 through July
1st, 2018.
2 Calif. Business and Professions Code §10131(b)
72 Property Management, Sixth Edition

DCA Guide for The California Department of Consumer Affairs (DCA) publishes a booklet titled:
Landlords and California Tenants: A Guide to Residential Tenants’ and Landlords’ Rights and
Tenants 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.

estate industry to refer to a DRE-licensed sales agent, or salesperson. To

simplify, the rest of this chapter will only use the term “agent” to refer to a
DRE-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 DRE as a California real estate broker. 

Editor’s note — A broker has the authority to act as a property manager

by virtue of their DRE 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

Performance to perform any of the following services on behalf of another in exchange for
of services in a fee: 
exchange for •  listing real estate for rent or lease; 

a fee requires •  marketing the property to locate prospective tenants; 

•  listing prospective tenants for the rental or lease of real estate; 
a license
•  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.3
An individual employed by a broker to perform any of the above services
needs to also be licensed by the DRE, either as a broker or sales agent, unless
exempt.  

3 Bus & P C §10131(b)

 Chapter 7: Property management licensing 73

Administrative and non-discretionary duties performed by an employee of a Unlicensed

broker who manages transient housing or apartment complexes are exempt
from real estate licensing requirements while the employee is under the vs. licensed
broker’s supervision and control.4  activities
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.5 

Licensed employees may perform any activities unlicensed employees

perform. However, licensed employees are additionally able to perform
License
activities relating to contacts with the landlord, as opposed to the tenant, required
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 Power-of-
to act as an “attorney in fact” under a power of attorney to temporarily
manage a landlord’s property.6 [See RPI Form 447]  attorney
However, a power of attorney may not be used as authority to continuously
exemption
manage real estate and does not substitute for a broker license.  power of attorney
A temporary authority
granted to an
individual to perform
4 Bus & P C §10131.01(a) activities during a
5 Bus & P C §10131.01(a)(1)
period of the owner’s
6 Bus & P C §10133(a)(2)
incapacity or travel.
[See RPI Form 447]
74 Property Management, Sixth 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.7 

Apartment Apartment building management has special licensing rules distinguishing

resident managers from nonresident property managers. 
resident
A resident manager is employed by either the landlord or the broker who
manager manages the apartment building or complex. The resident manager lives on
exemption 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.8 

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.9 

Apartment complexes with 16 or more units are required to have a resident

manager.10 

Other A person is not required to have a real estate broker license when they are
acting: 
licensing •  as an attorney performing management as part of their legal services11;
exceptions or 
•  under court appointment, such as a receiver or bankruptcy trustee.12 
7 Sheetz v. Edmonds (1988) 201 CA3d 1432
8 Bus & P C §10131.01(a)(1)
9 Bus & P C §10131(b)
10 25 Calif. Code of Regulations §42
11 Bus & P C §10133(a)(3)
12 Bus & P C §10133(a)(4)
 Chapter 7: Property management licensing 75

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.13 

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
Contingent
license.14  fees and
However, the unlicensed officer may not receive any contingency fees or bonus awards
extra compensation based on activities that require a license. They are to be
salaried or on wages.

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 DRE 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 commercial leasing. 

Similarly, where an LLC owns the property, the manager of the LLC need not
No license for
be licensed to manage the property — provided fees are not paid based on the LLC manager
quantity of leases negotiated or the LLC’s rental income.15 

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 contingency fee
LLC receive the same percentage.  An incentive bonus
paid upon successfully
completing or hitting
A property manager paid on a contingency fee basis, or any other employee
certain benchmarks,
or officer whose pay is structured as a contingency fee, of an office building, or received as
13 Bus & P C §10137 compensation on the
14 Bus & P C §10133(a)(1) occurrence of an event.
15 Bus & P C §10133(a)(1)
76 Property Management, Sixth 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.16

Bonus, award, commission, incentive or contingency fee programs in excess

of a base salary require the person receiving them to be licensed by the
DRE, 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
Certification of certified common interest development (CID) manager. Also, it is
to manage a not mandatory for a broker to be “certified” to manage a common interest
development, but some employers may request it. [See Chapter 8]
CID 
The benchmark professional certification is the Certified Community
Association Manager. This certification is issued by the California Association
certified CID manager of Community Managers. This designation is not an activity involving the
A non-required DRE. However, the minimum educational criteria for becoming a certified
professional designation
certifying an individual
CID manager are set by California law.17
has met legislated
educational When earning a designation as a certified CID manager, the manager is tested
requirements specific for competence in CID management in the following areas:
to managing common
interest developments. •  all subjects covered by the Davis-Stirling Common Interest
Development Act18;
•  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;

16 Bus & P C §10131(b)

17 Bus & P C §§11502. 11503
18 CC § 4000
 Chapter 7: Property management licensing 77

•  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.19
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.20

It is a widely held misconception that property managers are required to hold A common
a Certified Property Manager (CPM) membership with the Institute of Real
Estate Management (IREM) to perform property management activities. “licensing”
The CPM designation is a non-required unofficial designation bestowed by a misconception
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.

19 Bus & P C §11502

20 Bus & P C §11504
78 Property Management, Sixth Edition

Chapter 7 An individual or corporation need to hold a broker license if they

perform or offer to or perform any property management services on
Summary 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. 76

Chapter 7 contingency fee................................................................................pg. 75
Key Terms power of attorney............................................................................pg. 73

Quiz 2 Covering Chapters 5-8 is located on page 644.

 Chapter 8: Property management agreement 79

Chapter

8
Property management
agreement

After reading this chapter, you will be able to: Learning

•  understand the function of a property management agreement
to grant authority to operate a rental property and specify the
Objectives
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.

common interest
development
property management
agreement
Key Terms
managing agent

A property manager’s authority to take possession and control of income-

producing real estate and manage its leases, rents, expenses, mortgage
Authority to
payments and accounting in expectation of a fee is established in a property operate a rental
management agreement. The property management agreement sets out
the specific rights, responsibilities and expectations of the property manager
property
and the landlord, including authorized activities, performance standards
and expense limitations. [See Figure 1, Form 590]
80 Property Management, Sixth Edition

property Landlord responsibilities include providing the property manager with the
management information and items necessary to manage the property and its tenants,
agreement such as:
An employment
agreement setting the
rights, responsibilities
•  lease/rental agreements;
and expectations of •  service and maintenance contracts;
both the property
manager and the •  utilities information;
landlord. [See RPI
Form 590] •  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, mortgage payments and management
fees.1

Short-form Brokers who manage property need to enter into highly detailed
property management agreements, not generalized “short-form” property
vs. long-form management agreements.
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.

Property 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
managed to document the maintenance they recommend. This can be accomplished
by adding an addendum to the property management agreement or by
“as is”
1 Calif.  Civil Code §1624(a)(3)
 Chapter 8: Property management agreement 81

Figure 1

Form 590

Property
Management
Agreement

For a full-size, fillable copy of

this or any other form in this
book that may be legally used in
your professional practice, go to
realtypublications.com/forms

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.
82 Property Management, Sixth 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.

Handling Property management agreements authorize the property manager to act on

behalf of the landlord to handle all income received and incur expenses in
rents and the operation of the property.
expenses 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 mortgage payments from rents received from
tenants; and
•  complying with any local rent control ordinances.

Trust A property management agreement spells out which maintenance expenses,

insurance premiums, utilities, mortgage payments, management fees and
accounts for property taxes are to be disbursed by the property manager, and which are to
the landlord’s be separately paid by the landlord.

funds 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.

Periodic The property management agreement sets the amount of cash reserves the
landlord will deposit in the property manager’s trust account as a minimum
accounting by balance for payment of operating expenses and fees.
the manager A landlord is entitled to a statement of accounting:
•  at least once a quarter; and
 Chapter 8: Property management agreement 83

•  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 9]

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 Broker fee
without a written agreement with the person agreeing to the payment,
typically the landlord. enforcement
A prudent property manager will not orally agree with the landlord to the for
payment of management fees. If the landlord fails to pay fees or interferes management
with the manager’s disbursement of fees, without a signed writing the
property manager is unable to enforce their collection.4 services
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 Structuring

ways:
management
1. A percentage of the rents collected. 
The property manager is entitled to charge a set percentage of the rents
fees
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
84 Property Management, Sixth Edition

Figure 2

Form 135
(Partial)

Request for
Homeowner
Association
Documents

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. 
 Chapter 8: Property management agreement 85

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 common interest
landlord.6 developments
Condominiums
projects, cooperatives
However, no matter how customary and prevalent it is in the real estate or single family
industry to collectively and conscientiously charge a particular percentage residences in a
planned unit
fee, fees may not be set by collusion between brokers, or as a result of peer development. [See RPI
pressure among brokers to maintain equivalent fees. Unfortunately, this Form 135]
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 Management

residences (SFRs) in a planned unit development (PUD) are projects called
common interest developments (CIDs). Brokers may be retained by the of CIDs
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.
managing agent
Before a broker enters into a property management agreement to act as a A broker who manages
managing agent for a CID, the broker needs to disclose: membership, common
areas and accounting
for a common interest
•  the names and addresses of the owners of the their employing brokerage development.
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 7]
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
86 Property Management, Sixth 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,

Chapter 8 responsibilities and expectations of both the property manager and the
Summary 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. 85

Chapter 8 managing agent ............................................................................ pg. 85
Key Terms property management agreement .......................................... pg. 80

Quiz 2 Covering Chapters 5-8 is located on page 644.

 Chapter 9: A property manager’s responsibilities 87

Chapter

9
A property manager’s
responsibilities

After reading this chapter, you will be able to: Learning

•  recognize and act on a property manager’s responsibilities and
obligations owed the landlord;
Objectives
•  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.

commingling start-up fee Key Terms

property profile trust account
prudent investor standard trust funds

Property management is an economically viable and personally rewarding

real estate service permitted for real estate licensees. Serious brokers and
An evolving
agents often turn their attention from an interest in residential sales to the standard of
specialized and more disciplined industry of property management.
conduct
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.
88 Property Management, Sixth 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 Department of Real Estate
(DRE) 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 7]

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

Requisite To be successful in the property management field, a broker initially acquires

the minimum knowledge and experience through training sufficient to
competence adequately perform their tasks.
to manage 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:

trust account
•  prior experience handling and reporting trust account activities;
An account separate •  a knowledge of current programs used to record and track activity on
and apart and
physically segregated each property managed by the property manager; and
from a broker’s own
funds, in which the
•  a competent staff to perform office and field duties and to quickly
broker is required by respond to both the landlord’s and the tenants’ needs.
law to deposit all funds
received for clients.

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
 Chapter 9: A property manager’s responsibilities 89

A property manager’s obligations to a landlord include: Management

•  holding a broker license; obligations
•  diligently performing the duties of their employment;
owed the
•  sufficient oversight of the broker’s employees acting on behalf of the
landlord; 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.
The prudent
This standard is called the prudent investor standard. 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.
90 Property Management, Sixth Edition

prudent investor In contrast, the expectations of resident and non-resident landlords may not
standard necessarily be based on obtaining the maximum rental income or incurring
A property only those minimal expenses needed to maintain the long-term income flow
management
standard reflecting the of rents from tenants.
expectations of a well-
informed investor for Resident owners are more apt to maintain property in a condition which they
efficient and effective
management of rental
find personally satisfying, not necessarily in accord with sound economic
income and expenses. 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

Property standard, a property manager considers the following factors:
analysis to •  the type of the property and its niche in the market;
understand •  the socioeconomic demographics of the area surrounding the property’s
the tasks 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.
 Chapter 9: A property manager’s responsibilities 91

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

commercial property reviews the status of trust deed liens on the landlord’s
Liens affect
property. Both the property manager and the tenants are ultimately affected commercial
by the burden existing financing places on the landlord’s cash flow, and
possibly the landlord’s ability to retain ownership.
tenants
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 RPI 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 commercial 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.
Title profile
analysis avoids
A title check, commonly called a property profile, is supplied online by
title companies. A property profile will confirm: surprises
•  how ownership is vested and who has authority to employ property profile
management; A report from a title
company providing
•  the liens on the property and their foreclosure status; information about a
property’s ownership,
•  any use restrictions affecting tenants; and encumbrances, use
restrictions and
•  comparable sales information for the area. comparable sales data.
92 Property Management, Sixth 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

Due diligence activity sheet maintained for each property. This paper trail is evidence the
and the paper property manager has diligently pursued activities leading to the renting
and maintenance of the property. Keeping a file activity sheet reduces the
trail 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
Due Diligence 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
Handling UD to recover amounts due and unpaid under a lease or rental agreement if:
actions in •  the landlord has retained the property manager under a property
small claims 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)
 Chapter 9: A property manager’s responsibilities 93

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 DRE broker license.
A party other
The broker manages an apartment complex for a landlord under a property than the
management agreement.
landlord files
The property management agreement gives the broker all care and the UD
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 RPI 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
94 Property Management, Sixth 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

Property for one of several key situations:
inspections 1. When the property manager and landlord enter into a property
by the management agreement.
manager 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 RPI 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 19]
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
 Chapter 9: A property manager’s responsibilities 95

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 RPI 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
Periodic
landlord, including changes and the use of other forms proposed by the review of the
broker.
leases
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,
Awareness
they are able to make the necessary changes when negotiating leases and of market
rental agreements. The more curious and perceptive the property manager
changes
96 Property Management, Sixth 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.

Maintenance Obtaining the highest rents available requires constant maintenance and
repair of the property. Possibly, this includes the elimination of physical
and repairs obsolescence brought on by ageing. The property manager is responsible
as a for all the maintenance and repairs on the property while employed by the
landlord. This responsibility still exists if the property manager delegates the
responsibility 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 property under a net lease agreement will perform all maintenance
and upkeep of the property. [See RPI 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.

Property 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
manager of property manager to undertake these duties. A property manager acting on
an HOA 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.
 Chapter 9: A property manager’s responsibilities 97

A property manager discloses to their employing landlord any financial Earnings from
benefit the property manager receives from:
all sources
•  maintenance or repair work done by the property manager’s staff; or
•  any other materials purchased or services performed. disclosed
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 RPI 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.
Goodwill
A property manager in the ordinary course of managing property will is value
concentrate on increasing the intangible image — goodwill — of the property.
maintained or
Goodwill is maintained, and hopefully increased, when the property
manager:
lost
•  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

98 Property Management, Sixth 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.

Reserves To accommodate the flow of income and expenditures from the properties
and monies they manage, the property manager maintains a trust account
and deposits in their name, as trustee, at a bank or financial institution.9
in the trust Generally, a property manager receives a cash deposit as a reserve balance
account from the landlord. The sum of money includes a start-up fee, a cash reserve
for costs and the tenants’ security deposits.

start-up fee
A start-up fee is usually a flat, one-time management fee charged by the
A flat, one-time fee property manager to become sufficiently familiar with the property and its
charged by a property operations to commence management activities.
manager for the time
and effort taken to
become sufficiently The cash reserve is a set amount of cash the landlord agrees to maintain as
familiar with the a minimum balance in the broker’s trust account. The cash reserve is used to
operations of the
property to commence
pay costs incurred when costs and mortgage payments exceed rental income
management. 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 commercial properties, the security deposit accounting is
mailed 30 days after a commercial tenant’s departure.10 [See Chapter 19]

trust funds
A property manager is required to deposit all funds collected on behalf of
Items which have or a landlord into a trust account within three business days of receipt. These
evidence monetary funds are called trust funds.
value held by a broker
for a client when
acting in a real estate
transaction.

9 Calif. Code of Regulations §2830

10 Calif. Civil Code §1950.5(g)(1); 1950.7(c)(1)
 Chapter 9: A property manager’s responsibilities 99

Trust funds collected by a property manager include:

•  security deposits;
•  rents;
•  cash reserves; and
•  start-up fees.11

Again, trust accounts are maintained in accordance with standard accounting Separate
procedures. These standards are best met by using computer software
designed for property management.12 ledger for
Also, withdrawals from the trust fund account may not be made by the each landlord
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
Separate
represent. Each subaccount ledger accounts for all trust funds deposited into subaccount
or disbursed from a separate landlord’s trust account.
ledger for
Each separate, individual subaccount ledger identifies the parties to each each landlord
entry and include:
•  the date and amount of trust funds deposited;

11 Bus & P C §10145(a); California Bureau of Real Estate Regulations §2832

12 DRE Reg. §2831
13 DRE Reg. §2834(a)
14 DRE Reg. §2834(c)
15 DRE Reg. §2831(a)
16 DRE Reg. §2831(c)
100 Property Management, Sixth Edition

•  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
•  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

Manager’s of a trust account, the property manager is in violation of their duty to the
trust account landlord to maintain the trust account. This violation places the broker’s
license at risk of loss or suspension.
supervision
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

Accounting to Tied to the property manager’s duty to properly maintain their trust account
is the duty to account to the landlord.
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

17 DRE Reg. §2831.1

18 DRE Reg. §2831.1(b)
19 DRE Reg. §2832
20 Bus & P C §10148
21 DRE Reg. §2831.1
22 DRE Reg. §2831
 Chapter 9: A property manager’s responsibilities 101

•  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
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 DRE-approved form.23

Again, a property manager on the receipt of monies while acting on behalf of Handling 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 trust account
or the commingling of the landlord’s funds with the property manager’s funds
personal funds.

Consider a landlord who hires a broker to act as a property manager. In

commingling
addition to paying for expenses and costs incurred, the property manager is The mixing of personal
instructed and authorized to pay the monthly mortgage payments. funds with client or
third-party funds held
in trust.
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.

23 Bus & P C §10146

102 Property Management, Sixth Edition

More than three months later, the landlord terminates the property
management agreement.

Failure to Continuing the previous example, the property manager sends a closing
statement on the account containing some erroneous deductions. The closing
account for statement is the only accounting the property manager ever prepared for the
funds 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 DRE regarding the property
manager’s conduct while under contract.

The DRE 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 DRE properly revokes the property manager’s real estate
broker license.24

Management 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
conflicts be disclosed to their clients.
with sales For example, a creditworthy prospective tenant responding to a rental
operations 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

24 Apollo Estates Inc. v. Department of Real Estate (1985) 174 CA3d 625
 Chapter 9: A property manager’s responsibilities 103

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
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 RPI Form 527]

The landlord comes first. The broker’s concern for greater fees comes second.

A property manager employs a higher standard of conduct regarding Chapter 9

their operation of a property than a typical landlord might, referred to as
a prudent investor standard. The property manager applies this higher Summary
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. 101

property profile ............................................................................. pg. 91
Chapter 9
prudent investor standard ........................................................ pg. 90 Key Terms
start-up fee ..................................................................................... pg. 98
trust account ................................................................................. pg. 88
trust funds ..................................................................................... pg. 98

Quiz 3 Covering Chapters 9-13 is located on page 645.

 Chapter 10: Resident managers 105

Chapter
10
Resident managers

After reading this chapter, you will be able to: Learning

•  use a resident manager agreement to employ a manager to
oversee the daily management of a property;
Objectives
•  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.

resident manager resident manager agreement Key Terms

A broker, retained to manage a residential income property, enters into Employees: not
an employment agreement with a resident manager to oversee the daily
management of the property. This employment agreement is called a independent
resident manager agreement. [See Form 591 accompanying this chapter]  contractors,
Under the resident manager agreement, the resident manager:  not tenants 
•  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. 
106 Property Management, Sixth 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 30] 

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

Resident or landlord to live on-site at the managed complex and see to its daily
manager operations. A resident manager’s duties may include: 
activities  •  screening tenants and negotiating leases; 
•  cleaning vacated units; 
•  supervising landscaping, maintenance and repairs; 
resident manager
An individual •  serving notices; or 
employed by the
property manager •  attending to tenant inquiries. 
or landlord to live
onsite at the managed
complex property
and handle its daily
operations. [See RPI
Form 591]
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)
 Chapter 10: Resident managers 107

Both residential income property and commercial 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 Department of Real Estate (DRE) as a real estate broker.5 [See Chapter 7]

A property manager who employs a resident manager is responsible for the

following brokerage activities: 
Hiring a
•  selecting and hiring the resident manager;
resident
•  maintaining worker’s compensation, liability insurance and any manager 
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
resident manager
agreement called the resident manager agreement. [See Form 591] agreement
An employment
Family members who live with the resident manager are listed in the resident agreement which
manager agreement. Further, a statement noting these family members are establishes the rights
and duties of a resident
not tenants is to be included. Thus, the family members’ right to occupy the manager and the
property terminates with the resident manager’s right to occupy the property obligations of the
property manager and
(e.g., the termination of the resident manager’s employment). landlord. [See RPI
Form 591]
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
Payment for
on:  services,
•  a rent reduction given in exchange for the dollar value of the resident withholding,
manager’s services; 
benefits 
•  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
unit is deducted from their salary. After the rent deduction, the resident
4 25 Calif. Code of Regulations §42
5 Calif. Business and Professions Code §10131.01
108 Property Management, Sixth Edition

Form 591

Resident
Manager
Agreement

Page 1 of 2

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 10: Resident managers 109

Form 591

Resident
Manager
Agreement

Page 2 of 2

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.

Consider a property manager who hires a resident manager to run a large Rental value
apartment complex. As part of their salary, the resident manager receives a
unit rent-free plus a fixed monthly salary.  is not taxable
Is the value of the unit occupied by the resident manager considered income income 
for state or federal tax reporting? 
110 Property Management, Sixth Edition

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

Minimum 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
wage not taxable as personal income.8 
requirements Minimum wage requirements apply to resident managers. Resident
apply  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 $621.28 per month in 2019
(and $677.75 in 2020). For a couple employed as resident managers, the rent
credited toward hourly pay may not exceed $919.02 per month in 2019 (and
$1,002.56 in 2020).10

Married For example, a broker employs an individual as a resident manager of a

20-unit apartment complex in 2019. Later, the resident manager marries
resident and their spouse moves into the resident manager’s unit. The spouse is not
managers  employed to manage the residential property.

The following month, the broker subtracts $919.02 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.

The resident manager claims the maximum amount used to calculate their
hourly pay is the individual maximum of $621.28 since the spouse was not
also employed by the broker.

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); Labor C §1182.13
 Chapter 10: Resident managers 111

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 $621.28. 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
Compliance
manager to: with minimum
•  prepare time cards; wage
•  limit the number of hours per week the resident manager may work so requirements 
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

A resident manager is an employee of the property manager or the landlord Mismanaged,

who hires them.  As an employer, the property manager or landlord is liable
to others injured due to the resident manager’s negligence.14 negligent
resident
11 8 CCR §11050(10)(C)
managers 
12 Brewer v. Patel (1993) 20 CA4th 1017
13 Isner v. Falkenberg (March 18, 2008) 160 CA4th 1393
14 Calif. Civil Code §2338
112 Property Management, Sixth Edition

Case in point 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. 
An improper
The property manager hires a new, younger resident manager and relegates the old
termination 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]

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

Termination resident manager and the employing property manager or landlord. Thus,
of the the resident manager’s employment may be terminated at any time and
without prior notice. 
resident
manager 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”]

15 Stephens v. Coldwell Banker Commercial Group, Inc. (1988) 199 CA3d 1394
 Chapter 10: Resident managers 113

Recall from the opening scenario that the resident manager agreement
controls the resident manager’s right to occupy their unit as an employee.
Terminating
No separate lease or rental agreement is entered into or required (unless the a resident
property manager or landlord specifically intend to create a tenancy).
manager’s
The resident manager agreement also controls when that right to occupy the occupancy 
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
Conduct
receives a monthly salary and an apartment, rent-free.  changes
Under the resident manager agreement, the resident manager is to vacate manager’s
the apartment unit on termination of their employment. Thus, the right of
possession is extinguished when employment is terminated. 
occupancy
rights
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

114 Property Management, Sixth Edition

Case in point 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
How does 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
a landlord
by rent control annually. [See Chapter 57]
calculate
Several years later, the landlord terminates the resident manager and the manager
the rental
continues in occupancy of the unit as a tenant. Later, the landlord serves the former
payments of a manager with a notice of a rent increase, adjusting the rental rate upward to include
former resident all of the past annual adjustments permitted by rent control during the period of
manager who employment as the resident manager. The former manager refuses to pay the adjusted
remains as a rental rate.
tenant? 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 (2014) 225 C4th 325]

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
 Chapter 10: Resident managers 115

A resident manager is an individual employed by a property manager Chapter 10

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 Summary
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. 106 Chapter 10

resident manager agreement.................................................... pg. 107
Key Terms

Quiz 3 Covering Chapters 9-13 is located on page 645.

Notes:
 Chapter 11: Identification of property manager or owner 117

Chapter
11
Identification of property
manager or owner

After reading this chapter, you will be able to: Learning

•  authorize brokers under an agent-for-service clause in
management agreements to act on behalf of an owner to accept
Objectives
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.

agent-for-service clause agent-for-service process Key Terms

An owner of a residential income property employs a broker to manage the Notice to

property. The broker will operate the property acting as the landlord under
the property management agreement, which includes all contact with the tenant of
tenants on behalf of the owner. [See Chapter 8] agent-for-
One of the owner’s objectives is to become as anonymous as possible and service 
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, agent-for-service
such as the broker or the owner’s attorney. The agent-for-service of process, process
acting on behalf of the owner, will accept service of legal documents and An individual who
acts on behalf of the
notices initiated by tenants.1  owner, accepting
service of legal
documents and notices
initiated by tenants.
1 Calif. Civil Code §1962(a)(1)(B)
118 Property Management, Sixth 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

Appointing tenant. However, a residential income property owner may appoint any
the agent-for- individual, including their property manager or attorney, to be their agent-
for-service. Importantly, this appointment allows the owner to avoid
service  personal service on themselves. 

The property manager may be appointed as the owner’s agent-for-service

agent-for-service
clause by including an agent-for-service clause in the property management
A section in the agreement employing the broker. [See RPI Form 590] 
property management
agreement which
appoints the owner’s
As the owner’s agent-for-service, the broker accepts personal service of legal
agent-for-service. [See documents on behalf of the owner, such as notices and lawsuits initiated
RPI Form 590 §11.3] 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
Who is residential tenants: 
identified to •  the owner or other individual appointed by the owner as their agent-
the tenant? 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)
 Chapter 11: Identification of property manager or owner 119

The names and addresses of the owner’s property manager, the resident Delivery of
manager and agent-for-service are disclosed in: 
the notice 
•  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
Change in
address for service on the owner of a notice or complaint initiated by the ownership
tenant. This information is handed to the tenants within 15 calendar days
after any change in: 
and
•  the manager of the property; 
management 
•  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)
120 Property Management, Sixth Edition

Form 554

Change of
Owner or
Property
Manager

Page 1 of 2

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 
•  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 

12 CC §1962(d)(1)
13 CC §1962(d)(2)
 Chapter 11: Identification of property manager or owner 121

Form 554

Change of
Owner or
Property
Manager

Page 2 of 2

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

14 CC§1962(e)
122 Property Management, Sixth Edition

Chapter 11 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-
Summary 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.

Chapter 11 agent-for-service clause.............................................................. pg. 118

agent-for-service process............................................................ pg. 117
Key Terms

Quiz 3 Covering Chapters 9-13 is located on page 645.

 Chapter 12: Exclusive authorization to lease 123

Chapter
12
Exclusive
authorization to lease

After reading this chapter, you will be able to: Learning

•  understand the broker’s right to compensation for services
when employed by a commercial owner under an exclusive
Objectives
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.

contingency fee clause full listing offer to lease Key Terms

early termination clause leasing agent
exclusive authorization to open listing
lease
safety clause
exclusive right-to-collect
clause

Consider commercial property that is offered for lease by the owner. A broker Leasing agent’s
makes an appointment with the owner to discuss the possibility of becoming
their leasing agent.  bargain for fees
During the discussion, the broker explains they can best help lease the leasing agent
A broker who markets
property when operating under an exclusive authorization to lease, also the availability of
called a listing or employment agreement. space to rent and
locates and negotiates
the terms of a lease
with suitable tenants.
124 Property Management, Sixth 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.

Right to 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
compensation tenant for the identified space during the listing period, either on: 
for services •  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. 

Written 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
authorization exclusively with the leasing agent to market the space and locate a user.
to lease The owner does not, however, believe it is necessary to commit all these
arrangements to a written agreement. 
exclusive The broker explains an exclusive authorization to lease must be written
authorization to
lease and signed by the owner for the broker to be entitled to collect a fee. No
A written agreement signed writing, no services.
between a broker
and client employing
the broker to render
Is the broker correct?
services in exchange
for a fee on the Yes! A written agreement signed by the client is the only way a broker can
leasing the property protect their right to compensation for services. More importantly, a written
to a tenant located by
anyone. Also known
as a listing. [See RPI
Form 110]
 Chapter 12: Exclusive authorization to lease 125

EXCLUSIVE AUTHORIZATION TO LEASE PROPERTY

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - PAGE 2 OF 3 — FORM 110 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

4.6
Broker may have or will contract to represent Owners of comparable properties or represent Tenants seeking
Figure 1
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.
Prepared by: Agent Phone 4.7
Before any party to this agreement files an action on a dispute arising out of this agreement which remains

Form 110
Broker Email 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
NOTE: This form is used by a leasing agent when employed by a landlord as their sole agent to solicit prospective tenants settle the dispute.
and negotiate a lease of a specific property for a fixed period of time. 4.8 The prevailing party in any action on a dispute shall be entitled to attorney fees and costs, unless they file an
DATE: , 20 , at , California. action without first offering to enter into mediation to resolve the dispute.
Items left blank or unchecked are not applicable. 4.9 This agreement will be governed by California law.
1. RETAINER PERIOD: 5. REAL ESTATE:
1.1

1.2
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 ______.
Broker to use diligence in the performance of this agreement.
5.1 Type ___________________________________________________________________________________
Address _________________________________________________________________________________
Referred to as ____________________________________________________________________________
_______________________________________________________________________________________
Exclusive
2. ADDENDUMS to this agreement include:
a.
b.
� Title Report, or � Title Policy
� Work Authorization [See RPI Form 108]
5.2
Vesting __________________________________________________________________________________
Encumbrances of record:
a. A first loan in the amount of $_______________, payable $_______________ per month until paid,
Authorization to
Lease Property
c. � Occupant's Operating Expense Profile [See RPI Form 562] including interest at ______%, ARM, type ____________, impounds being $_______________ monthly.
d. � Criminal Activity and Security Disclosure Statement [See RPI Form 321] Lender _____________________________________________________________________________
e. � Lead-Based Paint Disclosure [See RPI Form 557] b. A second loan in the amount of $_______________, payable $_______________ per month, including
(Mandated for one-to-four residential units constructed before 1978.) interest at ______%, due _____________, 20______.
f. � _________________________________________________________________________________ Lender _____________________________________________________________________________
g. � _________________________________________________________________________________ c. Other encumbrance, bond, assessment or lien in the amount of $_______________.
3. BROKERAGE FEE: d. Any defaults ________________________________________________________________________
NOTICE: The amount or rate of real estate fees is not fixed by law. They are set by each Broker individually and 6. PERSONAL PROPERTY INCLUDED:
may be negotiable between the Client and Broker.
6.1 Referred to as ____________________________________________________________________________
3.1 Landlord agrees to pay Broker � see attached fee schedule [See RPI Form 113], or ________________________________________________________________________________________.
____________________________________________________ as compensation for services rendered, IF:
7. CONDITION OF TITLE:
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. 7.1 Landlord’s interest in the property is:
a. � Fee simple
b. The property is withdrawn from the rental market or made unmarketable by Landlord during the period of
this agreement. b. � Leasehold
c. The Landlord terminates this employment of the Broker during the period of this agreement. c. � _________________________________________________________________________________
d. Within one year after termination of this agreement, Landlord or their agent commences negotiations 7.2 Landlord warrants there are no unsatisfied judgments or actions pending against him, no condemnation/eminent
which later result in a transaction contemplated by this agreement with a tenant with whom Broker, or a domain proceedings or other actions against the property, and no unrecorded deeds or encumbrances against
cooperating broker, negotiated during the period of this agreement. Broker to identify prospective tenants the property.
by written notice to the Landlord within 21 days after termination of this agreement. [See RPI Form 122] 8. LEASE TERMS:
3.2 If this agreement terminates without Landlord becoming obligated to pay Broker a fee, Landlord to pay Broker the 8.1 The lease term sought is for a period of ________________________________________________________
sum of $_______________ per hour of time accounted for by Broker, not to exceed $_______________. 8.2 Occupancy to be available _____________, 20______.
3.3 If Broker procures a tenant who purchases the property during the term of Tenant’s lease or any modification, 8.3 Initial rent shall be $_______________, payable on the ______ day of each month, with annual adjustments
extension or renewal of the lease or other continuing occupancy of leased property, Landlord agrees to pay based on ________________________________________________________________________________.
Broker a fee of � see attached fee schedule [See RPI Form 113], or 8.4 A total deposit of $_______________, being $_______________ advance rents and $_______________ security
________________________________________________________________________________________ deposit.
________________________________________________________________________________________.
8.5 A late charge of $_______________ to be incurred ______ days after the rent is due, plus interest at ______%
4. GENERAL PROVISIONS: per annum beginning from the due date for the delinquent rent.
4.1 If Landlord’s intended lease period exceeds one year, Landlord acknowledges receipt of the Agency Law 8.6 Tenant to pay for and maintain:
Disclosure. [See RPI Form 550-2] a. � Water
4.2 Broker is authorized to place a For Lease sign on the property and publish and disseminate property information b. � Gas
to meet the objectives of this employment.
c. � Electricity
4.3 Landlord authorizes Broker to cooperate with other agents and divide with them any compensation due.
d. � Heat/Air Conditioning
4.4 Broker is authorized to receive, on behalf of any tenant, an offer and deposit.
e. � Public liability insurance
4.5 The Landlord’s acceptance of any tenant’s offer to lease to be contingent on approval of the tenant’s creditworthiness
and management capabilities. f. � Property damage insurance
g. � Plate glass insurance
h. � _________________________________________________________________________________
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - PAGE 1 OF 3 — FORM 110 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - PAGE 2 OF 3 — FORM 110 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

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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 ______________________________________________________________________________
________________________________________________________________________________________
________________________________________________________________________________________
________________________________________________________________________________________
________________________________________________________________________________________
________________________________________________________________________________________
________________________________________________________________________________________

I agree to render services on the terms stated above. I agree to employ Broker on the terms stated above.
� See attached Signature Page Addendum. [RPI Form 251]
Date: , 20 Date: , 20
Broker's Name: Landlord:
Broker's CalBRE #:
Agent's Name:
Agent's CalBRE #:
Signature:
Address: _______________________________________

For a full-size, fillable copy of this or

_______________________________________________
Phone: _________________ Cell: ___________________
Signature:______________________________________ Email: _________________________________________
Address: _______________________________________
_______________________________________________
Phone: _________________ Cell:___________________
Email: _________________________________________
any other form in this book that may
FORM 110 06-17 ©2017 RPI — Realty Publications, Inc., P.O. BOX 5707, RIVERSIDE, CA 92517
be legally used in your professional
practice, go to realtypublications.
com/forms

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
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

1 Phillippe v. Shapell Industries, Inc. (1987) 43 C3d 1247

 126 Property Management, Sixth Edition

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 

Exclusive An exclusive authorization to lease operates like an exclusive right-to-sell

listing agreement. 
authorization to
The leasing agent is employed to “sell the use,” a leasehold interest with
locate a user  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
open listing locating a buyer for a property. 
An employment
entered into by a
broker to render real The broker owes the same obligations and duties to the owner under an
estate services on exclusive authorization to lease as they owe a seller under an exclusive
a best-efforts basis right-to-sell listing. As a leasing agent, the broker’s primary obligation owed
under which a fee
is due to the broker an owner seeking tenants is to diligently, consistently and conscientiously
if they achieve the market the property and locate qualified tenants. 
client’s objective of the
employment before
the client or another
Conversely, a leasing agent’s performance under a written open listing
broker separately first requires only the broker’s best efforts to locate a tenant, not constant diligence. 
meet the objective, An open listing sets the leasing agent in competition with the owner and
such as the sale or
locating of a property. other brokers to locate a tenant and collect a fee. 

Fee schedule An exclusive authorization-to-lease calls for the preparation of a fee

schedule. The fee schedule is attached to the exclusive authorization and
establishes 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
broker’s right and other continuing leasehold and purchase arrangements which might be
to a fee entered into in the future by the tenant and the owner. [See RPI Form 113;
see Chapter 42]

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]; 

2 Shell v. Darneille (1984) 162 CA3d 957

 Chapter 12: Exclusive authorization to lease 127

•  an early termination clause assures payment of the fee if the owner termination-of-
withdraw the property from the rental market during the listing period agency clause
[See Figure 1, Form 110 §3.1b];  A provision which
assures payment of
•  a termination-of-agency clause assures payment of the fee if the the broker’s fee if the
owner cancels the
owner cancels the employment without cause before it expires under employment without
the listing, whether or not the owner intends to continue to market the cause before the listing
property for sale [See Figure 1, Form 110 §3.1c]; and  expires. [See RPI Form
102 §3.1(c), 103 §4.1(b),
•  a safety clause assures payment of the fee if, within one year after 110 §3.1c]
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. 
Ready,
willing and
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 able tenant
on the same terms specified in the exclusive authorization to lease. [See condition 
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
full listing offer to
substantially identical to the leasing terms in the authorization, called a full lease
listing offer to lease. [See RPI Form 556] A buyer’s or tenant’s
offer to buy or lease
The owner then demands higher rental rates and refuses to accept the offer. on terms substantially
identical to the
employment terms
The broker claims to be entitled to a fee since they produced a tenant who in the owner’s listing
was ready, willing and able to lease the property on the terms stated in the agreement with the
broker. [See RPI Form
exclusive authorization to lease.  556]

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

128 Property Management, Sixth Edition

An exclusive 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
right-to- space during the listing period. This clause is called the exclusive right-
collect clause  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.”
exclusive right-to- [See Figure 1, Form 110 §3.1a] 
collect clause
A provision which
assures payment of the The broker, as part of their efforts to locate a tenant, places a “For Lease” sign
broker’s fee if anyone on the premises. The sign is seen by a prospective tenant.
procures a tenant
on the terms in the
listing, or on terms the
The prospective tenant contacts the owner of the premises directly. 
landlordowner accepts.
[See RPI Form 110 Before the exclusive authorization to lease period expires, the prospective
§3.1a] 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 

Early 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
termination the property is: 
by owner •  withdrawn from the rental market; 
triggers fee  •  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
early termination
clause clause. An early termination clause protects the broker from loss of time and
A provision which money spent in a diligent effort to locate a tenant when the owner’s conduct
assures payment of
the broker’s fee if the
effectively removes the property from the rental market before the listing
owner withdraws the expires. When the owner interferes with the broker’s objective — to produce
property from a ready, willing and able tenant on the terms stated — a fee has been earned
the market during the
listing period. [See RPI and is immediately due. 
Form 110 §3.1c]
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
 Chapter 12: Exclusive authorization to lease 129

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 RPI 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 Safety clause
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]  covers
Under the safety clause, the owner owes the leasing agent the scheduled fee prospects
if: who lease 
•  during the safety clause period, the owner enters into negotiations
with a tenant located by the leasing agent during the listing period; safety clause
A provision in an
and exclusive listing
agreement earning the
•  the negotiations result in a lease agreement. 
broker a fee during an
agreed safety period
The safety clause includes a provision which calls for the leasing agent as a after expiration of
condition precedent to collecting a fee to provide the owner with a list of the the employment for
prospective tenants located by the leasing agent during the listing period. marketing efforts with
identified buyers,
[See RPI Form 122] tenants or property,
if the client sells the
Consider a broker and an owner who enter into an exclusive authorization listed property to an
identified buyer or
to lease. The exclusive authorization to lease contains a fee provision with a purchases or leases
safety clause.  an identified property
during the safety
On expiration of the listing period, the broker supplies the owner with period. [See RPI Form
102 §3.1(d), 103 §4.1(c)
the names of prospective tenants they have contacted and who received and 110 §3.1(d)]
information regarding the property. Thus, each of these prospective tenants
is “registered” with the owner.

5 Blank v. Borden (1974) 11 C3d 963

130 Property Management, Sixth 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

Contingency with the owner to lease a property. Along with a prospective tenant’s
fees due 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
on owner’s provision is called a contingency fee clause. [See RPI Form 556]
breach Consider an owner who accepts an offer to lease submitted by a broker
contingency fee
on behalf of a prospective tenant. The signed offer to lease contains a fee
clause provision which states the broker’s fee is payable by the owner on change of
A provision in an possession. [See RPI Form 556]
offer-to-lease which
states the broker’s fee is
payable on the transfer Later, the owner wrongfully refuses to enter into a lease agreement and
of possession to the convey the leasehold interest as agreed in the offer to lease. The broker makes
tenant. [See RPI Form
556 §15]
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

 Chapter 12: Exclusive authorization to lease 131

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 Additional
lease negotiated with the tenant. Further, they usually state the broker will fees on
receive an additional fee for any extension, renewal or modification of the
tenant’s occupancy under the original lease. [See Chapter 42]  extension of
For example, a broker operating under the authority of a written exclusive lease 
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
132 Property Management, Sixth Edition

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 12 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
Summary 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.

Chapter 12 contingency fee clause............................................................... pg. 130

early termination clause............................................................ pg. 128
Key Terms exclusive authorization to lease.............................................. pg. 124
exclusive right-to-collect clause.............................................. pg. 128
full listing offer to lease.............................................................. pg. 127
leasing agent.................................................................................. pg. 123
open listing.................................................................................... pg. 126
safety clause................................................................................... pg. 129
termination-of-agency clause................................................... pg. 127

Quiz 3 Covering Chapters 9-13 is located on page 645.

 Chapter 13: Exclusive authorization to locate space 133

Chapter
13
Exclusive authorization
to locate space

After reading this chapter, you will be able to: Learning

•  use an exclusive authorization to locate space to assure payment
of a fee for assisting prospective tenants;
Objectives
•  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.

agency duty exclusive authorization to

locate space
Key Terms
consultation fee
general duty
dual agency

A landlord of a commercial property holds an open house attended by

leasing agents. The purpose of the open house is to induce the leasing agents
A leasing
to locate tenants for the landlord’s vacant space.  agent and the
Leasing agents attending the open house are handed the landlord’s brochure commercial
on available space and lease terms. The information includes an unsigned tenant 
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. 
134 Property Management, Sixth Edition

Case in point Tenant needs and expectations

To know To effectively negotiate a commercial lease arrangement on behalf of a tenant, a

the tenant’s 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
expectations 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 RPI 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.

Completed The broker completes the tenant registration form identifying the broker
and prospective tenant. The registration form itself does not reference the fee
tenant schedule or any amount payable to the broker as a fee. 
regstration The registration form is handed to the landlord, or the landlord’s employee,
form 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 RPI Form 556] 

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 13: Exclusive authorization to locate space 135

Also, over projection of the potential income of a tenant’s business under a percentage- Case in point
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 To know
agent’s long-term service to either the landlord or tenant is limited. Thus, the leasing the tenant’s
agent needs to consider a system to help them match up the right landlord with the
expectations
right tenant.
Using a tenant lease worksheet cont’d
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 RPI 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.

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.
136 Property Management, Sixth Edition

exclusive Thus, the broker is able to enforce collection of a fee from the tenant. The
authorization to tenant signed an offer to lease the property, which contained a provision
locate space calling for the broker to be paid a fee. The tenant breached that fee provision
An employment
agreement by a broker by failing to provide for payment of that broker’s fee. In doing so, the tenant
and a prospective incurred liability for the fee.1 
tenant which
authorizes the broker
to act as the tenant’s
Conversely, a broker locating space for a client puts their fee orally promised
leasing agent to by the landlord at risk if the prospective tenant does not sign an agreement
locate suitable space — such as an exclusive authorization to locate space or offer to lease —
and negotiate a lease
agreement. [See RPI containing provisions for the payment of a broker’s fee if the tenant leases
Form 111] 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
Various signed by either the tenant or the landlord on at least four occasions during
written fee lease negotiations:

agreements •  when the leasing agent solicits a commercial landlord for authorization
to represent the landlord to locate users and negotiate acceptable
leasing arrangements; [See Form 110 in Chapter 12]
•  when the leasing agent solicits (or is solicited by) a commercial 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

Employment before extensively analyzing the tenant’s needs for space the broker intends
agreements 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
with a user 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.

1 Rader Company v. Stone (1986) 178 CA3d 10

2 Phillippe v. Shapell Industries, Inc. (1987) 43 C3d 1247
 Chapter 13: Exclusive authorization to locate space 137

Form 111
EXCLUSIVE AUTHORIZATION TO LOCATE SPACE
Exclusive
Prepared by: Agent
Broker
Phone
Email Authorization to
NOTE: This form is by a leasing agent when employed by a tenant as their sole agent to locate property and negotiate Locate Space
terms and conditions for its rental or lease for a fixed period of time.
DATE: , 20 , at , California.
Items left blank or unchecked are not applicable.
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 If Tenant’s intended lease period exceeds one year, Tenant acknowledges receipt of the Agency Law Disclosure.
[See RPI Form 550-2]
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 Broker.
4.1 Tenant agrees to pay Broker � see attached fee schedule [See RPI 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 their 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 RPI Form 123]
4.2 If this agreement terminates 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 If Landlord of space leased to Tenant agrees to pay a fee acceptable to the Broker, Tenant’s obligation to pay a
brokerage fee will be satisfied.
TYPE OF SPACE SOUGHT:
GENERAL DESCRIPTION ___________________________________________________________________________
LOCATION _______________________________________________________ SIZE ___________________________
RENTAL AMOUNT/TERM ____________________________________________________________________________

I agree to render services on the terms stated above. I agree to employ Broker on the terms stated above.
Date: , 20 � See attached Signature Page Addendum. [RPI Form 251]
Broker's Name: Date: , 20
Broker's CalBRE #: Tenant:
Agent's Name:
Agent's CalBRE #: Signature:
Tenant:

Signature:______________________________________ Signature:
Address: _______________________________________ Address: _______________________________________
_______________________________________________ _______________________________________________
Phone: _________________ Cell:___________________ Phone: _________________ Cell:___________________
Email: _________________________________________ Email: _________________________________________

FORM 111 06-17 ©2017 RPI — Realty Publications, Inc., P.O. BOX 5707, RIVERSIDE, CA 92517

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;
•  the formula for calculating the broker’s compensation and who will
pay the fee [See Form 113 in Chapter 42];
•  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.
138 Property Management, Sixth 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,

Exclusive the broker earns a fee when the tenant enters into a lease agreement for
authorization space similar to the space sought under the exclusive authorization. The
fee is collectible no matter who locates acceptable space or negotiates the
ensures lease agreement, established by the exclusive clause in the employment
collection of agreement. [See Form 111 §4.1a]

a fee 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
consultation fee
A fee the broker retainer period is later leased by the tenant in negotiations commenced
charges for the during the one-year period after the exclusive authorization expires. [See
time spent locating
rental property if
Form 111 §4.1c]
the tenant decides
not to lease space If the tenant decides not to lease space during the exclusive authorization
during the exclusive period, the fee provision is structured so the broker can include payment of
authorization period.
[See RPI Form 111 a consultation fee. A consultation fee is charged on an hourly basis for the
§4.2] time spent locating rental property.  [See Form 111 §4.2]

An exclusive authorization to locate space is mutually beneficial to a

Benefits of prospective tenant and a broker. The employment commits the commercial
exclusive tenant and broker to work together to accomplish a single objective — the
leasing of space.
authorization 
Understandably, an unrepresented tenant is at the mercy of the leasing
agent employed by the landlord. An agent employed by a landlord owes
agency duty
The fiduciary duty a the employing landlord an agency duty to use diligence in seeking the
broker owes a client most qualified tenant and negotiating terms for a lease most favorable to the
to use diligence in
attaining the client’s
landlord.
real estate goals. [See
RPI Form 305-1 and Conversely, the landlord’s broker only owes a general duty to a non-client
550-2] 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
general duty value.
The duty a licensee
owes to non-client The exclusive authorization to locate space is an employment agreement. It
individuals to act
honestly and in good
imposes on the broker an agency duty owed to the tenant, even though the
faith with upfront fee will most likely be paid by the landlord.
disclosures of known
conditions which The prospective tenant who exclusively authorizes a competent broker to
adversely affect a
property’s value. [See locate space saves time and money. The licensed advisor conducts the search
RPI Form 305-1 and and handles negotiations to lease property on the prospective tenant’s behalf.
550-2]
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.
 Chapter 13: Exclusive authorization to locate space 139

In a rising market, when available space is scarce, landlords have superior Who
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. controls the
Curiously, when a rising market allows landlords to control negotiations 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 commercial landlord who orally promises a broker to pay a fee

if the broker locates a prospective tenant. A prospective tenant is located by
Pay if you
the broker. The tenant is orally advised by the broker that the landlord has interfere with
agreed to and will pay the broker’s fee. No retainer agreements (listings) are
entered into by the broker.
a broker’s
economic
After seeing the property and before signing an offer to lease (with fee
provisions), the tenant contacts the landlord directly to negotiate a lease. advantage
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? 

Yes! The tenant is liable for the broker’s fee the landlord promised to pay since
the tenant: 
140 Property Management, Sixth Edition

•  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

Understanding tenant. The broker fails to ask for and is not employed under an exclusive
dual agency 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
dual agency
The agency were induced to employ the broker under the listing. The landlord delivers
relationship that possession to the tenant, but refuses to pay the broker’s fee. 
results when a broker
represents both The broker makes a demand on the landlord for payment of the fee. The
the buyer and the
seller in a real estate broker claims they acted as the exclusive agent of the tenant at all times. The
transaction. [See RPI
Form 117]

3 Buckaloo v. Johnson (1975) 14 C3d 815

4 Della Penna v. Toyota Motor Sales, U.S.A., Inc. (1995) 11 C4th 376
 Chapter 13: Exclusive authorization to locate space 141

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
Need for a
tenant, not the landlord, to enter into a written employment agreement. written
Also, an agency relationship with the landlord is unnecessary when the employment
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
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
142 Property Management, Sixth Edition

Chapter 13 In a rising market when available space is scarce, landlords have

superior negotiating power. Thus, it is in the tenant’s best interest to
Summary 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.

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 commercial 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.

Chapter 13 agency duty.................................................................................... pg. 138

consultation fee............................................................................ pg. 138
Key Terms
dual agency.................................................................................... pg. 140
exclusive authorization to locate space................................. pg. 136
general duty................................................................................... pg. 138

Quiz 3 Covering Chapters 9-13 is located on page 645.

 Chapter 14: Cost of operating in leased space 143

Chapter
14
Cost of operating in
leased space

After reading this chapter, you will be able to:

•  use the property expense profile to disclose to prospective tenants Learning
the costs they will likely incur to use and maintain a property; Objectives
•  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 nonrecurring deposits or Key Terms

charge charges
comparative cost analysis operating costs
further-approval property expense profile
contingency
property operating data
letter of intent
recurring operating expenses

Property operating data is readily available as property management services

are computerized. As a result, prospective tenants making decisions about
Disclosures
leasing property have greater awareness and higher expectations when by leasing
seeking a broker’s advice.
agents
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]
144 Property Management, Sixth Edition

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
Tenant’s cost transactions, brokers are retained by consumers (prospective tenants and
of occupancy buyers) to inform them of relevant conditions surrounding a property. Brokers
and their agents are the presumed experts, licensed and trained in the issues
and ongoing that affect pricing and users of property. Relevant information includes the
operations costs of occupying and ongoing operations within a space, collectively called
operating expenses. 
operating expenses As for a landlord and their leasing agent, their role in marketing space is
The total annual cost
incurred to maintain limited to:
and operate a property
for one year. [See RPI •  disclosing facts about the property that adversely affect the value and
Form 352 §3.21] use of the property; and
•  avoiding misleading disclosures.
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.

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
 Chapter 14: Cost of operating in leased space 145

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: 
Tenant’s
1. The property’s physical aspects, including square footage, shipping
expected costs
facilities, utilities, HVAC units, tenant improvements, sprinkler as part of a
system, condition of the structure, soil, geologic hazards, toxic or noise
pollution, parking, etc.; 
marketing
2. The conditions of occupancy affecting the use and enjoyment of the package
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 Operating
gathered and set forth on the property expense profile which is handed costs
to prospective tenants. These profiles are used by leasing agents to induce
tenants to rent their landlord-client’s space rather than other comparable disclosed to
space. [See Form 562] tenants 
Property-related expenditures incurred by a tenant of a specific property
during the leasing period are classified as:  recurring operating
expenses
The regular and
•  recurring operating expenses;  continuing costs of
•  nonrecurring deposits or charges [See Chapter 19]; or using and maintaining
a property.
•  rent and payments on mortgages secured by the tenant’s leasehold. 
Tenants, their leasing agents, and property managers compare the costs a nonrecurring
tenant will incur to occupy and operate in a particular space against the costs deposits or charges
to operate in other available space, a type of comparative cost analysis. One-time costs for
which the tenant is
Tenant improvements are a type of acquisition cost that the tenant has to responsible. [See RPI
contend with (paid for up front or over the initial term of the lease), whether Form 550 §2]
constructed by the landlord or the tenant.
146 Property Management, Sixth Edition

Form 562

Tenant’s
Property
Expense Profile

comparative cost The tenant’s comparative cost analysis is even more relevant to negotiations
analysis during periods of economic slowdown. Overbuilding or a decline in the
A comparison of the
costs a tenant will
number of commercial tenants increases vacancy levels. When this occurs,
incur to occupy and the economic function of the marketplace will dictate a reduced rent rate
operate in a particular until demand for space fills up the present supply of available space and
space against the costs
to operate in other rental rates rise.
available space. [See
RPI Form 562] 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. 
 Chapter 14: Cost of operating in leased space 147

Figure 1
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - PAGE 2 OF 3 — FORM 185 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
LETTER OF INTENT REVIEW PERIOD:
Prospective Buyer’s Proposal for Due Diligence Investigations 9. The review period for prospective Buyer’s due diligence investigation, inspection and testing expires ______ days after

Prepared by: Agent

Broker
Phone
Email
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
Form 185
NOTE: This form is used by a buyer’s agent, before making an offer to purchase a property, to request the seller to checked items as soon as reasonably practicable after agreeing to this letter:
provide information necessary for the buyer to complete their due diligence and determine its suitability for acquisition.
10.1 � A Rental Income Rent Roll statement itemizing, by unit or space, the tenant’s name, monthly rent amount

Letter of Intent
DATE: , 20 , at , California. including CAMs and other additional rent fees, rent due date, delinquencies and the amount in arrears, rental
Items left blank or unchecked are not applicable. period and expiration date, any incentive rent-free arrangements and bonuses or discounts, utilities paid by
FACTS: landlord, security deposits and prepaid rent, furnishings supplied, broker fees due or to become due under the
1. This Letter of Intent is entered into by _______________________________________, as the prospective Buyer,
1. leases. [See RPI Form 352-1]
and _____________________________________________________________________________, as the Owner, 10.2 � Tenant rental or lease agreements, including any riders, modifications or amendments and side agreements;
regarding real estate situated in the city of ____________________________________________________________, any option rights to renew or extend, lease additional space or purchase the property; and any pre-expiration
County of _________________________________, State of __________________________________________, cancellation rights and penalty amounts. A tenant turn-over report and an eviction report, by unit or space, for the
referred to as __________________________________________________________________________________ current and two preceding years.
_____________________________________________________________________________________________.
2. REVIEW PERIOD: This letter is submitted by prospective Buyer calling for Owner to cooperate with prospective Buyer 10.3 � Operating income and expense records, the current year-to-date and two preceding years' profit and loss
for the duration of a review period. statements (or schedule E) and capital expenditures for the property, and operating and capital budgets for this
and the following year.
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. 10.4 � Property management agreements and a list of employees including their compensation schedules, and
leasing agent listings to locate tenants.
2.2 If the prospective Buyer determines 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 10.5 � Maintenance agreements, outstanding work orders and other service or supply agreements related to the
Owner’s review and acceptance, counteroffer, or rejection. operation of the property.
3. NEGOTIATIONS: Prior to entering into a binding purchase agreement, either Owner or prospective Buyer may propose 10.6 � Utility, cable/TV, internet and phone bills, property and business tax bills, assessment statements for any rent
different pricing, terms for payment or conditions for closing than contained in this letter, may enter into negotiations and control and special district improvement bonds.
agreements with other parties in complete conflict with this proposal, or unilaterally withdraw this letter without further 10.7 � Invoices and copies of advertising and marketing for units or spaces during the past two years, along with any
obligation to each other. marketing budget and plans for this year and next.
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 to acquire the property, and it is not the 10.8 � Interview of individuals involved in the management and operations of the property and administration of the
grant of an option to buy the property. property’s financial books and records.
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 10.9 Natural Hazard Disclosure Statement issued by a geologist and signed by Owner, and any geological reports
written purchase agreement has been entered into by both Owner and prospective Buyer. relating to the property and possessed or known to Owner. [See RPI Form 314]
4.2 Before any party to this agreement files an action on a dispute arising out of this agreement which remains 10.10 � Conditions of property disclosures prepared and signed by Owner. [See RPI Form 304] Solar Shade Control
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 Notices sent or received by Seller to be handed to Buyer on acceptance. [See RPI Form 322]
settle the dispute. 10.11 � Seller's Neighborhood Security Disclosure prepared by Owner setting forth criminal activity on or about the
AGREEMENT: property during the past two years relevant to the security of persons and their belongings on the property, and
5. The proposal in this letter is to be deemed revoked unless agreed to by Owner within ______ days after date by delivery any security arrangements undertaken or which should be undertaken in response. [See RPI Form 321]
of a copy of this Letter of Intent, signed by Owner to prospective Buyer or prospective Buyer’s broker. 10.12 � Appraisals, feasibility studies, and market studies relating to the value and rentability of the properties.
6.
6. As a preliminary expression of Buyer’s intent to purchase the property, the written purchase agreement to be negotiated 10.13 � Soil reports, pest control reports, ADA compliance reports, structural or component reports by architects or
is to provide: contractors and other similar reports or studies.
6.1 The unrestricted right for either party to assign their interest in the purchase agreement and agree to cooperate in 10.14 � ALTA survey, topographical studies, plans and specification of improvements and engineering of the site.
effecting an Internal Revenue Code §1031 transaction prior to the close of escrow on either party’s written notice. 10.15 � An inspection of the property by prospective Buyer or consultants within ____ days after mutual agreement to
[See RPI Forms 171 and 172-2] this letter.
6.2 For Buyer’s monetary liability to Owner, limited to $_______________, if it is determined Buyer breached the 10.16 � All government related licenses, permits, mapping of the parcel, blueprints and plans, certificates of occupancy,
written purchase agreement. building inspections, health and safety reports, environmental impact and conditions reports or studies known to
6.3 The execution of estoppel certificates by each tenant affirming the terms of their tenancy. [See RPI Form 598] Owner, and copies of relevant local zoning ordinances affecting the use or operation of the property.
6.4 Owner to furnish a structural pest control inspection report and certificate of clearance of corrective conditions. 10.17 � Warranties or guaranties on fixtures or components of the property improvements.
6.5 The transaction to be escrowed with ___________________________________________________________, 10.18 � Schedule “B” exceptions to Owner’s most recent policy of title insurance and Owner’s knowledge of any
and provide for a closing date ______ days after entering into a written purchase agreement. encumbrances not listed on Schedule “B” as an exception.
6.6 A good-faith deposit into an escrow account in the amount of $_______________. 10.19 � Itemized inventory of the personal property, including any trade fixtures, owned or leased by Owner and used
7. Prospective Buyer proposes to pay a purchase price for the property of .............................................. $ 0.00 in the operation or maintenance of the property.
8. The terms for payment of the proposed purchase price to include: 10.20 � All effective insurance policies relating to the property and liability of Owner for its operations, statements of
8.1 Cash through escrow including funds from any purchase-assist financing ................................. $ premiums, and any claims made under any insurance policy covering the property during the past ______ years,
8.2 � Take title subject to, or � Assume, an existing first trust deed loan of ..................................... $ including claims made against building contractors.
8.3 � Take title subject to, or � Assume, an existing second trust deed loan of .............................. $ 10.21 � The note, trust deed or related documents for each monetary lien on the property to include any restrictions,
8.4 Assume an assessment bond lien of ........................................................................................... $ limitations or conditions on occupancy, rents, use, encumbrance, conveyance or reconveyance.
8.5 Execute a note in favor of Owner for the balance due on the purchase price of ......................... $
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - PAGE 1 OF 3 — FORM 185 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - PAGE 2 OF 3 — FORM 185 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - PAGE 3 OF 3 — FORM 185 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

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 their due diligence investigation and
review of the property and records.
10.24 � See attached Addendum – General Use for additionally requested documentation and information. [See RPI
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 _________:_________.
14. If these negotiations are for the transfer of a one-to-four unit residential property or a commercial property, Buyer and
Owner acknowledge receipt of an attached Agency Law Disclosure. [See RPI Form 305]
15. _____________________________________________________________________________________________
_____________________________________________________________________________________________
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.

Owner's Broker: Prospective Buyer's Broker: For a full-size, fillable copy of this or
any other form in this book that may be
Broker's DRE #: Broker's DRE #:
is the broker for: � Owner is the broker for: � Buyer
� both Buyer and Owner (dual agent) � both Buyer and Owner (dual agent)

Seller's Agent: Buyer's Agent: legally used in your professional practice,

go to realtypublications.com/forms
Agent's DRE #: Agent's DRE #:
is � Owner's agent (salesperson or broker-associate) is � Buyer's agent (salesperson or broker-associate)
� both Buyer's and Owner's agent (dual agent) � both Buyer's and Owner's agent (dual agent)

Signature: Signature:
Address: Address:

Phone: Cell: Phone: Cell:

Email: Email:

I agree to the terms stated above. I generally concur with the terms stated above.
� See attached Signature Page Addendum. [RPI Form 251] � See attached Signature Page Addendum. [RPI Form 251]
Date: , 20 Date: , 20
Prospective Buyer: Owner:

Signature: Signature:
Prospective Buyer: Owner:

Signature: Signature:

FORM 185 01-19 ©2019 RPI — Realty Publications, Inc., P.O. BOX 5707, RIVERSIDE, CA 92517

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.
148 Property Management, Sixth Edition

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.

The duty of a 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
tenant’s agent then obtain additional information during negotiations or by requiring
the information from the landlord through a contingency provision before
to investigate taking occupancy.
and advise
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
property operating
uninformed action.
data
The actual costs of The landlord either knows, or can easily obtain from their property manager
operating a property or current tenant, the actual costs of operating their property for the intended
for its intended use.
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;
letter of intent
A non-binding
•  make any offer to lease contingent on getting data; or
proposal signed •  use a letter of intent (LOI) to provide a method of getting information.
and submitted to a
property owner to start [See Figure 1, Form 185] 
negotiations.
Armed with knowledge of the costs, the tenant’s broker can comfortably
disclose the operating expenses to their client. 

CAMs Leases on commercial properties often include common area maintenance

charges (CAMs). CAMs are intended to be expenses incurred by the landlord
incurred by 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
the landlord, used to effectively increase rental income (and make the property’s published
paid by the rental rate appear advantageous) without ever incurring or accounting to
the tenant for amounts spent.
tenant
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
 Chapter 14: Cost of operating in leased space 149

of the rent payments to the landlord structured essentially as net leasing

common area
arrangements for multi-tenant properties, not single user property. [See RPI maintenance charge
Form 552-3] Property operating
expenses incurred
During a tight leasing market with reduced availability of space, landlords by a commercial
landlord and paid by
sometimes deceptively increase their net income by adding fixed amounts the tenant as rent in
as CAMs instead of directly raising rents. Thus, they fractionalize the rent to additonal to the base
distract the prospective tenant with what initially appears to be a competitive rent, adjustments and
percentages. [See RPI
rent, until the extent of the CAMs are brought up well into negotiations. Form 552 §6]

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
Accurate
landlord’s broker may provide estimates. However, estimates are required to estimates
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
by leasing
experienced.  agents 
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 further-approval
contingency
a further-approval contingency. [See Figure 1, Form 185 §9]  A provision in an offer
to rent property which
The further-approval contingency provision allows the tenant time to allows the tenant time
investigate and confirm the property information disclosed by the landlord. to investigate and
confirm the property
If the information cannot be confirmed, or is contrary to the information information disclosed
disclosed, the tenant their agent may cancel or renegotiate the offer to lease.4  by the landlord.

Best practices when disclosing operating costs include: 

•  the preparation of a property expense profile for each available property expense
unit, prepared by the landlord or property manager and signed by the profile
An itemized analysis
landlord [See Form 562]; and of the costs a tenant or
•  a comparison by the tenant and the tenant’s broker of the economic cost landlord will incur to
operate and maintain
of rent, and other operating expenses for one space versus operating a particular property.
costs and rent incurred in other qualifying spaces. [See RPI Form 562]

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.

4 Ford v. Cournale (1973) 36 CA3d 172

150 Property Management, Sixth Edition

A property’s operating costs are part of its signature, distinguishing it

Chapter 14 from other available properties. Data on a property’s operating costs
Summary 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.

Chapter 14 common area maintenance charge......................................... pg. 149

comparative cost analysis.......................................................... pg. 146
Key Terms further-approval contingency.................................................. pg. 149
letter of intent............................................................................... pg. 148
nonrecurring deposits or charges............................................ pg. 145
operating costs.............................................................................. pg. 144
property expense profile............................................................ pg. 149
property operating data.............................................................. pg. 148
recurring operating expenses................................................... pg. 145

Quiz 4 Covering Chapters 14-18 is located on page 646.

 Chapter 15: Tenant profiles 151

Chapter
15
Tenant profiles

After reading this chapter, you will be able to: Learning

•  ascertain a tenant’s needs when leasing property; and
•  manage tenant requirements during leasing negotiations.
Objectives

exclusive authorization to tenant lease worksheet Key Terms

locate space

A broker negotiating a commercial lease on behalf of a client needs to possess Get the
a high level of knowledge and expertise regarding different aspects of leasing,
including: negotiations
•  the economic attributes and financial results of lease agreements; rolling  
•  the legal consequences of lease agreement provisions and title
conditions affecting the tenant’s right to possession; and
•  the tax implications of the lease transaction.
A broker’s technical expertise enables them to ascertain their client’s needs
and requirements, whether their client is a landlord or a tenant. Once the
broker understands their client’s objectives, the broker can locate either a
suitable tenant (a user) or property (the space or premises). Then, what
remains is to enter into lease negotiations.

Most commercial tenants are completely consumed by the constant demands

of their business. They usually do not have sufficient time to devote to making
decisions in real estate leasing transactions. Further, annual operating costs
of leasing property represent a small fraction of the business’s gross income,
somewhere between 2% and 4%. High traffic shopping center space is the
exception.
152 Property Management, Sixth Edition

On the other hand, most landlords are primarily concerned with efforts to
get vacant space rented. Consequently, landlords and tenants rely on brokers
as their leasing agents to put the lease package together, which consists of
property data disclosures and lease documents.

The final lease agreement negotiated by a leasing agent will be the result of:
•  the relative bargaining strength of the landlord and tenant under
current market conditions;
•  the time the landlord and tenant are willing to devote and the urgency
given to negotiating the leasing details;
•  the expertise exercised and attention given to property and leasing
details by their respective leasing agents; and
•  local market conditions affecting user demand for the property and
rent amounts.

The tenant’s The broker usually gets the negotiations started with an offer to rent or
letter of intent (LOI). Once negotiations are underway, a broker’s advice to
letter of their client helps shape the final terms. The tenant’s broker drafts the initial
intent offer or LOI. The lease agreement needs to be prepared by the tenant’s agent if
they are to maintain their advantage of making the first offer. Landlords with
larger leasing operations often prepare their own documents “in house,” or
retain legal counsel to do so.

A leasing agent best determines the tenant’s intentions for leasing property
by preparing:
•  a tenant lease worksheet to assess the tenant’s space requirements
and, with financial statements, the financial condition of the tenant’s
business [See Form 555 accompanying this chapter]; and
•  an offer to lease and attached lease agreement to commit the tenant so
an acceptance by the landlord will bring about an enforceable contract
set by the terms of a lease agreement or a viable counteroffer. [See RPI
Form 556]
A LOI will probably precede the tenant’s actual offer in a casual effort to “feel
out” the landlord. But this may backfire on the leasing agent if the landlord
simply responds with a lease agreement as their proposal, stripping the
tenant’s leasing agent of control over lease agreement content.

List the With or without a written retainer agreement with a tenant, the leasing
agent who undertakes the task of locating space for the tenant assumes
tenant agency obligations to act on behalf of, and in the best interest of, the tenant.

However, without a written agreement, the leasing agent has no assurance

their fee, if earned, will be paid.1

1 Phillippe v. Shapell Industries, Inc. (1987) 43 C3d 1247

 Chapter 15: Tenant profiles 153

Thus, the prudent leasing agent only undertakes the duty to represent a
tenant when the tenant signs an exclusive authorization to locate space.
[See RPI Form 111]

Under a tenant’s exclusive authorization to locate space, the broker is

formally retained as the tenant’s representative. Thus, the broker will be paid
a leasing fee, either by the landlord or the tenant, if the tenant enters into a
lease for the type of property described in the tenant’s exclusive authorization
agreement. [See RPI Form 111]

A leasing agent acting on behalf of a tenant needs to investigate and confirm

why the tenant wants to move if the leasing agent is to better understand
Tenant
their user’s needs. conferences
For example, the tenant’s existing space may have become too large or too
small for their current or future needs. Alternatively, the tenant may be
exclusive
arguing with their current landlord over: authorization to
locate space
•  the rent, common area maintenance charges (CAMs) or assessments An employment
when renewing a lease; agreement by a broker
and a prospective
•  the tenant’s current space requirements that conflict with space tenant which
provided for under an option to renew or extend; or authorizes the broker
to act as the tenant’s
•  a lease assignment or sublease of a portion of the leased space. leasing agent to
locate suitable space
By uncovering the precise reasons for moving, the tenant’s agent is better and negotiate a lease
agreement. [See RPI
able to find a suitable new location and premises, or negotiate a renewal or Form 111]
extension of the tenant’s current lease.

When a prospective tenant is starting a new business, the leasing agent

needs to get information on the tenant’s business projections at the outset. A
The tenant’s
tenant’s new business projections may be overly optimistic. They may want future needs
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. Rent might be paid by the landlord accepting a
fractional participation in the ownership of the tenant’s business.

Conversely, a tenant may underestimate the potential future growth of their

business. The premises they favor may be too small to absorb their growth,
frustrating later attempts to expand. The tenant will be forced to relocate
again prematurely. In this case, the tenant may require options or the right of
first refusal on additional space, or a lease cancellation or buyout provision
so they may vacate the premises without liability for future rents under their
lease agreement.

Also, over projection of the potential income of a tenant’s business when

entering into a percentage-rent lease will reduce the landlord’s projected
rental income. Unless the leasing agent considers the space needs and gross
income of a user, the leasing agent’s long-term service to either the landlord
or tenant is limited. Thus, the leasing agent needs to develop a system to
match the right landlord with the right tenant.
154 Property Management, Sixth Edition

Form 555
TENANT LEASE WORKSHEET
Tenant Lease
Prepared by: Agent Phone
Worksheet Broker Email

NOTE: This form is used by a leasing agent when representing a prospective commercial tenant in need of space, to
Page 1 of 3 determine the tenant's motivations, business needs and financial status, and the type of property and lease terms sought
by the tenant.

DATE: , 20 , at , California.
1. GENERAL INFORMATION:
Tenant's name
Business address
Phone Fax
Email
Type of business
Tenant's financial condition
Tenant's creditworthiness: � Good � Adequate � Poor
2. Tenant business goals:
2.1 Short term (3-5 years)

2.2 Long term (5-10 years)

3. Information on space presently occupied by Tenant:

3.1 Type of building: � Multi-tenant � Free-standing
3.2 Location: � Good � Adequate � Poor
3.3 Suitability to business: � Good � Adequate � Poor
3.4 Square feet determined by
3.5 Tenant utility costs:
a. � Lighting/electrical. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$.
b. � Gas. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$
c. � Water. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $.
d. � . . . . . . . . . . . . . . . . .$
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 0.00
3.6 Tenant operating costs:
a. � Common area maintenance (CAM). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$.
b. � Casualty insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$
c. � Use fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$
d. � Real property taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $.
e. � Maintenance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$
f. � Assessments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $.
g. � Property management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $.
h. � Janitorial services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$
i. � Parking. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$
j. � Fire insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .
k. � . . . . . . . . . . . . . . . .$
l. � . . . . . . . . . . . . . . . .$
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 0.00
3.7 Rooms/offices (number of):
� Offices . . . . . . . . . . . . . . . . . . . . . . . . . . . .
� Reception area. . . . . . . . . . . . . . . . . . . . . .
� Storage rooms . . . . . . . . . . . . . . . . . . . . . .
� Kitchen. . . . . . . . . . . . . . . . . . . . . . . . . . . .
� Conference rooms . . . . . . . . . . . . . . . . . . .

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - PAGE 1 OF 3 — FORM 555 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

Using a Consider a tenant who runs an insurance agency that has more employees
and files than the premises it now occupies will accommodate. The tenant
tenant lease has three agents and a support staff of eight people, including secretaries, an
worksheet office manager and a full-time computer technician and webmaster.

The tenant expects the economy to allow the business to continue to grow.
Thus, they need a larger space to meet their present and expanding needs.
 Chapter 15: Tenant profiles 155

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - PAGE 2 OF 3 — FORM 555 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Form 555

� Lab/R&D rooms . . . . . . . . . . . . . . . . . . . . .
� Restrooms. . . . . . . . . . . . . . . . . . . . . . . . . .
� Dressing rooms . . . . . . . . . . . . . . . . . . . . . Tenant Lease
� Computer room . . . . . . . . . . . . . . . . . . . . .
� Hallways . . . . . . . . . . . . . . . . . . . . . . . . . . Worksheet
� Lunchroom . . . . . . . . . . . . . . . . . . . . . . . .
� ............
� ............ Page 2 of 3
� ............
� ............
3.8 Tenant improvements and trade fixtures

4. Information on space sought by Tenant:

4.1 Type of building: � Multi-tenant � Free-standing � Rural
4.2 Location preferance: � Downtown � Suburbs
City County
4.3 Access needed:
� Residential � Legal/civic centers � Shopping centers
� Agricultural � Hotels � Restaurants
� Industrial � Libraries � Redevelopment areas
� Mountain areas � Universities/Colleges � Government-state
� Freeways � Financial services � Government-federal
� Public transit � Warehouses � Publishing houses
� Parking � Office centers � Manufacturing centers
� Airports � Convention centers � Disposal facilities
� Coastal � Sports facilities � Trains
� Shipyards � Near competition �
� Trucking � Medical/hospital
4.4 Space needs:
a. Square feet
b. Rooms/offices:
� Offices � Storage rooms
� Conference rooms � Restrooms
� Computer rooms � Lunch rooms
� Reception area � Kitchen
� Lab/R&D rooms � Dressing rooms
� Hallways �
4.5 Physical plant needs:
� Signs � Ceilings
� Stairwells � Walls
� Finishing � Floors
� Partitions � Painting
� Carpeting � Ramps/parking
4.6 Utility needs:
� Lighting/electrical � Computer
� Water � Gas
4.7 Heating and air conditioning needs ____________________________________________________________
4.8 Parking/docking/shipping requirements ________________________________________________________
4.9 Response time for police and fire departments ____________________________________________________
4.10 Other Tenant needs ________________________________________________________________________
5. Lease terms on space now occupied by Tenant:
5.1 Type: � Office � Shopping center � Retail
� Industrial � Light business
5.2 Term Expiration date / /

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - PAGE 2 OF 3 — FORM 555 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

The tenant contacts a leasing agent to locate space with tenant improvements
suitable for their staff to occupy. The leasing agent explains they are the
leasing agent for a number of landlords in the area and will be able to find tenant lease
worksheet
suitable space for the tenant. The tenant is advised that, if needed, planners are A document the
available to design the use of the space and specify the tenant improvements leasing agent uses to
for occupancy. analyze the tenant’s
current financial
condition and needs
The leasing agent prepares a tenant lease worksheet. [See Form 555 for leased space. [See
accompanying this chapter] RPI Form 555]
156 Property Management, Sixth Edition

Form 555

Tenant Lease
Worksheet

Page 3 of 3

The worksheet covers three key areas the leasing agent needs to consider
and analyze:
•  the tenant’s current lease agreement obligations and conditions of
their existing space;
•  the tenant’s current and likely future needs for leased space; and
•  the tenant’s financial condition and creditworthiness.
Regarding the tenant’s existing space, the leasing agent will determine:
•  the type of building;
•  the square footage;
•  the monthly operating and utility costs; and
•  the tenant improvements and trade fixtures.
 Chapter 15: Tenant profiles 157

A necessary review of the tenant’s current lease includes: Agent’s

•  the expiration date; review of
•  monthly rent and periodic adjustments and assessments;
the tenant’s
•  the obligation to continue to occupy the premises;
•  the obligation to restore the premises or remove tenant improvements;
current lease
•  options to extend or renew the lease or buy the premises;
•  the tenant’s ability to assign or sublease; and
•  the amount of the security deposit.
These facts will help the leasing agent determine the tenant’s rights and
obligations under their present lease for timing the tenant’s relocation. When
representing the tenant, the leasing agent needs to point out and explain,
to the best of their ability, their knowledge of the beneficial or detrimental
effect any lease provisions have on the tenant.

When representing an owner, the leasing agent will advise them which
terms the tenant is unhappy with and which lease provisions are “throw
away” clauses. Such clauses are designed for negotiations and are of little or
no concern to the owner.

Next, the leasing agent ascertains the tenant’s needs and goals for the new Locating new
space.
space
Regarding the space requirements, the leasing agent will need to uncover
the tenant’s:
•  current square footage needs;
•  future square footage needs;
•  phone, utilities and computer facility 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, shopping and restaurants; and
•  any needs peculiar to the tenant.
Some tenants may focus on specific geographic locations in the business
market or population centers. Others may need the lowest rent possible,
regardless of location within the geographic area they wish to conduct
business.
158 Property Management, Sixth Edition

On completing a tenant lease worksheet, the leasing agent discovers the

tenant wants to:
•  stay in the same community because of their many strong business
and social ties to the area;
•  keep their rent fixed or have predictable (fixed) annual adjustments
over the next three to five years; and
•  move closer to the freeway for quick access to customers in outlying
areas.

Tenant needs The tenant currently needs 4,000 square feet to accommodate:
•  four private offices;
•  a computer room;
•  a reception area;
•  a conference room;
•  a storage room;
•  restrooms;
•  a lunch room; and
•  areas for sales staff and secretaries.
Financially, the business is profitable, but the tenant wants to keep rent at no
more than 4% of gross income. Additionally, the tenant is concerned future
inflation will mount. Thus, they do not want their rent adjustments tied to
the Consumer Price Index (CPI). If they have to be, then a ceiling needs to be
set on any annual rise in the CPI beyond 3%.

Also, the leasing agent might suggest negotiating for an option to lease
additional space if adjacent space becomes available and necessary for
expansion (and an additional fee for the leasing agent if exercised).

Finally, the leasing agent and the tenant need to discuss the rental terms
available in the leasing market. Several provisions in leases have a financial
impact, favorable or not, on the landlord and the tenant. Financial aspects of
a lease agreement include:
•  base monthly rent;
•  periodic rental adjustments (CPI or percentage);
•  payment of real estate taxes and insurance premiums;
•  tenant improvements;
•  responsibility for general maintenance (CAMs);
•  structural, roofing and HVAC maintenance;
•  government ordered retrofitting;
•  lease assignability and subletting authority;
•  options to renew or extend, or to buy; and
•  personal guarantees or letters of credit.
 Chapter 15: Tenant profiles 159

The prudent leasing agent only undertakes the duty to represent a Chapter 15
tenant when the tenant signs an exclusive authorization to locate space.
Summary
The leasing agent’s goal to locate space for the tenant involves several
steps. First the leasing agent prepares a tenant lease worksheet. The
worksheet covers three key areas the leasing agent needs to consider
and analyze:
•  the tenant’s current lease conditions and existing space;
•  the tenant’s current and future needs for leased space; and
•  the tenant’s financial condition and creditworthiness.

These facts will help the leasing agent determine the tenant’s rights and
obligations under their present lease agreement.

Next, the leasing agent ascertains the tenant’s needs and objectives to be
met in the new space. Finally, the leasing agent and the tenant need to
discuss the rental terms available in the leasing market.

exclusive authorization to locate space ................................ pg. 153 Chapter 15

tenant lease worksheet .............................................................. pg. 155 Key Terms

Quiz 4 Covering Chapters 14-18 is located on page 646.

 Chapter 16: Offers to lease 161

Chapter

16
Offers to lease

After reading this chapter, you will be able to: Learning

•  appreciate the legal significance of written negotiations; and
•  distinguish between submitting an offer to lease and a proposal
Objectives
to lease.

letter of intent offer to lease Key Terms

Once a leasing agent locates suitable premises for a prospective tenant, Negotiating
the agent brings the landlord and tenant together through negotiations to
develop the terms of a lease acceptable to all. the
The role the broker plays in negotiations and their duties as a leasing agent commercial
depends on whom they represent in the transaction: the landlord, the tenant lease
or both. How aggressive a role a broker may play on behalf of their client
depends on the bargaining power held by the landlord or tenant during the
current phase of the cyclical market conditions.

When representing the tenant, the broker needs to initially determine their
need for space and the rental amount the tenant is willing and able to pay for
the space. The broker uses a tenant lease worksheet, when first interviewing
the tenant to gather and review this information. [See RPI Form 555; see
Chapter 15]

When representing the landlord, the broker needs to know the rental terms
and leasing conditions the landlord desires for the space, and perform a due
diligence review of the space for rent. Usually, this data is set out in the
exclusive authorization to lease property. [See RPI Forms 110 and 590]
162 Property Management, Sixth Edition

The offer to Whether a broker represents the tenant or the landlord, the broker initiates
negotiations most efficiently by preparing an offer to lease form for the
lease tenant to review and consider for signing. [See Form 556 accompanying this
chapter]

The tenant enters into the offer to lease space for the same reasons a buyer
signs and submits an offer to purchase real estate.

For example, under an offer to lease, the landlord agrees to convey a right to
possession to the tenant for a set period of time under the lease.

Likewise, a buyer of a real estate interest under a purchase agreement

acquires either an existing leasehold (held by and being sold by an existing
tenant) or fee title (from the owner). This interest is conveyed to the buyer by
an assignment or deed.

Thus, like a sales transaction, the arrangement of a lease transaction has two
phases:
•  the offer and acceptance (agreement to lease); and
•  the drafting and signing of the lease and delivery of funds and
possession (the conveyance of the leasehold interest on closing).
In the leasing situation, the broker, the landlord or the landlord’s attorney
prepares and handles all the closing instruments, such as the lease agreement
and transfer of funds.

Leasing is usually accomplished without the benefit of a formal escrow.

If documents are to be recorded, such as occurs in a long-term leasing
transaction, a title officer and title insurance company become involved
with a title search and issuance of a leasehold title insurance policy.

Contents of To be effective, an offer to lease needs to set forth all crucial elements
negotiated to bring the landlord and tenant together in final leasing
the offer arrangements. [See Form 556]

offer to lease An offer to lease, like an offer to purchase, contains four sections:
A document which
sets forth all crucial •  identification of the parties and premises;
elements typically
negotiated to bring •  rental payment schedules and period of occupancy;
the landlord and
tenant together in final •  property maintenance and terms of possession (use); and
leasing arrangements.
[See RPI Form 556]
•  signatures of the parties.
A floor plan or common description of the premises is usually attached by a
reference to it in the identification section.

The tenant is asked to include a good faith deposit as is a fee simple buyer
under a purchase agreement. The check for the deposit needs to be made
payable to a broker involved, not the landlord.

Upon receipt of the good faith deposit, the broker needs to hold the deposit
in a trust account as trust funds. If lease negotiations are unsuccessful, the
 Chapter 16: Offers to lease 163

Form 556

Offer to Lease

Page 1 of 2

broker returns the good faith deposit to the prospective tenant. If the landlord
and tenant enter into a lease agreement, the broker disperses the funds to
satisfy the security deposit or rent amount due under the lease agreement.
In this case, the broker will deliver the amount of the good faith deposit to
either the landlord or the property manager, whomever is designated in the
lease agreement.

The section of the offer setting forth the rental payment schedule is a checklist
of various rental arrangements which may be selected by the tenant to pay
rent, including:
•  the duration/term of the initial leasing period;
•  the monthly base rent for the first year;
164 Property Management, Sixth Edition

Form 556

Offer To Lease

Page 2 of 2

•  any rental adjustments during the leasing period for inflation and
appreciation;
•  responsibility for payment of utilities;
•  responsibility for insurance policies, premium payment and payment
of property taxes;
•  the amount of the security deposit; and
•  options to renew or extend the leasing period, or to buy the property.
It is good brokerage practice to reference and attach a copy of the proposed
lease agreement form to the offer. It includes boilerplate provisions covering:
•  the responsibility for property operating and maintenance expenses;
 Chapter 16: Offers to lease 165

•  the right to assign, sublet or encumber the lease;

•  subordination/trust deed lender rights;
•  default remedies; and
•  eminent domain.

In the offer’s miscellaneous leasing provisions, the tenant and landlord

further agree to other terms peculiar to leasing, including:
Miscellaneous
•  the tenant’s proposed use;
provisions
•  the lease agreement form to be used;
•  responsibility for tenant improvements;
•  any alterations by the tenant;
•  brokerage fees; and
•  the time and manner for accepting the offer to lease.
Some landlords, in response to a letter of intent or offer to lease, initially present
prospective tenants with fully prepared but unsigned lease agreements. This
landlord negotiating stance works to the landlord’s advantage since the
issue of whose lease document to be used is ended. The parties then orally
negotiate the final terms.

To better clarify negotiations, the broker writes up the offer to lease (and
counteroffers). Then, within the offer-counteroffer context, acceptable terms
based on signed offers and counteroffers are developed. Expectations are
properly reached and negotiations are memorialized in writing to avoid later
conjecture.

The final section of the offer to lease is the signature section, where the
landlord and tenant sign and agree to the terms stated in the offer.

By signing an offer to lease prepared by a broker, a prospective tenant initiates

the negotiations in earnest on a property suitable for the tenant’s use. The
Offers to
landlord’s acceptance concludes the search for space. lease vs.
The key difference between an offer and a proposal to lease, called a letter of proposals
intent (LOI), is the offer on acceptance forms a binding contract. The LOI is
a mere proposal and solicitation of the landlord’s intentions, binding on no
one.
letter of intent
A non-binding
Solicitations, such as an LOI sent to the landlord or their leasing agent by proposal signed
the tenant’s agent, require the landlord, if they respond, to clarify their and submitted to a
property owner to start
previously announced terms and conditions. A phone call between agents negotiations to rent or
is more efficient than an LOI since no offer exists for the landlord to accept or buy a property. [See
counter. If the landlord responds, they need to make an offer in writing. This RPI Form 185]

forces the leasing agents to submit the landlord’s offer to lease to the tenant
for an acceptance, counteroffer or rejection.
166 Property Management, Sixth Edition

Form 180

Counteroffer

A proposal merely evidences a tenant’s or landlord’s intent to think about

and provide leasing information. The tenant and the landlord are not yet
ready to make a binding commitment, otherwise an offer is submitted by one
or the other.

Counteroffers To form a binding agreement to lease, an offer or counteroffer needs to

accepted in its entirety and without qualification or alteration.1
focus on
When a landlord or tenant conditions their acceptance of an offer to lease by
negotiations changing or adding specific terms, acceptance does not occur and a binding
agreement to lease is not formed.2
1 Calif. Civil Code §1582
2 CC §1585
 Chapter 16: Offers to lease 167

Consider a landlord who is currently negotiating with the CEO of a company to enter Case in point
into a lease agreement. A competing landlord (or their broker) actively solicits the
company’s officers and board members to lease space from them instead. Interference
Ultimately, the company enters into a lease agreement with the competing landlord. with
The landlord who lost out seeks to recover lost rent from the competing landlord, negotiations
claiming the competing landlord intentionally interfered with their prospective
economic advantage which existed with the CEO of the company. The landlord claims
the competing landlord induced the officers and board members to consider and accept
the competing landlord’s proposal while they were completing negotiations with the
company’s CEO.
However, a competing landlord and their brokers have a privilege of competition.
This right allows them to solicit a tenant who they know is negotiating with another
landlord. The competing landlord does not engage in unlawful interference with
another landlord’s prospective tenant when the prospective tenant has not yet finalized
negotiations and entered into an enforceable agreement to rent space from the other
landlord.
A landlord who has not yet entered into a binding offer to lease or lease agreement
does not hold an economic advantage (in the form of a binding contract) with which
a competing landlord may not interfere. [San Francisco Design Center Associates v.
Portman Companies (1995) 41 CA4th 29]

The added conditions or changes establish a rejection of the offer and create
a counteroffer. To avoid altering a signed document (the offer or lease), a
counteroffer form referencing the signed document is prepared, signed and
submitted. The other party then accepts, rejects or further counters the prior
offer.

Thus, if the offer to lease is not acceptable to the landlord or tenant, they may
counter by using a counteroffer form to state their acceptable terms. [See RPI
Form 180 accompanying this chapter]

As written negotiations continue, an acceptable set of terms develops by the

use of counteroffer forms. Written counteroffers keep the landlord and tenant
focused on the remaining unnegotiated details. LOIs do also if the agents fully
note all aspects previously agreed on by the tenant and the landlord. Further,
a deposit and credit application delivered with the offer demonstrate to the
landlord the tenant’s serious intent to rent the property.

After acceptance of the offer or counteroffer to lease, only the following

remain to close the lease transaction:
•  preparation of the lease agreement (and other closing documents);
•  transfer of possession; and
•  payment of the security deposits and initial rent.
168 Property Management, Sixth Edition

Chapter 16 Like a sales transaction, the arrangement of a lease transaction has two
phases:
Summary •  the offer and acceptance (agreement to lease); and
•  the drafting and signing of the lease agreement and delivery of
funds and possession (the conveyance of the leasehold interest on
closing).
The key difference between an offer and a proposal to lease, called a
letter of intent (LOI), is the offer on acceptance forms a binding contract.
The LOI is a mere proposal and solicitation of the landlord’s intentions,
binding on no one.
If the offer to lease is not acceptable to the landlord or tenant, they may
counter by using a counteroffer form to state their acceptable terms.
Once an offer or counteroffer is accepted in its entirety, and without
qualification or alteration, a binding lease agreement is formed.

Chapter 16 letter of intent ........................................................................... pg. 165

Key Terms offer to lease ................................................................................ pg. 162

Quiz 4 Covering Chapters 14-18 is located on page 646.

 Chapter 17: Residential tenant credit checks 169

Chapter

17
Residential tenant
credit checks

After reading this chapter, you will be able to: Learning

•  identify issues to be addressed by a tenant background check; and
•  intelligently analyze a prospective tenant’s creditworthiness for
Objectives
the payment of rent.

applicant screening fee credit reporting agency Key Terms

A landlord or property manager bases their analysis of a prospective tenant’s Protection for
ability to perform under a lease agreement on:
landlords and
•  a completed credit application from the tenant [See Form 302
accompanying this chapter]; brokers
•  a credit clearance through a credit reporting agency as authorized on
the credit application; and
•  an unlawful detainer (UD) clearance through a consumer reporting
agency.
Besides relying on financial ratios and formulas to analyze the suitability
of an individual as a tenant, on receipt of a rental application a prudent
residential landlord or property manager will:
•  call prior landlord(s) to confirm the amount of the prospective tenant’s
prior rent, payment history and personal conduct as an occupant on
the premises;
•  call the current employer to confirm the employment data on the
application;
•  confirm other sources of income, expenses and amount of indebtedness
disclosed in the credit application; and
170 Property Management, Sixth Edition

•  determine whether the prospective tenant is able to make the payments

or a guarantee is necessary.

Collecting Accurate credit and background information is needed on each prospective

tenant to properly analyze the risk of lost rent and enforced collection.
relevant
Owners and property managers of income-producing property need
information information to make informed decisions whether to accept or reject
prospective tenants. This information includes:
•  prior evictions;
•  late rent payments;
•  bounced checks; or
•  other breaches of lease agreements.
A conclusion on creditworthiness is drawn from the tenant’s credit history
and financial statements.

In the course of their brokerage business, a property manager makes decisions

and advises landlords on the ability (income) and willingness (payment
history) of tenants to pay rent and care for the premises.

Property managers advising landlords on tenants’ creditworthiness need

credit reporting to subscribe to the services available from a credit reporting agency
agency (CRA). Apartment owners’ associations obtain credit information for their
A private agency
which collects and membership from the same private tenant screening services directly
reports information available to landlords.
regarding an
individual’s credit
history.
Editor’s note — One such service is the Tenant Screening Center, Inc. at 140
Wikiup Drive, Santa Rosa, CA 95403 (1-800-523-2381, [email protected]).

A credit report does not guarantee the prospective tenant will perform under
Acquiring the rental or lease agreement. Neither does it establish the prospect’s ability
credit data to pay rent in the future.

However, the report does reveal the prospect’s previous performance in

paying their debts (e.g. money owed on finance contracts, utility services or
professional services, etc.). It also reveals whether they have incurred late
penalty charges on consumer credit accounts or been subjected to judgments
or tax liens. Thus, the report gives an indication as to whether the tenant will
pay rent and pay it on time.

Property managers seeking credit information need to identify themselves

to the CRA, state their purpose for seeking the information and certify to the
CRA that the information will be used for no other purpose than stated.1

1 Calif. Civil Code §1785.14(a)

 Chapter 17: Residential tenant credit checks 171

Form 302

Credit
Application

Page 1 of 2

Even if a broker is approved by a CRA, the agency will not provide a broker
with credit information on just anyone. A broker seeking information on a
prospective tenant will be refused service unless the tenant signs a release
form for the information. [See Form 302]

The requirement for a tenant to first authorize the release of credit information
is often waived if the broker is a member of an agency’s credit association.
Membership is open only to applicants who allow the agency to make a
full investigation of their own creditworthiness and professional integrity.
Abuse of the credit reporting service leads to termination of membership.
172 Property Management, Sixth Edition

Form 302

Credit
Application

Page 2 of 2

Consumer credit reports are limited to specific factual information on a

Credit report prospective tenant’s creditworthiness standing or capacity. Consumer credit
contents reports are used to establish eligibility for:
•  credit to be used for personal, family or household purposes;
•  employment purposes; and
•  the rental of a dwelling unit.2
A telecredit check reviews the tenant’s check writing history. The broker will
be informed if the tenant has written checks on insufficient funds in the past.
2 CC §1785.3(c)
 Chapter 17: Residential tenant credit checks 173

The credit report includes references to the payment status of existing liens,
mortgage and finance contracts, charge accounts, delinquencies, rental
histories and payments, skips, damages and monies owed landlords and
other creditors.

Information not available on a credit report includes:

•  bankruptcies pre-dating the report by more than ten years;
•  judgments pre-dating the report by the longer of seven years;
•  unlawful detainer (UD) actions in which the landlord did not receive a
final judgment by default, summary judgment or trial;
•  paid tax liens and accounts on collection pre-dating the credit report by
more than seven years; and
•  criminal activity or other adverse information pre-dating the report by
more than seven years.3

A prudent property manager uses a service which provides records on UD reporting

unlawful detainer (UD) actions in which the landlord prevailed by receiving
a final judgment. services
Some specialty credit services constantly obtain UD information from the
municipal courts and landlords who subscribe to their service. These CRAs
sell landlords information gathered from public records regarding UD
evictions, and from landlords on particular tenants with whom they have
adverse relationships. The broker then obtains more detailed information on
these tenants by contacting the landlord giving the adverse activity to the
CRA.

In the early 1990s, CRAs were singled out and prohibited from disclosing
the UD information needed by landlords to analyze their risks. The
prohibition was based on the claim the state had an interest in maintaining
the availability of rental housing to all individuals, despite their adverse
credit history. However, without the information, landlords were unable to
analyze the risk they undertake by renting to a particular prospect.

The statute prohibiting credit agencies from reporting UD actions was found
to be a violation of landlords’ First Amendment rights. Thus, credit agencies
now collect and report UD evictions.4

However, a tenant may request the agency clarify the disposition of the UD
action if the initial report, while technically true, is misleading or incomplete.5

Investigative consumer reports provide information on a tenant’s character,

reputation, personal characteristics and mode of living. Investigative
This information is obtained through personal interviews with neighbors,
reports go
friends and associations of the tenant. further
3 CC §1785.13(a)
4 U.D. Registry, Inc. v. State (1995) 34 CA4th 107
5 Cisneros v. The U.D. Registry, Inc. (1995) 39 CA4th 548
174 Property Management, Sixth Edition

Investigative consumer reports may be used for:

•  insurance or employment purposes; and
•  the rental of a dwelling unit.6
Investigative consumer reports are commonly used by landlords when
hiring a property manager or resident manager, or entering into a percentage
lease with a tenant. Before obtaining an investigative consumer report, a
landlord needs to notify and receive written permission from the prospective
employee or tenant to retrieve and use the investigative consumer report for
employment or leasing purposes.7

Additional information on the tenant’s creditworthiness and character is

Prior rental readily available to property managers who contact the tenant’s previous
history landlord. Critical questions to be asked of the prior landlord include:

inquiries •  Did the tenant cause any damage to the rental property?
•  Was the rent paid on time every month? Were partial payments made?
•  Were any late charges incurred, and if so, were they demanded and did
the tenant pay the late charges?
•  Was the tenant ever served a three-day notice?
•  Did the tenant leave on friendly terms?
•  Did the tenant care for and maintain the premises?
•  Did the tenant abide by restrictions in the lease (i.e., pets, guests,
building policy, etc.)?
•  Did the tenant interfere with or endanger other tenants?
If, after investigating a prospective tenant’s background, it seems likely the
tenant will damage, deteriorate, or otherwise diminish the value of the
property for other tenants, a prudent landlord or property manager may
not be willing to lease to the prospect or consent to their assumption of an
existing lease.

Evaluating Once a property manager has obtained the necessary credit information on
the tenant, the data needs to be evaluated.
credit
Information provided on forms filled out by the tenant, brokers and landlords
information may not be used to discriminate against any tenant based on their race, color,
religion, sex, sexual orientation, marital status, national origin, ancestry,
familial status or disability.8

However, each tenant needs to be treated individually when applying

income-to-debt or income-to-rent ratios as guidelines to determine a tenant’s
creditworthiness. A tenant who does not meet an income ratio is not
necessarily a credit risk if they have a strong balance sheet (assets and net
worth).
6 CC §1786.12(d)
7 CC §1786.12
8 Calif. Government Code §12955
 Chapter 17: Residential tenant credit checks 175

However, a landlord or property manager may analyze a prospective tenant’s

capability to pay rent by applying a ratio or formula (such as a “three-to-
one” income-to-rent ratio) as the only basis for determining the tenant’s
creditworthiness.9

Income-to-debt ratios and percentage income-to-rent standards assume all

prospective tenants who do not meet the ratio or percentage are unable to
pay. Exclusively using these ratios to qualify prospective tenants sacrifices a
thoughtful review of a prospective tenant’s ability to pay rent and maintain
the premises.

A more thorough review based on the tenant’s financial statements and

occupancy history will often yield tenants of better financial capacity than a
quick, mechanical test of the tenant’s financial ability.

When a tenant is refused occupancy or subjected to increased rent or security

deposit due to their credit report, the tenant needs to be:
Denied due to
•  told so by the landlord or property manager when relying on the credit
bad credit
report to reject the tenant; and
•  given the name of the service that issued the credit report.10
Any consumer who is denied credit, i.e., refused as a tenant for lack of
creditworthiness, needs to be informed they are entitled to a written statement
from the landlord or property manager of the reasons for the denial.11

A residential landlord may charge a prospective tenant a nonrefundable Nonrefundable

credit screening fee to cover the costs of obtaining information about the
prospective tenant.12 fees for credit
The information requested by the landlord permitting the charge of a credit reports
screening fee includes personal references, investigative reports and credit
reports.

The amount of the applicant screening fee may not exceed $30 plus applicant screening
annual adjustments based on increases in the Consumer Price Index (CPI), or fee
A nonrefundable fee
the lesser amount of: charged to the tenant
to reimburse the
•  out-of-pocket costs for gathering the information; and landlord for the cost
to obtain the tenant’s
•  costs of the landlord’s time in obtaining the information.13 credit report.

The landlord needs to provide the prospective tenant with an itemized

receipt of the out-of-pocket expenses and time spent to obtain and process
the tenant’s credit information.14

9 Harris v. Capital Growth Investors XIV (1991) 52 C3d 1142

10 CC §1787.2
11 CC §1787.2(b)(2)(i)
12 CC §1950.6(a)
13 CC §1950.6(b)
14 CC §1950.6(d)
176 Property Management, Sixth Edition

If a personal reference check is not performed or a consumer credit report is

not ordered, the landlord needs to refund any amount of the screening fee
not used to cover screening costs.15

Further, on request from the prospective tenant, the landlord needs to provide
the prospective tenant with a copy of the consumer report.16

An applicant screening fee may not be charged when a rental unit is presently
unavailable or will not be available within a reasonable period of time.17

Editor’s note — A reasonable time is probably the time period required to

notice the termination of a tenancy, such as under a notice to vacate.

15 CC §1950.6(e)
16 CC §1950.6(f)
17 CC §1950.6(c)

Chapter 17 A landlord or property manager bases their analysis of a prospective

tenant’s ability to perform under a lease agreement on:
Summary •  a completed credit application from the tenant;
•  a credit clearance through a credit reporting agency as authorized
on the credit application; and
•  an unlawful detainer (UD) clearance through a consumer
reporting agency.
A conclusion on creditworthiness is drawn from the tenant’s credit
history and financial statements.

A residential landlord may charge a prospective tenant a nonrefundable

credit screening fee to cover the costs of obtaining information about
the prospective tenant.

Chapter 17 applicant screening fee ............................................................. pg. 175

credit reporting agency ............................................................. pg. 170
Key Terms

Quiz 4 Covering Chapters 14-18 is located on page 646.

 Chapter 18: Commercial tenant screening 177

Chapter

18
Commercial tenant
screening

After reading this chapter, you will be able to: Learning

•  identify aspects of a commercial tenant’s background needing
further investigation prior to entering into a lease agreement; and
Objectives
•  proceed with a credit screening investigation.

balance sheet profit and loss statement Key Terms

An owner’s leasing agent, when reviewing an application to rent from a

prospective commercial tenant, has a duty to the owner to review the tenant’s
Qualified to
qualifications. A commercial lender reviews a person’s qualifications to stay and pay
borrow money in the same way.

Like lending money, leasing real estate is an extension of credit. Rent paid
for the use of property is comparable to interest paid for the use of money.
Both financial arrangements have the same economic function since each
generates a rate of return — one called rent, the other called interest.

Further, the owner conveys to the tenant the right to use the property,
comparable to a lender advancing money for use by a borrower. Both are
on loan. Finally, property let to a tenant is to be returned to the owner, just
as money lent to a borrower is returned to the lender without a decrease in
value.

Thus, the leasing agent and landlord analyze the prospective tenant’s
creditworthiness and whether they’re qualified to take possession of the
property, pay for its use in a timely manner and return it undiminished as
agreed.
178 Property Management, Sixth Edition

Credit report A credit report provides only partial information on a commercial tenant’s
creditworthiness. Credit reports do not evaluate the tenant’s managerial
partial ability to successfully operate their trade or business and care for the premises.
information Also, they do not consider the tenant’s assets (net worth) or the profitability of
the business. However, investigative reports carry this type of information.

A tenant, on inquiry from a leasing agent, will provide financial statements

on their company. The tenant’s business income, expenses and net operating
profit and loss income (NOI) are disclosed in the tenant’s profit and loss statement, a type
statement of financial statement. The tenant’s balance sheet is a separate financial
A type of financial
statement which
statement which sets forth the tenant’s net worth (assets) and liabilities
discloses the tenant’s (debts). [See Form 209-2 accompanying this chapter; see RPI Form 209-3]
business income,
expenses and net Occasionally, start-up companies do not have computer-generated financial
operating income. [See
RPI Form 209-2] statements. In this event, financial statement forms are available from
institutional lenders and forms publishers for tenants.
balance sheet The information contained in financial statements supplied voluntarily by
An itemized, dollar-
value presentation the tenant needs to be confirmed by the owner or their leasing agent. Most
for setting an credit agencies will perform this activity for a fee. The credit application
individual’s net worth usually supplies the name and address of banks and creditors of the tenant.
by subtracting debt
obligations (liabilities)
from asset values. [See Leasing agents may also check out the property currently occupied by
RPI Form 209-3] commercial tenants to see if the tenant failed to maintain the property. A
diminished property value on the tenant’s return of possession is what an
owner wants to avoid. Investigating the tenant’s behavior before entering
into a leasing agreement will help establish with more certainty what risk
the tenant’s conduct poses for the owner.

For managers of commercial property, the added dimension of the tenant’s

business operations and conduct needs to be considered. The tenant’s
business acumen and style of marketing from the premises will have an
effect on occupants of adjacent space.

Also, leasing agents need to give the same review to a substitute tenant
seeking to assume an existing lease and to a prospective tenant negotiating a
new lease. When a lease agreement contains an alienation provision stating
the owner’s consent “will not be unreasonably withheld,” the owner needs to
hold the substitute tenant to the same standards used to qualify new tenants.

Using different qualifying standards is an unreasonable interference with

the commercial tenant’s right to sell their business and transfer the leasehold
to the substitute tenant for the remainder of the term.

Purpose of A commercial manager, leasing agent or owner conducts a background check

on a new tenant to determine their:
background
•  credit history;
checks •  financial status;
•  business track record and proposed business plans;
 Chapter 18: Commercial tenant screening 179

•  compatibility with other tenants and class of clientele;

•  ability to manage their business; and
•  ability to maintain the property’s value.

Before a prospective tenant’s credit and financial history can be analyzed by

the owner, the prospective tenant needs to complete a credit application,
Credit and
also called an application to rent. On receiving the tenant’s credit application, financial
the owner and their leasing agent may begin the process of verifying the
tenant’s payment history based on the information supplied by the tenant
history
and reports ordered from credit agencies. [See RPI Form 302; see Chapter 17]

Any possible adverse information, such as foreclosures, bankruptcies, tax

liens, evictions, violations of use ordinances or records of arrests, needs to be
given weight when analyzing the tenant’s acceptability.

Editor’s note — Litigious and troublesome tenants are to be shunned since

they come with baggage and attitudes adverse to problem-free landlord-
tenant relationships.

Extensive financial data on the prospective tenant’s business is readily

available to the owner upon request. Financial information on the tenant’s
Business
business operations is usually provided through financial statements, track record
including:
•  profit and loss, income and operating statements for the current and
preceding year; and
•  a balance sheet for the last day of the month preceding the application
to rent.
Attention needs to be focused on the tenant’s:
•  prior work experience;
•  business or professional licenses;
•  familiarity with their proposed use of the property;
•  degree of responsibility;
•  managerial skills;
•  vocational or educational experience;
•  business acumen and survivability;
•  name recognition and length of time in the community; and
•  civic and community involvement.
The prospective commercial tenant’s income statement and balance sheet
statement need to be examined for:
•  income, expenses and net operating income (NOI) ratios;
•  ability to maintain or increase sales;
•  budget and income projections;
180 Property Management, Sixth Edition

Form 209-2

Profit and Loss

Statement

•  net cash flow;

•  age of accounts payable;
•  amortization periods and due dates of debts;
•  cash reserves;
•  ownership and control; and
•  product performance and service satisfaction.
Also, most commercial tenants are structured as business entities, not operated
as individual proprietorships. With an entity as the tenant, the landlord or
leasing agent needs to pull records from the Secretary of State for California to
determine if the company is in good standing with the state. It is also needed
 Chapter 18: Commercial tenant screening 181

to determine who is registered with the state as the CEO/President/managing

member permitted to enter into contracts, such as a lease agreement, binding
the entity to the agreement.

The tenant’s future plans for the space and their business objective for the
relocation are legitimate concerns of an owner. Some entrepreneurial owners
Future plans
accept stock or other share ownership in the tenant’s company in lieu of rent and business
for the leased space, particularly with business start-ups.
goals
Regardless of the form in which rent will be paid, the owner needs to
consider questions about the nature and substance of the tenant’s operations,
including:
•  Is the tenant consolidating or expanding their operations?
•  Do their income and expense projections, including the rent amounts,
make sense?
•  Does the business require the infusion of capital to relocate to new
space?
•  Does the tenant need to increase or reduce their debt or annual debt
service?
•  For tenants who are a corporation or limited liability company (LLC),
is a stockholder or a member willing to personally guarantee the lease
agreement or provide security?
•  Will the activities of the tenant pose any zoning, ordinance or insurance
coverage problems?
•  Will the tenant’s operations and the type of clientele it attracts enhance
or impair the future value of the real estate?
182 Property Management, Sixth Edition

Chapter 18 The leasing agent and landlord analyze the creditworthiness of

prospective tenants. They investigate the tenant to determine whether
Summary the prospective tenant is qualified to take possession of the property,
pay for its use in a timely manner and return it undiminished as agreed.

A commercial manager, leasing agent or owner conducts a background

check on a new tenant to determine their:
•  credit history;
•  financial status;
•  business track record and proposed business plans;
•  compatibility with other tenants and class of clientele;
•  ability to manage their business; and
•  ability to maintain the property’s value.
Extensive financial data on the prospective tenant’s business is readily
available to the owner upon request. Financial information on the
tenant’s business operations is usually provided through financial
statements.

Chapter 18 balance sheet .............................................................................. pg. 178

profit and loss statement .......................................................... pg. 178
Key Terms

Quiz 4 Covering Chapters 14-18 is located on page 646.

 Chapter 19: Security deposits and pre-expiration inspections 183

Chapter
19
Security deposits and
pre-expiration inspections

After reading this chapter, you will be able to: Learning

•  understand the use of a security deposit as a source of recovery
for money losses incurred by the landlord due to a tenant default
Objectives
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 commercial security deposit
refund requirements; and Key Terms
•  provide an itemized statement of deductions to account for
recoverable expenses and any interest accrued the landlord is to
pay on the security deposit.

final inspection rent

itemized statement of security deposit
deduction
statement of deficiencies
joint pre-expiration
inspection

Both commercial and residential landlords prudently require a tenant to pay Cover for
the first month’s rent and make a security deposit as a requisite to entering
into a rental or lease agreement. [See RPI Form 550, 551 and 552] a tenant’s
The security deposit provides a source of recovery for money losses incurred nonperformance 
due to a default on obligations agreed to in the rental or lease agreement. security deposit
Tenant monetary obligations include: A source of funds to
pay tenant obligations
•  paying rent; owed the landlord on
the tenant’s default
in the rental or lease
agreement.[See RPI
Form 550 §2.1 and 552
§1.2]
184 Property Management, Sixth 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 commercial
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

Rent is paid rental or lease agreement are characterized as one of the following: 
in advance •  rent;
•  a security deposit;
rent
Compensation •  a waterbed administrative fee; or
received by a landlord
in exchange for the •  a tenant screening fee for processing an application.1
tenant’s use, possession
and enjoyment of the Rent is compensation, usually paid periodically, received by a landlord in
property.
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 Residential tenants, unlike commercial tenants, lack sufficient bargaining

power when negotiating a rental or lease agreement. To prevent residential
security tenants from abuse, California public policy and laws limit the amount of
deposits: not security deposits a residential landlord may demand and collect from a
tenant.
rents, not
Residential security deposits are limited to: 
fees
•  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)
 Chapter 19: Security deposits and pre-expiration inspections 185

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 recharacterized as a security deposit are refundable

when the tenant vacates, less permissible deductions.
Uniform
application
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 of security
tenant’s creditworthiness. deposits
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 55] 

An additional security deposit may be demanded and collected when a

tenant maintains a waterbed in an unfurnished rental unit. [See RPI Form
The additional
564] waterbed
This waterbed deposit cannot exceed an amount equal to one-half month’s deposit
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
Commercial
5 CC §§1940.5; 1950.5(b), (c); 1950.6
security
6
7
CC §1950.5(c)
24 Code of Federal Regulations §100.60(b)(4) deposits
8 Calif. Government Code §12955(a); 24 CFR §100.65
9 CC §1940.5(g)
186 Property Management, Sixth Edition

Case in point 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
To defer the first equal to one month’s rent.
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
commercial 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

A commercial landlord has the discretion to set security deposit amounts

under a rental or lease agreement. Amounts set for commercial 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 19: Security deposits and pre-expiration inspections 187

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 commercial lease agreement, the amount of the
security deposit is negotiable between the commercial landlord and the
tenant prior to entering into the lease. 

When the availability of unfurnished residential units is tight, residential The

landlords often require all prospective tenants to advance the maximum
permissible amount of rent and security deposit. Landlords charge maximum problematic
amounts upfront in hopes of preventing less solvent tenants from renting last month’s
their units. 
rent 
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 

Commercial 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)
188 Property Management, Sixth Edition

Form 567-1

Notice of Right
to Request
a Joint Pre-
Expiration
Inspection

Page 1 of 2

Landlord 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 
treatment
However, while the security deposit belongs to the tenant, a landlord may
of security commingle the funds with other monies in a general business account. No
deposits  trust relationship is established when a landlord holds a tenant’s security
deposit.12 

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.

11 CC §§1950.5(d); 1950.7(b)
12 Korens v. R.W. Zukin Corporation (1989) 212 CA3d 1054
 Chapter 19: Security deposits and pre-expiration inspections 189

Form 567-1

Notice of Right
to Request
a Joint Pre-
Expiration
Inspection

Page 2 of 2

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
Joint pre-
vacating the unit. expiration
Editor’s note — The notice of right to request a joint pre-expiration inspection inspections
must also contain a statement notifying residential tenants of their right
to reclaim abandoned personal property. [See Chapter 33; see Form 567-1 §5
and the deposit
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 joint pre-expiration
inspection
prepare and give the tenant a statement of deficiencies before the tenancy An inspection
expires and the tenant vacates. conducted by a
residential landlord or
The notice requirement does not apply to tenants who unlawfully remain in the property manager
to advise a tenant of
possession after the expiration of a three-day notice to pay/perform or quit. the repairs the tenant
needs to perform to
The purpose for the joint pre-expiration inspection, also called an initial avoid deductions from
their security deposit.
inspection, is to require residential landlords to advise tenants of the repairs [See RPI Form 567-1]
or conditions the tenant needs to perform or maintain to avoid deductions
from the security deposit. 

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:
190 Property Management, Sixth Edition

Form 567-3

Statement of
Deficiencies
on Joint Pre-
Expiration
Inspection

Page 1 of 2

•  the lease term; or 

•  a 30-day notice to vacate initiated by either the landlord or the tenant.13
[See Form 567-1] 
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.

13 CC §1950.5(f)(1)
 Chapter 19: Security deposits and pre-expiration inspections 191

Form 567-3

Statement of
Deficiencies
on Joint Pre-
Expiration
Inspection

Page 2 of 2

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- Notice of entry
expiration inspection, the landlord serves a written 48-hour notice of entry
on the tenant stating: and statement of
•  the purpose of entry as the pre-expiration inspection; and deficiencies
•  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.

When the waiver is signed, the landlord may proceed with the inspection.14
[See RPI Form 567-2] 

14 CC §1950.5(f)(1)
192 Property Management, Sixth Edition

Form 585

Security Deposit
Disposition
on Vacating
Residential
Premises

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. 

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] 
 Chapter 19: Security deposits and pre-expiration inspections 193

The landlord’s pre-expiration inspection statement is prepared at the time of

the inspection and delivered to the tenant by either:  statement of
deficiencies
•  handing the statement directly to the tenant if they are present at the A document a
inspection; or  residential landlord
presents to a vacating
•  leaving the statement inside the premises at the time of the inspection tenant specifying any
if the tenant is not present.15 repairs or cleaning
to be completed by
If the tenant chooses to withdraw their request for an inspection after the tenant to avoid
deductions from the
submitting it, the landlord needs to send a memo to the tenant confirming security deposit. [See
the tenant’s decision to withdraw. [See RPI Form 525]  RPI Form 567-3]

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: 
Residential
•  complete a final inspection of the premises;
deposit
•  refund the security deposit, less reasonable deductions; and  refund
•  provide the tenant with an itemized statement of deductions taken requirements
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 final inspection
An inspection of the
that were deducted from the security deposit.18  premises conducted by
the landlord within 21
If repairs by the landlord are not completed and the costs are unknown days after a residential
tenant vacates the
within 21 days after the tenant vacates, the landlord may deduct a good faith property. [See RPI
estimated amount of the cost of repairs from the tenant’s security deposit. Form 585]

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 

15 CC §1950.5(f)(2)
16 CC §1950.5(f)
17 CC §1950.5(g)
18 CC §1950.5(g)(2)
19 CC §1950.5(g)(3)
194 Property Management, Sixth Edition

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 

No receipt It is not necessary for the landlord to provide copies of receipts, bills or
invoices for repair work or cleaning to the tenant if: 
or invoice •  the total deduction from the security deposit to cover the costs of repairs
copies 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: 

Reasonable
•  any unpaid rent, including late charges and bounced check charges
deductions incurred and requested on a proper demand;
from the •  recoverable costs incurred by the landlord for the repair of damages
deposit 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 37] 25 

As previously discussed, when a residential tenant vacates, the landlord

provides the tenant with a security deposit refund accounting. If local rent

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)
 Chapter 19: Security deposits and pre-expiration inspections 195

control ordinances (or state law) require the landlord to pay interest on itemized statement
security deposits, the landlord uses the itemized statement of deductions of deductions
to account for interest accrued on the security deposit. [See Form 585 §4.3]  A document
accounting for the
tenant’s security
A residential landlord who, in bad faith, fails to comply with security deposit, delivered
deposit refund requirements is subject to statutory penalties of up to twice by the landlord to a
residential tenant after
the amount of the security deposit. Additionally, the landlord is liable to the the tenant vacates. [See
tenant for actual money losses the tenant incurs for the wrongful retention RPI Form 585 §4.3]
of security deposits.26 

As an aside, on the landlord’s sale of a residential or commercial 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 RPI Form 586] 

A commercial lease does not need to set forth:  Commercial

•  the circumstance under which a tenant’s security deposit will be deposit
refunded; or 
•  a time period within which a landlord will refund a tenant’s security
refund rules
deposit. [See RPI Form 552 through 552-4] 
However, a commercial 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 commercial 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 commercial
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 

Unless otherwise stated in the rental or lease agreement, the commercial

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

26 CC §1950.5(l)
27 CC §§1950.5(h); 1950.7(d)
28 CC §1950.7(c)
29 CC §1950.8(b)
196 Property Management, Sixth Edition

Unlike the residential landlord, the commercial landlord is not required to

provide tenants with an itemized statement of deductions when the security
deposit is refunded. However, a prudent commercial 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 commercial landlord who, in bad faith, fails to comply with the refund
requirements is liable to the tenant for up to $200 in penalties.30

30 CC §1950.7(f)

Chapter 19 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
Summary or lease agreement.

The amount of security deposit the residential landlord may demand

and receive is controlled by codes. On a commercial 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.

Chapter 19 final inspection............................................................................. pg. 193

itemized statement of deductions........................................... pg. 195
Key Terms joint pre-expiration inspection................................................ pg. 189
rent................................................................................................... pg. 184
security deposit............................................................................. pg. 183
statement of deficiencies........................................................... pg. 193

Quiz 5 Covering Chapters 19-21 is located on page 647.

 Chapter 20: Residential turnover cost recovery 197

Chapter
20
Residential turnover
cost recovery

After reading this chapter, you will be able to: Learning

•  analyze the landlord’s recovery of residential tenant turnover
costs;
Objectives
•  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.

liquidated damages provision “stay-or-pay” clause Key Terms

net operating income

Following a cost-reduction review of management operations, the landlord

of an apartment complex is determined to offset the recent increase in the
Rent is set
cost of tenant turnover by shifting the costs to tenants.  to include
Each tenant turnover requires expenditures to:  all operating
•  refurbish the unit to eliminate the cumulative effect of normal wear expenses
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.
198 Property Management, Sixth Edition

Figure 1 (an unenforceable provision)

A stay-or-pay If the tenancy is terminated during the six-month period following commencement of
clause minimum this agreement, tenant shall forfeit tenant’s security deposit.
tenancy

At issue is the landlord’s net operating income (NOI). It is being reduced

net operating by the increased frequency of refurbishing and reletting costs. [See Figure 3,
income
The net revenue Form 352] 
generated by an
income producing Worse, any reduction in the NOI due to the increasing turnover costs
property as the becomes an equivalent dollar reduction in the landlord’s spendable income
return on capital,
calculated as the sum remaining after payment on mortgage financing.
of a property’s gross
operating income From an accounting point of view, the NOI is calculated by subtracting
less the property’s
operating expenses.
operating costs from rental income generated by the property. 
[See RPI Form 352 §4]
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
“stay-or-pay” clause the property’s value), the landlord chooses to add a ”stay-or-pay” clause
An unenforceable addendum to the month-to-month rental agreements.
provision calling for
the residential tenant
to forego a return of
The stay-or-pay clause states the residential tenant foregoes a return of their
their security deposit security deposit if they move within six months after taking occupancy.
if they move before a
set date. 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 — RPI rental and lease agreements do not include a stay-or-
pay provision. [See RPI Form 550 and 551]

Refund of The security deposit is to be fully refunded, regardless of how long the unit
remains vacant, if:
the tenant’s
•  the tenant has not breached the rental or lease agreement; and
security •  on expiration of proper notice, the tenant has fully paid all rents
deposit accrued and returns the unit in the condition it was received, less
ordinary wear and tear.
 Chapter 20: Residential turnover cost recovery 199

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: 
Classifying
•  rent;
tenant funds 
•  security deposits; the landlord
•  a waterbed administrative fee [See Chapter 19]; or receives
•  a tenant screening fee for processing an application.2 
The amount of the tenant screening fee is capped and may not exceed $52.46
for 2020.

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
Is it extra
maintenance of a property from rents rather than an up-front lump sum rent or a
amount paid by each tenant in addition to rent and a security deposit.
screening
Now consider a residential landlord who requires new tenants to prepay the fee?
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)
200 Property Management, Sixth Edition

Figure 2 (an unenforceable provision)

A liquidated Should the tenant choose to terminate this tenancy during the six-month period
damages beginning on commencement of this tenancy, the tenant shall pay as liquidated
minimum 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.
tenancy
provision
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

Unenforceable provision in month-to-month rental agreements in an effort to offset
liquidated 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
damages 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
ft Liquidated vacate, then vacates the unit. 
Damages

4 Krause v. Trinity Management Service, Inc. (2000) 23 C4th 11

5 CC §§1950.5; 1950.6
 Chapter 20: Residential turnover cost recovery 201

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 liquidated damages
provision
agreement is unenforceable as it calls for payment of a forfeiture.  A rental agreement
provision which acts as
Is the liquidated damages provision in a rental or lease agreement a penalty payment for
enforceable?  returning possession
before a set date.

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. RPI 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
Limited
impracticable to determine the amount of actual money losses incurred by circumstances
the landlord. This is never the case with real estate rentals as both the costs
and time involved managing the costs are known.7  for
The amount of recoverable losses a residential landlord incurs when a tenant
enforcement
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. 
Covering
tenant
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, turnover
in advance. Thus, they are not properly the subject of liquidated damages costs
provisions.

6 CC §1671(d)
7 CC §1671(d)
202 Property Management, Sixth 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. 

To lease for 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. 
a fixed term
The landlord’s best method for recovering turnover costs is to rent to
reduces costs 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
Tiered rents periods of continued occupancy. Tiered rents provide for a slightly higher
for time in 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
occupancy  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
 Chapter 20: Residential turnover cost recovery 203

Figure 3

Form 352

Annual Property
Operating Data
For a full-size, fillable copy of
Sheet (APOD)
this or any other form in this
book that may be legally used in
your professional practice, go to
realtypublications.com/forms

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; 
204 Property Management, Sixth Edition

•  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 commercial landlord (or a tenant).

For example, tenant improvements are recovered by a commercial 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 20 Each tenant turnover reduces the landlord’s net operating income (NOI)
due to the increased frequency of refurbishing expenses and lost rents
Summary 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.

Chapter 20 liquidated damages provision.................................................. pg. 201

net operating income.................................................................. pg. 198
Key Terms “stay-or-pay” clause..................................................................... pg. 198

Quiz 5 Covering Chapters 19-21 is located on page 647.

 Chapter 21: Accepting partial rent 205

Chapter
21
Accepting
partial rent

After reading this chapter, you’ll be able to: Learning

•  apply in practice the landlord’s right to receive partial rent under
a partial payment agreement with a tenant;
Objectives
•  distinguish the rights of residential tenants from commercial
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.

nonwaiver of rights provision reservation of rights clause Key Terms

partial payment agreement

A commercial tenant experiences cash flow difficulties due to a business Residential and
downturn. As a result, the tenant becomes delinquent in the payment of rent. 
commercial
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 landlord rights 
pay rent or quit the premises. [See Form 575 in Chapter 25] 
partial payment
Prior to the filing of an unlawful detainer (UD) action, the tenant offers to agreement
An agreement for
make a partial payment of the delinquent rent, if the landlord will accept it. receipt of partial
Further, the commercial tenant offers to pay the balance of the delinquent rent, specifying the
rent by a specific date if the landlord agrees not to file a UD action called a amount of deferred
rent remaining unpaid
partial payment agreement. [See Form 558 accompanying this chapter]  and the date for its
payment. [See RPI
The partial payment agreement states: Form 558 and 559]

•  the amount received as partial rent;

•  the amount of deferred rent remaining unpaid;
•  a promise to pay the deferred rent;
206 Property Management, Sixth Edition

•  the date the payment is due; and

•  the consequences of nonpayment.
If the deferred rent is not paid as scheduled, the commercial 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 commercial
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 commercial 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 commercial 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 commercial landlord can accept a partial payment of rent after serving
a three-day notice and before eviction. Without further notice to the tenant,
the commercial landlord can proceed with a UD action and evict the tenant.1 

Landlord’s Continuing our previous example, on accepting a partial payment of

delinquent rent, a commercial landlord does not need to agree to a new due
reservation of date for the remaining rent. They also do not need to enter into any agreement
rights clause regarding acceptance of the partial payment. However, the commercial
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

reservation of rights provision in commercial lease agreements as well as in acceptance of partial
clause
A clause in the rent agreements. [See RPI Form 552 §20] 
nonwaiver of
rights provision in However, the commercial landlord who memorializes their acceptance of
commercial rental
and lease agreements
the partial rent payment and the due date for payment of the remaining
stating acceptance of balance eliminates conflicting claims the tenant may make in a UD action.
late rent does not waive
the landlord’s right to The impact of serving a three-day notice, then later accepting partial rent
enforce remedies for
any remaining breach from a commercial tenant is vastly different from the protection a residential
of the lease agreement tenant is provided in partial rent situations.
by the tenant. [See RPI
Form 552 §20 and 558
§7]

1 Calif. Code of Civil Procedure §1161.1(b)

 Chapter 21: Accepting partial rent 207

Form 558

Partial Payment
Agreement:
Commercial

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

208 Property Management, Sixth Edition

Residential Acceptance of a partial payment toward delinquent rent is within the

discretion of the landlord. A landlord might agree to accept partial payments
vs. when: 
commercial •  the partial payment is at least equal to the rent accrued at the time the
landlords 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 commercial 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] 

Residential 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
rent paid the landlord may not proceed to eviction. The reason the UD action cannot
after notice  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 commercial
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 commercial landlord who serves their tenant with a three-day

Commercial notice to pay rent or quit. Later, the landlord accepts a partial payment of rent
nonwaiver under an agreement with the tenant containing a nonwaiver of rights
provision. This provision states the acceptance of rent does not waive the
requirements  landlord’s right to enforce a breach of the lease. If the nonwaiver notice is
not given, the commercial 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

 Chapter 21: Accepting partial rent 209

An alternative scenario exists since a nonwaiver of rights provision also nonwaiver of rights
exists in the commercial lease agreement entered into by the tenant. As provision
a result, the tenant has received a nonwaiver of rights notice before the A commercial rental
or lease agreement
landlord’s acceptance of partial rent. Here, the landlord may take the money provision containing
and file or continue with an already filed UD action to recover possession of the landlord’s
reservation of rights.
the premises.4 [See RPI Form 552 §20]  [See RPI Form 552 §20]

For example, a commercial tenant defaults on a rent payment called for in No waiver of
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 rights
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 commercial 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 commercial 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
commercial 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 Get it in
landlord who accepted partial rent: 
writing 
•  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 commercial 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)
210 Property Management, Sixth Edition

Form 559

Partial Payment
Agreement:
Residential

Residential The partial payment agreement entered into by a tenant and a landlord
accepting partial rent memorializes: 
partial
•  the landlord’s receipt of partial rent; 
payment •  the amount owed on the deferred portion of the delinquent rent;
agreement  •  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] 
 Chapter 21: Accepting partial rent 211

Consider a prudent residential tenant who informs the landlord they Prevention of
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 disputes
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. 
212 Property Management, Sixth Edition

Chapter 21 Acceptance of a partial payment toward delinquent rent is within the

discretion of the landlord. Both residential and commercial landlords
Summary may accept a partial payment of delinquent rent. Different rules apply
for commercial and residential partial rent payments.

A commercial landlord may accept a partial payment of rent after

serving a three-day notice and before eviction. Without further notice
to the tenant, the commercial 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.

Chapter 21 nonwaiver of rights provision.................................................. pg. 209

partial payment agreement....................................................... pg. 205
Key Terms reservation of rights.................................................................... pg. 206

Quiz 5 Covering Chapters 19-21 is located on page 647.

 Chapter 22: Changing terms on a month-to-month tenancy 213

Chapter
22
Changing terms on a
month-to-month tenancy

After reading this chapter, you will be able to: Learning

•  apply the rules to be adhered to when changing the terms of a
month-to-month tenancy;
Objectives
•  determine whether a 30- or 60-day notice is to be used by a
residential landlord based on the percentage change in rent
•  implement the proper procedure for serving the tenant with a
notice of change in rental terms; and
•  understand how the Tenant Protection Act (TPA) caps annual
rent increases in California.

notice of change in rental notice of intent to vacate Key Terms

terms
pro rata rent

A landlord and tenant enter into a month-to-month tenancy under Landlord’s

a rental agreement which grants an option to purchase the property.
The option expires on termination of the tenancy.  [See RPI Form 551] notice to
tenant 
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. 
214 Property Management, Sixth 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 

Notice of All conditions in a residential or commercial month-to-month rental

agreement or expired lease agreement may be changed on written notice by
change in the landlord. This notice is commonly referred to as a notice of change in
rental terms  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
notice of change in
rental terms increases greater than 10%. The 60-day notice is reviewed in a later subhead.2 
Written notice served
on the tenant noting Editor’s note — Conditions in a rental or lease agreement are also commonly
changes in the terms or referred to as provisions, clauses, terms, conditions, addenda, covenants, etc.
conditions
of a month-to- month
rental agreement. [See For example, a residential or commercial landlord under a month-to-month
RPI Form 570 and 574] 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 commercial 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
 Chapter 22: Changing terms on a month-to-month tenancy 215

Form 570
30-DAY NOTICE OF CHANGE IN RENTAL TERMS 30-Day Notice
NOTE: This form is used by a property manager or landlord when a residential or commercial property manager or landlord
of Change in
is increasing rent, shifting property operating expenses onto the tenant or adding or altering provisions in a rental or lease
agreement, excluding residential rent increases exceeding 10%, to notify the tenant more than 30 days in advance of a
Rental Terms
change in rental or lease agreement terms.
Date: , 20 , at , California.
To Tenant:
Items left blank or unchecked are not applicable.
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,
1.3 and , 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 will be $ payable � monthly, or � ,
in advance, and due on the day of the month.
2.1 Rent to be paid by � personal check, or � .
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 will 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.

8. This notice affects no other terms of your tenancy.

Date: , 20
Landlord/Agent: CalBRE#:

Signature:
Address:

Phone: Cell:
Fax:
Email:

FORM 570 12-17 ©2017 RPI — Realty Publications, Inc., P.O. BOX 5707, RIVERSIDE, CA 92517

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 

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. 

3 CC §827
4 CC §1946
216 Property Management, Sixth Edition

Form 572

30-Day Notice
to Vacate: From
Tenant

Calculating 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
rent due after during the rental period. 
an increase 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

5 CC §827
 Chapter 22: Changing terms on a month-to-month tenancy 217

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 11th is the first day of the 30-day notice period, the rent does not
begin to accrue at the increased rate until July 11th — 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- Notice

to-month rental agreement, the length of the notice period depends on the
amount of the rent increase. Two notices exist: periods
•  the 30-day notice of change in rental terms [See Form 570]; and
•  the 60-day notice of change in rental terms. [See RPI 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

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

6 Calif. Civil Code §827

7 CC §827
218 Property Management, Sixth Edition

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 (totaling $1,100) 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 15.8%. 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.

Tenant On being served with a notice of a change in rental terms, the month-to-
month tenant has three options:
responses to •  remain in possession and comply with the new rental terms;
a change •  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 vacate8
notice of intent to
vacate [See Form 572 accompanying this chapter]; or
A tenant’s notice to the •  remain in possession, refuse to comply with the rental terms and
landlord signifying
their intent to vacate raise available defenses, such as retaliatory eviction, in the resulting
the leased property. unlawful detainer (UD) action. [See Chapter 26]
[See RPI Form 571 and
572] 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
pro rata rent increased rent amount. Accordingly, the tenant serves the landlord with a
Rental payment 30-day notice of intent to vacate. [See Form 572]
amount due for the
portion of the rental
period remaining after The tenant owes pro rata rent at the new rate for the days after the rent
a change in the rent increase becomes effective through the date the tenant’s notice to vacate
amount due. [See RPI expires. The pro rata rent is payable in advance on the due date for the next
Form 552 §4.1]
scheduled payment of rent, usually the first.9

In communities with low density and rent control, limitations on rent

Rent control increases exist for older units.
restrictions
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.
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;
8 CC §1946
9 CC §14
 Chapter 22: Changing terms on a month-to-month tenancy 219

•  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.

The Tenant Protection Act (TPA) of 2019 enacts a limitation on rent Rent caps
increases for non-exempt residential properties.
enacted
Editor’s note – For more information regarding additional tenant protections
under the TPA, see Chapter 27. under the
An owner of residential property targeted by the TPA may not, over the
TPA
course of any 12-month period, increase the gross rental rate for a unit more
than the lesser of:
•  5% plus the percentage change in the applicable Consumer Price
Index (CPI); or
•  10% of the lowest gross rental rate charged for that dwelling or unit
at any time during the 12 months prior to the effective date of the
increase.10
The TPA applies to many multi-unit residential properties in California,
though numerous types of properties are exempted.

Multi-unit residential real estate exempt from TPA rent caps include:
•  residential units that have been issued a certificate of occupancy
within the previous 15 years;
•  a duplex of which the owner occupied one of the units as their principal
residence at the beginning of the tenancy and remains in occupancy;
•  units restricted as affordable housing for households of very low,
moderate income, or subject to an agreement that provides subsidies
for affordable housing for households of very low or moderate income;
•  dormitories constructed and maintained in connection with any
higher education in California;
•  units subject to rent control that restricts annual increases in the
rental rate to an amount less than set by the TPA;
•  multi-unit transient occupancy housing like hotels and motels;
•  accommodations in which the tenant shares kitchen or bathroom
facilities with an SFR owner-occupant;
•  single family residential (SFR) real estate that can be sold and
conveyed separate from the title to any other dwelling unit, like in a
SFR subdivision or condominium project, provided:
°  the owner is not one of the following:
10 Calif. Civil Code §1947.12(a)(1); CC §1947.12(h)(1)
220 Property Management, Sixth Edition

•  a real estate investment trust (REIT);

•  a corporation; or
•  a limited liability company (LLC) in which at least one
member is a corporation; and
•  the tenant has been given written notice stating the
rental property is exempt from the rent increase caps
under the TPA.11 [See RPI Form 550, 551 and 550-3]
The landlord uses a checkbox in the rental or lease agreement to notify
the tenant whether the property is subject to limitations on rent increases
and just cause eviction requirements under the TPA. [See Chapter 27; See
RPI Form 550 §10.1 and Form 551 §9.1]

For tenancies entered prior to July 1, 2020 which do not include the notice,

the landlord will provide the notice and, if applicable, indicate their exempt
status using the separate Just Cause and Rent Cap Addendum. [See RPI 550-
3]

When a residential property or tenancy does not meet any of the criteria
for exemption, the landlord is to abide by the TPA limiting their ability to
increase rent.

To properly raise rents on a property subject to the TPA, the landlord provides
a month-to-month tenant with a 30-day Notice of Change in Rental Terms –
For Properties Subject to Rent Cap Requirements. Notice of the limitations on
rental increases is included in this variation of the 30-day Notice of Change.12
[See RPI Form 570-1]

When calculating rent increases for properties subject to the TPA, rent
Rent discounts or credits are not included.13
Increases and
The cost of living adjustment is from April 1st of the previous year to April
adjustments 1st of the current year in the regional CPI for the region where the rental
under TPA property is located. This information is published by the Bureau of Labor
Statistics.

Additionally, when a regional index is not available, the index used is the
California Consumer Price Index for All Urban Consumers for all items,
published by the Department of Industrial Relations.

If a landlord has already increased the rent by more than is allowed under
the TPA between March 15, 2019 and January 1, 2020, the landlord needs to
revert the rent amount as of January 1, 2020 to the rent amount charged as of
March 15, 2019, plus the maximum permissible increases.

The landlord is not held responsible for any corresponding overpayment in

rent.14

11 CC §1947.12(d); CC §1946.2(e)
12 CC §1947.12(e)
13 CC §1947.12(a)(1)
14 CC §1947.12(h)(2)
 Chapter 22: Changing terms on a month-to-month tenancy 221

Further, for tenancies beginning or renewed on or after July 1, 2020, any

written notice informing tenants their rental is exempt from the rent increase
caps needs to be included in their lease or rental agreement. [See RPI Form
550 §10.1 and 551 §9.1]

For new tenancies, the landlord may establish any initial rate they choose,
limited only by current market factors and sound economic reason. However,
subsequent increases throughout the duration of the tenancy are subject to
the rent increase caps.15

15 CC §1947.12(b)

All conditions in a residential or commercial month-to-month rental Chapter 22

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 Summary
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.
For much of California multi-unit residential properties the Tenant
Protection Act (TPA) caps annual rent increases at 5% plus the rate of
inflation or 10% of the lowest gross rental rate charged for that dwelling
or unit at any time during the 12 months prior to the effective date of
the increase.

notice of change in rental terms............................................... pg. 214 Chapter 22

notice of intent to vacate............................................................ pg. 218 Key Terms
pro rata rent.................................................................................... pg. 218

Quiz 6 Covering Chapters 22-24 is located on page 648.

 Chapter 23: Lease guarantees and small claims actions 223

Chapter

23
Lease guarantees and
small claims actions

After reading this chapter, you will be able to: Learning

•  distinguish a lease guarantee agreement from a lease agreement;
•  understand its separate risk reduction function when used in
Objectives
conjunction with a lease agreement; and
•  implement enforcement of a guarantee if a tenant defaults on a
lease agreement.

accommodation party lease guarantee Key Terms

Consider three young prospective tenants who seek to rent their first
apartment as roommates. The prospective tenants lack any rental history or
Recovery
independent source of income. amount
A landlord agrees to lease to the tenants on the condition a creditworthy limited
parent of one of the tenants signs a lease guarantee agreement. A lease
guarantee is then entered into by the parents of one of the tenants. Under the lease guarantee
An agreement
lease guarantee, the parents are responsible for all monies due the landlord committing a person
on the lease agreement to be entered into by the tenants if the tenants fail to other than the tenant
pay. [See Form 553-1 §4.1 accompanying this chapter] to pay all monies due
the landlord under the
lease agreement. [See
The tenants enter into a one-year lease. However, before the lease expires, RPI Form 553-1]
the tenants stop paying rent.

The landlord serves the tenants with a three-day notice to pay rent or quit.

The landlord sends a copy of the notice to the guarantor as required to enforce
the guarantee agreement, contractually called a condition precedent to
exercising the guarantee. [See Form 553-1]
224 Property Management, Sixth Edition

Form 553-1

Guarantee
Agreement

Page 1 of 2

The rent remains unpaid and the landlord files an unlawful detainer (UD)
action. As a result, the tenants are evicted.

When the landlord regains possession, they discover the tenants and their
guests have extensively damaged the property. The landlord incurs $4,500
in losses due to the cost of preparing the unit for leasing and rents lost before
re-letting the unit.

Since the recovery sought under the lease agreement is less than $5,000 and
possession is no longer an issue, the landlord files a small claims court action
against the tenants who signed the lease agreement, also naming the parents
who signed the guarantee.
 Chapter 23: Lease guarantees and small claims actions 225

Form 553-1

Guarantee
Agreement

Page 2 of 2

However, at trial, the small claims judge advises the landlord that any
award against the parents who guaranteed the lease is limited to $2,500. The
landlord is then asked if they want:
•  a $2,500 judgment against the guarantors, which would bar any further
recovery from the guarantors; or
•  a dismissal of the case against the guarantors, which would allow the
landlord to file a superior court action against the guarantors to recover
on the guarantee.
Is the small claims court judge correct in limiting the landlord’s recovery
from the parents under the guarantee agreement?
226 Property Management, Sixth Edition

Figure 1 A licensed real estate broker retained solely to manage an owner’s rentals, not to
represent the owner in a small claims court action, may appear on the owner’s behalf
Appearing on in all small claims court actions related to the rental property the broker manages. [CCP
the owner’s §116.540(g)]
behalf However, if the owner seeks to collect amounts which exceed the small claims court’s
limitations, the action needs to be filed in a municipal court. In a municipal court action,
the broker may not represent the owner.
Only the individual owner or an attorney licensed in California may represent the owner
in a municipal court action. Also, entities need to be represented by an attorney in these
courts.

Yes! The small claims court only has jurisdiction over a person who is liable
as a guarantor for the obligations of another if the amount awarded is $2,500
or less.1

Thus, if the landlord wants a judgment against the guarantors for the full
amount of their losses, the landlord needs to dismiss the small claims action
against the parents and seek recovery on the separate guarantee agreement
in a superior court action.

When the landlord knows the small claims court limitations from the
beginning, they may consider seeking recovery against the guarantor and
the tenants in a superior court action by either representing themselves,
called in pro per, or being represented by an attorney licensed in California.
Under some property management situations, the broker managing the
property can handle the court action to recover possession and money losses.
[See Chapter 9; see Figure 1]

Partners and Now consider a corporate tenant who enters into an agreement to lease
an office building to be occupied by an incorporated business operation.
officers as The president of the corporation signs the lease agreement on behalf of
guarantors the corporation, acting in an agency capacity as authorized by the board
of directors. Thus, the corporation is liable for performance of the lease
agreement.

The corporate vice president, in a separate agreement, agrees to personally

guarantee as an individual the corporation’s promised performance under
its lease agreement with the landlord. The guarantee agreement signed by
the vice president identifies the guarantor as an individual, not the vice
president of the corporation. The guarantee agreement does not contain a
description of the guarantor’s relationship to the corporation as a corporate
officer.

Further, the separate guarantee agreement describes the obligation of the

guarantor as a personal obligation. The vice president also supplies the
landlord with a financial statement itemizing their personal assets.

1 Calif. Code of Civil Procedure §116.220(c)

 Chapter 23: Lease guarantees and small claims actions 227

The vice president signs the guarantee agreement and places the words “Vice
President” next to their signature.

The corporation breaches the lease agreement and files for bankruptcy. The
landlord then seeks to enforce the guarantee agreement against the vice
president, as an individual, to collect their money losses under the separate
lease agreement entered into by the corporation.

The vice president claims the guarantee agreement cannot be enforced against
them personally since, by identifying themselves as the vice president of the
corporation on the guarantee agreement, they were executing the guarantee
on behalf of the corporation which entered into the lease agreement, not
themselves.

In this example, the guarantee agreement contains words which bind the Personally
vice president personally. The fact the words “Vice President” were entered
along with their signature does not change the character of the person binding
identified in the guarantee agreement.

The words “Vice President” were merely a description of the individual as a

corporate officer. The guarantee agreement did not indicate they were acting
as an agent of the corporation, rather than on their own behalf, when they
signed it.

The nature of the guarantee agreement identifying the individual and the
inclusion of their personal financial statement indicated the vice president
was binding themselves personally as an individual.2

If the vice president signed the guarantee agreement on behalf of the

corporation (as the guarantor of its obligation to pay on the lease agreement),
the guarantee agreement is redundant and surplusage. The corporation is
already bound by the terms of the lease agreement.

Now consider a landlord who insists on a creditworthy co-signer on a lease

agreement before they will lease property to a couple who lack sufficient
Co-signers on
credit and net worth. They intend for a third party to hold the landlord the lease
harmless if the actual tenant defaults.

A co-signer signs the lease agreement but may or may not be identified in the
lease agreement as an additional lessee to whom the leasehold is conveyed.
The co-signer does not sign a separate guarantee agreement.

However, the co-signer here is not listed as a tenant who will occupy the
unit. The co-signer does not occupy the unit or receive any benefit from the
landlord or by use of the property for signing the lease agreement.

2 Sebastian International, Inc. v. Peck (1987) 195 CA3d 803

 228 Property Management, Sixth Edition

The tenants default and vacate the property. The landlord now seeks to
recover more than $2,500 in damages and unpaid rent from the co-signer.
The landlord files a small claims court action against the co-signer to collect
lost rent and the cost to repair excess wear and tear to the unit.

The co-signer claims the landlord’s recovery is limited to $2,500 since the co-
signer was not intended to be a tenant, did not take possession of the property
and received no benefit from the leasing transaction.

Here, the co-signer signed the lease agreement merely to assure payment of
the rent owed by the tenants. Thus, the co-signer claims they are liable for the
actions of the tenants as a guarantor.

Small claims While case law does not exist regarding the co-signer’s guarantor defense,
state law does limit a small claims recovery to $2,500 from a defendant who
is required to respond to claims by paying for losses based on the default,
actions or omissions of another person.

Negotiations conducted prior to the lease agreement establish the separate

legal nature of the co-signer’s involvement in the leasing transaction as
that of a guarantor. Negotiations demonstrate the purpose of the co-signer’s
involvement was to ensure the landlord received rent payments due under
the lease agreement — not to enforce any benefits on behalf of the landlord.

The co-signer argument is similar to the co-signer of a note who receives no

benefit from the mortgage proceeds and merely co-signs the note.

As a corollary to the co-signing of a note, the co-signer on a lease agreement

Involvement claims their activity of co-signing the lease agreement creates a contract
of an obligation similar to an accommodation party under California’s
Commercial Code, and thus, assures payment of a debt (rent) owed by another
accommodation person (the occupying tenant).
party Under the Commercial Code, an accommodation party is an individual who:
•  signs a note to include liability for a debt evidenced by the note; and
accommodation
party •  receives no direct benefit from the debt.3
An individual who
signs a note to include The co-signer claims the lease agreement needs to be viewed as a note since it
liability for a debt is evidence of a debt (rent) owed for letting the premises, a debt economically
evidence by the note
and receives no direct equivalent to interest owed on principal lent (and evidenced by a note).
benefit from debt. Also, due to the fact the co-signer was not to take possession under the lease
agreement, the co-signer is not primarily liable for payment of the rent and
needs to be considered the equivalent of an accommodation party.4

An accommodation party’s liability is secondary and similar to a guarantor’s.

Thus, the co-signer argues the landlord’s recovery in a small claims court
action is limited to $2,500.

3 Calif. Commercial Code §3419(a)

4 Com C §3419
 Chapter 23: Lease guarantees and small claims actions 229

In spite of the reference in the lease agreement to the co-signer as a (non-

occupying) tenant, the intent and sole purpose behind the co-signer’s
execution of the lease was to assure payment of the rent owed by others — the
occupying tenants. Thus, the co-signer entered into a guarantee agreement
on signing the lease agreement.

Further, the guarantor under a guarantee agreement waives their rights to

notices and consent to material changes in the lease agreement. This allows
the landlord to terminate the tenancy and pursue collection from the tenant
before ever making a demand on the guarantor. [See Form 553-1 §5]

Under a lease guarantee agreement, the guarantors are separately Chapter 23

responsible from the tenant for all monies due the landlord on the lease
agreement entered into by the tenants.
Summary
The purpose of the guarantor’s separate involvement from the tenant is
to provide an additional source for the landlord to recover monies due
under the lease agreement with the tenant.

A co-signer functions similar to a guarantor. The co-signer signs the lease

agreement rather than a separate guarantee agreement. A co-signer
may or may not be identified in the lease agreement as an additional
lessee to whom the leasehold is conveyed.

The co-signer assures payment of rent owed by another person (the

occupying tenant), but receives no direct benefit from the debt.

accommodation party................................................................ pg. 228

Chapter 23
lease guarantee ........................................................................... pg. 223 Key Terms

Quiz 6 Covering Chapters 22-24 is located on page 648.

 Chapter 24: Forfeiture of the lease 231

Chapter
24
Forfeiture
of the lease

After reading this chapter, you will be able to: Learning

•  distinguish a tenant’s real property right to occupy real estate
versus the landlord’s independent contractual right to collect
Objectives
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.

declaration of forfeiture loss mitigation Key Terms

provision
money action
default remedies provision
present value
forfeiture of possession
reinstatement period
holdover rent provision

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
Lease
in a rental or lease agreement. agreement
Once conveyed, the right of possession is owned by the tenant separate obligations
from the rental or lease agreement. The rental or lease agreements contain survive
provisions creating contractual rights and obligations between the landlord
and tenant. However, while the tenant holds the right granted to use and
232 Property Management, Sixth Edition

default remedies occupy the rented property as a separate real property right from contract
provision rights, the provisions of the rental or lease agreement control the terms and
A lease agreement duration of the use and occupancy of the tenant’s possessory rights.
provision authorizing
the landlord on
termination of the One contractual provision in rental or lease agreements is the default
tenant’s lease due to remedies provision. The default remedies provision creates the right
the tenant’s default
to collect rents for the
for the landlord to collect rents for the full term of the lease. The landlord’s
remaining unexpired contractual right to collect future rents is independent of the tenant’s right of
lease term. [See RPI possession, continuing after possession is terminated based on the tenant’s
Form 550 §3.1 and 552
§2.1] material breach of the lease agreement. [See RPI Form 552] 

Forfeiture-of- 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. 
lease clause
The notice contains a declaration of forfeiture provision stating the
is about tenant’s right of possession — the real estate leasehold interest owned by the
possession 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
declaration of
known as a forfeiture-of-lease clause.
forfeiture provision
A lease or rental Here, the “lease” subject to forfeiture is the property right of possession
agreement provision owned by the tenant, not the lease agreement entered into by the landlord
declaring a tenant’s
failure to cure a breach and tenant (which is subject to cancellation, but never a forfeiture since an
of the agreement agreement is not property as is the right of possession). Confusingly, the lease
constitutes a forfeiture
of the tenant’s right of
agreement document, the paperwork itself, is often also loosely referred to as
possession. [See RPI the “lease”, such as “this is the lease we signed.”
Form 575 §5]
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 25] 

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
holdover rent lease agreement contains a holdover rent provision setting holdover
provision rent rates, the landlord can pursue the tenant for holdover rents in a money
A rental or lease
agreement provision action. Holdover rents usually greatly exceed the current rent rate for the
which sets the rent space which is all the courts will award in UD actions. Further, occupancy is
rate during a tenant
holdover period. [See
often required by insurance carriers to remain qualified for hazard coverage.
RPI Form 550 §3.3 and [See Sidebar, “A holdover tenancy”]
552 §2.3]
The tenant later voluntarily vacates the property prior to expiration of the
lease. 
 Chapter 24: Forfeiture of the lease 233

A holdover tenancy occurs when a tenant remains in possession of a property without Sidebar
a valid right of possession. The right of possession expires:
• at the end of the term granted by the lease agreement; A holdover
• on expiration of a notice to vacate served by either the landlord of the tenant under a tenancy
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 30]
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.

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 forfeiture of
vacating; and  possession
The termination of
•  the remaining period under the lease agreement after the tenant the tenant’s right of
vacated until expiration of the lease. possession triggered by a
declaration of forfeiture
The tenant claims the landlord cannot collect rent called for in the lease in a notice to quit. [See
RPI Form 575 §5]
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
234 Property Management, Sixth 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 24]

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 

First “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
terminate remains enforceable to collect unpaid past rents and future rents; it was not
the lease on cancelled and is unaffected by the termination by forfeiture of the tenant’s
property rights, with or without the tenant being evicted.
default 
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 awarded 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
in a UD applies only to periods before the UD trial, including: 
action •  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)
 Chapter 24: Forfeiture of the lease 235

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: 
Three-day
•  a termination of the tenant’s right of possession under a declaration of
notice without
forfeiture provision in a three-day notice; or  a forfeiture 
•  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 reinstatement
entered. During this period, called the reinstatement period, the tenant period
may reinstate their yet unforfeited right of possession if they meet the terms The period of time
during which
set by the UD judgment. If the terms are not met within the reinstatement the tenant may
period of five days, the lease is then forfeited and the tenant evicted.7  reinstate their right
of possession if they
meet the terms set by
A landlord might deliberately remove the declaration of forfeiture provision the unlawful detainer
from a three-day notice to give a good tenant extra time to bring overdue judgment.
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.
Relief from
Only a court order, or a mutual agreement with the landlord, can restore the forfeiture of
tenant’s right of possession once terminated.
possession
The relief from forfeiture is sought primarily by commercial 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)
236 Property Management, Sixth 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

The leasehold— under a declaration of forfeiture provision in any three-day
obligation to notice or at trial, the landlord is entitled to: 
pay future •  file a UD action to physically remove the defaulting tenant from actual
possession, called eviction;
rent
•  enforce collection of rent earned and unpaid through entry of the UD
money action
judgment; and 
Litigation which seeks •  file a separate money action to recover future rents and any prior
to recover future rents
and any previously unpaid rent earned but not included in the UD judgment. 
unpaid rent earned
but not included in
an unlawful detainer 8 CCP §1179
judgment. 9 CCP §1179
10 CCP §1179
 Chapter 24: Forfeiture of the lease 237

Instead of or in addition to beginning the eviction process by serving a three-day notice Sidebar
with a declaration of forfeiture, a landlord may choose to sever the possession through
the abandonment process. [CC §1951.3; see RPI Form 581] Abandonment:
To begin recovering possession through abandonment, a landlord serves a notice of a passive
abandonment on the tenant. This notice is served if: alternative
• 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.

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)
238 Property Management, Sixth 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 rent13; 
•  costs incurred by the landlord as a result of the tenant’s breach14; 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

Loss landlord who seeks to recover future rents is to make a reasonable, good-faith
mitigation 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.
offsets future
If the landlord does not act to reduce loss of future rental income, a tenant
rents 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 
loss mitigation
The good-faith effort Consider a tenant who fails to pay rent as scheduled in the lease agreement. 
a landlord who seeks
to recover future rents
makes to reduce their
Ultimately, a UD judgment is entered in the landlord’s favor. The tenant is
loss of rent after a evicted by the sheriff under a writ of possession issued by the court. 
tenant vacates or is
evicted. 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)
 Chapter 24: Forfeiture of the lease 239

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
Discounted
rents.  future rent
To determine the present value of unearned rent at the time of the court’s and interest
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
on delinquent
Fed)’s discount rate. The Fed’s discount rate used for calculating the present rent
worth of future rent on an award in 2014 would be 1% over the discount rate
of 0.75%.19 
present value
From the time the tenant defaults on the payment of rent to the time the Unearned rent that is
discounted at the time
unpaid rent is awarded, the landlord is entitled to recover interest on unpaid of the court’s money
amounts of back rent.  award at the annual
rate of 1% over the
Federal Reserve Bank
of San Francisco’s
18 Zanker Development Co. v. Cogito Systems, Inc. (1989) 215 CA3d 1377 discount rate.
19 CC §1951.2(b)
240 Property Management, Sixth Edition

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 

Costs to relet  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

Chapter 24 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
Summary 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 24: Forfeiture of the lease 241

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. 232 Chapter 24

default remedies provision....................................................... pg. 232
forfeiture of possession............................................................... pg. 233
Key Terms
holdover rent provision............................................................. pg. 232
loss mitigation............................................................................... pg. 238
money action................................................................................. pg. 236
present value................................................................................. pg. 239
reinstatement period................................................................... pg. 235

Quiz 6 Covering Chapters 22-24 is located on page 648.

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 Chapter 25: Delinquent rent and the three-day notice 243

Chapter
25
Delinquent rent and
the three-day notice

After reading this chapter, you will be able to: Learning

•  determine when rent becomes delinquent and a three-day notice
to pay rent or quit may be served on a tenant;
Objectives
•  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.

delinquency late charge provision Key Terms

due date material breach
grace period minor breach
incurable breach notice to pay rent or quit

A tenant fails to pay rent on or after the due date and expiration of the grace Pay or forfeit
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 your right of
quit. [See Form 575 accompanying this chapter] 
possession
The three-day notice states the exact amount of:
notice to pay rent
•  delinquent rent unpaid; and or quit
A notice served on a
•  other delinquent amounts owed to the landlord and unpaid.  tenant by the landlord
which states the
amount of delinquent
rent and any other
delinquent amounts
owed the landlord.
[See RPI Form 575 and
575-1]
244 Property Management, Sixth 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 29; see RPI Form 575-1]

Declaration The three-day notice also contains a critical declaration of forfeiture

provision. The forfeiture provision states the tenant’s failure to pay the
of forfeiture delinquent rent before the notice expires causes the right of possession of the
property to revert to the landlord by forfeiture. 
provision
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]

Default, A tenant defaults on their rental or lease agreement by failing to: 

notice and •  pay rent and any other amounts due and called for in the rental or
lease agreement; or 
cure or
1 Calif. Code of Civil Procedure § 1174(a)
vacate 2 CCP §§ 1161(2); 1174(a)
 Chapter 25: Delinquent rent and the three-day notice 245

Form 575

Three-Day
Notice to Pay
Rent or Quit
— With Rent-
Related Fees

•  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. 
material breach
However, only a material breach allows the landlord to forfeit the tenant’s Failure to pay rent
right of possession. [See Case in point, “When is a failure to perform an or perform other
eviction-worthy breach?”’ significant obligations
called for in the rental
or lease agreement.
Failure to pay rent or perform other significant obligations called for in the [See RPI Form 577]
rental or lease agreement is a material breach. Conversely, the tenant’s
246 Property Management, Sixth Edition

Case in point 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
When is a failure change of terms states failure to comply constitutes grounds for the tenant’s forfeiture
to perform an of the right of possession of their unit. The tenant does not obtain personal property
eviction-worthy insurance. The landlord serves the tenant with a three-day notice to perform or quit.
breach? After expiration of the three-day period, the landlord files an unlawful detainer (UD)
action to evict the tenant.
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 three-day notice.
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.
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]
minor breach
Failure to pay late
charges, interest
penalties, bad check failure to pay late charges, interest penalties, bad check charges or security
charges or security deposits are minor breaches, which alone do not justify a three-day notice
deposits.
to cure or quit. 3 

incurable breach Some nonmonetary defaults by a tenant cannot be cured. These are known
Nonmonetary defaults as incurable breaches. Incurable breaches include:
in leases or mortgages
that cannot be cured or •  waste to the premises;
undone. [See RPI Form
577] •  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,
Three days containing a declaration of forfeiture provision, the tenant is required to cure
between 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
notice and service of the notice.)5 
UD Editor’s note – Separate notice requirements may apply if the property is
subject to the Tenant Protection Act (TPA). [See Chapter 27]

3 Keating v. Preston (1940) 42 CA2d 110

4 CCP §1161(4)
5 Calif. Civil Code §10
 Chapter 25: Delinquent rent and the three-day notice 247

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 22]

To cure a delinquency, the tenant’s delinquent rent payment needs to be delinquency

received by the landlord. For instance, when a check for delinquent rent A tenant or borrower's
is returned because of insufficient funds, the delinquent rent demanded failure to pay the
agreed amounts on or
in a three-day notice has not been paid. Unless the tenant actually pays before the due date or
the delinquent rent and it is received by the landlord prior to expiration expiration of any
grace period.
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
RPI Form 552 §3.10]   

A three-day notice may only demand rents which became due during the One-year
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 delinquent
and will not terminate the right of possession or support a UD action. More rent limitation
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 for UD
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
248 Property Management, Sixth Edition

Before 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: 
serving a
•  Is the rent delinquent? 
three-day •  What amounts are due and unpaid? 
notice •  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? 

When is Rent needs to be delinquent before a three-day notice to pay or quit may be
served. 
the rent
Rent becomes delinquent:
delinquent?
•  the business day following the due date, unless a grace period is
established in the rental or lease agreement; or
due date
The date provided •  the business day following the last calendar day of the grace period
in the rental or lease established in the rental or lease agreement.
agreement on which
rental payments are A grace period is the time period following the due date during which
due. [See RPI Form 550
§4.1 and 552 §4.1] 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.
grace period
The time period When a grace period exists and the day scheduled for payment of rent falls
following the due date on a legal holiday, the payment is not delinquent if it is tendered on the next
for a payment during
which payment
business day. For purposes of paying rent, legal holidays include:
received by a lender
or landlord is not
•  Saturdays;
delinquent and a late •  Sundays; and
charge is not due. [See
RPI Form 550 §4.3 and •  state or federal holidays.12 
552 §4.7]
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
 Chapter 25: Delinquent rent and the three-day notice 249

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 Conduct
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 extends the
payments are not received on or before the 10th of the month. A grace period
is not mentioned in the rental agreement. 
grace period
Each month, the tenant pays rent after the date for incurring a late charge. late charge
The landlord accepts the tenant’s late rental payments every month, but provision
makes no written demand for payment of the late charges. A provision in the
lease agreement which
imposes an additional
Finally, on receipt of yet another late payment, the landlord informs the administrative charge
tenant all future rent payments need to be received by the landlord prior to if rent payments are
not received before
the date for incurring a late charge.  the date the charge
is incurred. [See RPI
The next month, the late charge period stated in the rental agreement runs Form 550 §4.3 and 552
and rent has not been received. On the day the late charge is incurred, the §4.7]
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
250 Property Management, Sixth 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. 

Accurate 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,
residential a commercial landlord may estimate the amount of money due and unpaid,
rent demands  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 commercial 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 commercial tenant may include an estimate

Estimated of the amounts due if: 
commercial •  the notice states the amount due is an estimate; and 
rent •  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)
 Chapter 25: Delinquent rent and the three-day notice 251

Facts: A landlord and tenant enter into a residential lease which requires the tenant to Case in point
pay rent by mail. The tenant timely mails a money order for the correct amount to the
address specified in the lease, but the landlord does not receive it. The landlord issues Is a tenant liable
a three-day notice to pay rent or quit and the tenant holds over.
for unpaid rent
Claim: The landlord seeks possession of the property and money losses, claiming when the lease
the tenant violated the lease since the landlord did not receive their monthly rental
payment.
requires rent to
be paid by mail
Counter claim: The tenant seeks to retain possession of the property, claiming they did
not violate the lease since they sent their payment by mail as the lease indicates.
and the landlord
does not receive
Holding: A California court of appeals holds the tenant did not violate the lease
payment?
agreement since mailing the money order fulfilled the tenant’s obligations under the
lease and the landlord bears the risk of non-delivery. [Sleep EZ v. Mateo (April 4, 2017)
_CA4th_]

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 commercial tenant who takes possession of property on Estimating

entering into a percentage lease agreement. [See RPI Form 552-4]
unknown
The rent provisions in the lease agreement state: 
amounts
•  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? 

20 WDT- Winchester v. Nilsson (1994) 27 CA4th 516

252 Property Management, Sixth Edition

Yes! A commercial 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 

Rent On receiving a three-day notice stating the rental amount due is an estimate,
the commercial tenant may respond by tendering the amount of rent the
estimates by tenant estimates is due.22 
commercial If the amount the tenant estimates and tenders is equal or greater than
tenants 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 

Subtenant 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
evictions by tenant needs to also name the subtenant as a tenant in default. Similarly, the
notice is also served on the subtenant.
the owner
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

Evict the retain the subtenant may do so. The owner is not required to serve the
master tenant subtenant with a three-day notice when only the master tenant is being
evicted.25 
but keep the
subtenant 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 60] 

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. 

21 Valov v. Tank (1985) 168 CA3d 867

22 CCP §1161.1(a)
23 CCP §1161.1(a)
24 Briggs v. Electronic Memories & Magnetic Corporation (1975) 53 CA3d 900
25 Chinese Hospital Foundation Fund v. Patterson (1969) 1 CA3d 627
 Chapter 25: Delinquent rent and the three-day notice 253

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

26 CCP §1164

A tenant defaults on their rental or lease agreement by failing to: Chapter 25

•  pay rent and any other amounts due and called for in the rental Summary
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. 247 Chapter 25

due date........................................................................................... pg. 248
Key Terms
grace period.................................................................................... pg. 248
incurable breach........................................................................... pg. 246
late charge provision................................................................... pg. 249
material breach............................................................................. pg. 245
minor breach.................................................................................. pg. 246
notice to pay rent or quit............................................................ pg. 243

Quiz 7 Covering Chapters 25-29 is located on page 649.

 Chapter 26: Three-day notices to quit for nonmonetary breaches 255

Chapter
26
Three-day notices to quit
for nonmonetary breaches

After reading this chapter, you will be able to: Learning

•  differentiate between a curable breach a tenant can resolve and Objectives
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.

assignment notice to quit Key Terms

curable breach nuisance
monetary breach reasonable person test
nonmonetary breach retaliatory eviction
nonwaiver provision statutory breach
notice to perform or quit waste

On a routine inspection of an apartment complex, the property manager Curable

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.  and
As a courtesy, the tenant is asked, both orally and by a personal note, to incurable
remove the pet. However, the tenant retains the pet.  nonmonetary
breaches
256 Property Management, Sixth 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
curable breach by the tenant’s action, is known as a curable breach.1 
A breach of the lease
agreement which can
be remedied by action However, if the tenant breaches a provision in their rental or lease agreement
from the tenant. 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 

Types of 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
three-day tenant evicted. 
notices for Depending on the nature and extent of the tenant’s breach, one of the
various following types of three-day notices may be served: 

breaches  •  a three-day notice to pay rent or quit [See Form 575 in Chapter 25]; 
•  a three-day notice to perform or quit [See Form 576]; or 
•  a three-day notice to quit. [See Form 577 accompanying this chapter] 
Editor’s note – Separate notice requirements may apply if the property is
subject to the Tenant Protection Act (TPA). [See Chapter 27]
monetary breach
A tenant’s failure When a tenant’s breach is the failure to pay rent or other money obligation
to pay rent or other
money obligation due.
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. 
nonmonetary
breach
A tenant’s breach of
When the provision breached is not for rent or other money obligation, called
any obligation other a nonmonetary breach, and the breach can still be quickly corrected by the
than an obligation to tenant, such as the pet situation in the opening scenario, the tenant is served
pay money.
with a three-day notice to perform or quit. [See Form 576] 

1 Calif. Code of Civil Procedure §1161(3)

2 CCP §1161(3)
 Chapter 26: Three-day notices to quit for nonmonetary breaches 257

Form 576

Three-Day
Notice to
Perform or Quit

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 days;3 or 
•  a statutory breach.4
3 Matthew v. Digges (1920) 45 CA 561
4 CCP §1161(4)
258 Property Management, Sixth Edition

Notice to The three-day notice to perform or quit requires the tenant to either:

perform or •  perform under the breached lease provision; or 

quit  •  vacate the premises.5 

The tenant’s breach of a provision in a rental or lease agreement needs to be
notice to perform or
quit
a significant breach, called a material breach, to justify serving a three-day
A notice requiring a notice. A minor or trivial breach by the tenant will not support a three-day
tenant to perform an notice.6
action to remedy a
curable nonmonetary
breach of the lease For a tenant to avoid a forfeiture of their right of possession, they are first
agreement. [ See RPI given an opportunity to reinstate the rental or lease agreement. The landlord
Form 576] is required to give the tenant an opportunity to remedy the breach if the
breach can be cured in three days. 

The three-day notice to perform or quit specifies the provision breached and
the action to be taken to cure the breach. When the tenant cures the breach
before the three-day notice expires, the breach of the rental or lease agreement
is eliminated and possession continues as though no breach occurred. 

When a tenant fails to cure the breach by performance or by vacating

within three days after service of the notice to perform or quit and the notice
contains a declaration of forfeiture provision, the landlord may initiate a
UD action and have the tenant removed even if the tenant later performs.
The declaration of forfeiture in the three-day notice bars the tenant from
reinstating their right to possession after the three-day notice expires and
they have failed to first perform.7 

A tenant operates a retail business on leased premises. The lease agreement

Curable requires the tenant to periodically hand the landlord an inventory of their
nonmonetary sales merchandise. Also, the landlord is permitted to examine the tenant’s
business records. 
breaches
The landlord makes a request for an inventory and access to the records. The
tenant does not provide the inventories or permit the landlord to examine
their business records. 

The landlord serves the tenant with a three-day notice to quit the premises.
No alternative performance is given to allow the tenant to rectify the failures
and stay. The tenant does not vacate the premises. 

The landlord files a UD action, seeking to evict the tenant since the tenant
materially breached a lease obligation. 

The tenant claims they cannot be evicted since the three-day notice did not
give the tenant the alternative to perform by delivering inventory lists and
records to avoid a forfeiture of possession. 

5 CCP§1161(3)
6 Baypoint Mortgage v. Crest Premium Real Estate Investments Retirement Trust (1985) 168 CA3d 818
7 CCP §1161(3)
 Chapter 26: Three-day notices to quit for nonmonetary breaches 259

Form 577

Three-Day
Notice to Quit

Can the landlord maintain a UD action against the tenant based on the three-
day notice to quit? 

No! The three-day notice served on the tenant needs to be in the alternative
— perform or quit. Here, the tenant is able to hand over an inventory to the
landlord and give the landlord access to the business records, all within three
days.8 

When the tenant is capable of taking steps within three days which cure a
breach of a lease provision, the landlord needs to allow the tenant to cure the
breach, monetary or nonmonetary.9 

8 Hinman v. Wagnon (1959) 172 CA2d 24

9 CCP §1161(3)
260 Property Management, Sixth Edition

Notice to Recall from the opening scenario the use of a three-day notice to quit when
the tenant’s material breach is:
quit; no •  an incurable breach; or
alternatives •  a statutory breach.
Incurable breaches and statutory breaches automatically forfeit the tenant’s
right of possession. Incurable breaches either cannot be remedied within the
notice period, or are incurable by statute.10 

Statutory breaches, being incurable, include:

notice to quit •  an unauthorized subletting or assignment of the premises;
A notice to vacate
served on a tenant for •  nuisance; or
an incurable breach
of a rental or lease •  unlawful use of the premises.11
agreement or due to
a statutory breach of The three-day notice to quit does not need to indicate the provision breached
the tenancy. [See RPI or the activity of the tenant constituting the breach. Nor does it need to include
Form 577]
a lease forfeiture declaration by the landlord. The tenant’s right of possession
was automatically forfeited by the tenant’s incurable or statutory breach.
statutory breach Since these breaches cannot be cured by the tenant, the right of possession
A breach of the lease
agreement which may only be reinstated if the landlord chooses to waive the forfeiture. 
automatically forfeits
the tenant’s right of However, while a forfeiture of the lease has already occurred, a UD court
possession.
requires service of a three-day notice before a landlord may recover possession.

Consider a tenant who leases agricultural property. The lease agreement

Quit! The states the tenant’s use of the property is limited to grazing sheep. However,
breach the tenant plants crops on the property in breach of the lease agreement use
provision. 
cannot be
Based on the tenant’s unauthorized use of the premises, the landlord initiates
undone the eviction process by serving a three-day notice to quit on the tenant. 

The tenant’s use of the property to raise crops, instead of the single agreed-to
use as a pasture, is an incurable nonmonetary breach of the lease agreement.
The tenant cannot reverse the act or the effects of raising the crops on the soil
since the activity has already occurred.12

In another example, consider a tenant in possession of agricultural property

improved with an orchard. The lease obligates the tenant to poison squirrels
on the property to control the agricultural pest. 

The tenant does not poison the squirrels as required by the lease agreement
and the premises becomes infested with squirrels. 

The landlord serves the tenant with a three-day notice to quit the premises
based on the tenant’s failure to eradicate the squirrels with poison. 

10 CCP §1161(3)
11 CCP §1161(4)
12 Harris v. Bissell (1921) 54 CA 307 
 Chapter 26: Three-day notices to quit for nonmonetary breaches 261

The tenant does not vacate the premises. The landlord files a UD action to
evict the tenant. The tenant claims they cannot be evicted since the proper
notice to serve for the failure to poison the squirrels is a three-day notice to
perform or quit, allowing the tenant to cure their breach. 

However, the three-day notice to quit is the proper notice. The elimination
of squirrels by poisoning cannot be performed before the three-day notice to
quit expired.13

A tenant may be evicted for maintaining a nuisance or unlawful use of the

premises, even if these activities are not prohibited by the lease agreement.14  Breach of
A nuisance includes anything which: 
statutory
•  is injurious to health, such as contamination of the property’s soil; 
prohibitions
•  is offensive to the senses, such as excessive noise levels or obnoxious is a forfeiture 
fumes; or 
•  obstructs the use and enjoyment of surrounding property.15
For example, a tenant in a multi-unit property maintains a nuisance on the
premises in the form of excessive late-night noise. The noise interferes with
another tenant’s use or enjoyment of their premises. As a result, the landlord
may serve a three-day notice to quit on the interfering tenant. 

Also, a tenant who illegally sells, grows or manufactures controlled substances nuisance
An action which is
on the premises has, by their actions, triggered an automatic forfeiture of the injurious to health,
leasehold. The tenant may be served with a notice to quit for maintaining a offensive to the senses,
nuisance. If they do not vacate, they may be evicted by a UD action.16 or obstructs the use
and enjoyment of
surrounding property.
A tenant’s unlawful use of the premises under the statute includes violations [See RPI Form 550 §6.7
of local laws or ordinances if the prohibited use affects the property, such as and 552 §7.3]
noncompliance with zoning ordinances restricting the use of the premises.
Again, the leasehold is forfeited automatically due to the statutory violation.
The three-day notice is required as a requisite to maintaining a UD action
when the tenant remains in possession.17

However, before the use is unlawful and justifies service of a notice to quit,
the use needs to: 
•  threaten the physical safety of the property; 
•  stigmatize the premises; or 
•  impair the landlord’s continued receipt of rent. 

For example, a tenant’s lease agreement contains a provision stating the Nuisance or
tenant will not use the premises for any unlawful purpose or to violate any
laws, a provision that restates the statute.  unlawful use
13 Matthews, supra 
14 CCP §1161(4)
15 Calif. Civil Code §3479 
16 CCP §1161(4) 
17 Haig v. Hogan (1947) 82 CA2d 876 
262 Property Management, Sixth Edition

The tenant’s business, which is authorized to operate on the premises, is

penalized for conducting the pricing of its services and goods in violation of
federal anti-trust laws. The landlord seeks to evict the tenant for unlawful
use of the premises in violation of the lease. 

Here, the landlord may not evict the tenant. The tenant’s violation of anti-
trust laws is the unlawful conduct of their lawful business, not an unlawful
use of the premises by the tenant.18 

When a tenant’s activity is considered a nuisance or an unlawful use, a

three-day notice to quit may be served on the tenant even if the tenant is
able to cure the breach by terminating or eliminating the activity within
three days. The mere occurrence of the unlawful and endangering activity
automatically forfeits the lease, leaving nothing for the tenant to do except
vacate or be evicted based on the three-day notice to quit. 

Forfeiture on Consider a lease provision prohibiting the tenant from entering into a
sublease or an assignment of the lease without first obtaining the landlord’s
assigning or written consent, called a restraint-on-transfer provision. Unknown to the
subletting landlord or the property manager, the tenant subleases the premises. The
property manager discovers the premises is occupied by a subtenant. 

The property manager names and serves both the tenant and subtenant with
a three-day notice to quit. The subtenant does not vacate the premises. The
landlord files a UD action to regain possession from both the tenant and the
subtenant. 

The tenant claims their leasehold interest cannot be terminated by the three-
day notice to quit since the landlord cannot unreasonably withhold their
consent to a sublease of the premises. 

Can the landlord serve a three-day notice to quit and evict a tenant who
subleased the premises without their consent? 

Yes! The landlord may proceed to evict the subtenant based on a three-day
notice to quit. The tenant’s breach was the failure to request the landlord’s
consent prior to subletting the premises, an event that cannot be cured.
Further, as a statutory breach of the lease agreement, the tenant immediately
forfeits their right of possession. The landlord need not declare the forfeiture. 

The tenant cannot avoid the forfeiture of their right of possession due to the
breach by claiming the landlord was unreasonably withholding consent.
Here, the landlord was not given the opportunity to grant or withhold their
consent.19

Assignment When provisions in a lease agreement prohibit assignment or subleasing

without the landlord’s consent, and the tenant does so without obtaining
or subleasing
prohibited 18 Deutsch v. Phillips Petroleum Co. (1976) 56 CA3d 586
19 Thrifty Oil Co. v. Batarse (1985) 174 CA3d 770 
 Chapter 26: Three-day notices to quit for nonmonetary breaches 263

consent, a three-day notice to quit may be served on the tenant to recover assignment
possession. By statute, the act is an incurable activity that terminates the A tenant’s sublease of
lease, leaving no alternative to vacating.20 a portion of the leased
premises.

However, the landlord need not consider the lease terminated when the
tenant assigns the lease or sublets the premises without the landlord’s
consent. The landlord can waive the statutory forfeiture of possession. 

Thus, a three-day notice to perform or quit may be served on the tenant. The
tenant may then retain their possession by requiring the subtenant to move
from the premises within three days.21

Waste to the leased premises by a tenant is a breach that cannot be cured.

Waste terminates the tenant’s right of possession. The tenant needs to vacate
Waste forfeits
if the landlord serves a three-day notice to quit. [See Sidebar, “Covering your the lease 
bases with alternatives”]

However, waste is grounds for eviction only when the value of the leased waste
The intentional
premises is substantially or permanently impaired due to the tenant’s destruction or neglect
conduct.  of property which
diminishes its value.
Waste occurs when a tenant:  [See RPI Form 550 §6.8
and 552 §7.4]
•  intentionally damages or destroys the leased premises; or 
•  neglects the premises and impairs its value by failing to care for and
maintain it as agreed. 
Consider a tenant in an office building. The tenant’s lease agreement obligates
the tenant to follow all building rules. The building rules prohibit tenants
from adjusting the temperature controls. The tenant’s employees adjust the
ft Waste
temperature controls, resulting in damage to the thermostat. 

The landlord serves the tenant with a three-day notice to quit the premises.
The tenant does not vacate. The landlord then files a UD action. The landlord
claims the tenant committed waste to the premises since adjusting of the
temperature controls damaged the building’s thermostat. 

The tenant cannot, however, be evicted for waste. The damage to the
thermostat was minor and reparable within three days. Also, the landlord
was unable to demonstrate the tenant’s conduct substantially diminished
the property’s market value. 22

Now consider a landlord who discovers a tenant’s pets have damaged the
wooden floors, doors and plastered walls of the tenant’s apartment unit.
Unsanitary conditions also exist in the unit. 

A three-day notice to quit is served based on the tenant’s waste to the unit. 

Again, the landlord is unable to evict the tenant for waste. The tenant’s
failure to maintain the unit has not significantly nor permanently lowered
20 CCP §1161(4) 
21 CCP §1161(3) 
22 Rowe v. Wells Fargo Realty, Inc. (1985) 166 CA3d 310 
264 Property Management, Sixth Edition

the market value of the unit. The damage created by the tenant’s pets can be
repaired and the unit quickly returned to a marketable condition. The three-
day notice to quit was inappropriate.23

Consider a tenant of commercial property who wants to add further

Waiver of improvements to the leased premises. The lease agreement requires the
breach by landlord’s written consent before the tenant may make improvements to the
premises. 
conduct 
The tenant submits a request to the landlord for approval of additional
improvements they want to make. The landlord does not respond to the
tenant’s request. 

Without the landlord’s consent, the tenant begins construction on the

improvements. The landlord is aware of the construction. Further, the
landlord knows the construction extends beyond the area of the leased
premises and encroaches onto other property owned by the landlord. 

The landlord demands the tenant remove the improvements they

have constructed. As a result, the landlord and tenant commence lease
negotiations to expand the leased premises to include the property on which
the improvements now encroach. 

During negotiations, the landlord accepts all rent payments made by the
tenant. Ultimately, the landlord and tenant are unable to reach an agreement.
The unauthorized construction remains unresolved. The landlord then
serves a three-day notice to quit followed by a UD action to evict the tenant. 

The tenant claims the landlord’s acceptance of rent payments waived the
landlord’s right to terminate the tenant’s possession on the tenant’s breach. 

Can the landlord evict the tenant? 

Yes! The landlord did not waive their right to terminate the tenant’s
possession by accepting rent addressed in the lease agreement. The landlord
continuously objected and never acquiesced to the construction of the
improvements. 

While the landlord accepted rent payments, the landlord demonstrated to the
tenant that they did not intend for the tenant to construct the improvements
and continue to occupy the premises under the terms of the existing lease
agreement.24

The Many lease agreements contain an enforceable provision that states a

landlord’s waiver of a tenant’s breach of the lease is not a waiver of similar
nonwaiver or subsequent breaches by the tenant. This provision is called a nonwaiver
provision. [See RPI Form 552 §20.1] 
provision
23 Freeze v. Brinson (1991) 3 CA4th Supp. 1 
24 Thriftimart, Inc. v. Me & Tex (1981) 123 CA3d 751 
 Chapter 26: Three-day notices to quit for nonmonetary breaches 265

A tenant’s failure to comply with building rules or to maintain the premises in a clean Covering your
and sanitary manner are breaches of a lease agreement. Generally these types of bases with
breaches can be remedied within three days.
alternatives
The landlord who serves a three-day notice to perform or quit provides the tenant with
an opportunity to comply with building rules, or clean the premises and stay. If the
tenant’s breach remains uncured after three days, and the tenant remain in possession,
the landlord may file an unlawful detainer (UD) action to evict the tenant.
Consider again the tenant who may not be evicted for waste since their failure to follow
building rules did not permanently lower the market value of the premises.
A tenant whose breach results from the failure to follow building rules may stop the
activity constituting a violation on receiving a three-day notice perform or quit. If the
tenant performs on the notice by complying with building rules within the three-day
period, the tenant cannot be evicted.
However, the tenant might later resume the breaching activity. The tenant’s repeat
conduct may then constitute a nuisance, perhaps obstructing other tenants’ ability to
enjoy the use of the building.
The tenant will likely contest a three-day notice to quit for nuisance. The landlord will
then be forced to show how the tenant’s conduct constitutes a continuing nuisance.
Also, a three-day notice to quit results in a forfeiture of the tenant’s right of possession,
as no alternative exists — a harsh result courts do not favor.
Thus, if the tenant’s breach is non-statutory and can be cured within three days, a
three-day notice to perform or quit is the proper notice to serve.
When a landlord is uncertain about whether or not a breach can be cured within three
days, a three-day notice to perform or quit will either:
nonwaiver
• cause the tenant to cure the breach within three days; or provision
A provision in the
• support the landlord’s UD action to evict the tenant. lease agreement that
states a landlord’s
waiver of a tenant’s
breach is not a waiver
of similar or future
When a nonwaiver provision is in the lease agreement, the landlord’s breach. [See RPI Form
550 §7.4 and 552 §20.1]
acceptance of rent does not constitute a waiver of their right to evict the
tenant for a separate or later breach of the lease.25

Consider a tenant who operates a concession stand on leased property.

The lease agreement prohibits camping on the premises and contains a
Landlord’s
nonwaiver provision.  conduct
The tenant is unable to stop campers from using the premises. The tenant condones
installs a sign stating camping is not allowed and erects fences to keep breach
overnight campers off the premises. On a demand from the landlord, the
tenant takes down the sign and fences. 

On removal of the fence, the tenant advises the landlord of their inability to
prevent campers from using the premises without maintaining the sign. The
landlord does not respond, but continues to accept rent. 

25 Karbelnig v. Brothwell (1966) 244 CA2d 333 

266 Property Management, Sixth Edition

After an extended time, the landlord serves a three-day notice to quit

for breach of the lease agreement provision prohibiting camping on the
premises. The landlord files a UD action to evict the tenant. 

Can the landlord evict the tenant? 

No! The landlord’s conduct misled the tenant into believing the breaching
conduct was no longer a concern of the landlord. The landlord was
prevented from processing an eviction based on tenant activity authorized
by the landlord. This holds even if the lease agreement contains a nonwaiver
provision.26  

Once the tenant’s actions breaching a lease agreement provision have been
condoned by the landlord, the landlord has waived the nonwaiver provision.
They need to take reasonable steps if they intend to reinstate and enforce the
nonwaiver provision. 

A reasonable step to reinstate enforceability is the use of a written 30-day

notice to the tenant, stating the landlord’s intent to enforce the nonwaiver
provision in the lease agreement on expiration of the 30-day notice if 30 days
is sufficient time to cure the breach. [See Form 570 in Chapter 17] 

If the tenant continues to breach after expiration of the period for reinstating
the provision, the landlord may serve a three-day notice to perform or quit.

Statutory requirements need to be strictly followed when preparing and

Service of serving a three-day notice.
notice If the three-day notice is incorrectly or inaccurately prepared, or improperly
served on the tenant, the notice is invalid. To evict the tenant, a new three-
day notice needs to be correctly and accurately prepared, and properly served
on the tenant.27

Further, a proof of service form is filled out and signed by the person who
serves the three-day notice. Without a proof of service, a UD action cannot be
maintained. [See Form 580 accompanying this chapter] 

Concurrent A landlord may concurrently serve both a three-day notice to pay (perform)
or quit and a 30-day notice to vacate or change terms. However, the notices
service of two need to be served separately. If attached or otherwise combined, other than
their being served at the same time, they may be reasonably confused as one.
notices The confusion might defeat any UD action based on the three-day notice. 

Also, each notice is accompanied by its own separate proof of service to

clarify their independent existence. [See Form 580] 

26 Salton Community Services District v. Southard (1967) 256 CA2d 526

27 Lamey v. Masciotra (1969) 273 CA2d 709 
 Chapter 26: Three-day notices to quit for nonmonetary breaches 267

Form 580

Proof of Service

For example, a tenant on a month-to-month tenancy breaches their obligation

to maintain the premises. The landlord concurrently serves the tenant with
both a three-day notice to perform or quit and a 30-day notice to vacate.

Each notice stands alone, unattached to the other, and is separately, but
concurrently, handed to the tenant. Each service is returned by the server
accompanied by a separate proof of service. The tenant fails to maintain the
premises under the three-day notice to perform and remains in possession.
The landlord files a UD action based on the service of the three-day notice
and its proof of service. 

At the UD hearing, the tenant claims they were unaware of their need to
vacate within three days since they were also served with a 30-day notice
giving the tenant 30 days to vacate. 
268 Property Management, Sixth Edition

The court examines the content of the separate notices. The court’s analysis is
reasonable person based on the reasonable person test which sets guidelines for reasonable
test behavior between the two parties to an action. The court finds that a
A judicial test used to
determine reasonable
reasonable person might be confused by the separate requirements contained
behavior between two in the concurrently served notices.
parties.
Therefore, the tenant is granted a relief from forfeiture of possession under
the three-day notice to perform or quit. The tenant is allowed to stay, on
the condition they immediately perform the maintenance addressed in the
three-day notice.28

Regardless of any confusion the tenant had, in response to the judgment the
tenant will either: 
•  immediately perform the maintenance called for in the notice and
retain the right of possession; or 
•  take no action, and be evicted from the property for failure to perform
the maintenance called for in the notice. 

Application Now consider a tenant under a month-to-month tenancy who is served with
a three-day notice and a separate 30-day notice at the same time. Each notice
of the has its own proof of service statement. 
reasonable The three-day notice to pay or quit requires the tenant to pay amounts due
person test and delinquent, within three days after service of the notice, or vacate and
deliver possession to the landlord. 

The 30-day notice to vacate states the tenant is required to vacate and deliver
possession of the premises to the landlord within 30 days after service of the
notice. [See Chapter 30] 

The 30-day notice does not request that the tenant pay any delinquent rent
which is due, only the amount which will become due within 30 days on the
first of the next calendar month. The tenant pays the rent before the three-
day period expires. 

Later, at the end of the 30-day period, the tenant refuses to leave. The landlord
initiates a UD action on the 30-day notice to vacate. At the UD hearing, the
tenant claims they believed that by paying the delinquent rent under the
three-day notice, the 30-day notice was no longer applicable. 

Again, the court will apply the reasonable person test to determine if the
notices served might result in the tenant’s confusion. 

Courts also enforce the legislative scheme to make sure the landlord follows
all statutory requirements regarding content and service of the notice. If
the landlord is in compliance, the court awards the landlord relief available
under the legislative scheme. 

28 CCP §1179 
 Chapter 26: Three-day notices to quit for nonmonetary breaches 269

Here, the contents of the notices show they are mutually exclusive of one
another. Further, the three-day notice does not indicate that payment of the
delinquency mentioned in the three-day period nullifies the order to vacate
in the 30-day notice.

Also, while served concurrently, the landlord did serve the notices separately.
Both notices followed their respective legislative schemes: 
•  one for collecting delinquent rent; and 
•  the other for terminating the month-to-month tenancy. 
Finally, the tenant’s supposed confusion is not about the time for performance
or vacating while one of the notice periods remained unexpired. Rather,
the tenant assumed one notice overrode the provisions of the other, an
assumption unfounded and unreasonable, given the explicit content of the
notices. Thus, the tenant’s purported confusion is not a legal excuse for failing
to vacate.

A tenant under a month-to-month rental agreement continually fails to Retaliatory

timely pay rent and becomes delinquent on the current month’s rent. In
response to the repeated delinquencies, the tenant’s landlord concurrently eviction 
serves the tenant with a three-day notice to pay or quit and a 30-day notice
to vacate.

The tenant claims the 30-day notice was served to terminate their tenancy in retaliatory eviction
retaliation for being late with the rent, called a retaliatory eviction. The wrongful eviction
attempted by a
landlord against a
A retaliatory eviction occurs when a residential landlord attempts to evict a tenant for lawfully
tenant for:  exercising any of their
rights.
•  exercising their right to file a complaint with an appropriate agency
regarding the habitability of the premises; 
•  orally complaining to the landlord about the habitability of the
premises; 
•  filing documents to initiate a judicial or arbitration proceeding
regarding the habitability of the premises; 
•  organizing or participating in a tenant association or an association for
tenant’s rights; or 
•  lawfully exercising any rights, such as the refusal to authorize
credit reports or personal investigation after taking possession of the
premises.29
Here, the tenancy was not terminated in retaliation for complaints about the
habitability of the premises or for a legal right exercised by the tenant. Instead,
the tenant was being evicted for their continued delinquent payment of
rents — a breach by the tenant of the month-to-month rental agreement. 

29 CC §1942.5
270 Property Management, Sixth Edition

Recall that a notice to vacate need not include a reason for the termination of
occupancy. It is therefore up to the tenant to determine whether the landlord’s
conduct may justify the claim of a retaliatory eviction. [See Chapter 30]

A landlord convicted of a retaliatory eviction is liable for punitive damages

up to $2,000 for each act of retaliation.30

30 CC §1942.5

Editor’s note – Additional COVID-19-related eviction protections may

apply under the Tenant, Homeowner, and Small Landlord Relief and
Stabilization Act of 2020. For more on this recent legislation, see the
first tuesday journal at journal.firsttuesday.us.

Chapter 26 The three-day notice served on a tenant must be the correct type before
the tenant’s unlawful detainer of a premises can be established and the
Summary 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;
•  a three-day notice to perform or quit; or
•  a three-day notice to quit.
A breach which can be remedied by action from the tenant during the
notice period is known as a curable breach. A breach which cannot be
remedied by action from the tenant is known as an incurable breach.

When a tenant’s breach is the failure to pay rent or other money

obligation which is due, 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 lease 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, the tenant is served with a three-day
notice to perform or quit.
 Chapter 26: Three-day notices to quit for nonmonetary breaches 271

A three-day notice to quit is used when the tenant’s material breach is:
•  an incurable breach; or
•  a statutory breach.

assignment..................................................................................... pg. 263 Chapter 26

curable breach............................................................................... pg. 256
Key Terms
monetary breach........................................................................... pg. 256
nonmonetary breach................................................................... pg. 256
nonwaiver provision................................................................... pg. 265
notice to perform or quit............................................................. pg. 258
notice to quit.................................................................................. pg. 260
nuisance.......................................................................................... pg. 261
reasonable person test ................................................................ pg. 268
retaliatory eviction ..................................................................... pg. 269
waste................................................................................................ pg. 263
statutory breach............................................................................ pg. 260

Quiz 7 Covering Chapters 25-29 is located on page 649.

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 Chapter 27: Just cause evictions under the Tenant Protection Act 273

Chapter
27
Just cause evictions under
the Tenant Protection Act

After reading this chapter, you will be able to: Learning

•  identify which types of property are targeted by the Tenant Objectives
Protection Act (TPA);
•  differentiate the circumstances which constitute an at-fault just
cause eviction versus a no-fault just cause eviction; and
•  distinguish the concepts of an incurable and curable violation in
relation to an at-fault just cause eviction.

at-fault just cause eviction Tenant Protection Act (TPA) Key Terms
no-fault just cause eviction

The Tenant Protection Act (TPA) of 2019 made several significant changes Introducing
to the rights of landlords and tenants of targeted properties including:
the Tenant
•  capping annual rent increases at 5% plus the rate of inflation for
much of California multi-unit residential properties [See Chapter 22]; Protection
and
Act (TPA)
•  requiring “just cause” to evict tenants in place for 12 months or more.
Requiring a just cause for eviction makes it harder for landlords to evict
Tenant Protection
tenants in order to rent out their properties to new tenants at a higher rate. Act (TPA)
Further, if a tenant is being evicted at no fault of their own, the landlord may A bill signed into law
which caps annual
also be required to provide modest financial relocation assistance. rent increases for many
multi-unit residential
The changes enacted will be effective until they are repealed on January 1, properties and requires
2030.1 “just cause” to evict
tenants in place for 12
months or more.
1 Calif. Civil Code §1946.2(j)
274 Property Management, Sixth Edition

Targeted The applicability of the TPA is comprehensive, covering many multi-unit

residential real estate housing in California and single family residential
properties (SFR) units owned by a real estate investment trust (REIT), a corporation or a
and limited liability company (LLC) in which at least one member is a corporation.

exemptions However, there are numerous, sizable exemptions for multi-family

units and conditions for SFRs to be excluded. Multi-unit residential real
estate exempt from “just cause” eviction procedures include:
•  residential units that have been issued a certificate of occupancy
within the previous 15 years;
•  a duplex of which the owner occupied one of the units as their principal
residence at the beginning of the tenancy and remains in occupancy;
•  units restricted as affordable housing for households of very low or
moderate income, or subject to an agreement that provides subsidies
for affordable housing for households of very low, low, or moderate
income;
•  dormitories constructed and maintained in connection with any
higher education institution in California;
•  units subject to rent or price control that restricts annual increases in
the rental rate to an amount less than that set by the TPA;
•  multi-unit transient occupancy housing like hotels and motels;
•  accommodations in which the tenant shares kitchen or bathroom
facilities with an SFR owner-occupant;
•  SFR real estate that can be sold and conveyed separate from the title to
any other dwelling unit, like in an SFR subdivision or condominium
project, provided:
°  the owner is not one of the following:
•  a REIT;
•  a corporation; or
•  an LLC in which at least one member is a corporation;
and
°  the tenant has been given written notice stating the rental
property is exempt from the rent increase caps under the TPA.2
[See RPI Form 550, 551 and 550-3]
To notify the tenant of the property’s exempt status from the TPA, the
landlord uses a checkbox in the rental or lease agreement to indicate
whether the property is subject to just cause eviction requirements.
[See RPI Form 550 §10.1 and Form 551 §9.1]

When a residential property or tenancy does not meet any of the criteria
for exemption, the landlord is to abide by the TPA limiting their ability to
increase the rent or evict a tenant to regain possession.

2 CC §1947.12(d); CC §1946.2(e)
 Chapter 27: Just cause evictions under the Tenant Protection Act 275

For tenancies commenced or renewed on or after July 1, 2020, tenants are “Just cause”
to be notified of the new “just cause” and rent cap protections extended to
residential tenants by the TPA. required
The following statutory language is to be a provision in all residential and for certain
lease agreements, written in no less than 12-point type: evictions
California law limits the amount your rent can be
increased. See Section 1947.12 of the Civil Code for more
information. California law also provides that after all of
the tenants have continuously and lawfully occupied the
property for 12 months or more or at least one of the tenants
has continuously and lawfully occupied the property for
24 months or more, a landlord must provide a statement
of cause in any notice to terminate a tenancy. See Section
1946.2 of the Civil Code for more information.

This is incorporated as a boilerplate notice of tenant rights into RPI Form 550
§10 and Form 551 §9, our residential occupancy agreements.

Landlords of property exempt from the TPA need to notify the tenant in
writing of their exempt status to qualify themselves for the exemption.
The landlord notifies the tenant by using a checkbox in the rental or lease
agreement to indicate whether the property is subject to rent limits and just
cause eviction requirements. [See RPI Form 550 §10.1 and Form 551 §9.1]

For tenancies entered into prior to July 1, 2020 which do not include the
notice, the landlord will provide the notice and, if applicable, indicate
their exempt status using the separate Just Cause and Rent Cap Addendum.
[See RPI Form 550-3]

Landlords of non-exempt property seeking to evict tenants need to show just

cause when:
•  all tenants have continuously and lawfully occupied the unit for 12
months or longer; or
•  at least one tenant has continuously and lawfully occupied the unit
for 24 months or longer.3

Just cause eviction notices fall under two categories, based on whether the At-fault
tenant is:
just cause
•  at fault, called an at-fault just cause eviction;4 or
•  not at fault, called a no-fault just cause eviction.5
evictions
An at-fault just cause eviction is further categorized as either: at-fault just cause
eviction
•  curable; or An eviction based
on the actions of the
•  incurable. tenant which fall
under permissible
3 CC §1946.2(a) reasons under the law.
4 CC §1946.2(b)(1) These evictions can
5 CC §1946.2(b)(2) either be curable or
incurable.
276 Property Management, Sixth Edition

To qualify for an at-fault just cause eviction, the tenant:

•  defaulted on a rental payment;
•  failed to enter into a landlord-requested renewal or extension of a
lease which terminated on or after January 1, 2020 [See RPI Form 565];
•  breached a material term of the lease;
•  committed or permitted a nuisance or waste to occur on the property;
•  conducted criminal activity on the premises or common areas, or used
the premises for an unlawful purpose;
•  assigned or sublet the premises in violation of the expired lease;
•  refused the landlord’s authorized entry into the premises; or
•  failed to deliver possession after providing the landlord notice to
terminate the tenancy or surrender possession.6 [See RPI Form 576-1]

Also classified as an at-fault just cause eviction is a tenant’s failure to vacate

when the tenant was a resident manager or other employee of the landlord
and their occupancy was provided in conjunction with their employment
status and limited to the period of employment, and the employment has
been terminated.7

Editor’s note — When occupancy under a lease agreement expires, a landlord

may require the tenant to enter into a written extension or renewal, rather
than allow the tenancy to remain, converting the fixed-term tenancy to
a periodic month-to-month tenancy. However, if the tenant fails to enter
into a lease renewal or extension agreement and the landlord has not
accepted rent for a holdover period, this is considered an at-fault just cause
for eviction.8

When the tenant under an at-fault just cause tenancy breaches a nonmonetary
performance provision of a rental or lease agreement, the landlord of a non-
exempt property serves the tenant a Three-Day Notice to Perform – For
Properties Subject to Just Cause Eviction Requirements. [See RPI Form 576-1]

When the failure to perform is incurable – such as when a tenant commits

waste to the property or engages in overt criminal activity – the landlord
uses the Three-Day Notice to Quit, requiring the tenant to vacate and deliver
possession within three days of service.9 [See RPI Form 577-1]

However, when the failure to perform is curable, such as the breach of a

lease term which may be fully corrected within a three day period, the
landlord uses the Three-Day Notice to Perform to state what the tenant
needs to do to rectify or cure the breach in order to remain in possession.
[See RPI Form 576-1 §4]

Unique to properties subject to the just cause eviction requirements, when

the tenant does not cure the breach by full performance within three days
6 CC §1946.2(b)(1)
7 CC §1946.2(b)(1)(K)
8 CC §1946.2(b)(1)(E)
9 Calif. Code of Civil Procedure §1161(4)
 Chapter 27: Just cause evictions under the Tenant Protection Act 277

after service of the notice to perform, the landlord may not immediately
begin legal proceedings to regain possession by pursuing an unlawful
detainer (UD) action.

Rather, if the breach remains uncured on expiration of the Notice to Perform,

the landlord is required to prepare and serve the tenant with the Three-Day
Notice to Quit.10 [See RPI Form 577-1]

Here, the tenant who is served a notice to correct a curable breach and fails to
fully perform or quit, is given three additional days to vacate — quit — after
service of the final notice. When the tenant then fails to vacate and deliver
possession, the landlord’s remaining legal remedy is to file a UD action to
regain possession based on the tandem quit notices and seek an award for
rent owed and associated costs.11

Related, when the tenant commits a curable monetary breach, in order to

initiate the eviction, the landlord uses a Three-Day Notice to Pay Rent (with
or without related fees). These notices include sections which identify the
tenant as being under a lease which requires just cause to terminate the
tenancy and indicates their failure to pay rent constitutes just cause for
eviction. [See RPI Form 575-3 and Form 575-4]

Once the three days have passed and the tenant has still not paid the
appropriate amount(s) – a curable breach – the landlord may serve the tenant
with a Three-Day Notice to Quit without the further opportunity to cure the
violation. [See RPI Form 577-1]

A no-fault just cause eviction exists when the tenant is being evicted No-fault
under no fault of their own for any of the following reasons:
just cause
•  the landlord or their spouse, domestic partner, children, grandchildren,
parents or grandparents intent to occupy the premises; evictions
•  the property is withdrawn from the rental market;
no-fault just cause
•  the property is unfit for habitation as determined by a government eviction
agency and through no fault of the tenant; or An eviction which
occurs through no
•  the landlord intends to demolish or substantially renovate the fault of the tenant.
property.12 [See RPI Form 569-2 §3]
An improvement qualifies as a substantial remodel or renovation when
any structural, electrical, plumbing or mechanical system is replaced or
substantially modified, requiring a permit from a government agency. This
includes the abatement of hazardous materials like lead-based paint, mold
or asbestos, which cannot be completed with the tenant residing in the unit,
requiring the tenant to vacate for 30 days or longer.

10 CC §1946.2(c)
11 CC §1946.2(c)
12 CC 1946.2 (b)(2)
278 Property Management, Sixth Edition

Cosmetic improvements like painting or minor repairs that don’t require

the tenant to vacate to ensure their safety are not considered substantial
remodels.13

In the notice to quit discussed above used in the context of an at-fault

eviction — the tenant has materially breached the terms of a rental or lease
agreement and the landlord is using the breach to terminate the lease or
rental agreement. [See RPI Form 577-1]

Alternatively, a notice to vacate is used in the context of a no-fault eviction

to terminate a rental agreement and interfere with the automatic renewal of
the periodic tenancy when a breach of the rental agreement has not occurred
or is not an issue. [See RPI Form 569-2]

Relocation When a no-fault just cause eviction occurs for a non-exempt property,
the landlord is required to provide relocation assistance to the tenant.
assistance Relocation assistance is equal to one month’s rent and is to be made:
•  as a direct payment within 15 calendar days of the notice to vacate; or
•  in exchange for the landlord’s waiver of the payment of rent for the
final month before it becomes due.14 [See RPI Form 569-2 §7]
Further, the landlord needs to notify the tenant of their right to relocation
assistance in writing. This notice is provided within the body of the
specialized 60-Day Notice to Vacate required for tenants who have resided in
the property for 12 months or longer.15 [See RPI Form 569-2 §7]

If the landlord fails to provide relocation assistance, the notice to vacate is

void.16

Further, if the tenant receives the relocation assistance and then fails to vacate
at the end of the notice period, the landlord is able to recover the relocation
assistance as part of the damages in their action to retake possession.17

If it was through the actions of the tenant that the property was rendered
unfit for habitation, the tenant is not entitled to relocation assistance.18

Tenants may not waive their rights provided to them under the just cause
eviction laws. Any waiver made in the agreement is void as contrary to
public policy.

13 CC §1946.2 (b)(2)(D)(ii)
14 CC 1946.2(d)(1)
15 CC §1946.2(d)(2)
16 CC §1946.2(d)(4)
17 CC §1946.2(d)(3)(B)
18 CC §1946.2(b)(2)(C)(iii)
 Chapter 27: Just cause evictions under the Tenant Protection Act 279

Editor’s note – Additional COVID-19-related eviction protections may

apply under the Tenant, Homeowner, and Small Landlord Relief and
Stabilization Act of 2020. For more on this recent legislation, see the
first tuesday journal at journal.firsttuesday.us.

The Tenant Protection Act (TPA) caps annual rent increases at 5% for Chapter 27
many multi-unit residential properties and requires “just cause” to evict
tenants in place for 12 months or more. Summary
The TPA covers many multi-unit residential real estate housing in
California, though there are numerous sizeable exemptions, such as
residential units that have been issued a certificate of occupancy within
the previous 15 years.

Landlords of non-exempt property seeking to evict tenants need to show

just cause when:
•  all tenants have continuously and lawfully occupied the unit for
12 months or longer; or
•  at least one tenant has continuously and lawfully occupied the
unit for 24 months or longer.
“Just cause” evictions fall under two categories:
•  at fault; and
•  no fault.
An at-fault just cause eviction is an eviction based on the actions of the
tenant. At-fault just cause evictions can either be curable or incurable.

A no-fault just cause eviction exists when the tenant is being evicted
through no fault of their own.

When a no-fault just cause eviction occurs for a non-exempt property,

the landlord is required to provide relocation assistance to the tenant.
Relocation assistance is equal to one month’s rent.

at-fault just cause eviction........................................................ pg. 275

Chapter 27
no-fault just cause eviction....................................................... pg. 277
Tenant Protection Act................................................................. pg. 273 Key Terms

Quiz 7 Covering Chapters 25-29 is located on page 649.

 Chapter 28: Proof of service 281

Chapter

28
Proof of service

After reading this chapter, you will be able to: Learning

•  identify the type of three-day notice required to be used for various
tenant breaches of rental and lease agreements; and
Objectives
•  carry out the proper service of a three-day notice on a tenant.

notice to pay rent or quit substituted service Key Terms

Rent owed by a residential tenant under a rental or lease agreement has Diligence not
become delinquent. In a final effort to collect the delinquent rent, the
landlord (or property manager or unlawful detainer (UD) service) prepares a required to
three-day notice to pay rent or quit to be served on the tenant. locate the
The individual serving the notice, called a process server, is handed the notice tenant
and attempts to personally serve the tenant at the tenant’s residence. The
tenant is not present at the residence and the tenant’s place of employment notice to pay rent
or business is unknown to the landlord. or quit
A notice served on a
However, a 16-year-old who responds to the process server at the premises tenant by the landlord
which states the
is handed the three-day notice. The process server observes that the 16-year- amount of delinquent
old is of suitable age and discretion to accept service of the notice and pass it rent and any other
along to the tenant. Thus, the process server does not post the notice on the delinquent amounts
owed the landlord
property. under a rental or lease
agreement. [See RPI
A copy of the three-day notice is also mailed on the same day to the tenant at Form 575 and 575-1]
the residence address since a business address is unknown.

The three-day notice expires without the tenant paying the delinquent rent
or vacating. A UD action is filed to evict the tenant.
282 Property Management, Sixth Edition

At the UD hearing, the tenant claims they may not be evicted and the
three-day notice was improperly served since a person of suitable age and
discretion to accept service needs to be at least 18 years old.

Is handing a copy of a three-day notice to an apparently intelligent 16-year-

old on the premises and mailing a copy to the tenant sufficient service to
terminate the occupancy and establish the tenant’s unlawful detainer of the
property on its expiration?

Yes! The tenant’s unlawful detainer is established without personal service

of the notice on the tenant. After an attempt at personal service, substituted
substituted service service is authorized. Proper substituted service of a three-day notice
In place of personally
serving the tenant, the
includes delivery of a copy to an intelligent and mature 16-year-old on the
notice is personally leased premises. Thus, having been served, the tenant may be evicted.1
delivered to a person
of suitable age at the If the tenant is not available for personal service at their residence, or their
tenant’s residence or
place of business and place of business if known to the landlord, the three-day notice may be:
is mailed to the leased
premises, or posted •  handed to any person who is of suitable age and discretion at either
on and mailed to the location; and
premises.
•  copied and mailed to the tenant at their residence.2
The rules for serving a three-day notice do not specify a person of suitable age
and discretion needs to be at least 18 years old.

A young person who appears to be of suitable age and discretion, such as

a family member or an employee, may be handed the notice as part of the
substituted service on the tenant.

Editor’s note — A person of suitable age and discretion to accept substituted

service of a three-day notice will, on questioning, be able to understand
their responsibility to hand the notice to the tenant. If the responsibility is
not understood, then the process server will post the notice at the property
and mail a copy to the tenant.

Serving a To establish the UD of a property by a tenant or subtenant, a requisite to a

UD action, statutory requirements are to be strictly followed when serving a
three-day three-day notice.3
notice Both residential and commercial properties are subject to the same three-day
notice and service rules.

On the breach of a rental or lease agreement and depending on the type of

activity or inaction comprising the breach, one of the following statutory
three-day notices is served on the tenant:
•  a Three-Day Notice to Pay Rent or Quit [See RPI Form 575];
•  a Three-Day Notice to Perform or Quit [See RPI Form 576]; or
•  a Three-Day Notice to Quit.4 [See RPI Form 577]
1 Lehr v. Crosby (1981) 123 CA3d Supp. 1
2 Calif. Code of Civil Procedure §1162(a)(2), §1162(b)(2)
3 Lamey v. Masciotra (1969) 273 CA2d 709
4 CCP §1161
 Chapter 28: Proof of service 283

The three-day notice may be served on the tenant by: Service by

•  personal service; elimination of
•  leaving a copy with a person of suitable age and discretion at the
premises and mailing a copy to the premises if the tenant is not methods
personally served at their residence or place of business, called
substituted service; or
•  posting the notice on the leased premises and mailing a copy to the
premises if the tenant is not available for personal service at their place
of business or residence address if known, or a person is not be found to
be served at the tenant’s residence or place of business.5
The first attempt at serving a three-day notice is by personal delivery of a
copy to the tenant, called personal service.6

Personal delivery may be made wherever the tenant is located. Personal

service will be attempted at both the tenant’s residence and place of business,
if known. These two attempts to personally serve the notice are a prerequisite
to an attempt at substituted service.

Second, the attempt to personally serve the tenant will fail when they are
absent from both their residence and place of business (if known). In this
event, a copy of the three-day notice may then be:
•  handed to a person of suitable age and discretion at either the tenant’s
residence or place of business; and
•  mailed to the tenant at their residence, called substituted service.7
Third, both the tenant’s residence and place of business may be unknown
or the tenant cannot be found for personal service at either the residence or
business addresses, or a person of suitable age and discretion cannot be found
for substituted service at either place. In this event, the three-day notice may
be:
•  posted on the leased premises; and
•  mailed to the tenant at the address of the leased premises, loosely
deemed service by “nail and mail.”8
Usually, a landlord’s resident manager or property manager is responsible
for preparing and serving a three-day notice as part of their employment by
the landlord. [See RPI Forms 590 and 591]

The attorney or UD service handling the anticipated eviction often prepares

and causes the notice to be served.

The individual who serves the three-day notice will complete a form
confirming they served the notice and the method of service completed. This
Documenting
form is called a proof of service. [See Form 580 accompanying this chapter] service of
5 CCP §1162 the three-day
notice
6 CCP §1162(a)(1), §1162(b)(1)
7 CCP §1162(a)(2), §1162(b)(2)
8 CCP §1162(a)(3), §1162(b)(3)
284 Property Management, Sixth Edition

If a UD action is filed to evict a tenant, a completed proof of service will be

produced at trial, evidencing service of the three-day notice.

If the three-day notice is personally served on the tenant, the individual

serving the notice will verify in the proof of service that they made the
personal service at the address served. [See Form 580 §5.1]

When the server completes a substituted service, they verify in the proof of
service:
•  their attempts to personally serve the tenant at both addresses were
unsuccessful;
•  the notice was handed to a person of suitable age and discretion at the
tenant’s residence or business address; and
•  the three-day notice was mailed to the tenant at their residence. [See
Form 580 §5.2]
If the notice is served by posting on the premises, the server verifies:
•  no person of suitable age or discretion was available at the tenant’s
residence and business addresses, or the addresses are unknown; and
•  the three-day notice was mailed to the tenant at the address of the
leased premises. [See Form 580 §5.3]

When serving a three-day notice, the landlord first attempts to personally

Full serve the tenant before resorting to substituted service.9
compliance
Personal service occurs when the three-day notice is handed to the tenant,
on each whether or not the notice is:
attempt •  accepted by the tenant; or
•  dropped at the tenant’s feet after the tenant refuses to accept the notice.
Failure to attempt substitute service at both the tenant’s residence and place
of business, if known, before posting the property results in defective service.
The landlord will be unable to maintain a UD action against the tenant if the
tenant successfully challenges the service of the three-day notice.

Merely showing, and not handing, a copy of the three-day notice to a person
on the premises and mailing a copy to the address is not proper service.10

When leaving a copy with a suitable person or posting a three-day notice on

the leased premises, service is completed only if the notice is also mailed to
the tenant.11

The notice may be mailed by first-class, registered or certified mail.

9 Nourafchan v. Miner (1985) 169 CA3d 746

10 Kwok v. Bergren (1982) 130 CA3d 596
11 Jordan v. Talbot (1961) 55 C2d 597
 Chapter 28: Proof of service 285

A lender acquired title to a residential property occupied by a tenant at a trustee’s sale. Case in point
The lender posted a 90-day notice to quit on the property and mailed a copy to the
tenant’s address of record without first attempting personal service of the notice. After Improper
90 days elapsed, the tenant did not vacate. The lender filed an unlawful detainer (UD)
Service of a
action to remove the tenant.
Notice to Quit
The lender sought possession of the property, claiming the tenant’s occupancy was
unlawful since the 90-day period had expired.
The tenant claimed they were not required to vacate the premises since the lender did
not properly serve the notice to quit as they posted it on the property and mailed it
before attempting to serve the tenant personally.
Here, the tenant was not required to vacate the premises since the lender did not serve
the notice to quit properly. State law permits the lender to post and mail a notice to quit
only after they have first attempted to serve the tenant personally. [Bank of New York
Mellon v. Preciado (2013) 224 CA4th Supp. 1]
In order to properly serve a notice to quit, the lender was required to show that personal
service was attempted on a person of suitable age or discretion at either tenant’s
residence or business address before posting and mailing the notice, called substituted
service. This personal service procedure requirement applies to all notices served by
landlords and any successors-in-interest. [See RPI Form 573]

However, the mailing of a three-day notice is not itself a proper substituted

service. The notice needs to first be either handed to an individual of suitable
age and discretion or, if such an individual is not available, posted on the
premises.12

Personal service needs to first be attempted before resorting to substituted

service. However, reasonable diligence by the landlord or property manager No diligence
to locate the tenant so they may be personally served is not required. required to
For example, consider a property manager of an apartment building who locate the
prepares a three-day notice for service on a tenant. The property manager
is unaware of any business address for the tenant. No business address is
tenant
listed on the application to rent or on any other documents received by the
landlord or property manager.

The property manager attempts to serve the three-day notice on the tenant at
the unit they rented.

The property manager receives no response after ringing the doorbell and
knocking on the door of the premises. Thus, no personal or substituted service
can be made. The property manager posts the three-day notice to the door
and mails another copy addressed to the tenant at the unit they rented by
first-class mail.

The tenant does not pay the delinquent rent or vacate before the three-day
notice expires. A UD action is filed and served on the tenant.

12 Liebovich v. Shahrokhkhany (1997) 56 CA4th 511

286 Property Management, Sixth Edition

Form 580

Proof of Service

The tenant claims improper service of the three-day notice since the property
manager made no effort to locate the tenant’s business address and there
attempt personal service before posting it to the property and mailing them
a copy.

However, the property manager is not required to use diligence, much less
investigate the location of the tenant, when attempting personal service of
a three-day notice. A review of the property management files and personal
knowledge will suffice.
 Chapter 28: Proof of service 287

In the previous example, the property manager’s use of the post-and-mail Post-and-mail
alternative for service was proper. When the landlord or property manager is
unaware of any address for the tenant other than the leased premises:
•  no attempt to ascertain the tenant’s other address is necessary; and
•  service by posting the premises and mailing to the leased premises is
sufficient when no suitable person for substituted service is found at
the premises.13
Consider an individual who leases space in a retail center to operate their
business.

The tenant fails to pay their rent, and the property manager prepares a three-
day notice for service on the tenant. The property manager does not know
the tenant’s residential address.

The property manager attempts to personally serve the tenant with the three-
day notice at the leased premises, but the tenant is absent from the business.

The property manager hands the three-day notice to an employee of the

tenant and mails a copy to the tenant at the premises.

Is the method of service used by the property manager proper?

Yes! Reasonable diligence to locate the tenant is not required when attempting
personal service. Here the property manager need not make a second effort,
such as returning to the premises or looking in a directory or voting records,
to discover the tenant’s residential address.14

Even if the attempted service is defective, the tenant’s admitted receipt of the
three-day notice establishes personal service. Thus, the defective service is no
Personal
longer an issue.15 receipt of
For example, a property manager sends a three-day notice by certified mail. certified mail
It is the property manager’s only attempt to notify the tenant. No personal
service is attempted, or substituted and no notice is posted on the premises.

However, the tenant personally signs the postal receipt accepting the
certified mail. The tenant’s acknowledgement of receipt confirms they have
been personally served (by the post office) with the three-day notice on the
date they acknowledged receipt.

The mailing of the notice by the property manager did not constitute service
of the three-day notice on the tenant — even though certified mail was used.
However, the tenant’s signing of the postal receipt is proof the tenant was
handed the three-day notice by a post office employee — which is personal
service.

13 Hozz v. Lewis (1989) 215 CA3d 314

14 Nourafchan, supra
15 Valov v. Tank (1985) 168 CA3d 867
288 Property Management, Sixth Edition

The tenant who fails to pay the delinquent rent within the three-day period
following acknowledgment of their receipt of the three-day notice by mail is
unlawfully detaining the premises and may be evicted.

Editor’s note — If any person other than the tenant signs acknowledging
the receipt of the mail, personal service is not accomplished.16

An evasive tenant might not pick up certified mail addressed to them when
their rental payment is delinquent.

If personal service cannot be accomplished, the three-day notice period

begins to run the day the notice is either served by substituted service and
mailed, or posted and mailed. The day following service is day one of three.
When a Saturday, Sunday or holiday is the third day, the three-day period
then continues through the first following business day.

16 Liebovich, supra

Chapter 28 On the breach of a rental or lease agreement and depending on the type
of activity or inaction comprising the breach, one of three statutory
Summary three-day notices is served on the tenant:
•  a Three-Day Notice to Pay Rent or Quit;
•  a Three-Day Notice to Perform or Quit; or
•  a Three-Day Notice to Quit.
The three-day notice may be served on the tenant by:
•  personal service;
•  leaving a copy with a person of suitable age and discretion at the
premises and mailing a copy to the premises if the tenant is not
personally served at their residence or place of business, called
substituted service; or
•  posting the notice on the leased premises and mailing a copy to
the premises if the tenant is not available for personal service at
their place of business or residence address if known, or a person
is not found to be served at the tenant’s residence or place of
business.

Chapter 28 notice to pay rent or quit ........................................................ pg. 281

Key Terms substituted service .................................................................... pg. 282

Quiz 7 Covering Chapters 25-29 is located on page 649.

 Chapter 29: Other amounts due under three-day notices 289

Chapter
29
Other amounts due
under three-day notices

After reading this chapter, you will be able to: Learning

•  implement late charge provisions in rental and lease agreements;
•  understand the nature of a late charge as a recovery of costs or a
Objectives
penalty provision; and
•  determine whether the judge in an unlawful detainer action will
allow late charges as additional rent due in a three-day notice to
pay rent or quit.

late charge notice public policy Key Terms

late payment clause

A clause in a rental or lease agreement between a landlord and tenant calls for Know what
the accrual of interest on delinquent rent from the due date of the payment.
This is a type of late payment clause.  the judge will
The tenant fails to pay rent before it becomes delinquent. The landlord then allow 
prepares a three-day notice to pay or quit and serves the notice on the tenant.
[See Form 575-1 accompanying this chapter and Form 575 in Chapter 20]  late payment clause
A provision in a rental
or lease agreement
The three-day notice itemizes the amounts of delinquent rent and daily establishing the
interest accrued that are due and unpaid on the date the notice is prepared. landlord’s right to
demand and receive
The tenant fails to pay or quit during the three-day period. The landlord files a late charge when a
an unlawful detainer (UD) action to evict the tenant.  rent payment becomes
delinquent. [See RPI
At the UD hearing, the tenant claims the landlord cannot terminate the Form 550 §4.3 and 552
§4.7]
tenant’s right to possession of the premises under the three-day notice. The
notice demands payment of an amount greater than the rent due under the
lease agreement.
290 Property Management, Sixth Edition

May a three-day notice include money amounts due under a rental or lease
agreement in addition to the rent? 

Yes! A three-day notice to pay or quit is not limited to the scheduled amount
of periodic rent which is delinquent. While the notice to pay may not be
served until rent is delinquent, the notice may include all sums of money
which are properly due and unpaid under the rental or lease agreement at
the time the notice is served, including the delinquent rent.1

That said, late charges raise issues of the need for a demand for their payment,
their nature as a cost recovery remedy, their reasonableness and whether
they are punitive in amount.

Amounts in Examples of amounts of money due periodically under a rental or lease

agreement, in addition to scheduled rent, include: 
addition to •  common area maintenance charges (CAMs); 
scheduled •  association charges; 
rents •  pro rata insurance premiums, property taxes and assessments; 
•  late payment and bad check charges; 
•  expenses incurred by the landlord to cure waste or failure to maintain
the property; and 
•  other amounts of money properly due as compensation or
reimbursement of expenses arising out of the occupancy. 
A three-day notice to pay or quit form provides for the itemization of rent
and other amounts due which are unpaid and delinquent. [See Form 575 in
Chapter 25] 

Lump sum Under a commercial lease agreement entered into by a tenant, rent is typically
due and payable on the first day of each month, called the due date. The lease
late charges agreement contains a late charge provision stating the tenant agrees to pay a
specified charge if the rent is not received by the landlord within five days of
the due date, called a grace period. [See Chapter 25; see  RPI Form 552 §4.7] 

The rent payment is delinquent the day after the grace period runs, the
seventh day of the month. The delinquency triggers the landlord’s right to
demand payment of the agreed-to late charge, or do nothing and waive it. 

The lease agreement also requires the tenant to pay a specific sum for each
rent check returned for insufficient funds. [See RPI Form 552 §4.9] 

One month, the landlord receives the rent after the grace period expires. The
landlord as required accepts the rent since the tenant’s right of possession
has not been terminated by a declaration of forfeiture provision in a three-
day notice or expiration of the lease. The landlord then notifies the tenant

1 Canal-Randolph Anaheim, Inc. v. Wilkoski (1978) 78 CA3d 477

 Chapter 29: Other amounts due under three-day notices 291

in writing of their demand for payment of a late charge, payable with the
following month’s rent as called for in the lease agreement. [See Form 569 in
Chapter 30] 

The following month the landlord receives the regularly scheduled rent
within the grace period. However, the tenant does not tender the late charge
the landlord demanded due to the delinquency of the prior month’s rent
payment. 

The landlord’s options to enforce collection of the late charge payment, viable Landlord’s
or not, include: 
options for
•  returning the rent check to the tenant as insufficient payment for the
total amount due;  collection 
•  serving the tenant with a three-day notice to pay or quit; 
•  deducting the additional charge from the security deposit on written
notice to the tenant; or 
•  filing an action against the tenant in small claims court to collect the
late charge. 
Returning the rent check to the tenant will result in one of the following
scenarios: 
•  the tenant will submit another check which includes rent and payment
of the late charge (which payment will be delinquent and arguably
incur another late charge); or 
•  the tenant will retain the rent check as having been properly tendered
and paid, and do nothing more until they send a check for the following
month’s rent. 
A tenant who fails to pay rent or otherwise materially breaches the lease
agreement may be served with the appropriate three-day notice. The three-
day notice based on a material breach properly includes late charges and any
other monetary amounts past due.2

If the tenant fails to cure the material breach within three days following
service of the notice and remains in possession, the landlord may file a UD
action to regain possession.3  

A landlord will not succeed in a UD action when the landlord’s refusal to Refusal to
accept the tenant’s timely tender of a rent check is based solely on the tenant’s
refusal to pay late charges. Failure to pay the agreed late charge after notice is pay late
a minor breach.4  charges is a
minor breach

2 Canal-Randolph Anaheim, Inc., supra  

3 Calif. Code of Civil Procedure §1161
4 Canal-Randolph Anaheim, Inc., supra
292 Property Management, Sixth Edition

A late charge is properly sought when pursuing delinquent rent. But alone,
a late charge (or bounced check charge) is a minor breach and will not
independently support a UD action.5 

Thus, the landlord has two viable options for the collection of unpaid late
charges from the tenant: 
•  accept the rent check and deduct the amount of the unpaid late charge
from the security deposit, then or later, and advise the tenant of the
deduction; or 
•  accept the rent check and file a money action for the unpaid late charge
amounts. 
The financially practical action is for the landlord to accept the rent and
deduct the demanded late charge from the tenant’s security deposit.

Late charges To be enforceable, late charges need to be reasonably related to: 

to recover •  the actual costs of collecting the delinquent rent (the time, effort and
money spent); and 
costs •  the delay in its receipt (loss of use, such as interest). 
A lump sum late charge is a liquidated damages provision when the amount
of the late charge is significantly greater than the actual out-of-pocket losses.
As liquidated damages, the charge is a penalty and unenforceable.6

Editor’s note — Some may argue any lump sum late charge on residential
property is void as a liquidated damage since out-of-pocket money losses
due to a late payment are readily ascertainable, especially in real estate
transactions. 

A liquidated damages provision in any agreement is void unless:

•  the loss covered is impracticable or nearly impossible to calculate
(rarely the case in real estate transactions); or
•  the amount of the charge is a reasonable estimate of the landlord’s out-
of-pocket expenses for the collection effort.7  
When setting the amount of a late charge, a landlord considers charging an
amount equivalent to the late charge allowed on delinquent residential
mortgage payments as a public policy set by the state legislature. The late
charge formula amount for a delinquent mortgage payment is a good
indicator of what is reasonable as a late charge on a delinquent rent payment. 

The late charge amount allowed for a delinquent payment on a mortgage

secured by residential property is controlled by statute. This is not the case for
late charges on rent, which is determined by case law. 

5 Baypoint Mortgage v. Crest Premium Real Estate Investments Retirement Trust (1985) 168 CA3d 818
6 Garrett v. Coast and Southern Federal Savings and Loan Association (1973) 9 C3d 731
7 Calif. Civil Code §1671(d)
 Chapter 29: Other amounts due under three-day notices 293

Form 575-1

Three-Day
Notice to Pay
Rent or Quit

For example, the lump sum late charge allowed on a mortgage encumbering
an owner-occupied, single family residence (SFR) cannot exceed 6% of the
delinquent payment (principal and interest only).8 

Rent is the economic equivalent of interest as they accrue and are paid as
consideration for the use of property or money. For purposes of late charges,
delinquent rent payments need to be treated no differently than delinquent
mortgage payments. 

8 CC §2954.4(a)
294 Property Management, Sixth Edition

Late charges A late charge provision calling for interest to accrue at a predetermined
annual percentage rate on delinquent rent is not a liquidated damages
as liquidated provision. Thus, late charges are enforceable unless the rate of interest is
damages unconscionable.9

However, some landlords wrongfully view late charges as a means for

coercing tenants to pay rent on time. Thus, landlords set the late charge at
a punitive amount which is far greater than the out-of-pocket losses they
incurred in time, effort and money. An excessive amount constitutes a
penalty assessment and is unenforceable. 

A late charge provision calling for a lump sum dollar amount is classified
as a liquidated damages provision. The charge is a one-time, predetermined
fixed amount. It is intended by its nature to reimburse the landlord for the
delay in receipt of the rent money and the costs and effort spent to collect the
delinquent amount.10

Thus, a lump sum late charge provision in a commercial lease agreement

is valid unless the tenant can show the amount of the late charge is an
unreasonable reimbursement for the delay in receipt of the rent and costs of
collection efforts.11 

A late charge is unenforceable if the charge is so great in comparison to actual

losses that it imposes a penalty on the tenant for their late rent payment to
the extent the late charge becomes a windfall profit for the landlord.12 

In a lease agreement for single-user property encumbered by a mortgage,

an appropriate late charge for the tenant is equal to the amount of the late
charge imposed on the landlord from their mortgage lender. The landlord is
simply “passing through” the loss incurred by late receipt of the tenant’s rent
payment. 

However, in a residential lease agreement, a late charge provision setting a

fixed amount is void unless the losses suffered by the landlord due to late
payment are impracticable to calculate.13

Editor’s note — Determining money losses suffered due to late payments

in any real estate transaction, especially in a residential lease, is not
impracticable. A landlord may calculate this by accounting for known costs
incurred due to collection efforts and lost use of the funds until received. 

Imposing the A late charge is not automatically due and payable by the tenant when the
landlord fails to receive the rent payment within the grace period. 
late charge 
On the failure of a landlord to receive a rent payment prior to its delinquency,
the landlord needs to make a written demand on the tenant for payment
of the late charge if they intend to enforce collection of the late charge. The
demand includes the amount due and the date for its payment. 
9 Canal-Randolph Anaheim, Inc., supra
10 CC §1951.5
11 CC §1671(b)
12 Garrett, supra
13 CC §1671(d)
 Chapter 29: Other amounts due under three-day notices 295

Thus, a written billing demanding payment of the late charge with the next late charge notice
month’s rent is delivered to the tenant to ensure the late charge agreed to is A landlord’s written
imposed. This is called a late charge notice. [See RPI Form 568]  notice demanding
payment of a late
charge on a delinquent
The late charge notice advises the tenant the landlord is entitled to enforce rent payment. [See
collection of the unpaid late charge by:  RPI Form 586]

•  deducting the unpaid late charge amount from the tenant’s security
deposit; or 
•  filing a small claims or municipal court action for unpaid late charge
amounts. 

Recall that a landlord has only one year from the date of the delinquency to Too late to
serve a three-day notice to collect delinquent rent due and unpaid.14 
collect
As an alternative to seeking a recovery of money in a UD action with its one-
year limitation, the landlord may file a separate money action within four
years of the breach to collect unpaid late charges, returned check handling
charges and any other amounts due under the rental or lease agreement.15 

Ultimately, the landlord may deduct properly demanded late charges from
the tenant’s security deposit as payment of unpaid amounts due the landlord
under the rental or lease agreement.16 

The Canal-Randolph Anaheim, Inc. case clarified a landlord’s right to The UD court
include any money sums due and unpaid under the lease as an amount due
in the three-day notice.  problem 
Also, existing statutes do not forbid (or limit) the collection of a late charge in
a rental or lease agreement. However, cases do limit the charge to an amount
reasonably calculated to cover the losses inflicted by late payment.17 

Despite the holding of Canal-Randolph Anaheim, Inc., some trial judges

in UD actions declare late charges are not rent for purposes of enforcing
residential rental and lease agreements. Thus, the delinquency of a late
charge payment previously demanded is not properly included in their
courtrooms as an amount due the landlord to be collected by use of a three-
day notice to pay or quit.18

These judges hold a late charge or bad check charge cannot be included in the
three-day notice as part of the amount due. If included, the demand bars an
eviction before those judges. 

14 CCP §1161(2)
15 CCP §337
16 CC §§1950.5(b)(1); 1950.7(c)
17 Garrett, supra
18 CCP §1161(2)
296 Property Management, Sixth Edition

Varying Before a landlord or a property manager includes any late charge (or other
amounts due besides amounts stated in rental or lease agreements as base
approaches  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 the inclusion of late charges in the three-day notice and UD action. 

Judges in UD actions on residential rental or lease agreements vary in their

approach to late charges: 
•  some allow masked late charges built into the scheduled monthly rent
and cloaked as a forgiveness of 6% to 10% of the stated rent if paid on or
before the due date or within a grace period; 
•  some allow a late charge of up to 6% of the delinquent rent as a
reasonable charge; 
•  some disallow fixed-sum late charges as an unenforceable penalty for
being delinquent; 
•  some disallow late charges as a forfeiture of money (since the amount
exceeds the costs of collection); and 
•  some just disallow late charges altogether as an exercise of their
discretion. 
Information on the treatment given by the local UD trial judge can be
obtained from an attorney or other landlords who have experience appearing
before the judge.

If the judge will not allow the late charge as part of the amount due from
the tenant, the landlord needs to leave it out of the three-day notice. Instead,
the landlord’s best practice is to either deduct the late charge they have
demanded from the security deposit or pursue collection in a separate action
for money. Both of these remedies avoid the issue of whether late charges
or bounced check charges are proper in the three-day notice for residential
tenants.

The landlord needs to inquire into the local judge’s behavior to eliminate the
risk of getting an erroneous judicial determination that late charges or other
monetary amounts due were improperly included in the three-day notice.
Such a judgment will result in a denial of the eviction, requiring a new three-
day notice and UD process without the late charge or an appeal. 

Public policy An obvious solution to the inconsistent rules applied to late charges is public
policy legislation defining the nature of late charges and acceptable limits
legislation on time and amounts for recovery of the cost of collecting delinquent rent.
This would provide guidance for all involved in the UD process. 
to set
acceptable Late charges for rent are best treated like late charges on mortgages. Both serve
the same economic function — recovery of costs incurred due to the delayed
limits receipt of funds and resulting collection efforts. The number of homeowners
with mortgage payments is almost equal to the number of renters with rental
 Chapter 29: Other amounts due under three-day notices 297

payments in California. Both mortgage payments and rental payments are public policy
part of the cost of occupancy and entitled to equivalent legislative controls A system of laws
maintained by
over residential mortgage lenders and residential landlords.  local, state or federal
government for the
conduct of its people.

Editor’s note – Additional COVID-19-related eviction protections

may apply under the Tenant Protection Act of 2019 and the Tenant,
Homeowner, and Small Landlord Relief and Stabilization Act of 2020.
For more on this recent legislation, see the first tuesday journal at
journal.firsttuesday.us.

A rent payment becomes delinquent the day after the grace period runs. Chapter 29
The delinquency triggers the landlord’s right to demand payment of an
agreed-to late charge. But alone, a late charge (or bounced check charge) Summary
is a minor breach and will not independently support an unlawful
detainer (UD) action.
To be enforceable, late charges need to be reasonably related to:
•  the actual costs of collecting the delinquent rent (the time and
effort involved); and
•  the delay in its receipt (loss of use, such as interest).
The landlord on failure to timely receive a rent payment makes a written
demand on the tenant for payment of the late charge and includes the
date when the charge is payable. If the amount of the late charge is
significantly greater than the landlord’s actual out-of-pocket losses, the
late charge is unenforceable as a penalty.
Some trial judges hold late charges are not properly included as an
amount due residential landlords to be collected by use of a three-day
notice to pay or quit. If included, the demand bars an eviction before
those judges.
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 landlord needs to determine if the judge
presiding over UD actions in their jurisdiction allows for collection of
late charges in a UD action.

late charge notice......................................................................... pg. 295 Chapter 29

late payment clause..................................................................... pg. 289
public policy.................................................................................. pg. 297
Key Terms

Quiz 7 Covering Chapters 25-29 is located on page 649.

 Chapter 30: Notices to vacate 299

Chapter
30
Notices to vacate

After reading this chapter, you will be able to: Learning

•  determine the correct use of a notice to vacate by landlords and
tenants to terminate periodic month-to-month tenancies;
Objectives
•  differentiate the circumstances for the use of a 30- or 60-day notice
to vacate from those for the use of a three-day notices to quit on a
breach;
•  apply the requirement of a Section 8 landlord for good cause
when using a 30-day notice to vacate to terminate a tenancy; and
•  manage service for an owner-by-foreclosure of a 90-day notice to
vacate on holdover residential tenants.

bona fide lease agreement owner-by-foreclosure Key Terms

cancellation provision Section 8 housing
notice to vacate

A landlord enters into a lease agreement granting the tenant the right to Termination
use and occupy a single family residential property. The lease agreement
obligates the tenant to maintain the property’s landscaping as a condition of of periodic
the right of possession granted.  tenancies 
The landlord receives complaints from surrounding property owners
regarding the tenant’s behavior. A high number of visitors arrive at the
property late at night producing excessive noise. On more than one occasion,
the police have responded to calls from neighbors regarding the noise. Also,
the city ordinance compliance department has given notice for the removal
of disabled vehicles from the property.
300 Property Management, Sixth Edition

On a drive-by inspection, the landlord discovers the landscaping and lawn

have deteriorated since the tenant has not kept them watered.

The landlord decides to require the tenant to vacate the property although
the tenant consistently pays the rent on time and several months remain on
the lease. The tenant’s interference with their neighbors’ use and enjoyment
of their property is a nuisance and the failure to maintain the leased premises
is waste. Both a nuisance and waste are events automatically terminating
the tenant’s right of possession. 

notice to vacate
The landlord prepares and serves the tenant with a 30-day notice to vacate
A written document to avoid stating their reasons for terminating the tenancy.1 [See Form 569
used by a tenant or a accompanying this chapter] 
landlord to terminate
a periodic tenancy.
[See RPI Form 569 and The tenant remains in occupancy of the premises after the 30-day notice
569-1] expires and tenders the next rent payment on time. The landlord refuses to
accept the rent payment and files an unlawful detainer (UD) action to evict
the tenant.

Can the landlord, subject to an unexpired lease that the tenant has breached,
evict the tenant from the premises with a 30-day notice to vacate? 

No! When the tenant occupies the property under an unexpired lease, a notice
to vacate does not terminate the tenant’s right to possession as required to
maintain a UD action. Here, the landlord needed to use a three-day notice
to quit. The tenancy was already terminated by statute due to the separate
issues of nuisance and waste. Thus, the three-day notice to quit is merely
required to evict in a UD action.

A residential or commercial notice to vacate is only effective when used by a

landlord or tenant to terminate a periodic tenancy, such as a month-to-month
tenancy or one created by a continuing occupancy after a lease expires.

Remember that a notice to quit is used when the tenant has materially
Notice to quit breached a rental or lease agreement and the landlord uses the breach to
versus notice terminate the lease by a declaration of forfeiture or a statutory forfeiture
forcing the tenant to vacate or be evicted in a UD action. A notice to vacate
to vacate is used to terminate a rental agreement and interfere with the automatic
renewal of the periodic tenancy when a breach of the rental agreement has
not occurred or is not an issue. Exceptions to terminating residential tenancies
exist in rent control, Section 8 and occupancies subject to foreclosure sales.

cancellation A cancellation provision is occasionally included in a residential

provision or commercial lease agreement by negotiations to allow the tenant to
A lease agreement
provision permitting
terminate their occupancy and vacate prematurely on notice to the landlord
the tenant to terminate accompanied by payment of a set sum of money.
their occupancy
and rent obligation
by paying a set sum of
money.

1 Calif. Civil Code §1946

 Chapter 30: Notices to vacate 301

Form 569

30-Day Notice
to Vacate

Unlike the extension of a lease which needs to be agreed to, the 30-day rental Periodic
period under a month-to-month rental agreement (or for any other period,
whether residential or commercial) is automatically extended for the same tenancies
period and on the same terms. [See Forms 569 and 572]
extended/
To interfere with the automatic extension of a periodic tenancy and by the terminated
same act terminate the right to occupancy, either the tenant or the landlord
hand the other a notice to vacate. However, to terminate the tenancy of a
residential tenant who has resided on the property for one year or more,
residential landlords are required to give the tenant a 60-day notice to vacate,
not the 30-day notice to vacate commonly used.2 [See Form 569-1]
2 CC §1946.1
302 Property Management, Sixth Edition

Form 569-1

60-Day Notice
to Vacate

A 30-day notice to vacate on a month-to-month tenancy, whether given by

the tenant or the landlord, establishes a tenant’s unlawful detainer (UD) of
the property when it expires and the tenant remains in possession.3

If the notice to vacate expires and the tenant has not vacated, the landlord
may file a UD action to evict the month-to-month tenant without further
notice.4

3 Palmer v. Zeis (1944) 65 CA2d Supp. 859 

4 Code of Civil Procedure §1161(5) 
 Chapter 30: Notices to vacate 303

Consider a tenant who enters into a one-year lease of a unit in a residential Lease
building. On expiration of the lease, the tenant remains in possession,
becoming a holdover tenant unlawfully detaining the premises. However, transformed
the tenant continues to pay rent monthly which the landlord accepts. 
into a
Later, the residential landlord serves the tenant with a 60-day notice to vacate periodic
the property. The notice period expires but the tenant remains in possession.
The landlord files a UD action to evict the tenant.  tenancy
The tenant claims they cannot be evicted based on a 60-day notice to vacate.
They hold possession of the unit under a lease agreement. The tenant asserts
the lease which had expired was automatically extended for the same period
as the term of the original lease when the landlord accepted rent after the
lease expired. 

Here, the 60-day notice to vacate is effective to terminate possession and the
tenant can be evicted when they holdover on expiration of the notice. The
landlord’s acceptance of monthly rent after the lease expired establishes a
month-to-month tenancy on the same conditions for use and occupancy
stated in the lease agreement. The tenant under a lease agreement who
does not hold an option to extend the lease and continues in possession
and pay rent which is accepted by the landlord transforms the lease into a
rental agreement on the same terms, except as a periodic tenancy for the rent
payment period.5  

A landlord, residential or commercial, terminates a month-to-month

tenancy by preparing and serving the tenant with a 30-day notice to vacate,
Landlord’s
unless exceptions to this rule control the tenancy. However, when a tenant intent for
materially breaches a rental or lease agreement, the landlord uses the
appropriate three-day notice to quit to terminate the tenancy. [See RPI Form
a tenant to
571; see Form 579 in Chapter 6]  vacate
A notice to vacate form (as distinguished from a notice to quit) used by a
landlord contains: 
•  the name of the tenant; 
•  the address of the premises; 
•  a reference to the rental agreement or expired lease; 
•  a statement that the unit needs to be vacant within the applicable
number of days (30 or 60) after service of the notice; 
•  the dollar amount of pro rata rent to be paid when rent is next due; 
•  a statement regarding the security deposit and its disposition;
•  a statement informing the tenant of their right to request a joint
pre-expiration inspection of the premises so they may act to avoid
deductions from their security deposit; and
•  a statement notifying residential tenants of their right to reclaim
abandoned personal property. [See Chapter 33]

5 CC §1945
 304 Property Management, Sixth Edition

Notices to vacate do not include declarations of forfeiture since a breach is

not involved allowing for three days to require the tenant to vacate. When
the notice expires, the tenancy automatically terminates since the tenant no
longer holds an estate in the property. The content of the landlord’s notice to
vacate eliminates any confusion over the amount of rent to be paid for the
remaining term of the tenancy. [See RPI Form 571 §4] 

A tenant, residential or commercial, who intends to vacate and avoid further

Tenant’s liability under a month-to-month rental agreement serves the landlord with
intent to a 30-day advance notice the tenant is vacating. The notice may be in the
form of a letter personally delivered to the landlord or their agent, or sent by
vacate  certified or registered mail.6  

The tenant and landlord are best served by the landlord handing the tenant
a blank 30-day notice to vacate form when entering into a rental agreement,
but not when entering into a lease agreement. The tenant will then have the
correct paperwork to complete and deliver documentation to the landlord or
property manager. Use of a form lends certainty to the tenant’s understanding
of a critical event. [See Form 572]

A 30-day notice used by a tenant to advise the landlord they intend to vacate
Tenant acknowledges: 
acknowledgement •  the tenancy is terminated on expiration of 30 days after service of the
notice on the landlord or the manager; 
•  the tenant intends to pay pro rata rent; 
•  the amount of the security deposit;
•  the tenant’s right to request a joint pre-expiration inspection and receive
an itemized statement of maintenance and cleaning deficiencies for
any potential deductions from the security deposit;  
•  a security deposit statement and refund based on any deductions for
cleaning and repairs on a final review of the premises by the landlord
or property manager; and 
•  the landlord’s right to show the premises to a prospective tenant on 24
hour notice. 
If a tenant serves the landlord or property manager with a 30-day notice to
vacate, but fails to vacate the residence after expiration of the notice, they
become a holdover tenant unlawfully in possession. The tenancy has been
terminated by the tenant’s notice and with it the right to occupancy. The
landlord may immediately file a UD action to evict the tenant. No further
notice to quit is required since the tenancy has already been terminated.

6 CC §1946
 Chapter 30: Notices to vacate 305

A notice to vacate may be served at any time during the month.  Service of
However, a commercial landlord and tenant may agree in a rental agreement the notice to
that the 30-day notice to vacate may not be served during the last seven days
of the month. In contrast, service of a notice to vacate can occur at any time vacate
in a residential periodic tenancy.7

To be effective in commercial tenancies, the notice to vacate from a tenant or

landlord needs to be served: 
•  in the same manner as a three-day notice (in person, by substitution or
ultimately post and mail); or 
•  by certified or registered mail, methods of service not available for
three-day notices to quit.8  
The date of service is the date the notice, attempted in the following priorities,
is: 
•  personally served; 
•  handed to a person of suitable age and discretion at either the residence
of the tenant or the tenant’s place of business; or 
•  posted in a conspicuous place on the leased premises and mailed by
certified or registered mail. 
The minimum period within which the tenant is to vacate begins to run the
day after the date of service, which is day one of the 30- or 60-day period.9 

If the day for expiration of the notice is a Saturday, Sunday or a federal

holiday, the tenant is not required to vacate until the next business day.10

Most properly completed notice to vacate forms give a specific date by which
the tenant needs to vacate, on or before at least 30 days after service of the
notice. The day is not left to chance when filling out the notice and, as a
practical matter, not set as a weekend day or holiday. 

When a residential rental property is located in a rent control community,

the landlord has less discretion to terminate tenancies and evict tenants with
Rent control
a notice to vacate.  limitations on
Typically, the termination of a tenancy and evictions are allowed in rent eviction
control communities when: 
•  the tenant fails to pay rent or otherwise materially breaches the lease
agreement; 
•  the tenant creates a nuisance; 
•  the tenant refuses to renew a lease; 
•  the tenant uses the residence for an illegal purpose; or 

7 CC §1946
8 CC §1946
9 CC §10
10 CCP §12a 
306 Property Management, Sixth Edition

•  the landlord or a relative will occupy the unit. 

A landlord and their property manager of a property subject to residential
rent control need to be aware of local restrictions placed on landlords for the
eviction of tenants. 

Good reason Generally, a landlord is not required to state their reasons for terminating
the occupancy in a notice to vacate, or even have good cause for evicting a
to evict month-to-month tenant.11
exception Exceptions exist. If a tenant’s unit is subject to rent control, the landlord needs
to state a good cause for terminating the tenancy.

Likewise, when a tenant’s rent is subsidized by the Department of Housing

Section 8 housing and Urban Development’s (HUD) Section 8 housing program, the landlord
A government housing
program for low will state their good cause in the 30-day notice to vacate as the reason for the
income households termination. Good cause includes:
which provides
qualifying tenants •  the tenant’s material noncompliance with the rental agreement;
with rent subsidies and
minimum habitability •  the tenant’s material failure to carry out their obligations under any
standards. state or local landlord and tenant act;
•  criminal activity conducted by the tenant on the premises that
threatens the health, safety, or right to peaceful enjoyment of the
premises by other tenants; or
•  other good cause.12

Material Material noncompliance includes:

•  one or more substantial violations of the lease agreement;
noncompliance
•  repeated minor violations of the lease agreement, such as violations
which disrupt the livability of the project or interfere with the
management of the project;
•  failure to timely supply required income and eligibility information
to the landlord or knowingly providing incomplete or inaccurate
information; and
•  failure to pay rent or any other financial obligation due under the lease
agreement beyond any grace period.
The tenant is given notice of the landlord’s good cause so they can
prepare any defense they may have to avoid eviction.13

Recall that a material breach of a rental agreement is handled by a

three-day notice to quit, not a notice to vacate which is used when
no tenant breach exists. However, to terminate a tenancy for Section
8 housing, a landlord provides the tenant with a separate notice identifying
the inappropriate conduct of the tenant which is the basis for “good cause” to
terminate the occupancy.14
11 CC §1946 
12 24 Code of Federal Regulations §247.3(b)
13 Mitchell v. Poole (1988) 203 CA3d Supp. 1
14 24 CFR §247.3(b)
 Chapter 30: Notices to vacate 307

Whether or not a landlord provides good cause for terminating a tenancy, a

landlord may not evict a tenant for a wrong reason. The landlord terminating
a tenancy for the wrong reason may find they are not only unable to evict
the tenant, but defending against the tenant’s claim the eviction is: 
•  retaliation for the tenant making official complaints about the property
or against the landlord; 
•  based on discriminatory reasons, such as the tenant’s ethnicity or
marital status; or 
•  improper because of the landlord’s failure to maintain the property in
a habitable condition. 

The owner of a residential income property is in default on a mortgage secured

by a trust deed encumbering the property. While the owner is in negotiations
Residential
with the lender to modify the mortgage’s payment schedule and cure the foreclosure
default, they enter into a two-year lease agreement with a tenant, who takes
possession of the property.
and
continuing
Shortly after the residential tenant takes possession, negotiations with the
lender break down. The lender records a notice of default (NOD), commencing possession
a trustee’s foreclosure on the property. The property is sold at a trustee’s sale.
The high bidder takes title to the property as the new owner-by-foreclosure. owner-by-
foreclosure
Editor’s note — A notice of sale is to be posted with the notice of trustee’s The winning bidder
at a trustee’s sale
sale on a residential property in foreclosure. The notice of sale notifies who takes title to the
any occupant of the premises, including tenants, of the potential effect of property sold by a
trustee’s deed.
a trustee’s sale on the tenants’ right of possession and underlying rental or
lease agreement. This notice needs to be mailed to all occupants in possession
of the property in foreclosure.15 [See RPI Form 474-1]

The owner-by-foreclosure is a speculator who intends to fix up the property

and resell it for a profit. The owner-by-foreclosure has read state law controlling
the rights of tenants in possession at the time of the trustee’s sale and knows
the tenant’s leasehold interest in the property has been eliminated by the
foreclosure sale. They believe they can terminate the tenancy (at sufferance)
rights held by the tenant by serving the tenant with a 60-day notice to vacate
due to the foreclosure sale. [See Form 569-1]

The real estate agent hired by the owner-by-foreclosure to handle the resale
marketing of the property advises the owner-by-foreclosure to serve the
tenant with a 90-day notice to vacate under federal rules since:
•  the owner-by-foreclosure acquired the residential property through a
trustee’s sale;
•  the owner-by-foreclosure’s resale of the property will be to a buyer
who will occupy the property as their primary residence; and
•  the sale needs to be set to close on or after the 90-day notice expires.

15 CC §2924.8
308 Property Management, Sixth Edition

The owner-by-foreclosure ignores their agent’s advice and serves the tenant
with the 60-day notice to vacate as required by state law for evictions of
residential tenants in possession one year or more.16

60 days pass following the service of the notice on the tenant, but the tenant
remains in possession. Can the owner-by-foreclosure file a UD action and
obtain a court order to evict the tenant?

No! An owner-by-foreclosure of a residential property is required to serve

a bona fide tenant occupying the property at the time of the foreclosure
sale with at least 90 days’ notice before the tenant’s right of possession is
terminated. [See RPI Form 573 and 573-1]

An owner-by-foreclosure acquiring tenant-occupied residential property

The requisite at a trustee’s sale for investment purposes terminates the tenant’s right to
90-day notice continued occupancy by serving the tenant with a 90-day notice to vacate.
This rule expires December 31, 2019, unless extended by legislation.17 [See
to vacate RPI Form 573 and 573-1]

However, an owner-by-foreclosure may not use a 90-day notice to vacate to

avoid:
bona fide lease •  a bona fide lease agreement held by the existing tenant, entered
agreement
A lease agreement
into prior to the foreclosing lender recording the NOD, granting the
with a fair market rent tenant the right of possession for a period running beyond the 90-day
held by a residential notice period;
tenant when
ownership of the •  an existing Section 8 or state housing assistance payment contract
property is transferred which subsidizes the tenant’s rent; or
by a foreclosure sale.
[See RPI Form 550] •  local or state rent control ordinances or codes that provide the
residential tenant with a greater time period for occupancy or other
tenant benefits such as relocation money.18
A bona fide lease agreement is one entered into by a tenant and the prior
owner in which:
•  the tenancy granted was negotiated as an arm’s length lease agreement,
meaning the tenant is not a parent, spouse or child of the prior owner;
and
•  the lease agreement calls for payment of a fair market rent at the time
entered into.

16 Calif. Code of Civil Procedure 1161b(a)

17 CCP §§1161a,1161b
18 CCP §1161b
 Chapter 30: Notices to vacate 309

A tenant enters into a lease agreement and takes possession of a residential unit Case in point
created by the conversion of a garage. The owner defaults on a mortgage encumbering
the property. The lender forecloses and takes title to the property by a trustee’s deed. Owner-by-
The lender, as the new owner-by-foreclosure managing the property as REO inventory, foreclosure:
serves a 90-day notice to vacate by posting the notice on the door of the main house. an involuntary
A notice to vacate is not served on the tenant in the converted garage by personal landlord
or substitute service. Prior to the expiration of the lease held by the tenant of the
converted garage, the tenant is denied access to the property by a new occupant of
the main house.
The tenant seeks to recover their money losses from the REO lender, claiming the lender
failed to prevent the interference of the tenant’s right to occupy the converted garage
for the remainder of the lease term since the lease agreement was entered into prior
to the foreclosure sale and remains enforceable after foreclosure for lack of a notice to
vacate under the Protecting Tenants Against Foreclosure Act (PTFA).
The lender claims they have no liability exposure for interference of the tenant’s
possession of the property since the lender fulfilled its PTFA obligations by posting a
90-day notice to vacate on the main building of the property containing the converted
garage.
A California court of appeals held the lender, as the owner-by-foreclosure, was liable
for the existing residential tenant’s money losses due to the lender’s failure to protect
the tenant from third party interference with the tenant’s use of the property since
the lease agreement entered into by the tenant prior to the foreclosure sale remained
enforceable. [Nativi v. Deutsche Bank National Trust Company (2014) 223 CA4th 261]
On acquiring a property at a foreclosure sale, the successful high bidder, whether the
mortgage lender or a third-party, serves existing tenants with a 90-day notice to quit
due to foreclosure if they intend to force the tenants to vacate. [See RPI Form 573]
In addition to the 90-day notice to vacate requirements, the owner-by-foreclosure also
steps into the position of the landlord under the rental or lease agreements entered
into by the prior owner. With the original landlord out of the picture, it is the owner-by-
foreclosure who needs to manage and maintain the rental property for the occupancy
of the preexisting tenants.

Consider an owner-by-foreclosure who is an investor that plans to resell a

single family residential property they acquired. A residential tenant is in
Existing
possession of the property having taken possession before the trustee’s sale leases and
by entering into a lease agreement. The tenant’s lease agreement expires
within three months after the trustee’s sale.
the buyer-
occupant
The owner-by-foreclosure serves the tenant with the required 90-day notice
to vacate to terminate their right of possession. If the tenant does not vacate exception
upon expiration of the 90-day notice, the owner-by-foreclosure may evict the
tenant in a UD action.19

Now consider the same scenario, except the tenant has another six-month
term remaining on their lease following the day of the trustee’s sale. Here,
the tenant may remain in possession of the property until the lease term
expires or is terminated due to a tenant default.
19 CCP §1161b
310 Property Management, Sixth Edition

However, if this owner-by-foreclosure resells the property to a buyer who

will occupy the property as their primary residence, the tenant’s lease may
be terminated by the service and expiration of a 90-day notice to vacate.20

Additionally, if the lease agreement is the subject of the Section 8 voucher

program and was entered into prior to the trustee’s sale, the tenant may
enforce the lease agreement and require the owner-by-foreclosure to honor
the Section 8 voucher program until the lease expires.21

Bona fide Consider an owner-by-foreclosure who acquires a property subject to a

residential lease agreement at a fair rent entered into with the prior owner
residential before title is transferred at the trustee’s sale. The lease expires 45 days after
tenants and the date of the trustee’s sale.

the 90-day On expiration of the lease agreement, the owner-by-foreclosure demands

the tenant vacate since the lease has expired. The tenant refuses, claiming
notice the owner-by-foreclosure needs to serve the tenant with a 90-day notice to
vacate to terminate their right of possession.

May the owner-by-foreclosure file a UD action and succeed in evicting the

tenant since the tenant’s lease expired after the trustee’s sale?

No! All bona fide residential tenants at the time of the foreclosure sale are
entitled to remain in possession of their dwelling unit until the expirations
of a 90-day notice served on them by the owner, unless a longer period of
possession is provided for under:
•  an existing lease;
•  a Section 8 voucher program entered into prior to the trustee’s sale; or
•  local rent control ordinances or state law.22
The 90-day period applies whether their tenancy was:
•  a month-to-month rental agreement;
•  an expired lease agreement;
•  a tenancy at will; or
•  a lease agreement.23

A notice to A residential tenant who has been, or whose family member has been, the
victim of sexual assault, stalking, domestic violence or elder abuse may
vacate due terminate their tenancy by delivering to their landlord a written 30-day
to domestic notice to vacate with an attached copy of one of the following documents
relating to the sexual assault, stalking, or domestic violence:
violence •  a temporary restraining order;
•  an emergency protective order; or
20 CCP §1161b
21 CCP §1161b
22 Pub Law 111-22 §702(a)(2)(B); Pub L 111-22 §703 (2)
23 Pub L 111-22 §702 (a)(1)(2)(B)
 Chapter 30: Notices to vacate 311

•  a police report.24
The notice to vacate needs to be delivered to the landlord within 180 days of
the date the corroborating document was issued. Rent is owed for the 30-day
period after delivery of the written notice to vacate. On expiration of the 30-
day period, the tenant cannot be penalized for ceasing to pay rent.

If the tenant quits the premises within 30 days after delivering the notice
to vacate and the premises is rented to another party who takes possession
within the 30 day period, the rent due for that period is prorated.

No tenants other than the victim and any family members living in
the household are relieved of their obligations under the rental or lease
agreement.

24 CC §1946.7

A residential or commercial 30-day notice to vacate is used by a landlord Chapter 30

or tenant to terminate a periodic tenancy, such as a month-to-month
tenancy or a continuing occupancy after a lease expires. Summary
However, a 60-day notice to vacate is used if the property is residential
and the tenant has occupied the premises for one year or more.

If the tenant materially breaches the rental agreement, a landlord may

use a three-day notice to quit to terminate the tenancy.

A tenant, residential or commercial, who intends to vacate and avoid

further liability under a month-to-month rental agreement needs to
give 30 days’ advance notice to the landlord.

Generally, a landlord is not required to state their reasons in a notice to

vacate, or even have good cause for evicting a month-to-month tenant.
However, if the tenant’s rent is subsidized by the Department of Housing
and Urban Development’s (HUD) Section 8 housing program, the
landlord needs to set forth good cause as the reason for the termination
in the 30-day notice to vacate.

An owner-by-foreclosure of a residential property is required to serve a

bona fide tenant occupying the property at the time of the foreclosure
sale with at least 90 days’ notice before the tenant’s right of possession
is terminated.
312 Property Management, Sixth Edition

Chapter 30 bona fide lease agreement......................................................... pg. 308

cancellation provision................................................................ pg. 300
Key Terms notice to vacate............................................................................. pg. 300
owner-by-foreclosure.................................................................. pg. 307
Section 8 housing......................................................................... pg. 306

Quiz 7 Covering Chapters 30-33 is located on page 651.

 Chapter 31: Surrender cancels the lease agreement 313

Chapter
31
Surrender cancels the
lease agreement

After reading this chapter, you will be able to: Learning

•  identify a surrender as a cancellation of the lease agreement by Objectives
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.

early-termination fee surrender Key Terms

Before a commercial lease expires, consider a tenant who closes out their
business operations and vacates the premises, paying no further rent. The
Lost ability
landlord serves the tenant with a three-day notice to pay rent or quit. [See to recover
Form 575 in Chapter 25] 
future rents 
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 
314 Property Management, Sixth 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

Surrender 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. 
surrender
A mutual cancellation
The landlord’s affirmative response to the tenant’s letter foregoing future
of a lease agreement rents released the tenant from further liability on the lease agreement. The
by the landlord and landlord’s conduct constituted acceptance of the tenant’s offer to cancel the
the tenant, written or
by their conduct, when lease agreement obligations.
the tenant vacates the
leased premises. [See Editor’s note — The declaration of forfeiture did reserve the landlord’s right
RPI Form 587] 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 commercial lease agreement before the

A lease lease expires and vacates the premises without the landlord’s service of a
agreement three-day notice to quit on the tenant. The landlord may respond by taking
possession in one of four ways:
breached
•  terminate the tenant’s right of possession and cancel the lease
and space agreement by a surrender, then take possession and relet the
vacated 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
 Chapter 31: Surrender cancels the lease agreement 315

take possession and relet the premises to mitigate losses before making
a demand for payment of future rents [See Chapter 24; see RPI 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 49]
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 24]

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 RPI Form 552 §2.4]

The Termination of Lease and Surrender Agreement by RPI provides

the writing used to mutually terminate a lease agreement and release the
Termination
tenant and landlord from any further obligations and liability under the of Lease and
lease agreement. [See Form 587]
Surrender
Lease termination and surrender agreement provisions include: Agreement
•  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)
316 Property Management, Sixth Edition

Form 587

Termination
of Lease and
Surrender
Agreement

•  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]
 Chapter 31: Surrender cancels the lease agreement 317

Consider a tenant who makes a written offer to surrender the leased premises Surrender
to the landlord. 
by mutual
The landlord believes a new tenant, who will pay more rent for the space
than the current tenant, can be quickly located.  consent
Still, the landlord demands an early-termination fee equal to three early-termination
months’ rent to cancel the lease agreement. The tenant pays the fee and fee
A fee paid to the
delivers possession, and the acceptance by the landlord cancels the lease. A landlord by the
surrender has occurred. [See Form 587 §2.2] tenant to cancel the
lease agreement in
Editor’s note — Mid-term leases sometimes contain an early-termination exchange for returning
possession. [See RPI
provision for a surrender. The provision allows the tenant to cancel the Form 587 §2.2]
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
Surrender by
tenant removes all of their personal property and returns the key to the operation of
landlord. The tenant has no intention of returning and has breached the
lease agreement by failing to pay rent. 
law
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? 
318 Property Management, Sixth Edition

Case in point 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
Surrender voluntarily vacates the property. Without serving a three-day notice to quit (or a notice
on failure of abandonment) and terminating the tenant’s right to possession, the landlord takes
to declare a possession and relets the premises.
forfeiture 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]

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”]

4 Dorcich v. Time Oil Co. (1951) 103 CA2d 677

 Chapter 31: Surrender cancels the lease agreement 319

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
Repossession
relet the property on the tenant’s (rather than the landlord’s) behalf. on the tenant’s
Here, the landlord omits the declaration of forfeiture from the three-day behalf
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
Inconsistent
premises, take possession and relet the premises as the tenant’s agent.  behavior
The landlord relets the premises for less rent, but for a period extending while
beyond the expiration of the tenant’s lease. The landlord notifies the tenant
they have relet the premises on the tenant’s behalf. 
reletting
on tenant’s
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 behalf
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. 
320 Property Management, Sixth 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 

Maintenance 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
to prevent premises while attempting to relet the premises. 
waste 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 RPI 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
 Chapter 31: Surrender cancels the lease agreement 321

A surrender occurs when: Chapter 31

•  a tenant breaches a lease or rental agreement and vacates or
intends to vacate the premises; and
Summary
•  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 fee.................................................................. pg. 317

Chapter 31
surrender......................................................................................... pg. 314
Key Terms

Quiz 8 Covering Chapters 30-33 is located on page 651.

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 Chapter 32: Notice of belief of abandonment 323

Chapter

32
Notice of belief of
abandonment

After reading this chapter, you will be able to: Learning

•  analyze whether the tenant’s conduct constitutes an abandonment
of the premises;
Objectives
•  determine whether an abandonment is the best method for
terminating the tenancy; and
•  initiate the procedure necessary to terminate the tenant’s right to
possession.

abandonment surrender Key Terms

notice of right to reclaim tenant-mitigation
personal property provision

A tenant who is delinquent in rent payments due under their lease An alternative
agreement has vacated the premises. The tenant has not been served a notice
to quit. Here, the landlord may respond in one of several ways to terminate forfeiture
the tenancy and retake possession.
surrender
A mutual cancellation
The landlord may treat the tenant’s right to possession as terminated and the of a lease agreement
lease agreement as canceled. This is known as a surrender. by the landlord and
the tenant, written or
Alternatively, the landlord may treat the tenant’s right to possession as by their conduct, when
the tenant vacates the
terminated by serving a three-day notice to pay or quit which contains leased premises. [See
a declaration of forfeiture of the right of possession, or serving an RPI Form 587]
abandonment notice. After serving either of these notices, the landlord
may enforce the tenant’s financial obligations for rent and other amounts abandonment
due under the lease agreement. A unilateral
termination of a
tenancy by forfeiture,
delivered by the
landlord based on
notices from the
landlord. [See RPI
Form 581]
324 Property Management, Sixth Edition

The landlord may also take possession without terminating the tenant’s
leasehold interest by serving notice on the tenant stating the landlord is
acting as the tenant’s agent to relet the property.

Another option remaining for the landlord is to treat the lease as continuing if
the lease agreement contains a statutory tenant-mitigation provision. Under
this provision and treatment, the landlord may recover rent as it becomes
due without repossessing or reletting the property.1

Statutory The abandonment rules, like surrender rules, apply to both residential
and commercial property. The commonality between surrender and
abandonment abandonment is the tenant’s breach of the lease and vacating of the premises.
notice They differ, however, on the methods for terminating the tenant’s right to
possession and handling the landlord’s rights under the lease agreement
regarding the collection of future rent. A surrender is a mutual termination
agreed to by tenant and landlord, while an abandonment is a unilateral
termination by forfeiture based on notices from the landlord.

Further, abandonment is to be distinguished from a three-day notice

containing a forfeiture declaration. Both methods retain the landlord’s
rights to enforce collection of future rents under the lease agreement while
terminating the tenant’s right to retake possession. However, their differences
are in the time that needs to pass after serving the notices until the landlord
may retake possession.

An abandonment may be noticed and carried out when a tenant:

•  voluntarily vacates the leased premises with no intention to reoccupy;
and
•  fails to pay rent with no intention to further perform their obligations
on the lease agreement.
However, a tenant does not terminate their lease agreement, nullifying its
enforcement, by breaching the lease and vacating the premises. The landlord
may terminate the tenant’s leasehold right to possession in response to
the breach and vacating of the property, permitting the landlord to retake
possession.

For the landlord to proceed with the abandonment process, they are to first
confirm the tenant’s intent to abandon the property and terminate their
right to possession. The tenant’s intent is confirmed by the landlord serving
a statutory abandonment notice on the tenant. [See Form 581 accompanying
this chapter]

A Notice of Belief of Abandonment may be served on a tenant only if:

Notice of
•  the tenant has vacated the premises;
Belief of
Abandonment
1 Calif. Civil Code §1951.4
 Chapter 32: Notice of belief of abandonment 325

•  the tenant’s rent payment is due and unpaid for a period of at least 14
days prior to service of the Notice of Belief of Abandonment; and
•  the landlord reasonably believes the tenant has abandoned the
premises.2
If the tenant’s rent due on the first of the month has become delinquent,
no portion has been paid and the tenant no longer occupies the property,
the landlord may serve the notice on the 15th day of the month. Note that a
three-day notice to pay or quit will have already terminated the tenancy and
allowed the landlord to enter and take possession of the space.

The notice of abandonment may be served on the tenant by either: Service of

•  personal service; or abandonment
•  first-class mail sent to the tenant’s last known address and any other
addresses known to the landlord where the tenant might reasonably
notice
receive the notice.3
If the abandonment notice is personally served on the tenant, the tenant has
15 days after the date of service to respond before the notice expires. If the
abandonment notice is served by mail, the notice expires 18 days after the
date the notice is deposited in the mail.4

When personal service cannot be made, the service requirements for the
Notice of Belief of Abandonment are different from service requirements for
three-day notices. [See Chapter 28]

Once served, the notice of abandonment expires in 15 days unless in the

interim the tenant:
•  tenders all or partial payment of rent; or
•  rejects the abandonment in writing.
On expiration of the notice, the tenant’s right to possession is terminated if no
rejection or rents are received by the landlord.

Having terminated the tenancy by expiration of the abandonment notice,

the landlord may:
•  enter the premises to remove any personal property left behind by the
tenant and relet the premises as the landlord;5 and
•  collect past and future rents from the tenant as provided in the lease
agreement, less any rents received on reletting.6

After the tenant has been served with a notice of abandonment, the tenant
may reoccupy the premises. Reoccupying will not stop the abandonment
Tenant’s
procedure or avoid termination of the tenant’s right to possession on response
2
3
CC §1951.3(b)
CC §1951.3(c)
ends
4
5
CC §1951.3(d)
CC §1954 abandonment
6 CC §1951.2(a)
326 Property Management, Sixth Edition

expiration of the notice. Once served, further steps beyond merely reoccupying
the property need to be taken by the tenant to nullify the abandonment
procedure.7

After an abandonment notice has been served, the tenant can only disavow
an abandonment and avoid the termination of their right to possession by
doing one of the following:
•  showing the landlord cannot have justifiably believed the tenant had
abandoned the premises when the notice was served;
•  proving rent was not due prior to 14 days before service of the notice or,
if due, was not yet delinquent at the time the notice was served;
•  proving some or all of delinquent rent was received by the landlord
during the 14-day period preceding the service of the notice;
•  paying some or all of the past due rent prior to expiration of the notice;
or
•  handing a written notice to the landlord before the abandonment
notice expires stating the tenant has no intention to abandon the
premises and including an address for service on the tenant by certified
mail of an unlawful detainer (UD) action.8
Thus, when a portion or all of the delinquent rent is tendered, or a statement
of no intent to abandon is delivered to the landlord by the tenant prior to the
expiration of the abandonment notice, a UD action based on abandonment
will fail.

If the tenant reoccupies the premises after the notice is served — before or
after its expiration and without paying rent or delivering a statement of no
intent to abandon — the tenant may be evicted by a UD action on expiration
of the abandonment notice.

Concurrent Both a three-day notice to pay or quit (with forfeiture declaration) and a
notice of abandonment may be served concurrently under separate proof of
service with service statements. [See Chapter 26]
three-day Since both notices terminate the leasehold on their expiration, a tenant who
notice reoccupies or, on a commercial property tenders only a partial payment
of rent that the landlord accepts, may be dealt with quickly by filing a UD
action on expiration of the three-day notice.

However, under a UD action based on a three-day notice, the landlord needs

to prove their case for eviction.

Conversely, at a UD trial based on a notice of abandonment where the tenant

has reoccupied, the tenant needs to prove they may remain on the premises
by showing:
•  no delinquency existed when the notice was served;

7 CC §1951.3(e)
8 CC §1951.3(e)
 Chapter 32: Notice of belief of abandonment 327

•  a portion or all of the rent was paid within four weeks prior to the
expiration of the notice; or
•  they delivered the landlord a written statement of their intent to
occupy.

Tenants who vacate the leased premises occasionally leave significant Abandoned
personal property behind. When a landlord is confronted with a unit or
space vacated by the tenant, but loaded with abandoned personal property, personal
the notice of abandonment may be an efficient way to terminate the tenant’s
right to possession. Thus, the landlord may take possession on termination of
property
the tenancy without concern for claims by the tenant.

Before serving a notice of abandonment, a residential landlord may

temporarily enter the vacated premises to establish their reasonable belief
the tenant abandoned the premises.9

Even if the tenant has left personal items behind, a landlord’s observations
while inside the unit or space may lead them to reasonably believe the
premises is abandoned.10

If the landlord exercises their right to temporarily enter the unit when
a tenant appears to have abandoned it, the landlord may inventory the
personal property so it can be itemized in the abandonment notice.11

Abandoned personal property poses a problem regarding its removal (by the
landlord) and recovery (by the tenant). When personal property is left behind
Removal and
by a tenant who has vacated, the landlord is responsible for notifying the recovery
tenant of their right to reclaim the personal property.12

Notice of the tenant’s right to reclaim personal property may be included in

the notice of abandonment.13 [See Form 581] notice of right to
reclaim personal
When combined in one form, the notice of right to reclaim personal property property
A landlord’s notice
and the abandonment notice expire simultaneously. mailed to a former
tenant informing the
The combined abandonment and right to reclaim property notices are tenant of their right
appropriate when the landlord chooses to leave the tenant’s personal to reclaim or abandon
personal property
property on the premises until abandonment of the real estate and the remaining on the
personal property is established by expiration of the notices. premises. [See RPI
Form 583 and 584]
Thus, the landlord avoids moving the tenant’s belongings twice by serving
the abandonment notice, rather than by preparing both a three-day notice to
pay and a later notice to reclaim personal property.

9 CC §1954(a)
10 CC §1951.3(e)(2)
11 CC §1983
12 CC §1983
13 CC §1991
328 Property Management, Sixth Edition

On termination of the tenancy by expiration of the notice of abandonment,

the landlord is entitled to possession of the premises. The landlord may then
enter the unit to take possession, refurbish it and relet it to a new tenant
without concern for the tenant’s terminated possessory rights.14

The landlord needs to first terminate the tenant’s right to possession by a

three-day notice, 30-day notice to vacate or abandonment notice. If the
tenant’s right to possession is not first terminated, the landlord has interfered
with the leasehold estate held by the tenant to occupy the space or unit.

Thus, the landlord who does not first act to terminate the unexpired tenancy
before removing personal items or reletting the premises may find themselves
on the wrong end of a viable forcible detainer action.15

Tenant- If the tenant’s lease agreement, residential or commercial, contains a

statutory tenant-mitigation provision, the landlord may:
mitigation
•  treat the tenant’s leasehold rights to possession as continuing without
provision the landlord taking possession; and
•  enforce their landlord rights to recover rent from the tenant as it
tenant-mitigation
provision becomes due under the lease agreement.16
A provision in a
commercial lease When a residential or commercial tenant breaches their lease agreement and
agreement allowing vacates the leased premises, the tenant-mitigation remedy may be enforced
the landlord to
leave the tenant’s
when:
leasehold and the lease
agreement intact on
•  the tenant-mitigation remedy is included as a provision in the lease
the tenant’s breach, agreement; and
and then recover rent
from the tenant for •  the assignment and subletting (alienation) provision in the lease
the life of the lease agreement does not prohibit the tenant’s subletting or assignment of
without the landlord
first taking steps to
the leasehold interest.17 [See Form 596 accompanying this chapter]
mitigate losses. [See
RPI Form 552 §21.1]
The landlord may treat the leasehold and lease agreement as continuing and
recover rents as they become due if the lease agreement contains a provision
worded substantially as follows:
“The lessor has the remedy described in California Civil Code Section
1951.4 (lessor may continue lease in effect after lessee’s breach and
abandonment and recover rent as it becomes due, if lessee has right to
sublet or assign, subject only to reasonable limitations).”18

A landlord’s use of the tenant-mitigation remedy shifts the responsibility

Shift of for mitigating their losses under the lease agreement to the tenant when
responsibility the tenant vacates the premises and breaches the lease agreement. Instead
of the landlord being required to mitigate their loss of rents by reletting the
space as a requisite for qualifying to collect future rents, the tenant is to take
necessary steps to mitigate their liability to the landlord.

14 CC §1954
15 Calif. Code of Civil Procedure §1160
16 CC §1951.4
17 CC §1951.4(b)
18 CC §1951.4(a)
 Chapter 32: Notice of belief of abandonment 329

Form 581

Notice of
Belief of
Abandonment

When the landlord chooses to enforce the tenant-mitigation remedy,

the landlord may engage in the following activities without working a
termination of the tenant’s right to possession or a surrender of the lease
agreement:
•  maintenance to preserve the premises from waste;
•  appointment of a receiver (by a court) to protect the tenant’s interest; or
•  the reasonable withholding of consent to an assignment or subletting.19
The landlord who includes the tenant-mitigation provision in their lease
agreement usually is an absentee owner who enters into a long-term, net
lease agreement with a creditworthy, well-established user.
19 CC §1951.4(c)
330 Property Management, Sixth Edition

Form 596

Assignment of
Lease

The landlord entering into a long-term net lease intends to receive rent
payments without expending time and energy managing the property. The
tenant usually agrees to pay all costs of ownership of the property.

Assignment Now consider a commercial lease agreement containing the statutory

tenant-mitigation provision.
or subletting
The lease agreement also contains a subletting or assignment provision
restrictions calling for the landlord’s consent, which will not be unreasonably withheld.
The assignment provision also calls for the payment of money as a condition
for the landlord’s consent.20 [See Form 596]

20 CC § 1995.250
 Chapter 32: Notice of belief of abandonment 331

A separate lease cancellation provision in the lease agreement further permits Assignment
the landlord to cancel the lease agreement on their receipt of a request from
the tenant to consent to an assignment under the assignment provision.21 or subletting
The tenant stops paying rent and vacates the property. restrictions,
The landlord elects the remedy available to them under the statutory tenant-
cont’d
mitigation provision in the lease agreement.

The tenant, being responsible for reletting the premises, locates a replacement
tenant. The tenant notifies the landlord of their intent to assign the lease and
requests the landlord’s consent.

On receiving the request for consent to assign, the landlord sends the tenant
a notice canceling the lease agreement as permitted by the lease cancellation
provision in the lease agreement.

The tenant claims the landlord may not terminate the lease since the
landlord’s ability to refuse consent is subject to a standard of reasonableness
due to the tenant-mitigation provision.

However, the landlord’s cancellation of the lease under the lease cancellation
provision is neither reasonable nor unreasonable. The lease cancellation
provision relieves the tenant who has vacated the premises and breached
the lease of any further responsibility under the tenant-mitigation provision
in the lease.

Cancellation of the lease agreement terminates the tenant’s right to

possession and with it their ability to assign their leasehold interest. This
creates a “catch-22” for the opportunistic tenant with a leasehold interest of
more rental value than the rent obligations due under the lease agreement.22

21 CC § 1995.320
22 Carma Developers, Inc. v. Marathon Development California, Inc. (1992) 2 C4th 342
332 Property Management, Sixth Edition

Chapter 32 Abandonment rules, like surrender rules, apply to both residential

and commercial property. The commonality between surrender and
Summary abandonment is the tenant’s breach of the lease and vacating of the
premises.

They differ, however, on the methods for terminating the tenant’s

right to possession and handling the landlord’s rights under the
lease agreement regarding the collection of future rent. A surrender
is a mutual termination agreed to by tenant and landlord, while an
abandonment is a unilateral termination by forfeiture based on notices
from the landlord.

Further, abandonment is to be distinguished from a three-day notice

containing a forfeiture declaration. Both methods retain the landlord’s
rights to enforce collection of future rents under the lease agreement
while terminating the tenant’s right to retake possession. However,
their differences are in the time that needs to pass after serving the
notices until the landlord may retake possession.

Chapter 32 abandonment .............................................................................. pg. 323

notice of right to reclaim personal property ....................... pg. 327
Key Terms surrender .......................................................................................pg. 323
tenant-mitigation provision.................................................... pg. 328

Quiz 8 Covering Chapters 30-33 is located on page 651.

 Chapter 33: Personal property recovered by tenant 333

Chapter
33
Personal property
recovered by tenant

After reading this chapter, you will be able to: Learning

•  take the proper procedural steps to notify a tenant who left
personal property on the premises when they vacated;
Objectives
•  properly handle personal property remaining on the premise
after a tenant vacates; and
•  understand the requirement to sell abandoned personal property
at public sale when the items are valued at $700 or more.

landlord-initiated disposition notice to landlord to surrender Key Terms

procedure personal property
notice of right to reclaim reasonable belief
personal property
tenant-initiated recovery
procedure

A tenant vacates a rental property, residential or commercial, leaving behind Reclaim it on

personal belongings. 
notice
The tenant vacated because their right of possession had been terminated by
expiration of a three-day notice to quit with a provision declaring a forfeiture or lose it
of the leasehold. The space is immediately re-rented by the property manager
and needs to be made ready for the new tenant. 

The property manager removes the tenant’s belongings from the leased space
and stores them in a place of safekeeping. The value of the personal property
is determined by the property manager to be less than $700. 
334 Property Management, Sixth Edition

notice of right to The property manager immediately mails (or emails) the tenant a notice,
reclaim personal called a notice of right to reclaim personal property, which: 
property
A landlord’s notice •  describes each item or lot of personal property left on the premises; and 
mailed to a former
tenant informing the •  advises the tenant that the personal property will be discarded if not
tenant of their right reclaimed by the tenant within 18 days of mailing the notice.1 [See
to reclaim or abandon
personal property Form 584 accompanying this chapter] 
remaining on the
premises. [See RPI Editor’s note — Residential landlords serving a tenant with a notice to
Form 583 and 584] vacate, or a notice of the tenant’s right to request a joint pre-expiration
inspection of the property, will include a statement notifying the tenant of
their right to reclaim abandoned personal property.

The notice to reclaim property expires without a response from the tenant.
The property manager disposes of the tenant’s belongings. 

Later, the tenant sends the property manager a letter requesting the property
manager arrange for them to pick up their personal property. The property
manager ignores the tenant’s late response and does nothing. The tenant
then demands payment for the value of the items left behind. 

Here, the landlord is not liable for the value of the personal property left in
the unit and unclaimed by the tenant. The property manager followed the
statutory procedure for notice and disposal of property estimated to be worth
less than $700.2 

The statutory notice procedure: 

•  provides the tenant with time in which to reclaim their personal
property; and 
•  protects the landlord from liability on disposition of the personal
property if the tenant fails to respond prior to expiration of the notice
to reclaim. 

Removal of Before removing a tenant’s personal property from a vacant unit, a property
manager needs to be legally entitled to enter and take possession of the unit.
personal [See Chapter 4]
property The property manager can enter, take possession and dispose of a tenant’s
personal property when the tenant’s right of possession has expired or been
terminated by forfeiture. [See Chapter 34] 

Returning Two separate statutory procedures exist for the return of personal property
left on the premises by a tenant. One is initiated by the landlord or property
personal manager, the other by the tenant. 
property  Residential and commercial landlords and their property managers may
initiate (and control) the process of returning or disposing of the tenant’s
personal property. The notice of right to reclaim personal property prepared
1 Calif. Civil Code §1983
2 CC §§1982, 1984
 Chapter 33: Personal property recovered by tenant 335

Form 584

Notice of Right
to Reclaim
Personal
Property

by the property manager needs to be personally served or mailed to the landlord-initiated

tenant who vacated and left the personal property. The notice advises the disposition
tenant of their right to reclaim or abandon the personal property. This process procedure
The process of a
is called the landlord-initiated disposition procedure. [See RPI Form landlord mailing a
581 and Form 584]  notice of the right
to reclaim personal
property to a tenant
who vacated and left
personal property on
the premises. [See RPI
Form 581 and 584]
336 Property Management, Sixth Edition

The other procedure allows a residential tenant acting within 18 days

of vacating the premises to initiate a return of personal property they left
behind. By handing or mailing to the landlord or property manager a notice
notice to landlord to
surrender personal
to landlord to surrender personal property, the tenant may reclaim
property personal items left behind. This is called the tenant-initiated recovery
A written request procedure.3 [See Form 582 accompanying this chapter] 
submitted by a former
tenant to a landlord for
the return of personal The property manager is not required to use the landlord-initiated disposition
property left in the procedure when the tenant leaves personal property behind.4 
vacated unit. [See RPI
Form 582]
However, a property manager who sells or disposes of a tenant’s personal
property by other than these two procedures can be challenged for their
handling of the belongings.
tenant-initiated
recovery procedure
The recovery process
For example, a tenant claims their personal property was left behind
initiated by a tenant inadvertently, not abandoned. The property manager is not entitled to sell
to retrieve personal or dispose of the tenant’s personal property unless the property manager first
property from a
landlord within 18 establishes the tenant’s actual intent is not to reclaim the property, but to
days after vacating abandon it.
rental property. [See
RPI Form 582] The preferred method for establishing the tenant’s intent to abandon the
property left behind is the landlord-initiated disposition procedure. The
tenant is notified of their right to reclaim the property they left behind and
their need to respond to avoid its disposal. [See RPI Form 581 and Form 584] 

Residential Only a residential tenant may deliver to the landlord or the landlord’s agent
a written request for the return of personal property left in the vacated unit,
tenant- called a notice to landlord to surrender personal property. [See Form 582] 
initiated The residential tenant’s request for the landlord’s release of belongings the
recovery  tenant left behind needs to: 
•  be written; 
•  be mailed or handed to the landlord or property manager within 18
days after they vacate the unit; 
•  include the tenant’s current mailing address; 
•  contain an identifiable description of the personal property left behind; 
•  be received by the landlord or property manager while they are in
control or possession of the personal property; and 
•  be received by the landlord or property manager before they have
mailed a notice of right to reclaim personal property, commencing
the landlord-initiated disposition procedure.5
Within five days of receiving the tenant’s notice to surrender personal
property, the property manager mails, emails or hands the tenant a written

3 CC §1965
4 CC §1981
5 CC §1965(a)
 Chapter 33: Personal property recovered by tenant 337

Form 582

Notice to
Landlord to
Surrender
Personal
Property

demand for reasonable removal and storage costs. This written demand
itemizes the costs for removal and storage to be paid before the tenant can
remove the property.6 [See RPI Form 582-1]

The tenant or other owner of the personal property is not required to pay any
storage costs if:
•  their personal property remained on the rented premises; and
•  they reclaim their personal property within two days of vacating the
premises.
Once the tenant has received notice, it is then the tenant’s responsibility to
contact the property manager and arrange a mutually agreeable date, time
6 CC §1965(a)(3)
338 Property Management, Sixth Edition

and location for the tenant to claim and remove their personal property.
However, the tenant or the tenant’s agent needs to remove the personal
belongings within 72 hours after the tenant pays storage charges demanded
by the property manager.7 

After a tenant mails the property manager a request to surrender personal

property, the property manager might receive another request for the same
items from the tenant’s roommate, a secured creditor or other person with an
interest in the property. 

The first request received by the property manager controls the return of the
property left behind.8 

The landlord is not obligated to the roommate or anyone else who makes a
later request for the same personal belongings. 

Which The tenant-initiated process for residential rentals does not apply if the
property manager first mails, emails or personally delivers the notice to the
process tenant before the landlord or the property manager receives the tenant’s
controls  notice to surrender personal property.9 

But what if the property manager’s notice to reclaim property and the tenant’s
request to surrender the property pass in the mail? 

The landlord-initiated process begins the moment the property manager

deposits the notice of the tenant’s right to reclaim property in the mail (first-
class, postage prepaid). The tenant-initiated process does not begin until the
property manager personally receives the tenant’s request. 10

The property manager who neglects to mail the notice before actually
receiving a tenant’s request is required to respond to the tenant’s request.
Under abandonment rules, the landlord no longer controls disposition. 

Conversely, if the property manager can show they deposited either the
notice of abandonment (which covers both the rented real property and the
tenant’s personal property) or the notice to reclaim personal property in the
mail before they actually received the tenant’s notice to surrender, the tenant
abides by the landlord-initiated disposition procedure. [See Chapter 24]

Residential Consider a residential tenant who has vacated and timely hands the property
manager a notice to surrender personal items they left behind.  
landlord
The property manager makes a demand on the tenant to pay removal and
violations  storage costs. The tenant promptly pays the removal and storage costs. 

7 CC §1965(a)(4)
8 CC §1965(d)
9 CC §1965(c)
10 CC §1983
 Chapter 33: Personal property recovered by tenant 339

Form 584-1

Notice of Right
to Reclaim
Personal
Property (To
Non-Tenants)

If the property manager fails to hand over the items within 72 hours after
the tenant (or tenant’s agent) pays storage and removal fees, the landlord is
liable for: 
•  damages for the value of the personal items; 
•  $250 for each violation; and 
•  attorney fees.11 
This tenant-initiated procedure is entirely avoided when the property
manager merely sends by first-class mail either the notice of abandonment
(both real estate and personal property) or a notice to reclaim personal
property before they receive the tenant’s notice to surrender the property.
The notice to reclaim personal property may also be emailed to the tenant.
[See RPI Form 581 and Form 584] 

11 CC §1965(e)
340 Property Management, Sixth Edition

Landlord- On mailing or personally delivering the notice of abandonment to the tenant,

a residential or commercial property manager commences the landlord-
initiated initiated disposition process. [See RPI Form 581] 
abandonment  As an alternative to the abandonment procedure, the property manager may
deliver a notice to reclaim personal property to the tenant by either: 
•  personal service;
•  email; or 
•  first-class mail to the tenant’s last known address with a duplicate
notice mailed to the address of the vacated premises.12 
Notice is best given promptly on termination of the tenancy, but may be
given at any time after the tenant vacates the premises.13 

As a matter of practice, the tenancy is terminated before entering the

premises to determine whether the tenant left personal property, unless the
abandonment procedure is used. 

Abandonment A property manager may combine the abandoned personal property notice
(the right to reclaim personal property notice) with the notice of abandonment
notices of the premises. [See RPI Form 581]

The property manager combines the two notices when they believe the
tenant has abandoned both the personal property and the premises. The
property manager may choose to terminate the tenant’s right of possession
by establishing an abandonment of the premises instead of using a three-day
notice and declaration of forfeiture.14 [See Chapter 24]

Both abandonment notices from the property manager to the tenant include: 
•  a description of each item; 
•  notice that reasonable storage costs will be charged; 
•  the location where the property may be reclaimed; 
•  the date by which the tenant is to reclaim their property; 
•  notice the property will be kept, sold or destroyed if the value is
estimated at less than $700; and 
•  notice the property will be sold by public sale if it is worth $700 or more
and is not reclaimed.15 
If the notice is personally served on the tenant, the notice may expire no less
than 15 days after service. If the notice is mailed, the notice may expire no
less than 18 days after posting in the mail.16 

12 CC §1983(c)
13 CC §1983
14 CC §1991
15 CC §§1983(b), §1984(b)
16 CC §1983(b)
 Chapter 33: Personal property recovered by tenant 341

When personal property worth less than $700 is not reclaimed by a tenant
before the notice expires, the property manager may keep, sell or destroy the
property without further notice to the tenant.17 

Under the landlord-initiated procedure, the property manager also notifies

any other persons they reasonably believe may have any ownership interest
Notice to
in the personal property left on the premises.18 [See Form 584-1 accompanying third-party
this chapter] 
owners
The reasonable belief of ownership of the abandoned personal property
imposed on a property manager means the actual knowledge a prudent reasonable belief
person would have without making an investigation, unless such an The actual knowledge
a landlord has of the
investigation is of probable value and reasonable cost.19  ownership of personal
property without
The property manager is not required to investigate public records unless it investigating.
is likely they will find information pertinent to locating the owner of the
personal property. 

Also, if a property manager notices a name or phone number inscribed on

the personal items, such as a furniture rental company, they need to further
investigate. The landlord will not be protected from liability for failure to do
so. 

The notice to reclaim personal property needs to list every significant item or
“lot of items” left behind. 
Identification
of personal
Although the landlord or their property manager may choose to describe
only a portion of the personal property left behind, they are protected from property
liability only for those items they identify. 

A property manager may identify an item simply as a “bundle,” a “lot” or

a “box” of items. Alternatively, the property manager may look inside the
bundle or boxes to determine the contents and their worth. The total value
of the items will determine the method the property manager employs to
dispose of them. 

Additionally, if records remain on the premises after the tenant has vacated
or abandoned the property, the tenant alone is presumed to be the owner of
the records.

Records include any materials or equipment which record or preserve

information such as:
•  written or spoken words;
•  graphics;
•  printed materials; or

17 CC §1984
18 CC §1983(a)
19 CC §1980(d)
342 Property Management, Sixth Edition

•  electromagnetically transmitted items.20

The landlord, property manager or resident manager needs to consider having
a witness present or video record their inventory of the items to confirm their
estimated worth. The witness or video will provide evidence the property
manager behaved properly if the tenant claims the landlord or their property
manager confiscated or damaged items. 

The property manager may use reasonable belief to estimate the value of the
items. 

Storage and Like with the tenant-initiated procedure for reclaiming items, the property
manager may charge the tenant for the cost of removal and storage of the
release of property. The property manager may store the personal property in the unit,
property or remove it to another place of safekeeping, for which they may charge a fee. 

Recall, though, that the tenant or owner of the personal property is not
required to pay storage costs if the property is kept on the premises, and the
tenant recovers it within two days of vacating the premises.

While the property manager needs to exercise care in storing the property,
the landlord may be held liable only for damages caused by the property
manager’s intentional or negligent treatment of the items when removing
and storing them.21 

The property manager releases the personal property to the tenant, or the
person who first notifies the property manager of their right to reclaim it,
within 72 hours of payment of the storage costs. 

The tenant or owner reclaiming the personal items is responsible for storage
costs. Any owner other than the tenant is responsible only for the storage
costs of property they claim. The property manager may not, however, charge
more than one party for storage of any one item.22

If the total worth of the abandoned personal items is $700 or more, they are
Sale of the sold at public sale by the property manager.23 
abandoned
If the abandoned personal property notice states the property is subject to
property public sale, the property manager will surrender the personal property to the
tenant at any time prior to the sale, even after the date specified for expiration
in the notice of abandonment.24 

However, the tenant or the owner of the personal property is required to pay
advertising and sale costs in addition to storage costs.25 

20 CC §§ 1980, 1983, 1993 and 1993.03

21 CC §1986
22 CC §1990
23 CC §1988(a)
24 CC §1987
25 CC§ 1987
 Chapter 33: Personal property recovered by tenant 343

Form 582-1

Costs Payable
to Reclaim
Personal
Property

The property manager advertises the public sale prior to its scheduled date in
a local county newspaper of general circulation.26 

The notice of sale appears twice — once each week for two consecutive weeks.
The last advertisement may not be later than five calendar days before the
date of the public sale. The notice of sale specifies the date, time and location
of the sale. Also, the notice of sale needs to sufficiently describe the personal
property to allow the owner to identify the property as theirs. 

26 CC §1988(b)
344 Property Management, Sixth Edition

The timetable before the sale becomes the combination of the 15- or 18-day
period for the notice of abandonment and the 14 days of advertising. The
highest bidder (including the tenant or landlord) may buy the property. 

Any proceeds, minus the costs of sale, advertising and storage, are given to
the county treasurer within 30 days of the sale. Once the remaining proceeds
have been given over to the county treasurer, the tenant or owner of the
personal property has one year to claim the proceeds.27 

27 CC §1988

Chapter 33 Two separate statutory procedures exist for the return of personal
property left on the premises by a tenant. One is initiated by the
Summary landlord, the other by the tenant. If initiated by the landlord, the tenant
is notified of their right to reclaim the personal property left behind and
their need to respond to avoid its disposal.

Only a residential tenant may deliver to the landlord or the property

manager a written request for the return of personal property left in the
vacated unit.

When personal property worth less than $700 is not reclaimed by a

tenant before the notice expires, the landlord or the property manager
may keep, sell or destroy the property without further notice to the
tenant. If the total worth of the abandoned personal items is $700 or
more, the personal property needs to be sold at a public sale by the
landlord or the property manager.

Chapter 33 landlord-initiated disposition procedure............................. pg. 335

notice of right to reclaim personal property......................... pg. 334
Key Terms notice to landlord to surrender personal property............. pg. 336
reasonable belief.......................................................................... pg. 341
tenant-initiated recovery procedure...................................... pg. 336

Quiz 8 Covering Chapters 30-33 is located on page 651.

 Chapter 34: Constructive eviction cancels the lease 345

Chapter
34
Constructive eviction
cancels the lease

After reading this chapter, you will be able to: Learning

•  identify the circumstances which constitute a constructive
eviction;
Objectives
•  understand the tenant’s options when a landlord breaches the
implied warranty of habitability; and
•  distinguish the concepts of constructive eviction and implied
warranty of habitability.

anti-competition clause covenant of quiet enjoyment

Key Terms
constructive eviction remedies provision

A commercial tenant occupies a building in which they operate their Interference

restaurant business. The tenant’s lease agreement obligates the landlord to
make all necessary repairs to the exterior walls and roof during the term of forces the
the lease.  tenant to
During the tenancy, the roof begins to leak. The tenant notifies the landlord vacate 
about the leaks and the need for repairs. The landlord makes several personal
attempts to repair the roof. However, the roof is never properly repaired
and the leaks persist each year during the rainy season. The leaking water
damages the interior walls. During rain storms, water runs along beams and
down walls. Puddles form on the floors creating hazardous conditions for
employees and patrons. 

Fed up, the tenant vacates the premises. 

346 Property Management, Sixth Edition

The tenant then makes a demand on the landlord to recover their security
deposit and business losses. The tenant’s losses include lost income from
business operations, loss of goodwill, relocation expenses, employee medical
expenses and water damage to furnishings and equipment. 

Also, the tenant claims the lease agreement has been cancelled due to the
landlord’s interference with the tenant’s occupancy. The landlord failed to
meet their contractual obligation to repair the roof resulting in uninhabitable
conditions. This caused the tenant to vacate the leased premises, called a
constructive constructive eviction. 
eviction
A termination of
the tenant’s right
The landlord claims their failure to repair the roof was not conduct so
of possession and intrusive as to result in a constructive eviction. According to the landlord,
cancellation of the the tenant is only entitled to money for their losses, not a cancellation of the
lease agreement on
vacating due to the
lease agreement and obligation to pay future rent. 
landlord’s failure to
maintain the premises Here, the landlord’s failure to meet their obligation to repair the roof under
as stated in the lease. the terms of the lease agreement was conduct that terminated the tenant’s
[See RPI Form 552 §6]
right of possession and canceled the lease agreement. The leaking roof
significantly interfered with the tenant’s ability to use the premises to operate
a restaurant as permitted by the lease agreement. 

Collectively, the landlord’s failure to maintain the property and the tenant
vacating the premises in response constitute a constructive eviction. The
tenant recovers the security deposit and any money losses caused by the
landlord’s interference with possession.1 

Editor’s note — The constructive eviction could easily have been avoided in
this case had the landlord hired a competent contractor to promptly and
properly repair the roof. 

A tenant is not obligated to continue to occupy the premises and pay rent if
Premises the premises can no longer be used as intended due to the landlord’s conduct. 
cannot be Conversely, if the landlord’s failure to repair the premises does not
used as substantially deprive the tenant of their intended use of the premises, the
intended tenant’s right of possession and obligations under the lease agreement
remain intact, including the obligation to pay future rent. 

Further, the tenant may pursue the landlord in a money action for any losses
experienced when:
•  the landlord’s failure to repair or correct conditions does not amount to
a constructive eviction; or
•  the landlord’s failure to repair amounts to a constructive eviction, but
the tenant does not vacate.
The tenant may not, however, offset rent due to the landlord by the amount
of the tenant’s losses. The claim for losses requires a separate civil action.

1 Groh v. Kover’s Bull Pen, Inc. (1963) 221 CA2d 611

 Chapter 34: Constructive eviction cancels the lease 347

Both the landlord and the tenant are obligated to perform as agreed in Landlord’s
the provisions contained or implied in their lease agreement. If either the
landlord or tenant fails to fully perform, they breach the lease. Recall that a breach
breach by the landlord or tenant for failure to perform as agreed is either a
minor breach or a material breach. 
terminates
possession 
A minor breach of a lease agreement provision by either the landlord or the
tenant is not a justifiable basis for terminating the lease. Examples of minor
breaches include the landlord’s failure to maintain landscaping or tenant’s
failures which could be corrected under a three-day notice to perform or quit,
or the refusal to pay late charges. 

However, a material breach of the lease agreement by either the tenant or

landlord justifies a termination of the tenant’s right to possess the premises
— their leasehold interest in the property.

If a landlord’s failure to meet their obligations under the lease agreement

materially breaches the lease agreement, the tenant may: 
•  terminate their possession of the leased premises, causing their
possessory interest in the property to revert to the landlord; and 
•  cancel the lease agreement, including all future rent obligations. 

A constructive eviction occurs when: 

Constructive
•  the landlord or their agent substantially interferes with the tenant’s
use and enjoyment of the premises during the term of the tenancy; and 
eviction on
•  the tenant vacates the premises due to the interference.  substantial
A constructive eviction due to the landlord’s interference does not occur interference
until the tenant vacates. An eviction cannot exist while the tenant remains
in possession.

Examples of substantial interference by the landlord that justify the tenant’s

vacating the premises include: 
•  a material breach of the lease2; 
•  an unauthorized and extensive alteration of the leased premises that
interferes with the tenant’s intended use3; 
•  the sale of adjacent property owned by the landlord without reserving
the tenant’s parking and water rights given to the tenant as part of the
lease4; or 
•  the failure to abate a sanitation, noise or safety nuisance over which
the landlord, but not the tenant, has control.5 
In a constructive eviction, neither a three-day notice nor an unlawful
detainer (UD) action is used to force the tenant to vacate.6 
2 Groh, supra
3 Reichhold v. Sommarstrom Inv. Co. (1927) 83 CA 173
4 Sierad v. Lilly (1962) 204 CA2d 770
5 Johnson v. Snyder (1950) 99 CA2d 86
6 Reichhold, supra
348 Property Management, Sixth Edition

Tenant’s Every month-to-month rental and lease agreement contains an implied

covenant, an unexpressed lease provision, prohibiting the landlord from
losses and interfering with the tenant’s agreed use and possession of the property. This
remedies implied covenant is the covenant of quiet enjoyment.7 

When a landlord breaches the implied covenant of quiet enjoyment, or other

significant provision in the lease agreement, the tenant can: 
covenant of quiet
enjoyment •  vacate the leased premises, recover their money losses incurred and
An implied lease
provision which
cancel the lease agreement along with their obligation to pay future
prohibits the landlord rents based on their constructive eviction; or 
from interfering with
the tenant’s agreed use •  retain possession, continue to pay rent and sue for any income lost or
and possession of a expenses incurred due to the landlord’s interference. 
property.
The losses a tenant may recover when the tenant vacates due to a constructive
eviction include: 
•  advance payments of rent and security deposits8; 
•  the cost of removing trade fixtures9; 
•  relocation expenses; and 
•  loss of business goodwill.10 

The A tenant who fails to pay rent and later vacates the premises due to a
constructive eviction owes the landlord rent for the period of occupancy
breaching prior to vacating. 
landlord’s However, any unpaid back rent the landlord is entitled to collect is offset by
remedies money losses the tenant incurs due to the constructive eviction.11 

Breach The landlord’s breach of an anti-competition clause in the lease agreement

is a material breach. The tenant may respond by vacating the premises as a
of anti- constructive eviction. 
competition Consider a commercial lease containing an anti-competition clause. The
clause  clause states the landlord will not lease other space in the commercial
complex to competitors of the tenant. 
anti-competition
clause
A provision in the The lease agreement also contains a remedies provision stating the
commercial lease landlord may relet the premises without notifying the tenant if the tenant
agreement stating the
landlord will not lease
vacates prior to the lease expiration date.
space in a commercial
complex to competitors Later, the tenant holds a sale to liquidate their stock. The tenant closes down
of the tenant. their business operations, vacates the premises and returns the keys to the
landlord with instructions to find another tenant. The tenant’s lease does not
remedies provision expire for a few years. 
A provision in a
commercial lease
agreement stating the 7 Calif. Civil Code §1927
nonbreaching party’s 8 Groh, supra
available actions upon 9 Reichhold, supra
a breach of the lease 10 Johnson, supra
agreement. [See RPI 11 Petroleum Collections Incorporated v. Swords (1975) 48 CA3d 841
Form 552]
 Chapter 34: Constructive eviction cancels the lease 349

The landlord does not respond by entering into an agreement to cancel

(surrender) the lease, nor do they take possession of the premises. Further,
the landlord does not take steps to forfeit the tenant’s right of possession (by
an abandonment or three-day notice). 

The tenant pays no further rent and the landlord makes no demand on the
tenant for delinquent rent. The landlord tries to locate a new tenant, but is
unable. However, the landlord is able to lease another space in the building
to a competitor of the tenant. 

Several months after closing the business, the tenant re-enters the premises
and prepares to reopen for business since their lease of the premises has not
been terminated.

On discovering a competitor occupies the same commercial complex, the

tenant vacates the premises. The tenant has elected to cancel the lease since
the landlord breached the anti-competition clause in the lease agreement by
renting another space in the building to their competitor. 

The landlord makes a demand for all rents due until the expiration of the
lease agreement, claiming the obligation to pay rent has not been canceled. 

The tenant claims they are liable only for the rents due prior to their vacating
the premises (the second time) since the landlord’s breach of the anti-
competition provision in the lease agreement constituted a constructive
eviction. 

Can the tenant cancel the lease agreement and terminate their obligation to
pay rent for the remaining term of the lease? 

Yes! The tenant’s right of possession under the lease has been terminated.
Their obligation to pay rent under the lease agreement has been canceled
due to the landlord’s interference with the tenant’s use of the premises.
The landlord’s breach of the anti-competition clause is a material breach
of the lease agreement. The tenant is justified in vacating the premises and
canceling the lease agreement.12 

In the prior scenario, the landlord failed to terminate the tenant’s right to
occupy the premises. Due to the landlord’s failure to declare a forfeiture of
Failure to
the leasehold estate when the tenant first vacated the premises and became forfeit may
delinquent on rent payments, the tenant retained all their leasehold interests
and lease agreement contract rights.
lead to a
breach 
The landlord was able to terminate the lease when the tenant closed their
business and delivered the keys to the landlord by:
•  a surrender; or 
•  a three-day notice to pay rent or quit with a declaration of forfeiture of
the leasehold. 

12 Kulawitz v. Pacific Woodenware & Paper Co. (1944) 25 C2d 664

350 Property Management, Sixth Edition

Without a termination of the tenant’s leasehold rights, the tenant’s right of

possession granted by the lease agreement remained in effect throughout
the delinquency and while out of possession.

Since the tenant’s right of possession (use of the property) had not been
terminated, the landlord’s obligation to the tenant to abide by the anti-
competition clause in the lease agreement remained in effect. 

A landlord cannot reasonably expect to recover rents remaining due for the
unexpired duration of a lease agreement when they are the source of the
breach which resulted in the tenant’s constructive eviction.

Independent Now consider a tenant who leases a gas station. A modular sign on the premises
advertising the gas station can be seen from a nearby freeway. However, the
obligations to sign was previously installed without a permit. The city orders the removal
perform of the sign since its proximity to the gas tanks constitutes a fire hazard. 

The landlord removes the sign, replacing it with a billboard that cannot be
seen from the freeway. The tenant demands the landlord provide a sign
visible from the freeway, and of comparable likeness to the one removed. 

When the landlord fails to provide a similar sign, the tenant stops paying rent,
but remains in possession of the premises. Months later, the lease agreement
is canceled by the mutual agreement of the landlord and tenant. The tenant
then vacates the premises. 

The landlord now makes a demand on the tenant to pay rent for the months
the tenant did not pay rent prior to vacating the premises. 

The tenant claims they are not liable for rent during their period of occupancy
after the landlord removed the sign since the sign removal constructively
evicted them from the premises. The covenant of quiet enjoyment and use of
the property was breached. 

Is the tenant liable for the unpaid back rent during the period they remained
in occupancy? 

Yes! The tenant is liable for the agreed-to rent for the period of their occupancy.
A constructive eviction cannot occur until the tenant actually vacates the
premises, owing no more rent.13 

The landlord’s failure to replace the sign with a similar sign significantly
interfered with the tenant’s use of the property as intended by the lease
agreement. However, the tenant remained in possession after the breach
without first negotiating a modification of the lease agreement obligating
them to pay rent. 

When the tenant remains in possession and fails to pay rent, the interfering
landlord who also breached the lease may forfeit the tenant’s right to occupy
the property by use of a three-day notice to pay rent and declaration of
forfeiture. 
13 Petroleum Collections Incorporated, supra
 Chapter 34: Constructive eviction cancels the lease 351

A tenant leases space in a retail center under a commercial lease agreement Commercial
containing a remedies provision stating: 
quiet
•  the tenant may not terminate the lease agreement on any failure of the
landlord to fully perform on the lease; and  enjoyment
•  the tenant may only recover money losses if the landlord breaches the waiver 
lease. 
The landlord leases the adjoining space to a dry cleaning business. The
dry cleaning business emits fumes that enter the ventilation system and
permeate the tenant’s premises. The employees and business operations are
negatively impacted. The landlord is notified of the interference but fails to
remedy the ventilation problems over which they have control. 

The tenant stops paying rent and vacates the premises, claiming the dry
cleaning fumes were noxious and endangered their employees’ health. 

The landlord makes a demand on the tenant to pay rent for the remainder of
the lease term. The tenant rejects the demand, and seeks to recover their lost
profits. These consist of relocation expenses and employee medical expenses. 

The tenant claims the landlord’s failure to prevent the fumes from invading
the leased premises is a breach of the implied covenant of quiet enjoyment.
The breach constituted a constructive eviction, thus canceling the lease
agreement when the tenant vacated. 

The landlord claims the tenant is liable for the remaining rent whether or not
the tenant vacated since the lease contains a remedies provision, waiving
the tenant’s right to terminate the lease based on the landlord’s inaction.

Is the tenant liable for the rent due for the remaining term of the lease? 

Yes! The commercial tenant is liable for the rent remaining unpaid on the
lease. Here, the tenant was constructively evicted. However, they remain
liable for all future unpaid rent under the lease agreement since they
contracted to limit their remedies on the landlord’s material breach to a
demand for money. The tenant’s claim for money losses is separate from the
rent due under the lease.14 

Continuing the previous example, the tenant is obligated by the remedies Tenant
provision in their lease agreement to: 
•  remain in possession (and care) of the premises even though they have
obligations
been constructively evicted;  under the
•  continue paying the agreed rent for the entire duration of the lease; remedies
and 
•  sue the landlord to recover any money losses caused by the landlord’s
provision
breach of the lease agreement. 

14 Lee v. Placer Title Company (1994) 28 CA4th 503

352 Property Management, Sixth Edition

Editor’s note — For residential tenants, any waiver or limitation on the

remedies for breach of the covenant of quiet enjoyment is void as against
public policy. This is not so for commercial tenants.15 

However, when the landlord’s conduct completely prevents the tenant from
operating their business on the property and forces them to vacate, then the
value of the tenant’s leasehold interest has been completely diminished. 

While the commercial tenant waived their right to terminate the lease on
the landlord’s breach of the covenant of quiet enjoyment, they may vacate
the property and sue for money, including: 
•  a 100% offset against future rents due on the lease for money losses
occurring after the breach and until the landlord performs or the lease
term expires; and 
•  lost profits, relocation expenses, rent for the replacement space and loss
of goodwill. 

Landlord A tenant may convey a part or all of their leasehold rights to possess the leased
premises to a subtenant by entering into a sublease. However, most lease
interference agreements held by single-user tenants prevent the tenant from subleasing
with (or assigning) without the landlord’s permission. 

subtenants On entering into a sublease agreement, the subtenant becomes a third-party

beneficiary to the lease agreement entered into by the landlord, referred to
as the master lease. The benefits received by the subtenant under the master
lease include the implied covenant of quiet enjoyment, when: 
•  the master lease agreement permits subleasing; or 
•  the landlord consents to a sublease under a restraint on alienation
provision in the master lease agreement. 
The master lease agreement is attached to the sublease agreement as an
exhibit. The rights of the subtenant are limited by the terms of the master
lease. 

Editor’s note — Both the master lease and the sublease are of the same form
and contain the same provisions, except the lease agreement with the
subtenant references the lease agreement held by the tenant. [See RPI Form
552 §2.5] 

When a landlord’s conduct interferes with the subtenant’s use of the

premises under the sublease agreement (as limited by the referenced master
lease), the subtenant may vacate and recover losses from the landlord, called
a constructive eviction.16 

15 CC §1953
16 Marchese v. Standard Realty and Development Company (1977) 74 CA3d 142
 Chapter 34: Constructive eviction cancels the lease 353

When a subtenant has been constructively evicted by the landlord, the

master tenant may: 
•  vacate the entire premises, cancel the lease agreement and recover
losses from the landlord for a constructive eviction of the master
tenant; or 
•  remain in possession and recover money losses for breach of the
implied covenant of quiet enjoyment. 

Constructive eviction of either a residential or commercial tenant is distinct

from the implied warranty of habitability enforceable only against
Constructive
residential landlords. Constructive eviction requires the tenant to vacate or eviction vs.
pay the entire rent. The warranty of habitability requires neither. 
the warranty
Both residential and commercial lease agreements contain written conditions
that, if breached by the landlord, result in a constructive eviction. 
of habitability 
However, the warranty of habitability is not a written provision, it is implied.
It is judicially and legislatively considered to exist in all residential rental
and lease agreements. 

The implied warranty of habitability requires a landlord to maintain safe

and sanitary conditions in their residential units. On the landlord’s failure
to maintain habitable conditions, the residential tenant may remain in
possession and pay a reduced rent that will be set by the court. A constructive
eviction has not taken place since the residential tenant remains in
possession.17 [See Chapters 37 and 40]

However, both residential and commercial tenants can vacate the premises
based on the landlord’s significant interference with possessory rights and
recover any losses from their landlords that flow from the constructive
eviction. 

Consider a commercial landlord who fails to meet their obligations under a

lease agreement to maintain the property for the intended use.

The commercial tenant retaliates by refusing to pay rent. However, the

tenant does not vacate the premises. 

The landlord files a UD action to evict the tenant for their failure to pay rent
after service of a three-day notice to pay or quit. At trial, the tenant is unable
to raise the defense of a breach of the implied warranty of habitability since
their lease is commercial. The commercial tenant is without a legal excuse
for their failure to pay rent for the period of their actual occupancy. The
commercial tenant will be evicted in spite of the landlord’s material breach
of lease agreement provisions.18

17 Green v. Superior Court of the City and County of San Francisco (1974) 10 C3d 616; Calif. Code of Civil Procedure §1174.2
18 Schulman v. Vera (1980) 108 CA3d 552
354 Property Management, Sixth Edition

Chapter 34 Both residential and commercial lease agreements contain written

conditions that, if breached by the landlord, result in a constructive
Summary eviction.

Collectively, a landlord’s failure to maintain the property and the tenant

vacating the premises in response constitutes a constructive eviction.
The tenant is not obligated to continue to occupy the premises and
pay rent if the premises can no longer be used as intended due to the
landlord’s conduct.

Constructive eviction of either a residential or commercial tenant is

distinct from the implied warranty of habitability enforceable only
against residential landlords. Constructive eviction requires the tenant
to vacate or pay the entire rent. The warranty of habitability requires
neither.

Both residential and commercial lease agreements contain written

conditions that, if breached by the landlord, result in a constructive
eviction. However, the warranty of habitability is not a written
provision, it is implied. It is judicially and legislatively considered to
exist in all residential rental and lease agreements.

Chapter 34 anti-competition clause............................................................. pg. 348

constructive eviction.................................................................. pg. 346
Key Terms covenant of quiet enjoyment.................................................... pg. 348
remedies provision...................................................................... pg. 348

Quiz 9 Covering Chapters 34-37 is located on page 652.

 Chapter 35: Retaliatory eviction defense 355

Chapter

35
Retaliatory eviction
defense

After reading this chapter, you will be able to: Learning

•  differentiate between proper and improper reasons for eviction of
a tenant; and
Objectives
•  anticipate a tenant’s allowable defenses in an unlawful detainer
action.

repair and deduct remedy retaliatory eviction Key Terms

A tenant occupies a residential unit under a month-to-month rental Shackling

agreement. [See RPI Form 551]
vengeful
The unit has many defects which need to be repaired. The tenant requests
the landlord make repairs to correct the defects. The landlord does not make wayward
the requested repairs. landlords
The tenant complains to the landlord several more times about the need
for repairs and the lack of suitable living conditions in the unit. Finally, the
tenant threatens to exercise their right to perform the repairs and deduct the
costs from the rent. [See Chapter 38]

Before any repairs are made, the landlord serves the tenant with a 30-day
notice to vacate the premises. [See RPI Form 569]

The tenant remains in possession after the notice expires. Rent is tendered by
the tenant, but it is refused by the landlord. The landlord files an unlawful
detainer (UD) action to have the tenant evicted.
356 Property Management, Sixth Edition

The tenant defends against the UD action, claiming the landlord seeks to
evict them in retaliation for their repeated requests for repairs and complaints
retaliatory eviction about the habitability of the unit.
The wrongful evition
attempted by a The landlord claims the tenant may not raise the defense of retaliatory
landlord against a
tenant for lawfully eviction since the tenant did not file a complaint with a government agency
exercising any of their regarding the habitability of the unit or undertake to make the repairs under
rights. the statutory repair and deduct remedy.

To successfully defend against a UD action by a claim of retaliatory eviction,

repair and deduct
remedy
does the tenant need to first file a complaint with a government agency or
An option available make the repairs?
to a residential tenant
when the landlord No! The tenant need not file a complaint regarding the habitability of their
fails to repair leased
property which allows residential unit or repair the defects as a prerequisite to raising the defense of
the tenant to make retaliatory eviction in the UD action.
the repairs and deduct
their cost from the next
month’s rent payment.
Here, the residential landlord is prevented from evicting the tenant. The
landlord’s conduct indicates they sought to evict the tenant in retaliation for
complaining about the need for repairs.1

The A landlord’s sole purpose for filing a UD action is to recover possession from
a tenant.
retaliatory
In addition to the landlord’s recovery of possession from the tenant, the UD
eviction award against the tenant may include:
defense •  any unpaid delinquent amounts of rent accrued prior to the forfeiture
of possession by a declaration in the three-day notice to quit or as
granted at the UD trial;
•  the reasonable rental value of the premises during the tenant’s
unlawful detainer which follows the date of forfeiture of the right to
possession; and
•  up to $600 in addition to the rent for the tenant’s malicious behavior.2
Accordingly, UD proceedings are intended to be brief — from the use of
notices to quit or vacate to the inability of the tenant to bring up frivolous
defenses.

Thus, residential tenants are allowed to raise only two defenses in a UD

action:
•  a breach of the warranty of habitability [See Chapter 38];3 and
•  retaliatory eviction.
Residential tenants include mobilehome owners who rent or lease space in
a mobilehome park.4

1 Kemp v. Schultz (1981) 121 CA3d Supp. 13

2 Calif. Code of Civil Procedure §1174(b)
3 CCP §1174.2
4 Rich v. Schwab (1998) 63 CA4th 803
 Chapter 35: Retaliatory eviction defense 357

For commercial tenants, the only defense allowed in a UD action is the Commercial
defense of retaliatory eviction.5
retaliatory
This defense is not based on the statutory defense granted to residential
tenants, but on the equivalent, long-standing common law defense of eviction
retaliatory eviction. The public policy enforced by courts entitles all tenants defense
to exercise their rights against a landlord without retaliation. The tenant’s
activity outweighs the public’s interest in preserving the summary nature of
UD hearings provided for landlords.6

Further, a residential tenant may sue the landlord to recover money losses
incurred due to a landlord’s retaliatory acts, such as an unfair rent increase.7

Under a notice to vacate, a landlord may evict a tenant for any reason, or no
reason at all (except rent control and Section 8 properties), but they may not
evict a tenant for an improper reason.8

In rent control communities, ordinances require a residential landlord to

state their reasons for evicting a tenant in the notice to vacate. Also, a landlord
providing Section 8 housing needs to state a good reason in a notice to vacate
before they may evict the tenant.9

Actions by a residential landlord to increase rent, decrease tenant services or

evict are considered retaliatory acts if initiated by the landlord after a tenant:
Retaliatory
•  complains to the landlord or a government agency regarding the
reaction to
habitability of the premises; complaints
•  exercises the statutory repair and deduct remedy;10
•  organizes or becomes a member of a tenants’ association or tenants’
rights group;11 or
•  exercises any other legal rights held by the tenant, such as notifying
the police about the landlord’s criminal activity.12
Editor’s note — If a landlord fails to make repairs within 30 days after the
tenant notifies them of the need for repairs, the tenant may make the
repairs and deduct the cost from the rent, called the repair-and-deduct
remedy.13 [See Chapter 38]

5 Custom Parking, Inc. v. Superior Court of the County of Marin (1982) 138 CA3d 90
6 Barela v. Superior Court of Orange County (1981) 30 C3d 244
7 Aweeka v. Bonds (1971) 20 CA3d 278
8 S.P. Growers Association v. Rodriguez (1976) 17 C3d 719
9 Mitchell v. Poole (1988) 203 CA3d Supp. 1
10 Calif. Civil Code §1942.5(a)(1)
11 CC §1942.5(c)
12 CC §1942.5(c); Barela, supra
13 CC §1942
358 Property Management, Sixth Edition

In addition, a residential landlord is prohibited from increasing the rent,

decreasing tenant services or requiring the tenant to vacate within 180 days
after any of the following events:
•  the tenant’s notice to the landlord of the need for repairs, or complaint
to the landlord about the habitability of the premises;
•  the tenant’s filing of a written or oral complaint with a government
agency regarding the habitability of the premises;
•  an inspection or issuance of a citation resulting from the tenant’s
complaint to a government agency;
•  the filing of documents to initiate an action involving the habitability
of the premises; or
•  the entry of a judgment or issuance of an arbitration award adverse to
the landlord.14

Enforcing Consider a residential tenant holding possession under a month-to-month

rental agreement who prevails in a UD action brought by a landlord. The
the 180-day tenant is permitted by the court to remain in possession of their unit.
protection Four months (120 days) after the UD judgment, the landlord serves the tenant
rule with a notice to vacate. The notice will expire before the 180-day protective
period has run.

The tenant tenders an amount of rent on the next due date representing
rent due for a rental period extending beyond the expiration of the notice to
vacate. The landlord refuses to accept the rent and returns it undeposited. The
tenant remains on the premises after the notice to vacate expires.

The landlord next files a UD action to evict the tenant since the tenant
retained occupancy after the notice to vacate expired. The UD trial is set for
a date more than 180 days after the date of the prior UD trial at which the
tenant prevailed.

As a defense to the current UD action, the tenant claims the landlord is barred
from evicting them since a notice to vacate may not be served within 180
days after the tenant prevailed on the prior UD judgment.

The landlord claims they are not barred from evicting the tenant since the
current UD trial occurs after the 180-day protective period expired.

In this example, the UD action is barred. The tenant may not be required
to vacate the premises within the 180-day protection period. A UD action is
based on the failure of the tenant to vacant by the expiration of the notice to
vacate.

Under the notice, the tenant is required to vacate during the 180-day
protection period or be guilty of unlawfully detaining the premises. Thus,

14 CC §1942.5(a)
 Chapter 35: Retaliatory eviction defense 359

A landlord is prohibited from causing a tenant to involuntarily vacate their rental Landlords
property by threatening to disclose the immigration or citizenship status of the tenant prohibited
or other person associated with the tenant. [Calif. Business and Professions Code
§6103.7]
from taking
action against
A tenant may assert the landlord’s violation of this restriction as a defense in an
tenants based
unlawful detainer (UD) action. [Calif. Code of Civil Procedure §1161.4]
on immigration
Further, a landlord and their agent are prohibited from:
status
• threatening to disclose information about the immigration or citizenship status
of a tenant or other person associated with the tenant to compel the tenant to
vacate the property [Calif. Civil Code §1940.2];
• disclosing to any person or entity the immigration or citizenship status of an
existing or prospective tenant with the intent of harassment, retaliation or to
influence a tenant to vacate the property [CC §1942.5]; and
• disclosing the immigration or citizenship status of a tenant, occupant or
person associated with a tenant or occupant to any immigration authority, law
enforcement agency or government agency for the purpose of harassment,
retaliation or to compel the tenant or occupant to vacate the property. [CC
§1940.3]
When a landlord unlawfully discloses the immigration or citizenship status of a tenant
or occupant to an agency under the circumstances stated above, a court is required to:
• order the landlord pay civil penalties to the tenant in an amount between six
and 12 times the monthly rent charged for the tenant’s dwelling;
• issue an injunctive relief to prevent the landlord from future violations;
• notify the district attorney of the landlord’s potential violation of extortion laws;
and
• award attorney fees and costs to the prevailing party. [CC §1940.35]

the landlord may not use a UD action to evict the tenant, since the date set
for the return of the premises by a notice to vacate was within the 180-day
protection period.15

However, the landlord is not barred from serving a notice to vacate or a notice
of change in rental terms within the 180-day period, as long as the notice
does not expire within that period. Thus, the tenant confronted with a hostile
landlord has 180 days after exercising lawful rights which antagonize the
landlord to voluntarily relocate and avoid the seemingly inevitable notice
to vacate or change in terms of the occupancy.

Consider a commercial tenant who occupies a property under a month-to-

month tenancy. The rental agreement (or expired lease) requires the landlord
Commercial
to care for and maintain the exterior walls and roof of the building during the retaliatory
occupancy.
eviction

15 Kriz v. Taylor (1979) 92 CA3d 302

360 Property Management, Sixth Edition

The roof leaks, causing damage to the tenant’s personal property. On more
than one occasion, the tenant notifies the landlord of the leak, and requests
that the landlord repair the roof.

Several months later, the roof leaks again, and the tenant suffers more
losses. The tenant repairs the roof and makes a demand on the landlord for
reimbursement. The landlord rejects the demand.

The commercial tenant does not deduct the cost of the repairs from the
monthly rent since the space rented is commercial. The repair and deduct
remedy is only available to residential tenants and may not be used by
commercial tenants. The tenant continues to pay the rent as it becomes due.

The tenant sues the landlord to recover the cost of repairing the roof. The
landlord immediately serves the tenant with a 30-day notice to vacate. The
tenant remains in possession after the 30-day notice expires, and the landlord
files a UD action to evict the tenant.

The commercial tenant defends the UD action, claiming the landlord is

attempting to evict them for an improper reason — in retaliation for the
tenant’s enforcement of the landlord’s obligations by suing the landlord to
enforce the rental agreement (or expired lease).

The landlord claims the tenant may not raise the defense of retaliatory
eviction since the defense is statutory and available only to residential
tenants.16

Here, the common law retaliatory eviction defense, equivalent to the

statutory residential tenant defense, is available to the commercial tenant as
a matter of public policy enforced by the courts. The eviction sought by the
landlord is in retaliation against the tenant because the tenant exercised a
legal right.

When a landlord has an improper motive to evict a tenant, the tenant,

residential or commercial, may raise the common law defense of retaliatory
eviction.17

A commercial tenant has a right to recover expenses incurred due to the

landlord’s breach of the lease agreement. However, when the landlord
refuses to voluntarily reimburse the tenant after a demand, the tenant needs
to file litigation to recover the money and enforce collection by way of a
money judgment.

Losses Occasionally, a residential landlord will include a provision in the lease or

rental agreement in which the residential tenant purports to waive their right
recovered by to raise the defense of retaliatory eviction, or sue a landlord for retaliatory
tenant acts. However, a waiver of legal rights by a residential tenant is void.18

16 CC §1942.5
17 Custom Parking, Inc., supra
18 CC §1942.5(d)
 Chapter 35: Retaliatory eviction defense 361

If a residential landlord attempts to evict a tenant in retaliation for any

lawful activity by the tenant, the tenant is entitled to recover:
•  the tenant’s actual money losses incurred due to the landlord’s
retaliatory activity;19 and
•  punitive losses of no less than $100 and no more than $2,000 for each
retaliatory act where the landlord or their agent is guilty of fraud,
oppression or malice with respect to the retaliation.20
More financially frightening for a residential landlord whose conduct
subjects them to statutory punitive losses is the tenant’s right to bring a class
action suit. This action recovers money due to the landlord’s retaliatory act of
increasing the rents on all tenants who participate in a tenant association to
prevent rental increases by petitioning the city for rent control.21

Further, the prevailing party in an action brought by a residential tenant

seeking to recover losses from a landlord for retaliatory eviction is entitled to
reasonable attorney fees.22

19 CC §1942.5(f)(1)
20 CC §1942.5(h)(2)
21 Rich v. Schwab, supra
22 CC §1942.5(g)
362 Property Management, Sixth Edition

Chapter 35 Actions by a residential landlord to increase rent, decrease tenant

services or evict are considered retaliatory acts if initiated by the
Summary landlord after a tenant:
•  complains to the landlord or a government agency regarding the
habitability of the premises;
•  exercises the statutory repair and deduct remedy;
•  organizes or becomes a member of a tenants’ association or
tenants’ rights group; or
•  exercises any other legal rights held by the tenant, such as
notifying the police about the landlord’s criminal activity.

Occasionally, a residential landlord will include a provision in the lease

or rental agreement in which the residential tenant purports to waive
their right to raise the defense of retaliatory eviction, or sue a landlord
for retaliatory acts. However, a waiver of legal rights by a residential
tenant is void.

Chapter 35 repair and deduct remedy......................................................... pg. 356

retaliatory eviction .................................................................... pg. 356
Key Terms

Quiz 9 Covering Chapters 34-37 is located on page 652.

 Chapter 36: Defective building components 363

Chapter

36
Defective building
components

After reading this chapter, you will be able to: Learning

•  understand the difference between a manufacturer’s liability
for defective building components and a landlord’s liability for
Objectives
negligence in maintaining a building; and
•  Anticipate the landlord’s liability for injuries caused by defective
building components.

negligence strict liability Key Terms

Consider a tenant of a residential rental unit who slips and falls in the Liability for
bathtub, sustaining injuries. The bathtub does not have an anti-skid surface
and is very slippery when wet. neglect, no
The tenant claims the landlord is liable for their injuries since the bathtub strict liability
without an anti-skid surface is defective.

Is the landlord liable to the tenant for the injuries caused by the defective
bathtub surface?

No! Landlords are not liable for tenant injuries caused by a defective bathtub
surface. To be liable for another’s injuries without concern for fault, called
strict liability, the landlord needs to be a person in the chain of distribution strict liability
for the equipment or fixture that was installed and caused the injury. To be liable for
another’s injuries
without concern for
It is unreasonable to extend strict liability to hotel operators and residential fault.
landlords for defects in products manufactured, marketed and distributed by
others.1

1 Peterson v. Superior Court (1995) 10 C4th 1185

364 Property Management, Sixth Edition

Case in point Facts: A commercial landlord leases space to a tenant operating a health club. The
tenant does not maintain an AED on the premises. A client of the health club suffers a
Does a landlord fatal cardiac arrest while exercising on the premises.
who leases
Claim: The client’s family seeks money losses from the landlord, claiming wrongful
space to a death of the client since the landlord failed to maintain an AED required on the premises
health club of a health club.
operator need
to ensure Counterclaim: The landlord claims it owes no duty to ensure an AED is maintained on
the premises since the definition of a health club does not include a landlord and such
maintenance of
a requirement would impose an unreasonable duty.
an Automated
External Holding: A California court of appeals holds the landlord owes no duty to ensure an
Defibrillator AED is maintained at the site of the tenant’s health club since the landlord is out of
possession of the premises and such a requirement would impose an unreasonable
(AED) on the
duty on the landlord. [Day v. Lupo Vine Street, L.P. (April 11, 2018)_CA5th_]
premises?

Strict liability Strict liability for an injury caused by a product applies primarily to the
manufacturer who places the product on the market. Manufacturers and
distributors know products will not be inspected for defects before they are
used. Thus, the manufacturer is liable for defects.

The primary social purpose of strict liability is to impose on the manufacturer,

not the injured user, the costs of injuries caused by its products when used as
intended.

Strict liability for defect-related injuries also extends to distributors and

retailers who are part of the stream of commerce. Distributors and retailers are
considered to be in the best position to assert influence over the manufacturer
to create a product that is free of defects.

Strict liability acts as an incentive for retailers and distributors to give

attention to the safety of products they purchase from manufacturers for
resale to the public.

Social goal However, the social goal of imposing strict liability on all involved in the
manufacturing, distribution and resale of a product to the consumer is not to
ensure the safety of the product. The goal is to distribute the risks and costs of
injury due to lack of safety in the product’s use among those most able to bear
the burden of the costs.

The prevously cited Peterson court held the theory of strict liability is not
extended to residential landlords. Landlords are not distributors or retailers.
Landlords and hotel operators, unlike distributors and retailers, cannot exert
influence over the manufacturer to make a product safe. For the most part,
landlords and hotel operators are not builders and do not have a business
relationship with the manufacturer or the suppliers of the defective product.
 Chapter 36: Defective building components 365

Once the product is purchased and installed by the builder, the product
leaves the stream of commerce — distribution and resale has come to an end.
The later use of the product by occupants, be they tenants or guests, does not
transform the landlord or hotel operator into a retailer of the product.

Editor’s note — Peterson refused to decide whether strict liability may

be imposed on a landlord or a hotel operator who participates in the
construction of the building. Specifications established by planners,
designers and construction contractors will play a role in deciding whether
strict liability will be imposed on owner-builders of rental and hotel units.

When the landlord is negligent in the care and management of their

property, they become liable for injury to others. A landlord is negligent
Duty to correct
when they are confronted with a known dangerous condition and do not act known defects
to correct the condition. Thus, a residential landlord who fails to cure known
dangerous defects will be liable under general tort principles of negligence
for injuries caused by the breach of their duty to correct known defects.

Tenants are able to rely on the landlord’s inspection of the rented space and negligence
their correction of all visible and known defects. Residential landlords are in The failure to behave
the business of leasing property for human occupancy. with the level of
care that someone of
ordinary prudence
The residential landlord will provide a clean, safe and habitable premises would have exercised
during the term of the lease. Further, the landlord is obligated to repair all under the same
conditions.
known patent or latent defects, unless the tenant agrees to undertake repairs
and maintenance.2

Thus, the residential landlord is personally liable to the tenant for injuries
occurring on the rental property as a result of the landlord’s failure to inspect,
locate and repair defective and dangerous property conditions that are
known or reasonably expected to be known to the landlord.3

The residential landlord is obligated to repair uninhabitable conditions

which may affect the tenant’s health and safety immediately. [See Chapter
38]

Editor’s note — The tenant will be able to recover compensation from the
landlord if the tenant can show the landlord may have reasonably foreseen
the accident.

A landlord or hotel operator who is aware of injuries caused by latent defects

in products used on the premises will be liable if other similar latent defects
are not cured, since it is reasonably foreseeable injuries caused by similar
defects throughout the project will occur.4

2 Calif. Civil Code §1942

3 CC §1941
4 Sturgeon v. Curnutt (1994) 29 CA4th 301
366 Property Management, Sixth Edition

Chapter 36 Strict liability for an injury caused by a product applies primarily to

the manufacturer and distributors of the product which becomes a
Summary component or fixture in a building. It is the manufacturer who places
the product on the market and distributors of that product who know
it will not be inspected for defects before it is used. Thus, manufacturers
and distributors are liable for defects in products they manufacture,
market and distribute.

The residential landlord needs to provide a clean, safe and habitable

premises during the term of the lease. Further, the landlord is obligated
to repair all known patent or latent defects, unless the tenant agrees to
undertake repairs and maintenance.

The residential landlord is obligated to repair uninhabitable conditions

which may affect the tenant’s health and safety.

Thus, the residential landlord is personally liable to the tenant for

injuries occurring on the rental property as a result of the landlord’s
failure to inspect, locate and repair defective and dangerous property
conditions that are known or reasonably expected to be known to the
landlord.

Chapter 36 negligence ....................................................................................pg. 365

Key Terms strict liability ............................................................................... pg. 363

Quiz 9 Covering Chapters 34-37 is located on page 652.

 Chapter 37: Care and maintenance of property 367

Chapter
37
Care and maintenance
of property

After reading this chapter, you will be able to: Learning

•  identify the respective duties of the landlord and tenant to
maintain a leased property;
Objectives
•  determine the remedies available to the tenant or landlord if the
other party fails to perform;
•  understand the liability imposed on a landlord for their failure to
eliminate known dangerous conditions; and
•  discuss the circumstances in which a residential tenant can make
repairs to a unit and deduct the cost of the repairs from the next
month’s rent.

nondelegable duty repair and deduct remedy Key Terms

A landlord and a tenant enter into a lease agreement for a furnished unit in Tenant
an apartment complex. The lease agreement contains a provision, implied
if not stated, requiring the residential landlord to maintain the premises obligations
and common areas in a safe and sanitary condition, and comply with all
applicable ordinances and regulations. [See RPI Form 550] 
and remedies
The lease agreement further requires the tenant to keep the unit clean and
sanitary and properly operate all electrical, gas and plumbing fixtures.

Before the tenant takes possession, the resident manager and the tenant
conduct a walk-through of the unit. They agree on the condition of the
premises. The tenant and the resident manager complete a condition of
premises form which is attached as an addendum to the lease agreement
and signed by the tenant. [See Form 560 accompanying this chapter] 
368 Property Management, Sixth Edition

Form 560

Condition
of Premises
Addendum

Page 1 of 2

On the condition of premises form, the tenant notes any defects existing on
the premises. For example, the tenant marks if appliances are dented, screens
have holes or are missing from windows, plumbing fixtures are broken or
leaking, linoleum is peeling or damaged, carpeting has stains, chipped paint,
etc. 

Since the unit is furnished, the tenant and the resident manager also complete
a condition of furnishings addendum during the walk-through. [See Form
561 accompanying this chapter] 
 Chapter 37: Care and maintenance of property 369

Form 560

Condition
of Premises
Addendum

Page 2 of 2

The tenant records any defects in the furniture on the condition of furnishings
form, such as tears or burns in upholstery or scratches in wood furniture. No
minor or major defective conditions are observed by the tenant or the
landlord during the walk-through. 

Later, before the tenant vacates the unit, the tenant and the resident manager
will conduct a pre-expiration inspection. The manager will determine if the
unit and the furnishings have sustained any damage other than normal
wear and tear during the tenant’s occupancy. The tenant will be handed a
statement of deficiencies, listing any conditions which need to be corrected
to avoid a deduction of the corrective costs from the security deposit. [See
Chapter 19] 
370 Property Management, Sixth Edition

Form 561

Condition of
Furnishing
Addendum

The purpose of the condition of premises and condition of furnishings forms

are to determine if any defective conditions exist in the rental unit and to
repair them before the tenant takes possession. When the tenant vacates, the
landlord wants to be able to recover the cost of any damage to the unit or
the furnishings caused by the tenant. The completed forms document the
condition of the unit and its furnishings at the time of occupancy. 

On the other hand, the tenant wants to avoid liability for damage they did
not cause. 
 Chapter 37: Care and maintenance of property 371

A tenant is to repair all deterioration and damage to the premises caused by Tenant’s duty
their failure to use ordinary care. Normal wear and tear on the unit need not
be avoided or eliminated by the tenant.1 to maintain
Further, a residential tenant has a duty of care and maintenance in the use of
the leased premises which includes: 
•  keeping the premises clean and sanitary; 
•  disposing of all rubbish, garbage and waste in a sanitary manner; 
•  properly operating all electrical, gas and plumbing fixtures, and
keeping them clean and sanitary; 
•  allowing no person who is on the premises with the tenant’s permission
to intentionally destroy, damage, waste or remove any part of the
premises or the facilities, equipment or appurtenances; and 
•  occupying and using the premises for the purpose it is intended to be
used.2 
The landlord can agree to be responsible for the cleanliness of the common
areas, and the disposal of garbage.3 

The tenant breaches their duty to care for and maintain the premises when
the tenant: 
•  contributes substantially to the dilapidation of the premises; or 
•  substantially interferes with the landlord’s duty to maintain the
premises.4 
For example, a tenant does not notify their landlord of a leak in the roof that
is causing damage to the ceiling of the rental unit. Eventually, the ceiling
falls down, causing damage to the tenant’s personal property, the walls and
the floor coverings. 

Here, the tenant interfered with the landlord’s duty to maintain the property
since the tenant failed to: 
•  notify the landlord of the leak in the roof; or 
•  repair the leak. 

Also, the landlord is not liable for any damage to the tenant’s personal Neglect to
property resulting from the falling ceiling, since the tenant neglected to
report the water seepage. Conversely, the tenant is liable for the cost of the report
damage to the rental unit for failure to report the need for repairs on the first
sign of leakage. 

A landlord can recover the cost of repairs made to correct excessive wear and
tear by deducting the cost of repairs from the security deposit and demanding
payment for any deficiency in the deposit to cover the expenses.5 
1 Calif. Civil Code §1929
2 CC §1941.2
3 CC §1941.2(b)
4 CC §1941.2(a)
5 CC §1950.5(b)
372 Property Management, Sixth Edition

When a landlord or property manager needs to temporarily displace a tenant, discretion

Temporary is needed in order to not violate the tenant’s right to quiet enjoyment. [Calif. Civil Code
§1940.2(a)]
displacement
for fumigation Mutually agreed-to terms need to be set out in writing by the landlord and tenant when
or repairs the landlord needs to repair or fumigate a property requiring temporary displacement.
Unless otherwise agreed to, the landlord is responsible for the tenant’s costs of
temporarily relocating, including:
• hotel costs;
• pet boarding;
• meals if a kitchen at the replacement accommodation is not provided; and
• any other cost and expense incurred due to the displacement.
The Notice of Temporary Displacement published by RPI (Realty Publications, Inc.)
is used by a property manager or landlord when invasive repairs or fumigation work
require the temporary move-out of a tenant, to notify the tenant of the conditions for
the temporary displacement. [See RPI Form 588]

This notice sets forth:

• the date and time by which the occupant needs to temporarily vacate the
premises [See RPI Form 588 §2];
• the description of the work to be performed [See RPI Form 588 §3];
• the date and time the occupant may reoccupy the premises [See RPI Form 588
§4]; and
• the compensation offered by the landlord for the tenant’s temporary
displacement. [See RPI Form 588 §6]

If the tenant fails to pay any charges remaining unpaid after deductions
from the security deposit, the landlord can file an action against the tenant
to recover amounts not covered by the security deposit.6 

A residential landlord has a general obligation to: 

Landlord’s
•  put a residential unit in a condition fit for occupancy prior to leasing;
duty to and 
maintain •  repair all unsafe and unsanitary conditions that occur during
occupancy that would render the unit uninhabitable.7 
Further, all residential rental and lease agreements automatically contain
an implied warranty of habitability. The unwritten warranty imposes a
contractual duty on a landlord to keep their residential units fit for human
occupancy at all times.8 [See Chapter 38]

The landlord’s statutory obligation to maintain their residential units

requires the landlord to correct major defects interfering with the tenant’s
ability to live on the property, such as a lack of hot water or a leaky roof. 
6 CC §1950.5(n)
7 CC §1941
8 Green v. Superior Court of the City and County of San Francisco (1974) 10 C3d 616
 Chapter 37: Care and maintenance of property 373

The residential landlord has an obligation to care for and maintain all major
and structural components of residential rental units. They are also further
obligated to repair minor defects. Minor defects include such conditions as:
•  leaky faucets;
•  faulty electrical switches; and
•  failed locks or latches.
Typically, a residential landlord agrees in the rental or lease agreement
to care for and maintain the property, which includes the repair of minor
defects. [See RPI Form 550] 

The landlord’s failure to repair or replace minor defects constitutes a breach

of provisions in the rental or lease agreement. The landlord who breaches the
lease agreement by failing to make minor repairs is required to reimburse the
tenant for reasonable costs incurred by the tenant to cure the defects.

When a residential landlord fails to repair minor defective conditions on

the property on notice from the tenant, the tenant may exercise one of three
Tenant’s
remedies:  option to
•  repair the defect and deduct the costs of contracting for the repair from repair
the rent9; 
•  make the repairs, continue to pay rent and sue the landlord to recover
the cost of repairs; or 
•  vacate the premises.10 
However, if the premises are so unsafe and unsanitary they qualify as
uninhabitable, the tenant can remain in occupancy and withhold payment
of the rent. In an ensuing UD action, the tenant raises the defense of the
landlord’s breach of the implied warranty of habitability. The habitability
defense forces the landlord to make the necessary repairs to eliminate the
unsafe and unsanitary condition before they may collect rent. [See Chapter
38]

The court then sets the amount of rent due during the period of nonpayment
of rent. The rent amount is based on the percentage of uninhabitability,
usually determined in the tenant’s favor.

If the leased premises is in need of repair, whether minor or major, the tenant
needs to notify the landlord of the condition. The notification may be made
The repair
orally, or in writing. and deduct
After advising the landlord of the need for repairs, the tenant may make the remedy
repairs and deduct the cost of the repairs from the next month’s rent if:
•  the landlord fails to make the necessary repairs within a reasonable
time after notice of the defect; and  
9 CC §1942(a)
10 CC §1942(a)
374 Property Management, Sixth Edition

Smoke alarm A building permit issued for alterations or repairs of $1,000 or more on residential
requirements property will not be signed off until the property owner demonstrates all smoke alarms
are on the current list of devices approved and listed by the State Fire Marshal. [Health
for residential
and Safety Code §§13113.7, 13113.8, and 13114]
rental
Smoke alarms will meet the following requirements to be approved and listed by the
properties
State Fire Marshal:
•  display the date of manufacture;
•  have a hush feature;
•  include an alarm indicating the unit needs to be replaced; and
•  if battery operated, contain a non-replaceable battery that lasts at least ten years.
A fire alarm system with smoke detectors may be installed in lieu of smoke alarms.
Multi-family residential properties are no longer required to have smoke detectors in
common stairwells. Owners of multi-family housing properties who rent or lease their
property are now responsible for testing and maintaining smoke alarms within all the
units in their properties. This applies to both occupied and unoccupied units.
Residential property owners who rent out one or more units need to install any
additional smoke alarms required under existing building standards. Existing alarms
only need to be replaced if they are inoperable.

•  the cost of repairs does not exceed the amount of one month’s rent,
repair and deduct called the repair and deduct remedy.
remedy
An option available The tenant may not exercise the repair and deduct remedy more than twice
to a residential tenant
when the landlord in any 12-month period.11 
fails to repair leased
property which allows Also, any agreement by the tenant to waive or modify their right to repair
the tenant to make
the repairs and deduct
and deduct the costs from the rent is unenforceable.12 
their cost from the next
month’s rent payment. A reasonable time for the landlord to make necessary repairs after notice is
30 days, unless the need to repair is urgent and requires more immediate
attention.13 

The repair-and-deduct remedy is not available to the tenant when the need
for repair is created by the tenant’s conduct.14 

Repairs If the cost of repairs exceeds one month’s rent, the tenant, while continuing
to occupy and pay rent, may make the necessary repairs and file an action
exceeding against the landlord to recover the cost of the repairs. 
one month’s However, it may be impossible for the tenant to make the necessary repairs
rent when the tenant: 
•  rents a unit in a large complex; or 
•  is unable to cover the cost of repairs. 
11 CC §1942(a)
12 CC §1942.1
13 CC §1942(b)
14 CC §1942(c)
 Chapter 37: Care and maintenance of property 375

If a commercial landlord’s failure to make repairs substantially interferes

with a tenant’s use of the property, the tenant can vacate the premises and is
relieved of any further obligation under the lease. Recall that this is called a
constructive eviction.15 [See Chapter 34] 

Like a residential landlord, a commercial landlord who retains responsibility

for maintenance and repair under the lease agreement also has a duty to use
Maintaining
care in doing so.  property with
Consider a tenant, residential or commercial, who notifies their landlord a care
window is broken and will not stay open. The landlord begins work to repair
the window, but does not complete the work. The tenant gives the landlord
permission to enter the premises when the tenant is out to finish the repairs.
The landlord does not enter the premises to make the repairs. 

Finally, the window falls, injuring the tenant. 

Here, the landlord is responsible for the injuries. Once a landlord of residential
or commercial premises undertakes to make repairs on the premises to correct
a dangerous condition, the landlord is to complete the repairs in a timely and
proper manner.16 

Landlords of both residential and commercial property are also responsible

to tenants, guests of tenants and members of the public for injuries caused
to them by the landlord’s lack of ordinary care or skill in the maintenance of
their property.17 

Now consider a commercial landlord who hires a contractor to repair the Nondelegable
roof on leased property. A tenant is injured as a result of the contractor’s
negligence while performing the repair.  duty to repair
The tenant claims the landlord is liable for their injuries since the landlord
was responsible for the maintenance which created a dangerous condition. 

The landlord claims they are not liable since it was the roofing contractor’s
negligence while on the job which caused the tenant’s injury, not the
landlord. 

Is the landlord liable for injuries to a tenant caused by a contractor hired by

the landlord to perform repairs? 

Yes! A landlord’s duty to exercise care (not to be negligent) in the repair and nondelegable duty
maintenance of a leased premises is a nondelegable duty. A nondelegable A duty which cannot
duty is an obligation which cannot be transferred or assumed by another be transferred or
assumed by another
person, such as a property manager or contractor.18  person. In the case of a
landlord, a
nondelegable duty
cannot be assumed by
15 CC §1942(a)
a property manager or
16 Minoletti v. Sabini (1972) 27 CA3d 321 contractor.
17 CC §1714
18 Srithong v. Total Investment Company (1994) 23 CA4th 721
376 Property Management, Sixth Edition

When repairs It’s common for an agent to coordinate repairs on behalf of the owner when listing
require a property for sale or lease. Agents who order or oversee maintenance or repair projects
contractors costing $500 or more are considered consultants, and subject to contractor licensing
requirements issued by the California Department of Consumer Affairs Contractors
license State Licensing Board (CSLB).
Individuals are not required to be licensed under the contractors license law if:
• the work performed costs less than $500, including labor and materials [Business
and Professions Code §7048];
• the work is performed by the owner of the property [Bus & P C §7044];
• the work is performed by a public utility [Bus & P C §7042];
• the work involves petroleum and gas operations [Bus & P C §7043]; or
• the work performed is for agricultural purposes.
Further, a common interest development (CID) manager is not required to have a
contractors license when performing management services. [Bus & P C §7026.1(b)]
When operating a residential or commercial rental property, routine maintenance is
part of day-to-day property management. Routine maintenance prevents obsolescence
from decreasing a property’s desirability as a rental, and thus, its value and the total
rents it commands.
For repairs costing less than $500, the agent can contract with either:
• licensed contractors; or
• unlicensed individuals such as handymen.
However, when costs for all the proposed repairs are $500 or more, an agent who
does not have a contractors license is limited in involvement to recommending a
competent licensed contractor. All the negotiations, contracting and oversight are the
responsibility of the owner directly. [Bus & P C §7048]
The same rules apply to a property manager overseeing the ongoing repairs and
maintenance of property they are managing. A broker, retained as property manager,
is allowed to order out maintenance, repairs and replacements to be performed by
third parties when the total cost is less than $500 per project.
In addition, a property management agreement does not relieve an agent or broker
from the contractors licensing requirements if they intend to solicit bids or otherwise
facilitate or undertake any part of the work for repair and maintenance projects costing
$500 or more.
Accordingly, an agent who provides property management services and is also a
licensed contractor can order out work as authorized by the owner of the property
regardless of the cost. [See RPI Form 108]
In either situation, a professional property manager always has a predetermined limit
for repairs set by the property management agreement entered into with the owner.
Any repairs which exceed the limit require the owner’s further authorization.
 Chapter 37: Care and maintenance of property 377

The landlord is liable for injuries caused to persons (excluding the contractor’s
employees) during the fulfillment of the landlord’s duty to maintain the
property, whether the maintenance is accomplished by the landlord or by
contractors the property manager employs. 

A landlord is aware that felony crimes recently occurred in the common Penalty for
areas of their apartment complex and parking garage. 
failure to
The tenants of the complex complain to the landlord about the crimes. The
tenants request the broken doors, gates and locks be repaired and adequate maintain
lighting be provided as security to prevent the crimes from reoccurring. 

The landlord fails to make the repairs or provide the security measures
requested. Later, while in a common area, a tenant is assaulted and suffers
injuries. 

The tenant seeks to recover losses from the landlord for their injuries, as
well as punitive damages. The injured tenant claims the landlord breached
their duty to protect them from known criminal activity in the complex. The
landlord failed to maintain and provide adequate security measures in the
common areas. Further, the tenant claims the landlord is liable for breaching
the warranty of habitability.

First, can the tenant recover punitive damages from the landlord? 

Yes! The landlord was aware of the dangerous condition created by the lack
of maintenance. By failing to correct the deferred maintenance, the landlord
acted with a conscious disregard for the rights or safety of the tenants. The
landlord’s deliberate failure to maintain the premises by eliminating the
dangerous conditions which were known and over which they alone had
the power to correct, exposes them to liability for punitive damages.19 

Also, a landlord who fails to disclose dangerous conditions which are known
to the landlord is liable for punitive damages.20 

However, the landlord is not liable for breaching the warranty of habitability.
The living quarters were habitable, and the housing complied with local
codes. Thus, any tenant who fails to pay rent based on the landlord’s breach
of the implied warranty of habitability for lack of security in the common
areas will be subject to eviction.21

19 Penner v. Falk (1984) 153 CA3d 858

20 O’Hara v. Western Seven Trees Corporation Intercoast Management (1977) 75 CA3d 798
21 Penner, supra
378 Property Management, Sixth Edition

Chapter 37 A tenant needs to repair all deterioration and damage to the premises
caused by their failure to use ordinary care. Normal wear and tear on
Summary the unit need not be avoided or eliminated by the tenant.

A residential landlord has an obligation to care for and maintain all

major and structural components of residential rental units. They are
also further obligated to repair minor defects. The landlord’s failure to
repair or replace defects constitutes a breach of provisions in the rental
or lease agreement.

After advising the landlord of the need for repairs, the residential tenant
may contract for the repairs and deduct the cost of the repairs from the
next month’s rent if:
•  the landlord fails to make the necessary repairs within a reasonable
time; and
•  the cost of repairs does not exceed the amount of one month’s rent.

Like a residential landlord, a commercial landlord who retains

responsibility for maintenance and repair under the lease agreement
also has a duty to use care in doing so. Once a landlord of residential
or commercial premises undertakes to make repairs on the premises to
correct a dangerous condition, the landlord is required to complete the
repairs in a timely and proper manner.

Chapter 37 nondelegable duty....................................................................... pg. 375

repair and deduct remedy.......................................................... pg. 374
Key Terms

Quiz 9 Covering Chapters 34-37 is located on page 652.

 Chapter 38: Implied warranty of habitability 379

Chapter
38
Implied warranty of
habitability

After reading this chapter, you will be able to: Learning

•  discuss the circumstances in which the implied warranty of Objectives
habitability has been breached;
•  identify the features of a dwelling which, if not properly
maintained, constitute a breach of the implied warranty of
habitability; and
•  understand what steps residential landlords are to take when
a tenant fails to notify the landlord of a condition affecting the
habitability of a property.

habitability defense implied warranty of Key Terms

habitability
habitable condition

A landlord, aware an apartment complex they own is in a state of disrepair, Safe and
does nothing to correct the defective conditions on the property. Due to the
location of the property and its below market rents, the landlord is able to rent sanitary living
out units in the complex without repairing any of the defective conditions.  conditions 
A tenant, fully aware of the unsafe and unsanitary conditions, enters into
a lease agreement with the landlord. Soon after occupying, the tenant asks
the landlord to exterminate the rodents and cockroaches in their unit. The
tenant also requests that plumbing blockages, exposed electrical wiring and
the collapsing bathroom ceiling in the unit be repaired. 

The landlord does not correct or repair any of the defective conditions. In
retaliation, the tenant stops paying rent but continues to occupy the unit. 
380 Property Management, Sixth Edition

The landlord serves a three-day notice for nonpayment of rent and declares
a forfeiture of the tenant’s right of possession. The notice expires without
payment and the landlord files an unlawful detainer (UD) action to evict the
tenant. 

The tenant defends their right to occupy, claiming the landlord failed to
maintain the premises in a habitable condition. Thus, the tenant was entitled
to:  
•  retain possession; and 
•  pay a reduced rent set by the court. 
Even though they failed to make repairs, the landlord claims the tenant is
required to pay the amount of rent agreed-to in the lease since the tenant
needs to either: 
•  quit the premises; or 
•  make the repairs themselves and deduct the cost of the repairs from
their rent as authorized by law. 
Can the tenant continue to occupy the premises and pay a reduced court-
ordered rent to the landlord? 

implied warranty of Yes! The landlord’s failure to maintain the premises in a habitable
habitability condition constitutes a breach of the implied warranty of habitability.
An unwritten
provision, included All residential rental and lease agreements are subject to the warranty of
by statute, in all habitability regardless of the provisions in the lease agreements.
residential lease
agreements requiring
the landlord to provide
Also, the court-ordered reduced rent will remain for as long as the landlord
safe and sanitary fails to make the necessary corrections or repairs.1 
conditions in the
rental unit. Commercial leases are not subject to an implied warranty of habitability. [See
Chapter 42] 

However, if the commercial landlord fails to make the significant repairs they
are obligated to make under the lease agreement, the commercial tenant has
two options: 
•  pay for the repairs themselves, demand reimbursement from the
landlord, and if unpaid, file an action against the landlord to recover
the cost of the repairs; or 
•  vacate the premises, if justified, and file an action against the landlord
for losses resulting from a constructive eviction. [See Chapter 34]

Implied The typical residential tenant under a lease agreement acquires a leasehold
right to occupy the leased premises for a specific period of time. The tenant
warranty of properly expects the premises and appurtenances (e.g., common areas,
habitability parking and storage) available to them to be safe, sanitary and fit for use. 

1 Green v. Superior Court of the City and County of San Francisco (1974) 10 C3d 616
 Chapter 38: Implied warranty of habitability 381

However, a residential tenant, especially an apartment dweller, is not just

acquiring an interest in real estate; they have contracted for and are entitled
to a safe and sanitary place to live, called a habitable dwelling. [See RPI
Form 550] 

The implied warranty requires the residential landlord to care for the premises
by maintaining it in a habitable condition. A habitable condition is the habitable condition
minimum acceptable level of safety and sanitation permitted by a court as The minimum
acceptable level of
discussed later in this chapter.2  safety, utility and
sanitation permitted in
Residential property which is not in a habitable condition cannot be rented a residential rental.
or leased “as disclosed,” even though defective property conditions have been
fully disclosed and the substandard conditions consented to by the tenant.

The implied warranty applies to the space rented by the tenant as housing
and to all appurtenances.3 

The public policy establishing the warranty of habitability was legislated

due to landlord abuses during periods of scarcity in low-cost housing.
This economic situation left residential tenants in lesser socioeconomic
neighborhoods without the bargaining power possessed by more affluent
and mobile tenants when negotiating with landlords for better property
conditions. 

Market forces cannot prevail over the higher public policy requiring safe and
sanitary housing. The warranty of habitability serves to punish slumlords
and discourage slum-like conditions in low-income housing. 

A landlord who invests money in real estate needs to maintain their property.
Otherwise, the value of their investment will eventually disintegrate due to
competitive pressures in the rental market and court orders on tenant claims
of uninhabitability. 

The landlord breaches the implied warranty of habitability when they fail
to comply with building and housing code standards that materially affect
Landlord’s
health and safety.4  breach of the
A habitable place to live is a dwelling free of major defects, not mere warranty
inconveniences, which would interfere with the tenant’s ability to use the
premises as a residence. 

A residential dwelling is uninhabitable if any features of the dwelling are

not properly maintained or do not substantially comply with building and
housing codes, including: 
•  effective waterproofing and weather protection of roof and exterior
walls, including unbroken windows and doors; 
•  plumbing and gas facilities; 
2 Hinson v. Delis (1972) 26 CA3d 62; Calif. Code of Civil Procedure §1174.2
3 Hinson, supra
4 CCP §1174.2(c)
382 Property Management, Sixth Edition

•  a hot and cold running water system with appropriate fixtures which
are connected to a sewage disposal system; 
•  heating facilities; 
•  electrical lighting; and 
•  floors, stairways and railings.5 
In applying these guidelines, a leaky faucet does not render a residential
unit uninhabitable, despite the inconvenience. However, a lack of running
water, or no hot water, is a significant defect that materially interferes with
the tenant’s ability to use the property as shelter.

At the time the rental or lease agreement is entered into, the building
grounds and appurtenances, such as a pool, laundry facilities, storage areas
and parking structures, need to be maintained clean, sanitary and free from
all accumulations of debris, filth, rodents and vermin to meet habitability
guidelines.6 

Further, the landlord needs to provide an adequate number of garbage and

rubbish receptacles in clean condition and good repair.7 

A residential tenant in an apartment complex is not typically expected to

Landlord make repairs to major components of the complex, such as a central heating
responsibility system, an electrical or plumbing system or the roof. 

for repairs If a residential landlord fails to make necessary repairs, and the cost of the
repair is less than one month’s rent, the tenant may order out and pay for the
needed repairs. The tenant may then deduct the cost from the rent, called the
repair-and-deduct remedy.8

However, the repair-and-deduct remedy is not often feasible in apartment

complexes since areas where repairs are made are in the possession and
control of the landlord.

The residential tenant faced with inability to use self-help to cure defects
may resort to other remedies, such as:
•  vacating the premises, called a constructive eviction [See Chapter 34]; 
•  stop paying rent and, in any ensuing UD action, prove the landlord
breached the implied warranty of habitability; or 
•  raise and prove the defense of retaliatory eviction in any UD action. 
 

Before renting a residential unit in a building intended for human habitation,

Pre-leasing the landlord, in addition to continually maintaining habitability, will:
maintenance •  install and maintain an operable dead bolt lock on each main entry
program door of a unit, unless the door is a horizontal sliding door; 
5 Calif. Civil Code §1941.1
6 CC §1941.1(f)
7 CC §1941.1(g)
8 CC §1942
 Chapter 38: Implied warranty of habitability 383

Facts: A rental property was owned by two individuals as co-owner. One co-owner Case in point
primarily managed the property while the other co-owner was passive performing only
limited management duties. The co-owners held an insurance policy covering claims Does a co-
resulting from unknown dangerous housing conditions. The managing co-owner was owner’s limited
aware of dangerous housing conditions on the property. A tenant of the rental property management of
sued and was awarded money damages against both co-owners for dangerous housing
conditions. The insurance company paid the damages then sought to recover the rental property
expenditures from the co-owners. expose them
Claim: The insurance company claimed the damages they advanced were not covered
to liability for
by the insurance policy since both the co-owners were aware of the dangerous knowing of
conditions due to their mutual management of the rental property. dangerous
Counter claim: The passive co-owner claimed their share of the damages was covered housing
under the insurance policy since they had only limited involvement in the management conditions on
of the rental property and was unaware of the dangerous housing conditions. a co-owned
Holding: A California court of appeals held the damages awarded the tenant and property?
advanced by the insurance company were not covered by the insurance policy and the
insurance company was entitled to recover the advances from either or both co-owners
since the passive co-owner’s limited involvement in the management of the rental
property put them on notice of the dangerous conditions. [Axis Surplus Insurance
Company v. Reinoso (2012) 208 CA4th 181]

•  install and maintain operable security or locking devices for windows

which are designed to be opened, unless the window is a louvered
window, casement window, or more than 12 feet vertically or six feet
horizontally from the ground, roof or other platform; and 
•  install locking mechanisms on the exterior doors leading to common
areas with access to dwelling units in an apartment complex.
Editor’s note — Installation of a door or gate is not required if none existed
on January 1, 1998.9 

A tenant is responsible for promptly notifying the landlord of an inoperable

dead bolt lock, window security or locking device in the unit. The landlord
will only be liable for injuries caused by their failure to correct the defect
within a reasonable period of time after being notified or becoming aware of
the defect.10 

A residential landlord failing to comply with required security measures

entitles the tenant to: 
•  repair and deduct the cost from rent; 
•  vacate the premises; 
•  recover money losses incurred due to the condition of an uninhabitable
building; 
•  recover losses caused by any landlord retaliation; 
•  file an action for breach of contract; or 

9 CC §1941.3(a)
10 CC §1941.3(b)
384 Property Management, Sixth Edition

•  seek injunctive relief to stop the landlord from maintaining an

uninhabitable building.11 

Landlord’s In a UD action, a tenant who successfully raises the habitability defense will
be allowed to: 
warranty of •  retain possession of the premises; 
habitability •  pay a reduced amount of rent based on the uninhabitable condition of
defense the property; and 
•  recover attorney fees and costs of litigation.12 
To retain possession, the tenant pays the rent awarded to the landlord, offset
by the tenant’s attorney fees, within: 
•  five days of the entry of judgment; or 
•  ten days, if the UD judgment is served on the tenant by mail.13 
If the tenant fails to pay the rental amounts set by the court in a timely
manner, the landlord is awarded possession of the premises.14 

The UD judgment may or may not require the landlord to make all repairs
necessary to return the premises to a safe and sanitary condition. When a
landlord is ordered to correct the uninhabitable conditions by returning the
premises to a safe and sanitary condition: 
•  the tenant remaining in possession pays the reasonable monthly
rental value of the premises in its uninhabitable condition until the
repairs are completed; and 
•  the court retains control to oversee compliance by the landlord.15 
habitability defense The tenant who raises the habitability defense instead of paying the rent
A residential tenant’s takes the risk of being evicted. The landlord’s failure to make repairs may
pursuit of a legal
remedy due to a not rise to the level of a substantial breach of the warranty of habitability
landlord’s failure to if the repairs are minor and are judged to create only an inconvenience or
maintain habitable
conditions on the
annoyance to the tenant. 
rented premises.
If the landlord has not substantially breached the warranty of habitability: 
•  the landlord is awarded the right of possession; and 
•  the tenant is liable for rent accrued through the date of judgment.16 
Further, the prevailing party in a UD action is entitled to their attorney
fees, even if the rental or lease agreement does not contain an attorney
fees provision. The prevailing party is the party awarded possession of the
premises.17 

11 CC §1941.3(c)
12 CCP §1174.2(a)(1)
13 CCP §1174.2(a)
14 CCP §1174.2(b)
15 CCP §1174.2(a)
16 CCP §1174.2(b)
17 CCP §1174.2(a), (b)
 Chapter 38: Implied warranty of habitability 385

To calculate the reasonable rental value of the premises when a breach of the Determining
implied warranty of habitability exists, the court will: 
reasonable
•  establish the percentage attributable to the tenant’s diminished
habitability or use of the premises due to the substandard living rental value
conditions; and 
•  use the percentage to reduce the agreed-to monthly rental payment.18 
When determining the percentage of habitability or usability lost caused by
the landlord’s failure to maintain, criteria includes: 
•  the area of the rental unit affected; 
•  the duration of the tenant’s exposure to the defect; 
•  the degree of discomfort the defect imposes on the tenant; 
•  whether the defect is health-threatening or just intermittently
annoying; and 
•  the extent to which the defect caused the tenant to find the premises
uninhabitable.19 
If the agreed-to monthly rent is already below market rent due to the
condition of the premises, the landlord who has breached the warranty of
habitability may receive only a minimal amount of rent from the tenant.
The court-ordered rent properly may be so minimal as to result in a financial
penalty to the landlord. 

Editor’s note — While this penalizing rental amount actually may be unfair
to the landlord until they repair the premises, courts are unsympathetic.20

The purpose of the warranty of habitability is to prevent illegal, substandard

housing from having any market rental value. It also encourages landlords
to maintain their premises in a condition where market rents can be
charged and actually enforced in a UD action. 

The mere existence of unsafe and unsanitary conditions, whether or not they
are known to the tenant, establishes the landlord’s breach of the implied
Landlord’s
warranty of habitability.  breach on full
Consider a prospective tenant who contacts a property manager to rent a disclosure
unit in an older apartment building. The tenant inspects the unit and notices
wall cracks and broken windows. Considering the condition of the unit and
the tenant’s financial condition, the tenant offers to rent the premises in
exchange for a reduced rent. The landlord agrees, and the property manager
rents the unit. 

The tenant takes possession. Soon afterwards, the tenant notifies the property
manager of an inoperable heating system, electrical fixtures with exposed

18 Cazares v. Ortiz (1980) 109 CA3d Supp. 23

19 Cazares, supra
20 Cazares, dicta
386 Property Management, Sixth Edition

wiring, no hot water and a rodent infestation. The property manager advises

the landlord of the need for repairs and pest control. The landlord does not
correct the defective conditions in the unit. 

The tenant remains in possession but refuses to pay any rent, claiming their
unit has substandard living conditions making the unit uninhabitable. The
tenant is served with a three-day notice to pay or quit. The tenant still does
not pay, and a UD action is filed. 

The tenant claims they are not obligated to pay rent since the landlord
breached the implied warranty of habitability. The landlord claims the
tenant is barred from claiming a breach of the warranty since the tenant was
fully aware of the extent of the defective conditions at the time they took
possession. 

Here, the landlord is not relieved of their duty under the implied warranty of
habitability even though the tenant was fully aware of unsafe and unsanitary
conditions when they took possession. It is the state of the premises, and not
the disclosure of existing uninhabitable conditions that determines whether
a breach of the implied warranty of habitability took place.21 

Unlike the sale of property, when a landlord fails to care for and maintain
their residential property in a habitable condition, they cannot rent the
property “as-disclosed” and escape liability for having fully informed the
tenant about the conditions. 

Landlord has A landlord may not allow a tenant to take possession of a property known
to be unsafe or unsanitary. Before renting out such a unit, the landlord is to
no time to ensure the premises is fully repaired. 
respond The warranty of habitability is breached when the need for repairs is: 
•  known by the landlord, either through notice from the tenant or by the
physical state of the property at the time it is rented; and 
•  the landlord fails to immediately correct the defective conditions. 
Landlords have a duty to inspect and maintain their property and improve
or correct known substandard conditions before renting it. Landlords are
not granted a reasonable time to repair uninhabitable conditions if they are
known to the landlord to exist before renting out the property to a tenant. This
rule is based on the notion that landlords are to be aware of the condition of
the physical components of the premises at the time the unit is rented.22 

However, if a tenant has possession of the property, the tenant is to make the
landlord aware of the unsafe or unsanitary conditions before the landlord
can be held responsible for repairing them.

21 Knight v. Hallsthammer (1981) 29 C3d 46

22 CC §1714
 Chapter 38: Implied warranty of habitability 387

Consider a tenant who rents a single-family residence that is in a safe and

sanitary condition when they take possession. The condition of the premises
is documented at the time possession is transferred. 

During the tenant’s occupancy, the toilet begins to leak and the linoleum
floor does not repel the water. On noticing the leak, the tenant has a duty to
notify the landlord and give them a reasonable amount of time to make the
repairs before taking other action.23 

However, the tenant fails to notify the landlord of the need for repairs.
The bathroom floor rots due to the toilet leak, weakening the subfloor and
eventually creating a hole. When the rent is due the tenant notifies the
landlord of the unsafe and unsanitary bathroom conditions, but does not
pay the rent. 

Due to their refusal to pay rent, the tenant is promptly served with a three-
day notice to pay rent or quit. The landlord begins repairs on the unit. The
three-day notice expires and a UD action is filed and served on the tenant.
The landlord completes the repairs prior to the UD hearing. 

At the UD hearing, the tenant claims the landlord breached the implied
warranty of habitability.  

The landlord claims the warranty of habitability has not been breached since
they did not have notice of the need for repairs until the tenant complained
and refused to pay rent. 

Has the landlord breached the implied warranty of habitability? 

No! The tenant brought about the unsafe and unsanitary condition by failing
to promptly notify the landlord of the need for repairs.24 

Consider a landlord of an apartment building whose tenants notify them of New landlord
seriously unsafe living conditions in the units. 
steps into the
The landlord is financially incapable of paying for the repairs needed, and
sells the complex. The new landlord inspects the building and is aware of
breach
defective and substandard conditions in the units. The new landlord proceeds
to correct the conditions by renovating the building. 

The new landlord notifies the tenants of the complex’s change in ownership
and an increase in their monthly rent to amortize their costs of renovation. 

A tenants’ association is organized. The tenants refuse to pay rent due to the
ongoing state of disrepair in the units. The landlord serves three-day notices
on the tenants who fail to pay the agreed rent. Unlawful detainer actions are
filed, and the tenants raise the breach of the implied warranty of habitability
as a defense to avoid eviction and reduce rents. 

23 CC §1942
24 CC §1942
388 Property Management, Sixth Edition

The landlord claims the landlord is not breaching the warranty of habitability
since the previous landlord breached the warranty of habitability. 

The tenants claim the change in ownership did not terminate their right to
raise the warranty of habitability defense. The breach was a condition of the
property that continued after the new landlord took possession, whether or
not the landlord knew of the breach. 

Can the tenants raise the warranty of habitability defense against a new
landlord who did not cause the existing unsafe conditions? 

Yes! The tenants have a valid implied warranty of habitability defense that
justifies their failure to pay rent since: 
•  the premises were uninhabitable during the new landlord’s ownership;
and 
•  the new landlord is attempting to evict the tenants for rental amounts
due under their ownership.25 
Even though the landlord did not cause the premises to become uninhabitable
and began rehabilitating the property when they purchased it, the tenants
can still refuse to pay the agreed-to rent and avoid eviction.

Duty to avoid A tenant can recover more than a rent adjustment when the landlord
breaches the implied warranty of habitability. 
foreseeable
For example, a tenant inspects a rental unit and enters into a month-to-month
injury rental agreement with the landlord. When the tenant takes occupancy of the
unit, the tenant discovers faulty electrical wiring, a clogged kitchen sink and
a leak in the roof, later damaging the tenant’s personal property. 

The tenant notifies the landlord (and the county health department) of the
defective property conditions and asks the landlord to make the necessary
repairs. 

The landlord fails to make any repairs. The tenant continues to reside on the
premises.

Eventually, the county health department issues a notice condemning the

building as unfit for occupancy. The tenant relocates. 

The tenant then makes a demand on the landlord for water damage to their
personal property and the cost of relocating to a new residence since the
landlord breached their duty of care to repair the defective conditions. 

Here, the landlord owes a duty of care to the tenant, apart from the implied
warranty of habitability, to properly maintain the premises and avoid the
risk of the tenant’s foreseeable financial loss.

25 Knight, supra
 Chapter 38: Implied warranty of habitability 389

A rodent infestation is a breach of the implied warranty of habitability, inherent in all How many mice
residential rental and lease agreements as though it is a written provision. [Green v.
are too many?
Superior Court of California (1974) 10 Cal. 3d 616]
A dwelling is considered uninhabitable if it is not “substantially free” from rodents and
vermin. This, of course, raises the question of what constitutes “substantial.” [Calif. Civil
Code § 1941.1(a)(6)]
Under the implied warranty of habitability, an infestation is considered substantial
enough to constitute a breach of the warranty if there is a “continued presence of rats,
mice and cockroaches on the premises.” [Green, supra]
When a residential property is thus infested, the tenant has the right to withhold
rent for the duration of the infestation, until the landlord returns the property to a
habitable condition. In the event the landlord proceeds with servicing notices and an
unlawful detainer (UD) action for the tenant’s failure to pay rent, the tenant defends
their occupancy by claiming the landlord breached the implied warranty of habitability.
If the tenant successfully defends against the UD action, the tenant is still required to
pay rent for the period of the landlord’s breach. However, the court will reduce the rent
by an amount proportional to the infestation’s impact on the unit’s habitability. In cases
where a unit’s habitability is severely affected, that amount can be reduced to almost
nothing.
In multi-family properties infestations are not usually limited to one unit, frequently
affecting areas beyond the control of an individual tenant. Lack of control makes it
difficult or impossible for the tenant to eliminate an infestation on their own.
Bear in mind that a tenant may not withhold rent for a habitability issue they caused.
Also, if the tenant never notified the landlord a condition had arisen that renders the
unit uninhabitable, the landlord is not in breach of the implied warranty. Further, a
tenant’s request to repair the defect needs to be made in writing since proving the
landlord breached the implied warranty is the tenant’s responsibility.
Ultimately, rent will continue to accrue on an uninhabitable unit. However, policy
mechanisms are in place to severely reduce the economic viability of an uninhabitable
unit for the landlord. The goal is to prevent substandard units from entering the
marketplace to begin with.

The landlord is liable for the costs incurred by the tenant to replace damaged
personal property and relocate. The costs the tenant incurred were a result of
the landlord’s breach of their duty of care by failing to make the necessary
repairs to eliminate unsafe and uninhabitable conditions.26 

Additionally, the tenant can recover excessive rent paid for periods of their
occupancy when the unit was uninhabitable. 

A tenant who fails to raise the warranty of habitability defense in a UD action

and is evicted or otherwise vacates can later recover any excessive rent paid
during the period the landlord failed to maintain the unit in a habitable
condition.27 

26 Stoiber v. Honeychuck (1980) 101 CA3d 903

27 Landeros v. Pankey (1995) 39 CA4th 1167
390 Property Management, Sixth Edition

A habitable condition is the minimum acceptable level of safety and sanitation — i.e.,
Bed bugs: a a property that is clean, sanitary and free of debris, garbage, rodents and vermin, such
new kind of as bed bugs. [Calif. Civil Code §1941.1]
controlled pest
Bed bugs pose a particularly challenging problem for California residential landlords.
In multi-family properties, infestations frequently affect areas beyond the control of an
individual tenant. Thus, properly coordinated and timely intervention is necessary to
prevent a bed bug infestation from getting out of control.

Landlords are to provide a written bed bug notice to prospective tenants when entering
into a rental or lease agreement. [See RPI Form 550 and 551]

The notice contains information about:

• bed bug identification, behavior and biology;
• the importance of cooperating in bed bug prevention and treatment;
• the importance of prompt written reporting of bed bug infestations to the
landlord; and
• the procedure for reporting suspected bed bug infestations to the landlord. [See
RPI Form 563-2]
When a residential landlord enters into a rental or lease agreement, the notice is
included an as addendum attached to the agreement. Effective 2018, the landlord is
also required to hand the notice to tenants under existing rental or lease agreements
which did not contain the bed bug attachment. [See RPI Form 563-2]

Landlord and tenant duties

The bed bug notice advises tenants to cooperate in the prevention and treatment of bed
bugs. It also notes the tenant is to promptly hand their written notice of a suspected
bed bug infestation to the landlord or property manager.

When a tenant reports a suspected infestation, the landlord or property manager will
promptly contact a structural pest control operator requesting they investigate and
correct the reported infestation.

Prior to the pest control operator’s entry, the landlord serves the tenant a written 24-
hour Notice of Intent to Enter Dwelling. [See RPI Form 567]

When a pest control operator identifies an infestation and takes actions to cure the
infected area, tenants are to cooperate with the pest control operator’s treatment
strategy, such as:
• reducing or removing clutter;
• washing clothing, linens and furniture;
• clearing items from closets, shelves, drawers and other storage areas;
• thoroughly vacuuming and cleaning the infested and surrounding areas;
• allowing the operator to conduct their investigation unhindered or temporarily
leaving the unit during the pest control operator’s inspection or treatment; or
• destroying any untreatable items identified by the pest control operator.
 Chapter 38: Implied warranty of habitability 391

When a landlord has no notice or suspicion of a bed bug infestation, they do not need Bed bugs: a
to call for an inspection of a dwelling unit or common areas for bed bugs. However, new kind of
when a bed bug infestation is visually detectable during any landlord inspection, the
landlord is deemed to be on constructive notice of the infestation.
controlled pest

Further, a landlord may not show a prospective tenant any residential rental unit the cont’d
landlord knows is infested by bed bugs.

The landlord has two business days after receiving a bed bug inspection report from a
pest control operator to notify the affected tenants about the units or common areas
inspected of the pest control operator’s findings. [See RPI Form 563-3]

Editor’s note — When a bed bug infestation exists in a common area, the landlord is
to provide notice of the infestation and inspection results to all tenants. [See RPI Form
563-3]

Now consider a tenant of an apartment unit forced to relocate due to unsafe Conditions
flooring and unsanitary conditions. The unsanitary conditions cause the local
health department to issue an order condemning the apartment complex.  creating a
The tenant makes a demand on the landlord to pay their relocation expenses. nuisance
The tenant claims the defective conditions in the rental unit constitute a
nuisance since they are deprived of the safe and healthy use and enjoyment
of the leased unit. 

The tenant also seeks the recovery of punitive damages from the landlord.
The tenant claims the landlord’s failure to correct the defective conditions
that created the nuisance was intentional and malicious. 

The landlord claims the tenant cannot recover losses based on a nuisance,
much less receive a punitive award for money. The landlord claims their
interference with the tenant’s use and enjoyment of the unit is a breach of
the contractual warranty of habitability implied in the lease agreement, not
the tortious creation of a health nuisance. 

Here, the landlord has both breached the implied warranty of habitability
and created a nuisance for the tenant. The landlord’s failure to make repairs
and properly maintain the rental unit substantially interfered with the
tenant’s continuing use and enjoyment of the unit.28 

Recall that a nuisance is any condition that: 

•  is injurious to health; 
•  obstructs the free use of property; or 
•  interferes with the comfortable enjoyment of property.29
Further, the landlord’s continued failure to maintain and repair the
premises in a safe condition during the health department’s investigation

28 Stoiber, supra
29 CC §3479
392 Property Management, Sixth Edition

and condemnation action indicates the landlord intentionally maintained a

nuisance on the premises — an ongoing disregard for the safety and health of
the tenant. 

Tenant The tenant can recover their relocation expenses. They are also entitled to an
award for punitive damages since the landlord maintained a nuisance when
recovery for they failed to repair the unit. 30 
landlord’s Further still, the landlord’s liability to the tenant for creating a nuisance is
failure additional to any refunds of rent and rent reduction for breaching the warranty
of habitability in the rental agreement.

The tenant can also recover any medical expenses due to an intentional
infliction of mental distress or personal injury if the landlord’s failure to
maintain the unit in a habitable condition is the result of the landlord’s
extreme and outrageous conduct.31

30 Stoiber, supra
31 Stoiber, supra

Chapter 38 A residential landlord’s failure to maintain the premises in a habitable

condition constitutes a breach of the implied warranty of habitability.
Summary A habitable condition is the minimum acceptable level of safety and
sanitation permitted by public policy. All residential rental and lease
agreements are subject to this implied warranty regardless of the
provisions in the lease agreement. Commercial leases do not contain an
implied warranty of habitability.

The implied warranty requires the residential landlord to care for the
premises by maintaining it in a habitable condition. On noticing a
condition that breaches the implied warranty of habitability, the tenant
has a duty to notify the landlord and give them a reasonable amount of
time to make the repairs before taking other action.

habitability defense.................................................................... pg. 384

Chapter 38 habitable condition..................................................................... pg. 381
Key Terms implied warranty of habitability............................................. pg. 380

Quiz 10 Covering Chapters 38-41 is located on page 653.

 Chapter 39: Fire safety programs 393

Chapter

39
Fire safety programs

After reading this chapter, you will be able to: Learning

•  comply with the landlord’s responsibility to provide fire safety
programs; and
Objectives
•  identify the variety of methods which deliver fire safety
information to tenants.

liability Key Term

A residential apartment building contains state-approved smoke detectors in Smoke

each individual unit and in the common areas.
detectors,
A tenant informs the landlord the smoke detector in their unit does not
operate, even with new batteries. The landlord and their manager do not security bars
repair or replace the broken smoke detector. Later, a fire breaks out in the and safety
tenant’s unit.
information
The tenant is injured in the fire and their property is damaged as a result of
the defective smoke detector. The tenant claims the landlord is liable for liability
their losses since the landlord has a duty to repair or replace the defective A financial debt or
smoke detector on notice from the tenant. obligation owed to
others.

Is the landlord liable for property damage and personal injuries caused by
the defective smoke detector?

Yes! On receiving notice that the smoke detector is inoperable, the landlord is
required to promptly repair or replace it.1

1 Calif. Health and Safety Code §13113.7(d)

394 Property Management, Sixth Edition

Further, a landlord will be subject to a $200 fine for each failure to:
•  install a smoke detector in each unit and in common areas as required;
and
•  repair or replace a faulty smoke detector on notice from the tenant.2

Tenant’s duty Smoke detectors are to be installed and maintained in all dwelling units
intended for human occupancy, including single-family residences,
to notify duplexes, apartment complexes, hotels, motels, condominiums and time
share projects.3

The smoke detector will be in operable condition at the time the tenant takes
possession of the unit.4

If a smoke detector does not work when tested by the tenant, the tenant is
responsible for notifying the landlord or property manager. The landlord
is not obligated to investigate whether detectors are operable during the
tenant’s occupancy.

If the tenant does not notify the landlord about an inoperable smoke detector
and the landlord is unaware of the condition, the landlord is not responsible
for injuries caused by the faulty smoke detector.5

To repair or replace a faulty smoke detector, the landlord may enter the unit
24 hours after serving a written notice on the tenant of their intent to enter,
unless the tenant gives permission for an earlier entry.6 [See RPI Form 567;
see Chapter 4]

Duty to install An ordinary battery-operated smoke detector installed according to the

manufacturer’s instructions satisfies the requirement for both single- and
and maintain multiple-unit dwellings, unless another type is required by local ordinances.7

For example, some local ordinances require the smoke detector to receive its
power from the building’s electrical system.

To determine the smoke detector requirements for a property, the landlord

may contact the local fire department or the county fire planning department.

As of January 1, 2014, a building permit issued for alterations or repairs of

$1,000 or more on residential property will not be signed off until the property
owner demonstrates all smoke alarms are on the current list of devices
approved and listed by the State Fire Marshal.

2 Health & S C §13113.7(e)

3 Health & S C §§13113.7(b), 13113.8
4 Health & S C §13113.7(d)
5 Health & S C §13113.7(d)
6 Health & S C §13113.7(d)
7 Health & S C §13113.7(a)
 Chapter 39: Fire safety programs 395

Smoke alarms are to meet the following requirements to be approved and

listed by the State Fire Marshal:
•  display the date of manufacture;
•  have a hush feature;
•  include an alarm indicating the unit needs to be replaced; and
•  if battery operated, contain a non-replaceable battery that lasts at least
ten years.
Housing units with a fire sprinkler system are not exempt from smoke
alarm installation requirements. However, a fire alarm system with smoke
detectors may be installed in lieu of smoke alarms.

Multi-family residential properties are not required to have smoke detectors

in common stairwells. However, as of January 1, 2014, owners of multi-family
housing properties who rent or lease their property are responsible for testing
and maintaining smoke alarms within all the units in their properties. This
applies to both occupied and unoccupied units.

As of January 1, 2016, residential property owners who rent out one or more
units are to install any additional smoke alarms required under existing
building standards. Existing alarms only need to be replaced if they are
inoperable.8

The landlord of an apartment building is to provide emergency fire safety

information to all tenants if the building consists of:
Posting
•  two or more stories;
fire safety
•  three or more units; and information
•  a front door that opens into an interior hallway or lobby area.9
The information is to be on signs using international symbols. The signs are
to be located:
•  at every stairway and elevator landing;
•  at the intermediate point of any hallway exceeding 100 feet in length
and all hallway intersections; and
•  immediately inside all public entrances.10
Further, the landlord is to provide fire information to all tenants through
brochures, pamphlets or videotapes, if available, or conform to adopted State
Fire Marshal regulations.11

If the rental or lease agreement the landlord negotiates is in a language other

than English, the required information provided to the tenant is to be in
English, international symbols and the four most common foreign languages
in California.12
8 Health and Safety Codes §§13113.7, 13113.8, and 13114
9 Health & S C §13220(c)
10 Health & S C §13220(c)(1)
11 Health & S C §13220(c)(2)
12 Health & S C §13220(c)(3)
396 Property Management, Sixth Edition

A consumer-oriented brochure in English, international symbols and the four

most common foreign languages is available from the State Fire Marshal.13

The State Fire Marshal has adopted California Code of Regulations Title 19 §3.09
concerning the dissemination of fire information to tenants in hotels, motels,
office buildings and high-rises. Health and Safety Code §13220 addresses
these issues for tenants in apartment complexes. However, information does
not exist as to which four languages will be used to translate fire information.

Further, if the landlord has any questions about the enforcement or the
requirements for posting and informing tenants of fire information, they are
to contact their local fire department or the county fire planning department.
The codes and regulations are enforced on a local level. Each county or
city may have different requirements for complying with fire information
regulations.

Emergency Emergency procedures and information for office buildings of two or more
stories are to be provided to the building’s occupants.14
procedures
The emergency procedures information for an office building of two or
for office more stories may be published in the form of literature (pamphlets, etc.). It
buildings is to be made available to all persons entering the building and to be located
immediately inside all entrances to the building.15

In lieu of literature, floor plans describing emergency procedures are to be

posted at every stairway landing, elevator landing, and immediately inside
all public entrances.16

For high-rise structures, fire safety requirements include:

•  posting emergency procedures on a floor plan at every stairway landing,
elevator landing, and immediately inside all public entrances; and
•  appointing a Fire Safety Director to coordinate fire safety activities, train
employees in the building, develop an emergency plan, etc. (which is
also required of operators of hotels, motels and lodging houses).17
A high-rise structure is a building rising more than 75 feet above the lowest
floor level providing access to the building.18

Release Security bars on residential property are to have release mechanisms for fire
safety reasons. The release mechanisms are not required if each bedroom
mechanism in with security bars contains a window or door to the exterior which opens for
escape purposes.19
security bars

13 Health & S C §13220(d)

14 Health & S C §13220(a)
15 19 California Code of Regulations §3.09(a)(1)(A)
16 19 CCR §3.09(a)(1)(B)
17 19 CCR §3.09(c), (d)
18 Health & S C §13210(b)
19 Health & S C §13113.9(e)
 Chapter 39: Fire safety programs 397

Also, the owner of an apartment complex is to install exit signs that can be
felt or seen near the door of the exit.20

Editor’s note — Any questions concerning fire safety requirements or

whether an owner has properly complied with the requirements are to be
directed to the local fire department or the county fire planning department.
Some departments provide checklists of requirements that are to be met.

20 Health & S C §17920.8

The landlord of an apartment building is to provide emergency fire Chapter 39

safety information to all tenants if the building consists of:
•  two or more stories;
Summary
•  three or more units; and
•  a front door that opens into an interior hallway or lobby area.
The information will be on signs using international symbols. The signs
are to be located:
•  at every stairway and elevator landing;
•  at the intermediate point of any hallway exceeding 100 feet in
length and all hallway intersections; and
•  immediately inside all public entrances.
For high-rise structures, fire safety requirements include:
•  posting emergency procedures on a floor plan at every stairway
landing, elevator landing, and immediately inside all public
entrances; and
•  appointing a Fire Safety Director to coordinate fire safety activities,
train employees in the building, develop an emergency plan, etc.
(which is also required of operators of hotels, motels and lodging
houses).

liability ..........................................................................................pg. 393 Chapter 39

Key Term

Quiz 10 Covering Chapters 38-41 is located on page 653.

 Chapter 40: Security to prevent crimes 399

Chapter
40
Security to prevent
crimes

After reading this chapter, you will be able to: Learning

•  identify the landlord’s responsibilities to reduce the risk of
reasonably foreseeable crime; and
Objectives
•  understand the landlord’s responsibilities to reduce the risk of
crime or warn tenants upon obtaining knowledge of criminal
activity on the leased premises.

reasonably foreseeable Key Term

The landlord of an apartment complex is aware of recent assaults on tenants Protective

in the common areas of the property. The landlord has also received a
composite drawing of the criminal and a description of the criminal’s mode measures and
of operation released by the local police.  warnings 
The landlord does not undertake any of the security steps available to
reduce the risk of a recurrence of the same or similar criminal activities. 

The landlord later rents a unit to a new tenant. The landlord does not disclose
the recent criminal assaults or the criminal’s mode of operation. The tenant
is not given a copy of the composite drawing of the perpetrator developed by
the police. Further, the landlord represents the complex as safe and patrolled
by security. 

Later, the tenant is assaulted by the same perpetrator inside the tenant’s
apartment unit, not in the areas open to the public. The tenant seeks to recover
their money losses caused by the assault from the landlord. The tenant claims
the landlord failed to disclose the prior assaults and misrepresented the safety
of the apartment complex to induce the tenant to rent and occupy the unit. 
400 Property Management, Sixth Edition

The landlord claims they are not liable for the tenant’s injuries since
the assault occurred within the tenant’s apartment unit and not in the
common areas where the prior attacks occurred. 

Here, the landlord is liable for injuries suffered by the tenant inside the
apartment unit. The landlord knew of criminal activity on the premises and
owed a duty to care for and protect the tenant by either: 
•  providing security measures in the common areas; or 
•  warning the tenant of the prior assaults.1 
Based on the prior criminal incidents, the likelihood of similar future
reasonably assaults on tenants is reasonably foreseeable. When criminal activity is
foreseeable
The possibility a crime reasonably foreseeable due to known prior criminal activity, the landlord
or danger may occur has a duty to take reasonable measures to prevent harm to persons on the
due to a previous property from future similar criminal activities.
crime on the premises.
A landlord has a duty
to take reasonable The landlord’s failure to warn the new tenant about known criminal activity
measures to prevent creates a risk that a tenant may be injured. Due to the landlord’s further
harm to persons on the
property or warning
failure to put security measures in place to prevent harm, the landlord is
tenants of the prior liable for compensating the injured person by the payment of money, called
criminal activity. damages. 

Alternatively, the landlord may also be liable for the tenant’s losses based on
their intentional misrepresentation to the tenant regarding the safety of the
apartment complex.

Editor’s note — Like a landlord, a homeowners’ association (HOA) has

exclusive control over the maintenance of the common areas. Thus, like a
landlord, an HOA has the duty to maintain the common areas.

An HOA is liable for money losses due to any injury caused by a dangerous
condition which it knows about or should have known about.2 

Degree of Consider the landlord of a shopping center who has exclusive control over
the maintenance and repair of the common areas. Burglaries and purse
foreseeability snatchings have recently occurred on the premises. However, the landlord
is unaware of this criminal activity in the shopping center. 
of harm
At tenant association meetings, concerns about the lack of security in the
center are addressed. The tenant association decides not to hire security
guards on account of the expense. The tenants do not discuss or bring their
security concerns to the attention of the landlord. 

Later, a tenant’s employee is physically assaulted and injured on the

leased premises.

The employee claims the landlord is liable for their injuries since the
landlord failed to provide security guards to protect employees of tenants
from an unreasonable risk of harm. 
1 O’Hara v. Western Seven Trees Corporation Intercoast Management (1977) 75 CA3d 798
2 Frances T. v. Village Green Owners Association (1986) 42 C3d 490
 Chapter 40: Security to prevent crimes 401

The landlord claims they are not liable since the assault on the tenant’s
employee was a type of crime that was unforeseeable by the landlord. 

Here, the landlord has no duty to provide security guards in the common
areas. The prior crimes (theft) were not of a similar nature that would have
made a physical assault foreseeable.3 

The landlord’s duty to provide protection is determined in part by balancing

the foreseeability of harm against the burden imposed on the landlord to
remove or prevent the harm. A high degree of foreseeability is necessary to
impose a duty on a landlord or HOA to hire security guards. 

Unless prior incidents of similar crimes are brought to the landlord’s

attention, the high degree of foreseeability required to impose a duty on the
landlord to take steps to prevent or eliminate future injury does not exist. 

However, prior similar incidents are not the only factor used in determining
whether a landlord has a duty to take measures to prevent future criminal
activity. The foreseeability of an injury is also determined by the circumstances
surrounding the injury and its occurrence, such as the nature, condition and
location of the premises.4 

Consider a landlord of an office building and parking structure located in

a high-crime neighborhood. Many petty thefts and acts of vandalism have
Reasonably
occurred on the premises, but no assaults have taken place. The security foreseeable
system maintained by the landlord to monitor the parking structure is in
disrepair and does not function.  criminal
A visitor returning to their car enters the parking structure while an armed
activity
robbery is taking place. The visitor is shot and killed. 

The visitor’s spouse seeks to recover money losses from the landlord,
claiming the death of the spouse was reasonably foreseeable and could have
been prevented by the landlord. The spouse also claims the landlord, who
was aware of criminal activity on the premises, breached their duty to take
measures to prevent further criminal activity. 

The landlord claims the injury was not reasonably foreseeable since the prior
criminal acts were not similar to the act causing the visitor’s death. 

Is the landlord liable for failing to provide adequate security in the parking
structure? 

Yes! The landlord’s failure to properly maintain existing security features in

light of prior criminal activity and the nature of a public parking structure
is a breach of the duty of care the landlord owes to persons who enter the
structure. Although the foreseeability of the type of criminal activity causing
the death is low, the landlord is liable since the burden of maintaining the
existing security system is minimal. 

3 Ann M. v. Pacific Plaza Shopping Center (1993) 6 C4th 666

4 Ann M., supra
402 Property Management, Sixth Edition

Not only was the landlord aware of vandalism and thefts regularly occurring
in the parking structure, the landlord knew the parking structure was located
in a high-crime area. Further, parking structures by their dark and private
nature tend to invite criminal activity. Death resulting from a visitor’s
accidental disruption of an armed robbery is reasonably foreseeable, even
though no other armed assaults had previously occurred on the premises.5 

No liability The extent of the security measures a landlord is required to provide is

dictated by the degree of foreseeability of any future harm to others.6 
if not
When an injury is not foreseeable due to the nature, condition and location
foreseeable of the leased premises which do not indicate a person entering or using the
property is at risk, a landlord is not liable if an injury which security measures
may have prevented occurs on the premises.

Consider an apartment complex where previous criminal activity has

not occurred. However, the community where the complex is located is
generally known as a high-crime area. 

The light bulb installed at the entrance to a tenant’s apartment burns out.
The tenant asks the landlord to replace the light bulb. The lighting in the
common area is functional. 

Before the landlord replaces the bulb, the tenant is assaulted in their unit,
suffering injuries. The tenant claims the landlord is liable for their injuries
since the landlord has a duty to provide adequate lighting as a security
measure. 

The landlord claims they are not liable since the light bulb outside the
tenant’s unit is for the tenant’s convenience, and is not intended as a security
measure to protect tenants. 

Here, the landlord is not liable. Prior criminal activity had not occurred on
the premises that would put the landlord on notice of foreseeable risks. The
landlord has no duty to take security precautions against criminal activity.
Further, lighting alone is not considered an adequate security measure for
deterring crime.7 

On-site, Tenants occupying an apartment complex have been victimized by numerous

assaults and robberies in the garage area and courtyard. The landlord is aware
not off-site of the criminal activity on the premises.
prevention In response to tenants’ complaints, the landlord promises to install additional
lighting. 

A tenant parks on the street instead of in the garage due to the inadequate
lighting in the common areas. One night, while parking on the street, the

5 Gomez v. Ticor (1983) 145 CA3d 622

6 Ann M., supra
7 7735 Hollywood Boulevard Venture v. Superior Court (1981) 116 CA3d 901
 Chapter 40: Security to prevent crimes 403

tenant is attacked and injured. The tenant claims the landlord is liable for
their injuries since the landlord’s failure to provide adequate on-site lighting
created a dangerous condition, forcing them to park on the street. 

Is the landlord liable for the tenant’s injuries that occurred on a public street? 

No! The landlord does not have a duty to protect a tenant from criminal acts
committed by others that injure the tenant when they are not on the leased
premises.8 

While the landlord’s conduct may have caused the tenant to park in the
street, the tenant’s decision to park on the public street imposes no duty
on the landlord to also eliminate dangerous off-premises conditions. A
landlord’s duty of care is to prevent harm to others in the maintenance and
management of the leased premises, not adjoining properties.9 

The landlord’s duty of care is derived from their ability to prevent the
existence of dangerous conditions from existing on the property they control,
Prevent
not adjacent properties or public right of ways over which they have not dangers
taken control. A landlord is liable only when a connection exists between
the harm suffered by the tenant and the landlord’s care and maintenance
within your
of their property and any adjacent property over which the landlord takes control
control. 

While the landlord in the prior scenario failed to exercise care in the
maintenance and repair of their premises, the landlord exercised no control
over the public street, nor did they create or permit the dangerous condition
in the street which caused the tenant’s injury. 

The purpose for providing adequate lighting in the common areas of leased
premises is to help protect tenants or others against the risk of criminal attacks
on the leased premises, not on a public street where the responsibility for
lighting and security lies with government agencies. The lack of adequate
lighting in the apartment complex was not the cause of the attack suffered by
the tenant on the public street; it only caused the tenant to use the street.10 

Now consider a landlord who is aware of criminal activity occurring on

public property adjacent to the leased premises. A visitor leaves the leased
Ability to
premises at night via a public sidewalk adjacent to the premises. Lighting is control is not
not installed on the public side of the premises to illuminate the sidewalk. 
control
While walking on the public sidewalk, the visitor is assaulted and injured.
The visitor makes a demand on the landlord to recover money losses incurred
due to their injuries. The visitor claims the landlord has a duty to protect
patrons of tenants from criminal assaults on public sidewalks that provide
access to the premises. 

8 Rosenbaum v. Security Bank Corporation (1996) 43 CA4th 1084

9 Calif. Civil Code §1714
10 Rosenbaum, supra
404 Property Management, Sixth Edition

The visitor contends the landlord knew criminal activity had occurred on the
sidewalk and had the power to exert control over the sidewalk by installing
lights on the outside of the building. The sidewalk was the means of ingress
and egress to the building. 

Is the landlord liable for the client’s injuries due to a dangerous condition
on adjacent property? 

No! The landlord does not owe a duty of care to anyone to take control over an
adjoining property and remove or prevent injury from dangerous conditions
existing on the adjoining property. The landlord is not liable for failing to
take steps to prevent possible injuries from occurring on a public sidewalk
adjacent to the leased premises that are regularly used by tenants for access
to their units.11 

The landlord’s failure to provide lighting for a public sidewalk that the
landlord does not own or control did not create the dangerous condition
that caused the assault against the tenant’s client. The fact the landlord can
influence or alter the condition of the public sidewalk by voluntarily adding
lighting in no way indicates they have control over the sidewalk, which
would impose liability for failure to provide off-site security.12

11 Donnell v. California Western School of Law (1988) 200 CA3d 715

12 Donnell, supra

Chapter 40 When criminal activity is reasonably foreseeable due to known prior

criminal activity, the landlord has a duty to take reasonable measures
Summary to prevent harm to persons on the property from future similar criminal
activities.

A landlord is to properly maintain existing security features on the

leased premises. However, the landlord does not have a duty to take
control over an adjoining property and remove or prevent injury from
dangerous conditions existing on the adjoining property.

Chapter 40 reasonably foreseeable............................................................... pg. 400

Key Term

Quiz 10 Covering Chapters 38-41 is located on page 653.

 Chapter 41: Dangerous on-site and off-site activities 405

Chapter
41
Dangerous on-site and
off-site activities

After reading this chapter, you will be able to: Learning

•  identify the duty of care a landlord has to inspect the leased
premises and remove on-site dangers;
Objectives
•  identify conditions imposing a liability on the landlord; and
•  understand how a landlord is to properly address dangerous
conditions existing on the premises.
comparative negligence Key Term

A landlord, by their exercise of reasonable care in the management of their Duty to all to
property, will take steps to prevent foreseeable injury to all who enter the
leased premises.1 remove on-
If a person is injured due to the landlord’s breach of their duty of care to site dangers
remove or correct a known dangerous on-site condition, the landlord is liable
for the person’s money losses incurred due to the injury. The person can be a
tenant, guest, invitee or trespasser.2 

The duty of care for others owed by the landlord applies to all persons on the
property whether they enter the premises with or without permission, unless
the person is committing a felony on the property. 

Before liability can be imposed on a landlord for an injury suffered by any Conditions
person on the leased premises, several factors are considered:
•  the foreseeability of the type of injury suffered by the individual; 
imposing
responsibility
1 Rowland v. Christian (1968) 69 C2d 108; Calif. Civil Code §1714
2 CC §1714
406 Property Management, Sixth Edition

•  the closeness of the connection between the landlord’s conduct and

the injury suffered; 
•  the moral blame attached to the landlord’s conduct; 
•  the public policy of preventing future harm; 
•  the extent of the burden on the landlord and the consequences to the
community of imposing a duty to exercise care to prevent the injury
suffered; and 
•  the availability, cost, and prevalence of insurance for the risk involved.3 
For example, the landlord with knowledge of a dangerous situation
created by the presence of a tenant’s dog is liable for injuries inflicted on
others by the dog based on many of these factors. The landlord’s failure
to cause the dangerous condition to be removed from their property is
closely connected to injuries inflicted by the dog.

The landlord is sufficiently aware of the dangerous condition created

by the presence of the dog to reasonably foresee the possibility of injury
to others. Also, the landlord has the ability to eliminate or reduce the
dangerous condition and prevent future harm by serving on the tenant
a three-day notice to remove the dog or vacate.4 

Landlord’s To prevent harm, the property is to be inspected by the landlord whenever

entry is available to the landlord.
duty to
Each time a landlord enters into, renews or extends a rental or lease agreement,
inspect a reasonable inspection of the leased premises for dangerous conditions is
completed as part of their duty of care. If the landlord fails to inspect when
the opportunity exists, the landlord is still charged with knowledge of any
dangerous condition discoverable by an inspection. 

Consider a landlord and tenant who enter into a commercial lease agreement. 
[See RPI Form 552]

The lease agreement allows the landlord to enter the premises for yearly
inspections. Also, the tenant is required to obtain the landlord’s approval
before making any improvements. 

With the landlord’s consent, the tenant builds a roadside marketing

structure and operates a retail produce business. The structure’s concrete
floor is improperly constructed and unfinished. Produce is often littered on
the floor. 

More than a year after construction, a customer slips and falls on produce
littered on the floor, causing the customer to be injured. The customer claims
the landlord is liable for their losses due to the injuries since the landlord’s
right to inspect the property puts them on notice of the dangerous condition. 

3 Rowland, supra
4 Uccello v. Laudenslayer (1975) 44 CA3d 504
 Chapter 41: Dangerous on-site and off-site activities 407

Facts: A single family residence (SFR) includes an in-ground swimming pool on the Case in point
property. The pool complied with all safety codes when it was built 25 years prior and
the owner has not modified conditions by installing a security fence. The owner later Is a swimming
rents the property to a tenant. A guest of the tenant visits, bringing their 4-year-old pool a
child to the property. The only door leading from the home to the pool is left open dangerous
during the visit. The door does not have a self-closing mechanism. The child falls into condition?
the swimming pool and drowns.
Claim: The guest makes a demand on the owner for money losses due to the death of
the child, claiming the owner’s negligence contributed to the child’s death since the
swimming pool was not maintained by the owner in a reasonably safe condition for
tenants and guests by installing a security fence or other safety mechanism to prevent
access to the pool.
Counter claim: The owner claims they are not liable for the child’s death since the
pool complied with safety codes when built and the owner need only to implement
additional safety features if the pool is newly-constructed or being remodeled.
Holding: A California court of appeals held the owner is liable for the child’s death since
the owner’s failure to implement safety features around the pool constituted neglect
as the pool was not maintained in a reasonably safe condition for tenants and guests.
[Johnson v. Prasad (2014) 224 CA4th 74]
Here, the injury was foreseeable and preventable by the landlord. The court further
concluded the burden of installing safety features to comply with safety code was
outweighed by the benefits of that burden—i.e., saved lives. Additionally, this burden
is lessened with the availability of homeowners’ insurance, which is typically available
to cover these risks.

The landlord claims they are not liable for the customer’s injuries since
they had no actual notice of the dangerous condition created by the
temporary deposit of produce on the floor. 

However, the landlord is liable for the customer’s injuries if the construction
of the concrete floor: 
•  is a dangerous condition; or 
•  poses a dangerous condition when littered with produce from a
permitted use.5 

A landlord is required to conduct an inspection of the leased premises for the

purpose of making the premises safe from dangerous conditions when: 
The
•  a lease is executed, extended or renewed; and 
landlord’s
•  the landlord exercises any periodic right to re-enter or any other control inspection
over the property, such as an approval of construction.6 
Here, the landlord would have observed the condition of the floor had
they conducted the yearly inspection of the premises called for in the lease
agreement. The landlord is liable for slip and fall injuries when the condition
of the floor is determined to be dangerous.7
5 Lopez v. Superior Court (1996) 45 CA4th 705
6 Mora v. Baker Commodities, Inc. (1989) 210 CA3d 771
7 Lopez, supra
408 Property Management, Sixth Edition

A reasonable A landlord has a duty to inspect the leased premises when they enter the
premises for any single purpose. This includes maintenance, water damage
inspection on or some other exigency causing them to make an emergency visit. 
any entry A landlord who enters the premises during a lease term is not required to make
a thorough inspection of the entire leased premises. However, the landlord
who enters will be charged with the knowledge of a dangerous condition if
the condition would have been observed by a reasonable person.8 

A landlord of a leased premises containing areas open to the public will be

liable for injuries caused by a dangerous condition in the public area if the
condition would be discovered during a landlord inspection. 

However, if the landlord is not responsible under the lease agreement for
repair and maintenance of nonpublic areas, the landlord will not be liable
for failing to discover a dangerous condition. The landlord is not required to
expend extraordinary amounts of time and money constantly conducting
extensive searches for possible dangerous conditions.9 

For example, a management-free net lease agreement transfers all or nearly

all responsibility for maintaining and repairing the property to the tenant.

Under a net lease agreement, the landlord is not liable for injuries to persons
caused by a dangerous condition on the leased premises if:
•  the dangerous condition came about after the tenant takes possession;
and 
•  the landlord has no actual knowledge of the dangerous condition. 
Editor’s note — Landlords concerned about tenant maintenance of leased
premises will often reserve the right to enter the premises every six or twelve
months. However, frequent inspections of a leased premises create a greater
potential of liability for the landlord. 

Landlords often reserve the right to conduct frequent inspections to assure

that the tenant is not damaging or wasting the premises and reducing its
market value. The right to enter brings with it the obligation to inspect for
dangerous conditions. Also, the landlord may erroneously tend to overlook
possible dangerous conditions they can control that are connected to the
tenant’s use, rather than maintenance of the property. [See Sidebar, “The
agency duties of property managers”]

Consider a landlord and tenant who enter into a residential rental agreement
Knowledge giving the tenant permission to keep a German Shepherd dog on the premises. 
of dangerous
After the tenant takes possession of the property, the landlord never visits
conditions the premises. Later, an employee from a utility company enters the yard and
suffers injuries when they are attacked by the tenant’s dog. 

8 Mora, supra
9 Mora, supra
 Chapter 41: Dangerous on-site and off-site activities 409

Often, landlords employ real estate licensees to act as their property managers. Sidebar
When acting as an agent for the landlord, the property manager has a duty to notify
the landlord of the property manager’s activities and observations regarding the The agency
maintenance and management of the landlord’s property. [Calif. Civil Code §2020] duties of
However, the landlord is considered to have the same knowledge about the condition property
of the landlord’s property as the property manager. [CC §2332] managers
Further, since the property manager is the landlord’s representative, the landlord is
liable for the property manager’s actions performed in the scope of their representation.
[CC §2330]
However, the landlord is entitled to indemnity from the property manager if the
landlord is held liable for the property manager’s failure to perform their duties and
keep the landlord informed. The property manager who breaches their agency duty
owed to the landlord is liable to the landlord for any losses the landlord suffers due to
the failure, called indemnity. [CC §2333]

The utility company employee seeks to recover money from the landlord
as compensation for the injuries inflicted on them by the tenant’s dog. The
employee claims the landlord should have known the dog was dangerous
since German Shepherds are a breed with the propensity for viciousness. 

Is the landlord liable for the employee’s injuries? 

No! The landlord did not have knowledge the tenant’s dog was vicious and
presented a danger to others.10 

A landlord’s obligation to prevent harm to others arises only when the

landlord is aware of or should have known about the dangerous condition
and failed to take preemptive action. 

For example, the landlord receiving complaints from neighbors about the
behavior of a tenant’s dog may deduce the dog creates a dangerous condition,
even if the dog has not yet injured anyone. 

Editor’s note — The landlord’s duty to protect others from an injury

inflicted by a dog does not yet include asking the tenant if their dog is
dangerous. However, it is feasible the legislature could enact a law or the
courts could impose a duty of inquiry on landlords when authorizing the
tenant to keep a dog on the premises. Dogs genetically are European wolves
hybridized to their present condition. 

The pet authorization provision in the rental or lease agreement could

include a declaration that the authorized pet is not dangerous. Further, the
owner of a dog is neither civilly nor criminally liable for a dog bite suffered
by a person who enters the dog owner’s property, lawfully or otherwise,
unless the person is invited onto the property by the owner of the dog, is an
employee of a utility company, a police officer or a U.S. mail carrier.11 

10 Lundy v. California Realty (1985) 170 CA3d 813

11 CC §3342(a)
410 Property Management, Sixth Edition

The landlord Now consider a landlord who leases commercial property to a tenant who
operates a retail sales business on the property. The tenant keeps a dog on the
ought to have premises and posts a “Beware of Dog” sign. A newspaper article written about
known the dog’s vicious temperament is also posted on the premises. The landlord
visits the leased premises several times a year and knows the dog is kept in
the public area of the premises. 

After the lease is renewed, a delivery man is attacked and injured by the dog.
The delivery man claims the landlord is liable for their injuries.

The landlord claims they are not liable since they were personally unaware
the dog was dangerous. 

Is the landlord liable for the delivery man’s injuries? 

Yes! The landlord owes a duty to the delivery man as a member of the public
to: 
•  exercise reasonable care in the inspection of their property to discover
dangerous conditions; and 
•  remove or otherwise eliminate the dangerous condition that may
be created by the presence of a vicious dog. 
The injured person can recover when the landlord is personally unaware of
the dog’s vicious propensities since a reasonable inspection of the premises
on renewal of the lease would have revealed to the landlord the newspaper
article and the “Beware of Dog” sign.12 

Also, it is foreseeable that a guard dog kept on a premises during business

hours might injure someone. 

Further, the landlord’s failure to require the tenant to remove the dog from
the premises on discovery that the dog constitutes a dangerous condition is
closely connected to the delivery man’s injuries. 

The landlord has control over the condition. They may serve a three-day
notice on the tenant to require the tenant to either remove the dog from the
premises during business hours or vacate the premises.

A landlord can often remove a dangerous condition by merely exercising

their responsibility to make repairs that will eliminate the condition.
However, a dangerous condition caused by a tenant’s activity may require a
three-day notice requiring the tenant to correct for the dangerous condition,
or vacate the premises. [See Form 576 in Chapter 26]

On-site Now consider a landlord and tenant who enter into a rental agreement for
a residential dwelling. The agreement allows the tenant to keep dogs on the
danger leads premises. 
to off-site
injury
12 Portillo v. Aiassa (1994) 27 CA4th 1128
 Chapter 41: Dangerous on-site and off-site activities 411

After the tenant occupies the residence, the landlord visits the premises
monthly to collect the rent payments. During their visits, the landlord
observes the dogs. The landlord is aware of the dogs’ vicious nature. 

One day, a neighbor and their dog are attacked and injured by the tenant’s
dogs two blocks away from the leased premises. The neighbor demands the
landlord pay for losses resulting from the injuries. The neighbor claims the
landlord owes them a duty of care to prevent injuries arising from dangerous
animals the tenant keeps on the landlord’s premises. 

The landlord claims they are not liable since the injuries occurred off the
leased premises. 

Here, the landlord is liable for the off-site injuries since the landlord: 
•  was aware of the vicious propensities of dogs housed on their
premises; and 
•  had the ability to remove the dangerous condition by serving a three-
day notice on the tenant to remove the dogs or vacate the premises.13 
The landlord’s liability for injuries inflicted by a tenant’s dog off the premises
is the same as their liability for injuries inflicted by the dog that occur on the
premises. 

While the landlord did not have control over the property where the injury
occurred, the landlord did have control over the tenant’s right to keep and
maintain a known dangerous condition. 

The landlord’s failure to have dangerous dogs removed from the premises
caused the injuries suffered by the neighbor. The injury would not have
occurred if the landlord had not allowed the dogs, which they knew to be
vicious, to remain on the premises they controlled.14 

Consider a landlord who is aware the tenant of their single family rental unit
occasionally discharges a firearm in the backyard. One day, a bullet fired by
Tenant’s
the tenant enters the backyard of the neighboring residence and kills the dangerous
neighbor. 
on-site
The neighbor’s spouse makes a demand on the landlord for the financial loss
resulting from the neighbor’s death. The spouse claims the landlord breached
activity
their duty to individuals on the neighboring property by failing to exercise
care in the management of their property. 

Is the landlord liable for the neighbor’s death? 

Yes! Even though the injury occurred off the leased premises, the landlord is
liable since the landlord: 
•  knew of the dangerous on-site activity carried on by the tenant who
inflicted the injury; and 

13 Donchin v. Guerrero (1995) 34 CA4th 1832

14 Donchin, supra
412 Property Management, Sixth Edition

•  had the ability to eliminate the dangerous condition by serving a

three-day notice on the tenant to refrain from discharging the gun or
quit the premises.15 
The landlord had a duty to prevent the tenant from continuing to fire the
gun on the premises. Once again, a landlord is liable for any injury resulting
from a known dangerous condition or activity occurring on their property
that they have the ability to remove. This is the case even if the actual injury
is suffered off the leased premises.

However, had the tenant left the landlord’s premises with their gun and then
shot and killed an individual, the landlord would not be liable.16 

Failure to Some dangerous conditions are obvious to persons entering or using the
premises. Obviously dangerous conditions impose a duty of care on each
avoid obvious person to avoid injury to themselves. 
dangers For example, a person wearing cleats walks on a concrete path. Alongside
the concrete path is a rubber walkway used to prevent slip and fall
injuries. The person wearing cleated shoes walks on the concrete path
and slips, becoming injured in the fall. A sign does not exist explaining
the danger of the person’s activity. 

Here, a landlord has no duty to warn or guard others against a dangerous

condition that is obvious.17 

While a landlord is liable for injuries caused to others by their failure to use
skill and ordinary care in the management of their property, the liability has
its limits.  

A person, who willfully or by their own lack of ordinary care injures

themselves, exonerates the landlord, wholly or in part, from liability.18 

A person has a duty of care to themselves to be sufficiently observant and

keep themselves out of harm’s way. 

When the injured person’s lack of care for themselves contributes to their
injury, the money losses recoverable by the injured person will be diminished
in proportion to the percent of negligence attributable to the injured person.
This injured person’s share of the negligence causing their injury is called
comparative
comparative negligence.19 
negligence
An injured person’s Consider a trespasser who illegally enters a property and fails to conduct
share of the negligence themselves with care to avoid harm. 
causing their injury
when the injured
person’s lack of care for
themselves contributes
to the injury.

15 Rosales v. Stewart (1980) 113 CA3d 130

16 Medina v. Hillshore Partners (1995) 40 CA4th 477
17 Beauchamp v. Los Gatos Golf Course (1969) 273 CA2d 20
18 CC §1714
19 Li v. Yellow Cab Company of California (1975) 13 C3d 804
 Chapter 41: Dangerous on-site and off-site activities 413

When the trespasser is negligent in exercising care to prevent harm to

themselves, any losses recoverable by the injured trespasser will be reduced
by the percentage amount of their negligence which caused the injury.20 

The landlord’s liability will be further limited if the trespasser was in the
process of committing a felony on the property when they were injured.21 

Now consider a person who enters leased commercial property and wants to Not a
look inside the building. 
dangerous
Next to the building, below a window, stands a vat of acid maintained by
the business authorized to operate on the leased premises. The vat is covered condition
with plywood for the purpose of keeping out dirt and dust. 

In order to see through the window, the person climbs up and steps onto
the plywood cover which collapses. The person falls into the vat, suffering
injuries.

The injured person attempts to recover money from the landlord for losses
resulting from their injury. 

Here, the landlord is not liable for the person’s injuries since the vat is not a
dangerous condition that presents a risk of harm. The vat of acid is an integral
part of the business run on the leased premises and is not a danger to any
person who conducts themselves with care around the vat. 

The injured person undertook the risk of harm to themselves by climbing on

top of the vat and creating the dangerous situation leading to their injuries.22 

Now consider a landlord of an apartment complex used by gang members as

a base for planning their off-site criminal offenses. One of the gang members
is a named tenant on a rental agreement. 

The tenants and law enforcement officials complain to the landlord about
the gang. However, the gang members do not harm or pose a threat of danger
to the tenants. 

Later, a pedestrian walking past the complex in the public right of way is
chased by the gang members. One of the gang members, who is not the
tenant, shoots and kills the pedestrian on a street adjacent to the complex. 

The spouse of the pedestrian claims the landlord is liable for the death since
they failed to remove the presence of gang members from their premises. 

However, the landlord does not have a duty to protect members of the public
using adjacent public streets from assaults by gang members who congregate
on the leased premises.23 

20 Beard v. Atchison, Topeka and Santa Fe Railway Co. (1970) 4 CA3d 129
21 CC §847
22 Bisetti v. United Refrigeration Corp. (1985) 174 CA3d 643
23 Medina, supra
414 Property Management, Sixth Edition

Case in point Facts: A residential tenant rents a room on a property. The property contains a flight
of steps with a functioning light located over the steps. The landlord advises the tenant
Does a flight of to turn on the light before walking down the steps. The tenant, unable to find the light
steps constitute switch, uses the steps in the dark and falls, injuring themselves.
a dangerous Claim: The tenant makes a demand on the landlord for these losses claiming the steps
condition? constitute a dangerous condition since the tenant did not locate the light and injured
themselves falling down the steps.
Counter claim: The landlord claims the steps did not constitute a dangerous condition
since a functional light was located over the steps.
Holding: A California court of appeals held the landlord was not liable for the tenant’s
injuries since the steps did not constitute a dangerous condition as a functional light
was located over the steps. [Castellon v. US Bancorp (2013) 220 CA4th 994]

The congregation of gang members on the leased premises is not itself a

dangerous condition. Thus, the landlord’s failure to take steps to prevent the
gang members from congregating on the leased premises is not the cause of
the off-site shooting of a pedestrian by one of the gang members. 

Again, the landlord is not liable for injuries that occur off the leased premises,
since the landlord has no control over the activities of individuals or tenants
while they are on public property, only when they are on their property.24

Dangerous Now consider a landlord who leases a residence to a tenant. The residents of
the neighboring property own a dog the landlord knows to be vicious. The
off-site neighbor brings their leashed dog onto the leased premises. The neighbor
invites the tenant’s child to pet the dog. 
conditions
The dog breaks free from the leash and attacks the child, causing injuries. The
tenant claims the landlord is liable for their child’s injuries since the landlord
failed to warn them of the dangerous condition created by the neighbor’s
vicious dog. 

Is the landlord liable for injuries inflicted on-site by the neighbor’s dog,
which they knew was vicious? 

No! The dangerous condition was not maintained on the leased premises.
The landlord has no control or authority to remove the dangerous condition
from the neighbor’s property.25 

While a landlord owes a duty to others to remove a dog from their

property that they know to be dangerous, they do not have a duty to
warn their tenants of the presence of vicious animals located on other
properties in the neighborhood. 

24 Medina, supra
25 Wylie v. Gresch (1987) 191 CA3d 412
 Chapter 41: Dangerous on-site and off-site activities 415

The landlord’s failure to warn the tenant about the neighbor’s dog did not
create a dangerous condition on the leased premises that caused the tenant
to be injured. A landlord’s duty to correct or prevent injury from dangerous
conditions does not extend off the premises.26 

While the landlord has a duty to make the leased premises safe, they are not
required to ensure the tenant’s safety from off-site hazards.27 

The public right of way for a street fronting a leased premises includes part Off-site
of the front lawn, located between the street curb and the property line. The
landlord maintains the entire lawn up to the curb.  injuries under
A water meter is located on the lawn in the street right of way. Several tenants
landlord
inform the landlord the water meter box is broken and needs repair.  control
A tenant trips on the broken water meter box and suffers injuries. The tenant
makes a demand on the landlord for losses caused by their injuries, claiming
the landlord has a duty to eliminate dangerous conditions located in the
public right of way within the lawn maintained by the landlord. 

The landlord claims they are not liable since the water meter box is not
located on their property and the landlord does not own or control the meter
box. 

However, the landlord is liable for the injuries suffered by the tenant. While
the broken water meter box is located in a public right of way, the surrounding
lawn is maintained by the landlord.28 

Also, a landlord or other property owner who installs trees adjacent to or in the
lawn area between the public sidewalk and the street-side curb owes a duty of
care to prevent the trees from causing injury. 

For example, trees planted and maintained by the property owner grow and
eventually produce roots that crack and lift the sidewalk. The owner is aware
of the hazard created by the tree roots but undertakes no steps to have the
hazardous condition repaired or replaced. 

Here, the owner has taken control over the off-site area containing the public
sidewalk since the roots of the trees on their property have damaged the
sidewalk. Thus, the owner will be liable to any pedestrian who is injured by
the cracked sidewalk.29

26 Wylie, supra
27 7735 Hollywood Boulevard Venture v. Superior Court (1981) 116 CA3d 901
28 Alcaraz v. Vece (1997) 14 C4th 1149
29 Alpert v. Villa Romano Homeowners Association (2000) 81 CA4th 1320
416 Property Management, Sixth Edition

Chapter 41 Before liability can be imposed on a landlord for an injury suffered by

any person on the leased premises, several factors are considered:
Summary
• the foreseeability of the type of injury suffered by the individual;
• the closeness of the connection between the landlord’s conduct
and the injury suffered;
• the moral blame attached to the landlord’s conduct;
• the public policy of preventing future harm;
• the extent of the burden on the landlord and the consequences
to the community of imposing a duty to exercise care to prevent
the injury suffered; and
• the availability, cost, and prevalence of insurance for the risk
involved.
Each time a landlord enters into, renews or extends a rental or
lease agreement, a reasonable inspection of the leased premises for
dangerous conditions needs to be completed as part of their duty of
care. A landlord who enters the premises during a lease term is not
required to make a thorough inspection of the entire leased premises.
However, the landlord who enters will be charged with the knowledge
of a dangerous condition if the condition would have been observed
by a reasonable person.

A landlord is liable for any injury resulting from a known dangerous

condition or activity occurring on their property they have the ability
to remove or correct. This is the case even if the actual injury is suffered
off the leased premises. However, a landlord’s duty to correct or prevent
injury from dangerous conditions does not extend to conditions that
exist off the premises.

Chapter 41 comparative negligence.......................................................... pg. 412

Key Term

Quiz 10 Covering Chapters 38-41 is located on page 653.

 Chapter 42: Commercial lease agreements 417

Chapter
42
Commercial lease
agreements

After reading this chapter, you will be able to: Learning

•  distinguish the various types of commercial lease agreements
and use them to meet the objectives of the landlord and tenant;
Objectives
•  recognize the separate provisions of a lease agreement and
understand what conduct they control;
•  use an offer to lease or a letter of intent to initiate and document
negotiations prior to entering into a written lease agreement; and
•  determine whether the tenant or the landlord is responsible for
paying property operating expenses and attending to the care
and maintenance of the leased premises under lease agreement
provisions.

ad valorem taxes gross lease Key Terms

attorney fees provision heirs, assigns and successors
clause
bona fide purchaser
license
choice-of-law provision
net lease
constructive notice
reasonable certainty
corporate resolution
reformation action
eminent domain
reversionary interest
entire agreement clause
full-service gross lease

A lease agreement is a contract entered into by a landlord and tenant setting The
forth tenant and landlord responsibilities, namely, the payment of money
and the care of the real estate. conveyance
of a leasehold
418 Property Management, Sixth Edition

The lease agreement also acts to convey a possessory interest in real estate,
called a leasehold estate, or simply referred to as a lease.1 

By entering into a lease agreement and delivering possession of the leased

property to the tenant, the landlord conveys to the tenant the exclusive right
to occupy a parcel of real estate, or space in a parcel, for a fixed period of time.
The continued right to occupancy of the real estate is conditioned on the
tenant’s performance of their obligations under two sets of provisions in the
lease agreement:
•  one calls for the payment of rent; and
•  the others call for various levels of property maintenance and payment
of operating expenses. 
On expiration of the term of the lease, the right of possession to the real estate
reverts to the landlord. During the term of the lease, the landlord as the fee
reversionary owner holds only a reversionary interest in the leased parcel or space. 
interest
A landlord’s
temporarily suspended Once the landlord and tenant have entered into a lease agreement and the
right to occupy tenant takes occupancy, the right of possession of the leased real estate is
property leased to a
tenant for the duration
controlled by landlord/tenant law, not contract law.
of the lease term.
On the other hand, the rent provisions in the lease agreement which
evidences the debt the tenant has agreed to pay to the landlord over the
term of the lease is controlled by contract law, not landlord tenant law. The
landlord may prematurely repossess the real estate by declaring a forfeiture
of the tenant’s leasehold interest and right of possession when the tenant
breaches a material provision in the lease agreement, the nexus between
landlord-tenant and contract laws.

Recall from prior chapters that a forfeiture of the right of possession, the lease,
does not automatically cancel the underlying lease agreement, the contract.
The lease agreement requiring the tenant to pay rent and other amounts for
the duration of the term of the lease remains intact and enforceable.

Conversely, the tenant’s obligation to pay as agreed in the lease agreement is

avoided on a cancellation of the lease agreement prior to expiration of the term
of the lease. For example, a landlord’s conduct due to their misunderstanding
of the forfeiture provision in a notice to quit on a tenant’s breach may bring
about a surrender of the lease.2 [See Chapter 31] 

Validity of A lease agreement conveying a term of occupancy exceeding one year needs
to be written to be enforceable, a statute of frauds requirement.3 
the lease
Provisions in a lease agreement are separated into three categories of
agreement activities: 
form •  conveyance of the leasehold interest; 
•  money obligations of the tenant, a debt called rent; and
1 Calif. Civil Code §761(3)
2 Desert Plaza Partnership v. Waddell (1986) 180 CA3d 805
3 CC §1624(a)(3)
 Chapter 42: Commercial lease agreements 419

Figure 1
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COMMERCIAL LEASE AGREEMENT 4.5 CPI ADJUSTED RENT: � Monthly base rent for the initial 12 months of the term is the amount of

Form 552
Gross — Single Tenant $_______________, adjusted annually on the first day of each anniversary month by increasing the initial
monthly base rent by the percentage increase between the applicable Consumer Price Index for All Urban
Prepared by: Agent Phone Consumers (CPI-U) figures published for the third month preceding the month of commencement and the third
Broker Email month preceding the anniversary month.
a. The applicable CPI-U (1982-1984 = 100) is:
NOTE: This form is used by a leasing agent or landlord when the entire space in a commercial property is leased by one � Los Angeles-Riverside-Orange County, � San Francisco-Oakland-San Jose
tenant for a fixed-term, to grant the tenancy and set the terms for rent, impose payment of utilities and janitorial expenses � San Diego, � National, � .

Commercial
on the tenant with the landlord responsible for maintenance and carrying costs of the property. b. Annual rent increases under CPI-U adjustments are limited to an increase of ______%.
c. On any anniversary adjustment, if the CPI-U has decreased below the CPI-U for the prior 12-month period,
DATE: , 20 , at , California. the monthly rent for the ensuing 12 months will remain the same as the rent during the prior 12 months.
Items left blank or unchecked are not applicable. d. If the CPI-U is changed or replaced by the United States Government, the conversion factor published by

Lease
1. FACTS: the Government on the new Index will be used to compute annual adjustments
1.1 , as the Landlord, e. Following each _____-year period after commencement, including any extensions and
leases to , as the Tenant, renewals, the monthly rent is to be adjusted upward to current market rental rates for comparable premises.
the Premises referred to as ,
which is part of the Project known as . Computation of any future annual CPI-U adjustments in monthly rent on each anniversary month after

Agreement
1.2 Landlord acknowledges receipt of $ to be applied as follows: adjustment to current market rental rates will treat the monthly rent for the initial 12 months of each market
� Security deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ rent adjustment as the initial monthly base rent, and treat the first month of each market rent adjustment as
� First month's rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ the month of commencement for selecting the Index figures. Landlord to reasonably determine and advise
� $ Tenant of the adjusted rental rates no less than 3 months prior to the effective date of the adjustment.
1.3 The following checked addenda are part of this lease agreement: 4.6 Rent to be paid by:
� Addendum — Lease/Rental [See RPI Form 550-1] � Option to Renew/Extend Lease a. � check, � cash, or � cashier's check, made payable to Landlord or .
� Broker Fee Addendum [See RPI Form 273] [See RPI Form 565] Personal delivery of rent to be during the hours of to at Payee's address

Gross — Single
� Condition of Premises Addendum [See RPI Form 560] � Option to Purchase [See RPI Form 161 & 161-1]
� Tenant's Property Expense Profile [See RPI Form 562] � Option to lease additional space on the following days .
� Property description � Building rules b. � credit card # / / / ; expiration date , 20 ;
� Plat map of leased space � security code which Landlord is authorized to charge each month for rent due.

Tenant
2. TERM OF LEASE: c. � deposit into account number
2.1 The lease granted commences _____________, 20______, and expires _____________, 20______. routing number
a. The month of commencement is the anniversary month. at (Financial Institution)
2.2 The lease terminates on the last day of the term without further notice. (Address)
2.3 If Tenant holds over, the monthly rent will be increased to 120% of the monthly rent applicable immediately d. � .
preceding the termination of this lease agreement, prorated at 1/30th of the monthly rent for each day until the 4.7
Tenant to pay a charge of � $_______________, or � ______% of the delinquent rent payment, as an additional
Premises is delivered to Landlord. amount of rent, due on demand, in the event rent is not received within � 5 days, or �______________ days,
2.4 Tenant may surrender this lease only by a written surrender agreement with Landlord. [See RPI Form 587] after the due date.
2.5 � This lease agreement is a sublease of the Premises which is limited in its terms by the terms and conditions of 4.8
If any rent or other amount due Landlord is not received within the grace period provided in Section 4.7, interest
the attached master lease agreement. will accrue from the due date on the amount at 18% per annum until paid. On receipt of the payment of any
3. POSSESSION: delinquent rent, Landlord to promptly make a written demand for payment of the accrued interest which will be
3.1 Possession to be delivered to Tenant and Tenant to take possession � on commencement of the lease, or payable within 30 days of the demand.
� on _____________, 20______. 4.9 Tenant to pay a charge of $_______________ as an additional amount of rent, due on demand, for each rent
3.2 If Landlord is unable to recover and deliver possession of the Premises from the previous tenant, rent will not check returned for insufficient funds or stop payment, in which event Tenant to pay rent when due for each of the
accrue and Tenant will not be liable for rent until possession is delivered. 3 following months by cash or cashier’s check.
3.3 Tenant may terminate the lease if Landlord does not deliver possession within 10 days after commencement of 5. OPERATING EXPENSES:
the lease. 5.1 Tenant is responsible for payment of utility and service charges as follows:
3.4 If Landlord is unable to deliver possession of the Premises, Landlord will not be liable for any damages. .
4. RENT: 5.2 Landlord is responsible for payment of utility and service charges as follows:
4.1 Tenant to pay rent monthly, in advance, on the first day of each month, including rent for any partial month pro .
rated at 1/30th of the monthly rent per day. 5.3 Tenant will, on request of Landlord, authorize their utility companies to release energy consumption data directly
a. Tenant to pay additional rent due as called for in this lease agreement to Landlord for Landlord's Data Verification Checklist used for energy benchmarking purposes and, upon further
4.2 Rent to begin accruing � on commencement of the lease, or � on , 20 . request, provide energy consumption data on the Premises. [See RPI Form 552-9]
4.3 FIXED RENT: � Monthly rent for the entire term is fixed at $ . 5.4 Tenant to pay all taxes levied on trade fixtures or other improvements Tenant installs on the Premises.
5.5 If Landlord pays any charge owed by Tenant, Tenant will pay, within 30 days of written demand, the charge as
4.4 GRADUATED RENT: � Monthly rent, from year to year, is graduated on anniversary months as follows:
additional rent.
Initial year's monthly rent to be $ , and continues until:
5.6 Landlord to pay all real property taxes and assessments levied by governments, for whatever cause, against the
a. � % increase in monthly rent over prior year’s monthly rent for years to ________,
% increase in monthly rent over prior year’s monthly rent for years to ________,
land, trees, tenant improvements and buildings within the Project containing the Premises, excluding those to be
% increase in monthly rent over prior year’s monthly rent for years to ________, paid by Tenant under Section 5.4.
b. � Monthly rent commencing on the _______ anniversary to be . . . . . . . . . . . . . . . . . . . $_____________, 6. REPAIR AND MAINTENANCE:
Monthly rent commencing on the _______ anniversary to be . . . . . . . . . . . . . . . . . . . $_____________, 6.1 The Premises are in good condition, � except as noted in an addendum. [See RPI Form 550-1]
Monthly rent commencing on the _______ anniversary to be . . . . . . . . . . . . . . . . . . ..$_____________,
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--------
---------------------------
552 - - - - - - - - - - - - - - - - - - - - - - - -
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fixtures ---------------------------
condition and repair, including all - - - - - - - - - - - - - - - - - - - PAGE 5 OF
its improvements in good order,
5 — FORM 552 - - - - - - - - - - - - - -
---------------------------
6.2 Tenant will keep the Premises and as authorized 21. DEFAULT areREMEDIES
------------------
ents, electrical, lighting, and � 11.3 On expiration of this lease, tenant improvements . by Landlord to: :
related to plumbing, HVAC compon a. � become fixtures and part of the Premises not to be removed by Tenant. 21.1 If Tenant breaches any provision
Form 552-6] of this lease agreement, Landlord
ification addendum. [See RPI b. � be removed by Tenant in their entirety. collect future rental losses after forfeiture may exercise its rights, including
a. � See attached maintenance mod c. and repair
� be partially removed by Tenant as follows:
condition the structures and
22. BROKERA GE FEES:
of possession. the right to
Landlord will maintain in good order, lease
6.3 Except as stated in Section 6.2, exist on the commencement of this 22.1 � Landlord and Tenant to pay Bro .
uipment within the Premises which
common area components and eq 12.plumbing
RIGHT TO and sewers, electrical systems, structural
ENTER: ker fees per the attached Schedul
to existing HVAC, 113] e of Leasing Agent’s Fee. [See RP
agreement, including but not limited glass in exterior walls, roof, government-mandated retrofitting, I Form
front, plate 12.1 Tenant agrees to make the Premises available on 24 hours' notice for entry by Landlord for necessary repairs, 23. MISCELLA NEOUS:
foundations, exterior walls, store ys, and �
ry, sidewalks, driveways/right of wa alterations, or inspections of the Premises. .
parking areas, lawns and shrubbe 23.1 � See attached addendum for addi
13. LIABILITY INSURANCE: tional terms. [See RPI Form 550-1]
23.2 In any action to enforce this
THE PREMISES : 13.1 Tenant will obtain and maintain commercial .
general liability and plate glass insurance coverage insuring lease Tenant agreement, the prevailing party is
7. USE OF 23.3 This lease agreement is binding entitled to receive attorney fees.
ill be and Landlord against all claims for bodily injury, personal injury and property damage arising out of Tenant’s onuse all heirs, assigns and successors
7.1 The Tenant's use of the Premises w 23.4 This lease agreement is to except as provided in Section 9.
rmitted. of the Premises. be enforced under California law.
7.2 No other use of the Premises is pe Landlord’s insurance premiums.
which increases13.2 in the minimum amount23.5 of $ This lease agreement .reflects the entire agreement
a. Tenant may not conduct any activity Tenant to obtain insurance for this purpose and
or building
for any unlawful purpose, violate any government ordinance 23.6Landlord � This leas
between the parties.
Tenant will not use the Premises 13.3 Tenant to provide Landlord with a Certificate of Insurance naming as an additionalt is secured
e agreemen insured. The by a trust deed. [See RPI Form
7.3 451]
any nuisance.
tenant association rules, or create Premises o
Certificate is to provide
r equipmen t, or commi for written t waste, or notice permit to Landlord if a change or23.7 cancellation � The perfo of thermance of t
policy occurs.
his lease ag reement is assured by a Guarante
r remove any part of the e Agreement. [See RPI Form 553-1]
7.4 Tenant will not destroy, damage, o 13.4 Each party waives all insurance subrogation rights they may have.23.8 If lease exc
eeds one year, Tenant and Landlo
any person to do so. 14. FIRE INSURANCE: all keys to the rd acknowledge receipt of the Agen
including tenant improveme nts as noted in Section 11.3 and Form 550-2] cy Law Disclosure. [See RPI
Tenant will deliver the Premises, 14.1 Tenant , exceptafor reasonable
7.5 Tenantwill took obtain
possession and maintain standard
in as good a condition as whenfor 100% of the replacement value of all Tenant's personal property and the restoration of tenant improvements.
fire insurance policy with 23.9 extended Notice: � L coverage for theft and vandalism
andlord has actual knowledge the property is
Premises, on expiration of the lease potential flooding. Tenant may obtain located in a special flood hazard ar
ea or an area of
wear and tear. and zoning that were in effect at the information about flood and other hazards at
15. codes,
with building HOLDregulations HARMLESS: ca.gov/. Landlord's insurance does http://myhazards.caloes.
that the Premises comply to Tenant’s intended
apply harmless for all claims, damages or liability flood insura not cover Te nant’s poss essions. Tenant may purchase rente
7.6 Landlord warrants . SaidTenant
15.1 warranty willdoes hold not Landlord arising out of the Premises
nce to insur causedessions from by r’s insurance and
thereof, was constructed Act (ADA) or any e their poss
time each improvement, or portion Tenantricans with Disabilities about flood hazards beyond this loss. Landlord is not required to pr
which may be required by the Ame or its employees or patrons. notice. ovide additional information
use of the Premises, modifications 24.
use. 16. DESTRUCTION: appropriate for
similar laws as a result of Tenant’s codes, zoning and regulations are
whether the building
7.7 Tenant is responsible for determining 16.1 In the event the Premises are totally or partially destroyed, Tenant agrees to repair the Premises if the destruction
Tenant’s intended use. is caused by Tenant or covered by Tenant's insurance. specifying the
these warranties, Tenant is to give Landlord written notice
7.8 If the Premises do not comply with and Landlord
16.2 Landlord will repair the Premises
is to promptly correct the non-complia
nce at Landlord’s
if the cause is not covered by Tenant’s insurance policy and is covered by
non-complia nce, warranty within 6 months
nature and extent of such Landlord’snce insurance
with thispolicy.
Landlord written notice of the non-complia the non-compliance
expense. If Tenant does not give 16.3 Thiscorrect lease agreement may not be terminated due to any destruction of the Premises, unless:
Tenant, at Tenant’s expense, will
following the commencement date, a. Specialist (
the repairsCASp). cannot be completed within 30 days;
has not, be en inspected by a Certified Access der of the replacement I agree
7.9 The Premis es � has, � b. the
o meet all a cost ofpplicable st
restoration andards un
exceeds 70% valuetooflet theon the terms stated above.
premises;
has, � has not, been determined t I agree to occupy on the terms
a. If inspected, the Premises � c. the insurance proceeds are insufficient to cover the actual Date: cost of the repairs; ,or20 stated above.
Calif. Civil Code §1938 and §55.53. d. the Premises may not be occupied by law. Date: , 20
Landlord:
8. APPURTE NANCES: 17. SUBORDINATION:
and egress. Tenant:
access of ingress
8.1 Tenant has the right to use Landlord’s 17.1 Tenant
legal description.
agrees to subordinate the leasehold estate to any new financing secured by the Premises which does
within the property’s Signature: __________________
8.2 Tenant has the use of the entire Premises not exceed 80% loan-to-value ratio, and interest of 2% over market, and not less than a 15-year monthly
Signature: ____________________
one] Tenant:
G AND ENCUMBRANCE: [Check only amortization and 5-year due date. e leasehold. Landord's Broker:
9. ASSIGNMENT, SUBLETTIN e Premises, or further encumber th
or sublet any part of th
9.1 � Tenant may not assign this lease 18. TENANT ESTOPPEL or consent CERTIFICATES: of Landlord. Broker's DRE #: Signature: __________________
____________________
rest in the Premises without the pri
9.2 � Tenant may not transfer any inte 18.1 Within 10 days after notice, Tenant will execute a Tenant Estoppel Certificate verifying the existing terms of the Tenant's Broker:
sonably wit hheld. is the broker for: � Landord
a. � Consent may not be unrea RPI Form 552-7]
lease agreement to be provided to prospective buyers or lenders. [See RPI Form 598]
ttached alienation provisions. [See Broker's DRE #:
b. � Consent is subject to the a 18.2 Failure by Tenant to deliver the Certificate to Landlord will be conclusive � both
evidence Tenant and the information contained in
Landlord (d ual agent)
10. SIGNS AND ADVERTIS ING: the Certificate withoutisthe prior consent of Landlord.
correct. is the broker for: � Tenant
sign or other advertising on the Premises
10.1 Tenant will not construct any 19. the EMINENTPremises displaying the name and suite number
DOMAIN: of Landord's Agent: � both Tenant and
a directory in the lobby of Landlord (dual agent)
10.2 � Landlord will maintain 19.1color, In the style event andaletteringportion of or theall ofdirectory.
the Premises is condemnedAgent's DR for public use, E #: Landlord may terminate the lease and
determine the size, shape,
Tenant. Landlord has the right to Tenant’s to Tenant’s possession. suite. The If the lease fees for is not cost and Tenant will receive a rent abatement for the actual reduction
the terminated,
is � Landord's agent (salesperso
Tenant's Agent:
door
sign to be placed on the primary (if any) in the value of the leasehold interest held by Tenant. n or broker-associate)
10.3 � Landlord will provide a Agent's DRE #:
installation will be paid by Tenant. � both Te nant's and L andlord's ag
19.2 Tenant waives the right to any compensation awarded from the condemning authority for theent (dual ag
whole or partial ent) is � Tenant's agent (salesperson
ERATIONS: or broker-associate)
11. TENANT IMPROVEM ENTS/ALT taking of consent
prior
the Premises. to include tenant improvements
the Premises without Landlord’s Signature: � both Tenant's and Landlord's ag
11.1 Tenant may not alter or improve 19.3 Tenant to be compensated by the condemning authority only for the tenant improvements paid for by Tenant. ent (dual agent)
necessary for Tenant to occupy. 20. WAIVER: nts and will timely notify Landlord
to Address: Signature:
Tenant will keep the Premises free of all claims for any improveme
a. Form 597]
20.1 Waiver of a breach of any provision in this lease agreement does not constitute a waiver of any subsequent Address:
sponsibility. [See RPI
permit posting of Notices of Nonre additional rent
nts made by Tenant will become
breach. Phone:
Any increases in Landlord’s property taxes caused by improveme Cell:
11.2 20.2 Landlord’s receipt of rent with knowledge of Tenant’s breach Email: does not waive Landlord’s right to enforce the Phone:
due on demand. breach. Cell:
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IVERSIDE, CA 92517

•  responsibility of the tenant and the landlord for care and maintenance
of the leased premises and other property operating expenses. [See
Figure 1, Form 552]
Editor’s note — Many variations of the commercial lease exist. Which
of these the landlord and tenant choose depends on the specifics of the
tenancy. RPI provides gross and net lease agreements tailored to common
variations in commercial lease agreements, including:
•  Single Tenant Gross Lease [See RPI Form 552];
•  Multi-Tenant Gross Lease [See RPI Form 552-1];
420 Property Management, Sixth Edition

•  Single Tenant Net Lease [See RPI Form 552-2];

•  Multi-Tenant Net Lease [See RPI Form 552-3];
•  Percentage Lease [See RPI Form 552-4]; and
•  Month-to-Month Tenancy [See RPI Form 552-5].
A landlord and tenant may further customize and modify their lease
agreements with different addenda, such as:
•  Maintenance Modification Addendum [See RPI Form 552-6];
•  Alienation Addendum [See RPI Form 552-7]; and
•  Subordination Addendum [See RPI Form 552-8].
To be valid, a lease agreement: 
•  designates the size and location of the leased premises with reasonable
certainty; 
•  sets forth a term for the tenancy conveyed; and 
•  states the rental amount and other sums due, and the time, place and
manner of payment.4

Condemnation A leasing agent, whether they represent the landlord or the tenant, uses
either an offer to lease or a letter of intent (LOI) to initiate and document
conditions lease negotiations prior to preparing and entering into a lease agreement.
in an offer or [See RPI Form 556] 

LOI The preparation and signing of the lease agreement takes place after the
terms and conditions of a lease have been negotiated and agreed to in the
offer to lease or LOI. 

Consider a prospective tenant who signs an offer to lease property. The offer
is submitted to the landlord. The offer calls for the landlord to erect a building
on the property for use in the tenant’s business. The offer does not include
an attached copy of a proposed lease agreement nor reference the form to be
used. However, the offer to lease does contain:
•  a description of the premises to be leased and its location — a building
on the premises; 
•  a lease term — five years; and 
•  the amount of periodic rent and when it will be paid. 
The landlord accepts the offer to lease, agreeing to lease the premises to the
tenant. Occupancy is to be delivered on the completion of the improvements
by the landlord. The offer to lease also states the tenant will lease the premises
for five years, commencing on completion of the improvements. The tenant
is to begin making rental payments once the improvements are completed. 
A formal lease agreement is not prepared or entered into by the landlord and
tenant for various reasons.

4 Levin v. Saroff (1921) 54 CA 285

 Chapter 42: Commercial lease agreements 421

After construction of the building is complete, the tenant takes possession.

Monthly rental payments are made to the landlord when due.

Both the landlord and the tenant perform according to the terms stated in the
offer to lease, except for their failure to enter into the lease agreement.

Later, the property becomes the subject of an inverse condemnation action.

Persons with an interest in the property, including the tenant, are entitled
to share in the money paid by the government agency for the taking of the
property. 

The landlord claims the tenant is not entitled to any amount from the
condemnation award since there is no lease agreement which memorializes
the tenant’s interest in the property.

The tenant claims they have a leasehold interest in the property under the
offer to lease and delivery of possession. Further, the tenant claims they are
entitled to recover the value of their lost leasehold interest in the property
resulting from the condemnation of the property. 

Here, the tenant will participate in the condemnation award; they hold a
leasehold interest in the property that was not limited by agreement. The
written agreement entered into by the landlord and the tenant — an offer
to lease on the terms stated — becomes the lease agreement when the
tenant takes possession of the premises without entering into a formal lease
agreement.5 

The agreement to lease (the offer or LOI) signed by the landlord contained all
the essential terms needed to create a lease. Since all the elements necessary
to create a lease are agreed to in writing, the landlord’s act of delivering
possession to the tenant conveys the agreed five-year leasehold interest to
the tenant.

A lease agreement need not be recorded. Between the landlord and the
tenant, and all other parties who have actual or constructive knowledge of
To record or
the lease, the agreement is enforceable whether or not it is recorded.6  not to record
An unrecorded lease agreement with a term exceeding one year in length
is only unenforceable against a new owner if the new owner qualifies as a
bona fide purchaser.7  bona fide purchaser
A buyer of leased
To qualify as a bona fide purchaser, the buyer needs to: real estate who lacks
knowledge that a
•  lack knowledge the lease agreement exists; and lease agreement exists
and purchases the
•  purchase the leased real estate for valuable consideration or accept the property for valuable
consideration or
real estate as security for a debt (foreclosure).  accepts the real estate
as security for a debt.
Regardless of whether the lease agreement is recorded, the buyer is charged
with the knowledge of the tenant’s leasehold interest if the tenant occupies
5 City of Santa Cruz v. MacGregor (1960) 178 CA2d 45
6 CC §1217
7 CC §1214
422 Property Management, Sixth Edition

constructive notice the property at the time it is purchased. The tenant’s occupancy puts the
To be charged with purchaser on constructive notice a lease (or some other arrangement with
the knowledge the occupant) exists.8 
observable or recorded
conditions exist on
the property. When However, when a lease agreement is recorded, the content of the recorded
a tenant occupies agreement may be relied on by a purchaser as a statement of all the rights of
a property under a
lease agreement, a
the tenant.
buyer is charged with
constructive notice of Editor’s note — The above rules also apply to lenders when the landlord uses
the tenant’s leasehold the property as security for a mortgage.
interest by the
occupancy.
Also, if the lease agreement is recorded but the tenant holds an unrecorded
option to buy the leased property or extend the lease, the option cannot
be enforced against a buyer or lender who later acquires an interest in the
property if: 
•  the buyer or lender had no actual knowledge of the option at the time
of acquisition; or
•  the unrecorded options are not referenced in the recorded lease.9 

A commercial lease agreement form has five main sections: 

The contents
•  identification of the parties and the premises, and the conveyance and
of a lease term of the lease; 
agreement •  the terms for payment of rent and other amounts owed, collectively
called the rent provisions [See Chapter 43 and Chapter 47]; 
•  the provisions setting forth the responsibility for care and maintenance
of the leased property, collectively called use-maintenance
provisions [See Chapter 47]; 
•  miscellaneous provisions for circumstances unique to the transaction;
and 
•  the signatures of the parties. 
The identification section of a real estate lease agreement contains facts: 
•  the names of the landlord and the tenant; 
•  a description of the leased premises; 
•  words of conveyance of the leased property; 
•  a receipt for prepaid rents and the security deposit; and 
•  a list of the addenda which contain exhibits or additional terms. [See
Form 552 §1.1-1.3] 

The leasehold The lease agreement includes words of transfer by which the landlord
conveys — grants — a leasehold interest in the property to the tenant. [See
conveyance Form 552 §1.1] 

8 Manig v. Bachman (1954) 127 CA2d 216

9 Gates Rubber Company v. Ulman (1989) 214 CA3d 356
 Chapter 42: Commercial lease agreements 423

The conveyance of a lease is typically achieved with the words “landlord...

leases to...tenant the real estate referred to as...” [See Form 552 §1.1] 

Consider the landlord of a department store who enters into an agreement License or
with a tenant to occupy space in the store for three years. The tenant will use
the space to conduct their business.  lease?
The agreement states the space to be occupied by the tenant will be designated
by the landlord at the time of occupancy.

The agreement also: 

•  outlines the formula for the monthly rent to be paid for the space; 
•  gives the tenant the sole and exclusive right to conduct their business
in the store without competition; 
•  restricts transfer of the tenant’s right to occupy the space without the
landlord’s consent; and 
•  requires the tenant to surrender the occupied premises on the last day
of the rental term. 
The tenant takes possession of the space designated by the landlord. Before
the term for occupancy expires, the landlord notifies the tenant they are
terminating the agreement and the tenant is to vacate the premises. The
tenant does not comply with the landlord’s notice to quit. 

As a result, the landlord removes the tenant’s fixtures, equipment and

inventory, and bars the tenant from entering the premises. 

The tenant claims the landlord can neither terminate the occupancy nor
remove their possessions without first filing a UD action and obtaining a
judgment to recover possession. The occupancy agreement constitutes a lease
which conveyed a leasehold interest in the occupied space to the tenant
which needs to terminate before the tenant has to vacate. 

The landlord claims the occupancy agreement is a mere license to conduct license
business in the store. It is not a lease since no defined space was described in The personal,
the agreement to identify the location of the leased premises.  unassignable right
held by an individual
to the non-exclusive
Here, the agreement to occupy the space conveyed a leasehold interest in use of property owned
the space provided for the tenant to occupy, not a license to use. While the by another.
agreement itself does not identify the space to be occupied by the tenant or
contain words of conveyance, the agreement becomes a lease on the tenant’s
occupancy of the premises designated by the landlord since the agreement
states: 
•  possession of the premises is to be delivered to the tenant for their
exclusive use in exchange for monthly rent; 
•  assignment of the lease calls for the prior consent of the landlord; and 
424 Property Management, Sixth Edition

•  the premises need not be delivered up to the landlord until expiration

of the right of occupancy.10 
The agreement entered into by the landlord does not contain the words
“landlord...leases to...tenant” as words of conveyance. However, the contents
of the agreement indicate the landlord’s intention to convey a leasehold
estate to the tenant, not create a license to use.

Sale Conversely, an occupancy agreement does not automatically convey a lease

just because it uses words of leasehold conveyance. The economic function
disguised as of a “lease transaction” may actually be something quite different, that of a
sale which has been recharacterized by the parties under the guise of a lease. 
a lease
For instance, a lease-option agreement that allocates option money or a
portion of each rental payment, or both, toward the purchase price or down
payment set for the purchase of the property is not a lease at all. The lease-
option agreement is a disguised security device for executing an installment
sale since it evidences a credit sale by a carryback seller.

Taxwise, the lease-option agreement is a sale requiring the seller (the

“landlord”, in this scheme) to report any profit in the down payment when
the monies are received. Since this is a sale, the down payment cannot be
deferred as option money under option rules.11

Proper Each party to a lease agreement needs to be properly identified. On the

lease agreement form, the identification of the tenant indicates how their
identification ownership of the lease conveyed will be vested. Ownership of the lease can
of the parties be vested as:
•  community property;
•  community property with right of survivorship;
•  joint tenancy;
•  tenancy-in-common;
•  sole ownership;
•  a trustee for themselves or for someone else; or
•  a business entity. 
When the ownership interest of the landlord is community property, both
spouses need to consent to agreements leasing the community property for
a fixed term exceeding one year. If not, the community is not bound by the
lease agreement. Also, if challenged within one year after commencement
by the nonconsenting spouse, the tenant cannot enforce the conveyance of
the leasehold interest.12 

10 Beckett v. City of Paris Dry Goods Co. (1939) 14 C2d 633

11 Oesterreich v. Commissioner of Internal Revenue (9th Cir. 1955) 226 F2d 798
12 Calif. Family Code §1102
 Chapter 42: Commercial lease agreements 425

In addition to individuals, business entities which may own or lease Business

property include: 
entities as
•  corporations and out-of-state entities qualifying as a corporation such
as business trusts;  owner or
•  limited liability companies (LLCs);  tenant
•  partnerships, general or limited; 
•  real estate investment trusts (REITs); 
•  nonprofit organizations; and 
•  governmental agencies. 
When the landlord or tenant is a partnership or LLC, the lease agreement
indicates: 
•  whether the partnership is a limited (LP), general (GP) or limited ft Real Estate
liability partnership (LLP);  Investment
Trust
•  the partnership’s or LLC’s state of formation, and if out of state, whether
it is qualified to do business in California; and 
•  the name of the partners or members authorized to bind the partnership. 
With information on the partnership or LLC, the landlord and any title
company insuring the leasehold can review recorded documents to confirm
the authority of the general or managing partner or managing member to
bind the partnership or LLC. 

Whether a corporation is the landlord or tenant, the full corporate name

and the state of incorporation needs to be stated. Also included is the name
and title of the officer who will be signing the lease agreement as the agent
committing the corporation to the lease agreement. 

The corporate information will allow for confirmation of: 

•  the corporation’s good standing to operate in the state; and 
•  the officers registered with the state to act on behalf of and bind the
corporation under resolution by the corporation’s board of directors. 

The commercial lease agreement describes the premises to be leased Premises

sufficiently to be located with reasonable certainty. A description is
reasonably certain if it furnishes a “means or key” for a surveyor to identify identified
the parcel’s location.13  with certainty
If the premises is a building or a space in a building, the common street
address, including the unit number, is a sufficient description to identify the reasonable certainty
The degree of certainty
premises.  expected from a
reasonable person.
If the premises is not easily identified by its common address, a plot map or
floor plan needs to be included as an addendum to the lease agreement. The

13 Beverage v. Canton Placer Mining Co. (1955) 43 C2d 769

426 Property Management, Sixth Edition

Case in point A tenant signs and hands a landlord an offer to lease together with the proposed lease
agreement for space in a retail commercial center. Attached to the proposed lease
A sufficient agreement is a plot plan outlining the location of the leased premises.
description The lease agreement contains a provision requiring the landlord to provide the exact
legal description of the premises as an addendum to the lease agreement. The landlord
is to deliver this addendum no sooner than 30 days after the leased premises is occupied
by the tenant.
After submitting the offer to lease, the tenant decides to lease space at another location.
The tenant mails a revocation letter to the landlord for the withdrawal of their offer.
However, the tenant receives the signed offer and lease agreement from the landlord
before the landlord receives the tenant’s revocation letter. The lease agreement does
not include a copy of the plot plan addendum that was attached to the proposed lease.
The tenant refuses to perform under the lease agreement, claiming the lease agreement
is unenforceable since the landlord failed to deliver the plot plan addendum that
designated the size of the leased premises.
The landlord seeks to enforce the tenant’s performance of the lease agreement.
Here, a lease has been entered into which is enforceable. The precise size of the leased
premises is not crucial to the lease transaction since the location of the premises is
known due to the plot plan attached to the proposed lease agreement. Also, the lease
agreement states the exact size of the premises identified on the plot plan will be
determined after the tenant takes possession. [Mabee v. Nurseryland Garden Centers,
Inc. (1978) 84 CA3d 968]

space to be rented is highlighted or otherwise identified. A plot map or floor

plan eliminates confusion over the location of the leased parcel or space in
the building, and initially establishes the parameters of the leased space. 

An attached floor or plot plan noting square footage is useful when rent
is calculated based on square footage occupied by the tenant, or on the
percentage of square footage within a project leased to the tenant. 

However, an inaccurate or incomplete description of the leased premises

will not prevent a landlord from conveying, and the tenant from accepting,
a leasehold interest in a parcel of real estate. When the premises described in
a lease agreement is incomplete or inaccurate, the tenant’s actual possession
of the premises will set the boundaries.14

Further, an incomplete or inaccurate description of the leased premises

which the tenant has occupied does not release a tenant from liability under
the lease for the space they actually occupied.15

Addenda to Terms common to commercial lease agreements are contained in the

provisions of a regular form. [See RPI Form 552—552-5] 
the lease
agreement
14 Beckett, supra
15 City of Santa Cruz, supra
 Chapter 42: Commercial lease agreements 427

However, the terms and conditions peculiar to the leasing of a particular Addenda to
type of commercial tenancy, such as commercial, industrial, office, farming
operation or hotel, or provisions unique to the parties and their advisors, are the lease
handled in an addendum attached to the lease agreement. 
agreement
The use of an addendum to house extraordinary and atypical provisions not
in common use prevents a later surprise.

Also, any handwritten or typewritten provisions added to an agreement

control over conflicting pre-printed or boilerplate provisions. When
inconsistencies arise between provisions in the pre-printed lease agreement
form and an attached addendum, the provisions in the addendum control.16 

The use of addenda for making changes or additions to leasing provisions

allows parties to tailor the lease agreement to meet their unique needs. 

Addenda occasionally attached to a commercial lease agreement include: 

•  terms unique to the type of property leased; 
•  a property description addendum, such as a plot map or site plan; 
•  a structural or tenant improvement agreement; 
•  a condition of premises addendum [See Form 560 in Chapter 37]; 
•  a maintenance modification addendum [See RPI Form 552-6];
•  an alienation addendum [See RPI Form 552-7];
•  a building rules addendum; 
•  an option or right of first refusal to renew or extend [See RPI Form 566]; 
•  a brokerage fee addendum [See RPI Form 273]; 
•  a tenant leasehold subordination agreement regarding a future
mortgage [See RPI Form 552-8]; 
•  a non-disturbance and attornment provision [See Chapter 60]; 
•  a signage or tenant association agreement; 
•  an option or right of first refusal to lease additional space [See RPI
Form 579-1]; 
•  authority to sublease or assign; and 
•  an option or right of first refusal to buy. [See RPI Form 161 and Form
579 in Chapter 6] 
If the lease agreement is for a sublease of the premises, a copy of the master
lease is referenced in and attached to a regular lease agreement thus creating
a sublease. [See Form 552 §2.5] 

A commercial lease agreement is an agreement to rent real estate for a fixed

term, as opposed to a periodic rental term. Thus, the lease agreement indicates
The term of
the dates the lease term commences and expires.17 [See Form 552 §2.1] the tenancy
16 Gutzi Associates v. Switzer (1989) 215 CA3d 1636
17 CC §761(3)
428 Property Management, Sixth Edition

Form 113

Schedule of
Leasing Agent’s
Fee

The date for delivery and acceptance of possession are addressed separately
from the date of the lease agreement. Further, the date given at the top of a
lease agreement is for the purpose of identifying the document. [See Form
552 §3.1] 

On expiration of the lease term on the date stated in the lease agreement, the
tenant’s right of possession automatically terminates. The tenant vacates the
 Chapter 42: Commercial lease agreements 429

property on the lease expiration date unless further occupancy agreements

exist. No further notice is required from the landlord or tenant to terminate
the tenancy or to vacate.18

Recall that a holdover tenancy is created when: 

•  the tenant remains in possession after the lease term expires without a
right to renew or extend the tenancy; and 
•  the landlord refuses to accept further rent payments. 
The holdover tenancy ends when the tenant vacates or is evicted.

The lease agreement contains a holdover rent provision calling for a set
dollar amount of rent due for each day the tenant holds over. The holdover
Holdover
rent is due and payable when the tenant vacates or is evicted, not before. The provision
daily rent rate is usually significantly higher than the fair market rate. As a
result, holdover rent is considered unreasonable in a UD action. UD actions
typically allow only market rent rates for the holdover period. [See Form 552
§2.3] 

If the amount of holdover rent is not set in the lease agreement, a fair market
rate will be recoverable during the holdover (which is also the ceiling for
rent awarded in a UD action to evict the holdover tenant). 

The landlord may initiate UD proceedings to evict the holdover tenant

immediately on expiration of the tenant’s right to possession.19 

Lease agreement provisions set the date the tenant will take possession of Delivery and
the leased premises. The agreement also address the consequences when a
landlord fails to deliver the premises to the tenant as agreed. [See Form 552 acceptance
§3.2] of possession
The tenant is given the opportunity to terminate the lease agreement
if possession is not delivered within an agreed-to number of days after
commencement of the lease. [See Form 552 §3.3]

A landlord sometimes fails to deliver possession to the tenant due to their

inability to recover the premises from a previous tenant. For the tenant to
cover this risk, the lease agreement states the tenant is not liable for rent
payments until possession is delivered. [See Form 552 §3.2]

Conversely, the lease agreement states the landlord will not be liable for
damages if they are unable to deliver possession.  [See Form 552 §3.4]

A tenant may contract away their right to receive any compensation awarded Eminent
to the landlord in a condemnation action by a government agency to take
the real estate (fee and leasehold), also known as eminent domain.20  domain
18 CC §1933
19 CCP §1161(1)
20 New Haven Unified School District v. Taco Bell Corporation (1994) 24 CA4th 1473
430 Property Management, Sixth Edition

Commercial leases typically reserve for the landlord all rights to any
condemnation award. This reservation is made under the eminent domain
provision. [See Form 552 §19] 

eminent domain Also, the landlord may reserve their right to terminate the lease in the event
The right of the of a partial condemnation. If the landlord does not choose to terminate the
government to take
private property for lease when a partial taking occurs, the tenant is entitled to rent abatement
public use on payment for the reduction in value of their leasehold interest.  [See Form 552 §19.1] 
to the owner of the
property’s fair market A tenant under a lease has a right to receive compensation for their leasehold
value.
interest if their lease is terminated due to a condemnation proceeding.21 

However, if a lease provision eliminates the tenant’s rights to any

compensation awarded to the landlord, the tenant looks to the condemning
authority to recover other losses, such as: 
•  relocation costs; 
•  loss of goodwill; 
•  bonus value of the lease (due to below market rent); or 
•  severance damages when a partial taking occurs. 

Brokerage Initially, the responsibility for assuring payment of a broker fee for leasing
services is controlled by employment provisions in:
fees •  an authorization to lease [See Chapter 12];
•  an authorization to locate space [See RPI Form 111]; or
•  a property management agreement.
Secondly, the payment of fees is controlled by the placement of a brokerage
fee provision within the tenant’s offer to lease or LOI signed by the tenant. 

Lastly, a provision for payment of the broker fees is included in the lease
agreement. This redundancy allows the broker to enforce payment of the
Eminent brokerage fees in case the prior documents did not include a commitment
Domain from either the tenant or the landlord to pay the brokerage fees. Also, fee
arrangements are negotiable and change between the initial employment
and signing of a leasing agreement. [See Form 552 §22 and Form 113
accompanying this chapter] 

An attorney fee provision is essential in a lease agreement if the landlord

Miscellaneous is to recover costs incurred to enforce payment of rent or evict the tenant.
provisions Regardless of how an attorney fee provision is written, the prevailing party
is entitled to their fee.22 [See Form 552 §23.2] 
attorney fees
provision The heirs, assigns and successors clause binds those who later take the
A provision in an
agreement permitting
position of the landlord or tenant to the existing lease (or rental) agreement
the prevailing party through a(n):
to a dispute to receive
attorney fees when
litigation arises due 21 CCP §1265.150
to the agreement. [See 22 CC §1717(a)

RPI Form 552 §23.2]

 Chapter 42: Commercial lease agreements 431

•  grant; heirs, assigns and

•  assignment; or successors clause
A clause in a lease
•  assumption.23 [See Form 552 §23.3]  agreement which
binds those who later
A choice-of-law provision in the lease agreement assures application of take the position of
landlord or tenant to
California law when a dispute arises between the tenant and the landlord. the existing agreement.
[See Form 552 §23.4]  [See RPI Form 552
§23.3]
Application of California law in disputes over property located in California
adds stability to the legal expectations of the landlord and tenant. It also
produces greater commercial certainty in real estate transactions and choice-of-law
provision
stabilizes property values.  A provision specifying
California law applies
Additionally, the lease agreement reflects the entire agreement between the if a dispute arises with
a tenant regarding the
parties and is best modified only in writing.  lease. [See RPI Form
552 §23.4]
An entire agreement clause serves two key purposes. The objective is to
avoid disputes over “just what are” the terms of the lease agreement resulting
from negotiations to enter into or modify the agreement. An entire agreement entire agreement
clause
clause limits the ability for the tenant or the landlord:  A clause in a lease
agreement which
•  to imply terms into the lease based on oral statements made before limits the tenant’s
entering into the lease agreement; and  ability to imply terms
into the lease based on
•  to later orally modify terms of a lease agreement. [See Form 552 §23.5] oral statements made
before entering into
Performance assurance provisions address the tenant’s performance of the lease. [See RPI
their lease obligations, including: Form 552 §23.5]

•  security for lease agreement obligations provided by a trust deed

encumbering real estate owned by the tenant (or others) [See RPI Form
451; see Form 552 §23.6]; and
•  guarantees given by a corporate tenant’s officer or another person. [See
RPI Form 553-1; see Form 552 § 23.7]
If the tenant fails to pay rent or otherwise breaches the lease, the landlord
may evict the tenant. Then, after a demand for payment, the landlord may
foreclose under the performance trust deed to recover rent due, attorney fees
and costs of the trustee’s sale.24 

Individuals who sign a lease agreement on behalf of the landlord or the Signatures on
tenant need to have the capacity and the authority to act on behalf of and
bind the landlord or tenant.25  behalf of the
Unless the landlord is aware that the persons signing do not have authority parties
to enter into a lease on behalf of the corporation, the lease entered into by a
corporate tenant is valid if it is signed by: 
•  the chairman of the board, president or the vice president; and 

23 Saucedo v. Mercury Savings and Loan Association (1980) 111 CA3d 309
24 Willys of Marin Company v. Pierce (1956) 140 CA2d 826
25 CC §§2304; 2307
432 Property Management, Sixth Edition

Sidebar All commercial rental and lease agreements include an Americans with Disabilities Act
(ADA) disclosure. Without it, landlords expose themselves to tenant litigation for fraud
Americans with (or indemnity) when the tenant is hit with an ADA violation claim. [See Figure 1, Form
Disabilities Act 552 §7.6 and 7.9]
(ADA) disclosure An ADA risk compliance disclosure provision is included in RPI’s commercial lease
agreements. California’s Disabled Access Law makes disclosure of ADA conditions a
material fact.
To avoid misrepresenting property conditions, a commercial lease agreement needs
to declare whether the property has undergone an inspection by a Certified Access
Specialist (CASp). Further, if the property has been inspected, a statement whether it
does or does not meet ADA standards is included. [See Figure 1, Form 552 §7.9]
While the landlord needs to disclose ADA conditions, they need not obtain a CASp
inspection. It is the failure to make ADA disclosures, as with code violations, which
exposes the landlord to claims of fraud. [Calif. Civil Code §1938 and §55.53]

•  the secretary, assistant secretary, chief financial officer or assistant

treasurer.26 
corporate resolution However, a corporate resolution is the best evidence of the corporate
A document from a
corporation’s board officers’ authority to act on behalf of the corporate tenant. A corporate
of directors which resolution is a document from a corporation’s board of directors which gives
gives the officers of a the officers of a corporation the authority to sign and bind the corporation to
corporation the
authority to sign and a lease.27 
bind the corporation to
a lease. When an LLC or LLP enters into a lease agreement, the manager signing on
behalf of the LLC or LLP needs to be the person named as the manager in the
LLC-1 or LLP-1 certificate filed with the Secretary of State and recorded with
the local county recorder. 

However, an LLP or an LLC will still be bound to a lease agreement if:

•  a partner or member, other than the general partner or manager, signs
the lease agreement; and
•  the landlord believes the partner or member is acting with the authority
of the entity due to their title as chairman or president.28 

Commercial lease agreements are used in transactions involving industrial,

The commercial, office and other types of commercial income-producing
economics of property. 
commercial A tenant who acquires a leasehold interest in commercial real estate agrees
leases to be obligated for none, some or all of the operating costs of the real estate
incurred directly or paid as additional rent. These obligations are in addition
to payment of the base rent and periodic adjustments to the rent. 

Editor’s note — Residential lease agreements generally do not require the

tenant to undertake the full care and maintenance of the premises. Usually,
residential tenants only have the duty to prevent excessive wear and tear.
26 Corp C §313
27 Calif. Corporations Code §300
28 Corp C §17154(c)
 Chapter 42: Commercial lease agreements 433

Typically, the longer the term of the commercial lease, the more extensive
the shift of ownership costs and responsibilities to the tenant, including: 
•  property operating expenses; 
•  all or future increases in real estate taxes, called ad valorem taxes;  ad valorem taxes
Real estate taxes
•  hazard insurance premiums;  imposed on property
based on its assessed
•  repair and maintenance of the improvements; and  value. [See RPI Form
552-2 §5.1]
•  the risk of an increase in interest payments on an adjustable rate
mortgage encumbering the property. 
When a long-term lease obligates the tenant to pay for all expenses incurred
in the ownership and operation of the property, the tenant incurs the
expenses in one of two arrangements: 
gross lease
•  directly, the tenant contracting for services and paying the costs, A commercial lease
including payment of property taxes and insurance premiums; or  specifying that the
tenant pays for
•  indirectly, the landlord incurring operating expenses and in turn their utilities and
billing the tenant for payment, commonly called common area janitorial fees, but
unless modified
maintenance charges (CAMs).  is not responsible
for any other care,
The responsibility for the payment of operating costs is reflected by the titles maintenance or
given to commercial lease agreements as either: carrying costs of the
property. [See RPI
•  a gross lease; or Form 552 and 552-1]

•  a net lease.

Variations and modifications exist for both types of lease agreements Lease
provided by addendums. For example, a gross lease calling for the tenant to
pay some of the operating expenses is called a modified gross lease. When variations
the landlord enters into a net lease agreement and retains responsibility for
some of the operating expenses, the lease is called a modified net lease. full-service gross
lease
A commercial lease is typically called a gross lease if the tenant pays for A commercial lease
specifying that the
their utilities and janitorial fees, but is not responsible for any other care, landlord retains the
maintenance or carrying costs of the property.  responsibility for
payment of all costs of
care and maintenance,
When the landlord of an office building retains the responsibility for unless modified,
payment of all costs of care and maintenance, including the tenant’s utilities including the tenant’s
and janitorial services, the gross lease is referred to as a full-service gross utilities and janitorial
services. [See RPI
lease. [See RPI Form 552 and 552-1] Form 552 and 552-1]

Conversely, a commercial lease that transfers to the tenant the obligation

to pay some or all of the costs and responsibilities of ownership, in addition net lease
to utilities and janitorial services, is referred to as a modified gross lease (or A commercial lease
which transfers to the
a modified net lease if the tenant is obligated for most operating expenses).  tenant the obligation,
[See RPI Form 552-2 and 552-3] unless modified, to
pay all of the costs of
ownership in addition
A lease becomes more net (and less gross) as the landlord shifts ownership to utilities and
responsibilities and operating costs to the tenant.  janitorial services. [See
RPI Form 552-2 and
552-3]
434 Property Management, Sixth Edition

A leasing or buyer’s agent enters into an employment agreement with a user-client as

Sidebar
the client’s representative to locate and negotiate a lease or purchase commercial space
to house their business operations. On determining the client’s space requirements, the
Agent Survey
agent turns to the task of collecting information on available properties. From the data
Sheet for assembled, qualifying properties most likely to satisfy the client’s needs are identified.
Commercial
Here, when a leasing agent seeks out information on available properties the issue
Property becomes: “what is the best way to quickly gather pertinent details on available
properties for later analysis?”
The answer lies in the use of a quick-fact checklist to itemize the types of data and
information required on a property to determine its suitability for the client’s need for
space. One such itemized checklist is the Agent Survey Sheet for Commercial Property.
[See RPI Form 320-3]
The Agent Survey contains a series of questions to be asked of the owner’s agent, or
the owner if the property is not listed with a broker. Armed with detailed information
on available properties, the agent and their user-client can determine which of the
available properties best meets the client’s needs. At this point, enough is known about
a property to determine whether or not to submit a letter of intent (LOI) or an offer to
lease or buy, and if so, on what terms. Essentially, the survey is used as a prudent risk
mitigation practice for the broker. [See RPI Form 556]
The Agent Survey Sheet for Commercial Property contains probing questions relating
to:
• the usable square footage of the improvements and the lot and its age;
• facilities within the improved space including the number of bathrooms, and
descriptions of the kitchen and breakroom/staff lounge;
• warehouse specifications, including usable square footage, ceiling clearance
height, type of flooring and type of lighting;
• asking rent amount or base rent sought;
• move-in incentives offered by the owner;
• whether the owner or tenant pays the property taxes, insurance premiums, and
like items;
• a description of the property’s surrounding area;
• problems with vandalism or crime reported in the area, known earthquake
faults and seismic hazards, or noise nuisances; and
• a description of the existing internet connections and phone lines, existing
energy efficiency improvements and the ENERGY STAR® Energy Performance
Score.
The Agent Survey Sheet for Commercial Property functions as a thorough quick-reference
guide. By using it, the agent has compiled and considered all the advantageous and
adverse information on a property in a single document. It makes for an easy, focused
review by the agent and the user-client.

Reformation During lease negotiations, a landlord orally assures a tenant they will enter
into a lease for an initial term of five years with two five-year options to
of the lease renew. The landlord and tenant do not memorialize the offers to lease or LOIs
agreement in writing. 
 Chapter 42: Commercial lease agreements 435

However, the lease agreeent the landlord prepares and hands to the tenant
sets the lease term at 15 years. Without reviewing the lease agreement, the
tenant signs the lease agreement and takes possession of the premises. 

The business operated by the tenant on the leased premises later fails, and
the tenant defaults on the rent payments. The tenant then discovers for the
first time the length of the lease term is 15 years. The landlord seeks to collect
the unpaid rent for the 15-year period under the lease agreement (subject to
any mitigation and present-worth discounting). 

The tenant seeks to rescind the lease agreement due to the landlord’s oral Reformation
misrepresentation about the length of the lease term. The tenant claims the
lease provisions contradict the oral agreements between the landlord and of the lease
the tenant which predated the lease agreement. 
agreement,
Can the tenant rescind the lease agreement?  cont’d
No! The landlord’s oral representations regarding the lease term prior to
execution of the lease agreement do not render the lease unenforceable.
The terms set forth in the written lease agreement control over prior oral
understandings.29 

Rescission of lease agreements is rare since intentional misrepresentation or

other fraud in the inducement is required to be shown by the tenant. As an
alternative remedy, the tenant in this scenario may pursue a reformation reformation action
action to alter the terms of the written lease agreement to conform to the A court action by a
tenant seeking to
terms of the oral agreement.  reform the terms of
a lease agreement
Another reason for reformation of lease provisions arises when a significant to include prior
agreements, oral or
difference exists between the square footage contained in the leased space written, intended to
and the square footage given in the lease agreement for calculating rent. be part of the lease
agreement.

29 West v. Henderson (1991) 227 CA3d 1578

A lease agreement is a contract entered into by a landlord and tenant Chapter 42

addressing the tenant’s primary responsibilities: the payment of money
and the care of the real estate. The lease agreement also acts to convey a Summary
possessory interest in real estate to the tenant. By entering into a lease
agreement and delivering possession to the tenant, the landlord conveys
to the tenant the exclusive right to occupy a parcel of real estate, or space
in a parcel, for a fixed period of time. On expiration of the term of the
lease, the right of possession to the real estate reverts to the landlord.

The provisions contained in a written lease agreement fall into one of

three categories of activities:
•  conveyance of the leasehold interest;
•  the money obligation of the tenant, a debt called rent; and
436 Property Management, Sixth Edition

•  responsibility of the tenant and the landlord for care and

maintenance of the leased premises and other property operating
expenses.
A broker, whether they represent the landlord or the tenant, uses either
an offer to lease or a letter of intent (LOI) to initiate and document
lease negotiations prior to entering into the lease agreement itself. The
preparation and signing of the actual lease agreement remains to be
done after its terms and conditions have been negotiated and agreed to
in the offer to lease.

A commercial lease agreement form has five main sections:

•  identification of the parties and the premises, and the conveyance
and term of the lease;
•  the terms for payment of rent and other amounts owed, collectively
called rent provisions;
•  the provisions setting forth the responsibility for care and
maintenance of the leased property, collectively called the use-
maintenance provisions;
•  miscellaneous provisions for circumstances specific to the
transaction; and
•  the signatures of the parties.
A lease agreement conveying a term of occupancy exceeding one year is
required to be written to be enforceable.

ad valorem taxes........................................................................... pg. 433

Chapter 42 attorney fees provision............................................................... pg. 430
Key Terms bona fide purchaser..................................................................... pg. 421
choice-of-law provision.............................................................. pg. 431
constructive notice...................................................................... pg. 422
corporate resolution.................................................................... pg. 432
eminent domain........................................................................... pg. 430
entire agreement clause............................................................. pg. 431
full-service gross lease................................................................ pg. 433
gross lease....................................................................................... pg. 433
heirs, assigns and successors clause........................................ pg. 431
license.............................................................................................. pg. 423
net lease.......................................................................................... pg. 433
reasonable certainty.................................................................... pg. 425
reformation action....................................................................... pg. 435
reversionary interest................................................................... pg. 418

Quiz 11 Covering Chapters 42-46 is located on page 654.

 Chapter 43: Rent provisions in commercial leases 437

Chapter
43
Rent provisions in
commercial leases

After reading this chapter, you will be able to: Learning

•  understand the rent provisions in a regular lease agreement, such
as the dollar amount of the rent, and the time, place and manner
Objectives
of payment;
•  distinguish fixed-rent provisions from adjustable, graduated and
percentage rent provisions, and describe the attributes of each;
•  identify the rent provisions which periodically adjust a tenant’s
rent; and
•  negotiate the operating costs to be paid by the tenant in addition
to rent in long-term commercial leases.

base rent percentage lease Key Terms

fixed-rent lease

Various rent formulas exist to meet the financial needs of landlords and
tenants. All commercial lease agreements set a minimum amount of
Setting the
monthly rent to be paid by the tenant. This minimum monthly rent is called rent
base rent. [See RPI Form 552 §4.4] 
base rent
The minimum
Typically, the base rent is the monthly amount paid during the first year of monthly rent due
the lease (with the exception of percentage leases). [See RPI Form 552-4] under a commercial
lease agreement. [See
RPI Form 552 §4.3]
However, in many short-term leases (e.g. leases of two to five years), the base
rent is paid during the entire term of the lease, without an adjustment.
fixed-rent lease
A lease agreement which sets monthly rent payments at a specific dollar A lease agreement
with monthly rent
amount over the entire life of the lease results in what is called a fixed-rent payments set at a
lease. [See RPI Form 552 §4.3]  specific dollar amount
for the life of the lease.
[See RPI Form 552]
 438 Property Management, Sixth Edition

In a rising local economy or period of general price inflation, a long-term

fixed-rent lease will prove to be a financial disaster for the landlord. Fixed
rent shifts the inflation hedge appreciation in the property’s value to the
tenant for so long as the fixed rent continues. [See Chapter 44]

However, a landlord may be forced to accept fixed-rent leases during economic

downturns or static rental markets when interest rates are anticipated to
rise in the future. To avoid a potential loss of return under a fixed-rate lease
during an economic recovery, the landlord needs to consider negotiating a
short-term lease or month-to-month tenancy. 
percentage lease
A commercial lease When leasing space in larger, multi-tenant retail properties, landlords often
agreement for a retail
operation that sets the negotiate a rent provision that calculates the total amount of rent the tenant
total amount of rent will pay annually as a percentage of the tenant’s gross sales. This type of lease
the tenant will pay
as a percentage of the
is called a percentage lease. [See RPI Form 552-4]
tenant’s gross sales.
[See RPI Form 552-4] Under a percentage lease, the tenant pays the greater of the base rent or the
percentage rent. [See RPI Form 552-4] 

Periodic rent Many commercial lease agreements contain provisions under which the
base rent is adjusted periodically, usually on each anniversary of the lease
adjustments commencement date and again every three to five years. Price adjustment
provisions include:
•  an inflation-adjusted rent provision which adjusts for annual price
inflation as measured by the Consumer Price Index (CPI) [See RPI
Form 552 §4.5];
•  a graduated rent provision which annually adjusts rents upward in
set percentage or dollar amounts; and 
•  an appreciation-adjusted rent provision, which adjusts the base rent
every five years or so for property appreciation in excess of inflation
due to changes in local market conditions. [See Chapter 43; see RPI
Form 552 §4.5e] 
Editor’s note — These price adjustment provisions are discussed in great
detail in Chapter 44.

As an alternative to the CPI, rent provisions may call for an annual percentage
increase in rent over the base rent, or simply state an increased dollar amount
for rent in each year of the lease term. This type of annual rent adjustment is
called graduated rent. [See RPI Form 552 §4.4] 

The lease agreement rent provisions need to precisely state any rent
adjustment formulas to be enforced by the landlord. [See Sidebar, “Rent
provisions and the NOI”]

Setting the The rent provisions in a commercial lease agreement include the: 

grace period •  dollar amount of the rent; 

•  time for payment; 
and late charge
 Chapter 43: Rent provisions in commercial leases 439

The rent payments a landlord actually receives from all tenants constitutes the Sidebar
landlord’s effective rental income from the property for the period analyzed. [See RPI
Form 352 §2.2] Rent provisions
The current rent and the terms for setting future rents as called for in the rent provisions and the NOI
of the lease agreement greatly influence the:
•  market value of the real estate;
•  amount of long-term financing available;
•  property’s attractiveness to potential buyers; and
•  landlord’s future return on their investment.
The calculation for setting the market value of a commercial income property is based
primarily on its anticipated future net operating income (NOI). A property’s NOI is
composed of the property’s gross operating income less operating expenses. Without
a future flow of NOI, improved real estate has little value greater than the value of
the land. Unless rental income exists to be capitalized, the property’s value cannot be
properly established.
Brokers and investors rely on the present and anticipated future NOI of a property to
arrive at its current fair market value.
The NOI is initially capitalized at the current yield obtainable on comparable
investments. The capitalization rate sets the property’s fair market value for the price
(present worth) a buyer will likely pay, and the amounts a lender will likely lend, based
on the property’s fundamentals.
Lenders limit mortgage amounts secured by real property based on:
•  the property’s NOI; and
•  the financial strength of the tenants to meet their lease obligations.
Likewise, buyers determine what purchase price they will set in an offer based on
(among other things):
•  the property’s NOI;
•  a review of the tenants’ financial track records; and
•  the landlord’s control over operating costs.
Thus, the leasing agent or property manager negotiating a commercial lease for a
landlord ensure that lease agreements produce rents and control costs effectively to
produce a maximum return, now and in the future.

•  place for payment; and 

•  manner of payment.1 
Additionally, if the landlord is to receive prepaid rent, the lease agreement
needs to include a provision stating the tenant will pay rent in advance.2 [See
RPI Form 552 §4.1] 

Rent payments not timely received by the landlord are considered

delinquent. Rent is not delinquent until any grace period expires. In

1 Levin v. Saroff (1921) 54 CA 285

2 CC §1947
440 Property Management, Sixth Edition

commercial (and residential) lease agreements, the grace period is negotiable

by the landlord and the tenant. There are no legal mandates on the length of
a grace period, or that a grace period even be granted. [See RPI Form 552 §4.7] 

Having established a grace period by agreement or conduct, the landlord

may not serve a three-day notice to pay until the grace period expires. [See
Chapter 29] 

The landlord may contract for a late charge as reimbursement for their
delinquent rent collection efforts. The charge needs to be reasonably related
to the landlord’s out-of-pocket costs incurred during collection efforts or the
delay in receipt of the untimely payment. 

Late charges are typically assessed in leases as either a percentage of the

rent due or a flat rate charge. The flat rate charge is to approximate the costs
incurred to enforce collection and the loss of use of the rent money. In
addition to dollar amounts equivalent to reimbursement of collection costs,
the accrual of interest on any delinquent amount is often included to cover
loss of the use of rent monies. [See RPI Form 552 §4.8] 

Rent is to be paid in U.S. dollars at a set location, such as at the landlord’s or

Place and leasing agent’s office. The rent may be delivered personally or by mail. [See
manner of RPI Form 552 §4.6a] 
payment However, rent does not have to be paid with money. Rent may be paid by the
delivery of crops, precious metals, services, assets or other currencies.3 

The manner of rent payment is also established. Typically, landlords

will accept cash, check, credit card, electronic transfer or other means of
transmitting funds. 

A landlord may charge a flat rate for a check returned for insufficient funds.
However, the charge must be memorialized in the lease agreement in order
for the landlord to shift this expense item to the tenant. [See RPI Form 552
§4.9] 

If the tenant’s check is returned for insufficient funds, the landlord may
require payment of rent in cash or by money order. However, this cash
requirement may not apply to rents after a three month period. After three
months, the landlord is required to again accept alternate forms of payment.4
[See RPI Form 552 §4.9]   

When square In commercial leases for industrial, commercial, office and retail space, the
base rent is generally set as a dollar amount, determined by multiplying the
footage sets total number of square feet rented by a per-square-foot rate. 
the rent For example, a tenant leases 4,000 square feet at $2 per square foot. The base
rent is set for the lease as $8,000, payable monthly. 

3 Clarke v. Cobb (1898) 121 C 595

4 CC §1947.3
 Chapter 43: Rent provisions in commercial leases 441

The per-square-foot rent formula is used to negotiate the lease, and then a
specific dollar amount of rent is stated in the lease agreement. The per-square-
foot formula used in negotiations usually is not mentioned in the lease
agreement unless the footage is uncertain at the time the lease is entered
into. 

When the base rent or any additional rent, such as common area
maintenance charges (CAMs), is based on square footage stated in the
lease, the space attributable to the leased premises is to be clearly defined
and accurately measured.

To avoid disputes, the landlord and tenant agree on how the square footage
will be measured: 
•  from the interior walls; 
•  from the middle of common walls; 
•  from the exterior of the walls; or 
•  to include a portion of the common hallways, lobby, restrooms or other
interior areas of the structure. 
The standard for determining how the square footage will be measured is
negotiated through the offers and counteroffers to lease, and the competitive
availability of space. 

As additional rent, the commercial tenant may pay some or all of the costs
of operating the property, producing various modifications of a gross or net
Additional
lease agreement. Operating costs include: rent and
•  expenses incurred in the ownership and operations of the property; other sums
and
due
•  future increases in these expenses. [See RPI Form 552-3]
CAM provisions obligate the tenant to pay a pro rata share of the costs
incurred by the landlord to maintain the common areas of the property and
otherwise defray the costs of ownership, which may include:
•  utilities (water, electric, etc.);
•  heating, ventilation and air conditioning (HVAC);
•  sewage;
•  garbage;
•  janitorial services;
•  landscaping;
•  security;
•  insurance premiums;
•  management fees; and
•  property taxes and assessments. [See Figure 1, Form 552]
442 Property Management, Sixth Edition

Figure 1

Excerpt from
Form 552

Commercial
Lease
Agreement

Gross — Single
Tenant

CAMs are classified as additional rent and generally arise in multi-tenant

Additional projects. Customarily, CAMs owed by a tenant are based on the ratio between
rent and the space leased by the tenant and the total rentable space in the project. 

other sums The term “common area” is broadly defined to include sidewalks, corridors,
plazas, halls, restrooms, parking facilities, grounds, etc. 
due, cont’d
The term “maintenance” is defined to include garbage removal, janitorial
services, gardening and landscaping, repairs and upkeep, utilities and other
specified operating costs.

The allocation of responsibility for operating expenses depends on: 

•  the type of property and its use; 
•  the relative bargaining positions of the landlord and tenant in the
current real estate market; 
•  the financial objectives of the landlord and tenant; and 
•  the length of the lease term. 
The landlord and tenant may agree the property operating expenses will
be paid by the tenant directly to the provider or creditor, or indirectly to the
landlord as a CAMs reimbursement. 

Taxes and Tenants with long-term leases often agree to pay some or all of the real
estate taxes, insurance premiums and special assessments when the leased
assessments premises is an industrial or other free-standing, single-use building. 

Simply put, the annual cost to a tenant is basically the same whether the
landlord receives rent (a greater amount) and pays operating expenses out
of the rent, or the tenant pays rent (a lesser amount) plus operating costs.
Expenses are always eventually paid by the tenant, whether paid directly
 Chapter 43: Rent provisions in commercial leases 443

or indirectly through the landlord. If the tenant directly pays operating

expenses or reimburses the landlord via CAMs, then the tenant, not the
landlord, carries the risk they will increase.

Property is reassessed by the county assessor when the landlord sells their
interest, even if the tenant remains in possession.5 

If the landlord sells the leased property and the property is reassessed at a
higher valuation, the increase is attributed to the landlord, not the tenant.
[See RPI Form 552 §4.5] 

A savvy tenant will demand a cap on any rent increases due to reassessments
caused by the landlord. When a cap is agreed to in the lease, the landlord is
responsible for any property tax increases exceeding the cap. However, the
tenant is held responsible for the payment of assessments and taxes caused
by their own improvements and trade fixtures. [See RPI Form 552 §4.3]

The utilities provision covers the cost of utilities used in the space leased
by the tenant. They are separate and distinct from the utilities required to
Utility
operate the common areas. [See Figure 1, Form 552 §§5.1, 5.2]  charges
To protect against the increased cost of utilities consumed by the tenant, the
landlord who pays for utilities may negotiate to pass the responsibility on
to the tenant. The landlord may determine the tenant’s pro rata share, or
have each leased premises privately metered to determine the charge for the
tenant’s consumption. 

Tenants who use a lot of energy or utilities should be required to contract

with the utility companies themselves. 

As a practical matter, the landlord avoids paying the utilities whenever

possible, except, perhaps, for water. However, if the landlord pays the utilities
and charges the tenant, the charge is additional rent to all other rent agreed
to be paid.

5 Calif. Revenue and Taxation Code §60

444 Property Management, Sixth Edition

Chapter 43 Various rent formulas exist to meet the demands of the marketplace and
Summary the financial needs of the landlord and tenant.

A lease agreement which sets monthly rent payments at a specific dollar

amount over the entire life of the lease is called a fixed-rent lease. A
lease agreement with a rent provision that calculates the total amount
of rent the tenant will pay as a percentage of the tenant’s gross sales is
called a percentage lease.

Many commercial lease agreements contain provisions under which

the base rent is adjusted periodically. Common price adjustment
provisions include:
•  an inflation-adjusted rent provision, which adjusts for annual
price inflation as measured by the Consumer Price Index (CPI);
•  a graduated rent provision which increases rent from year to year
in set percentage or dollar amounts; and
•  the appreciation-adjusted rent provision, which adjusts for
property price appreciation every five years or so due to changes
in local market conditions.
In a rising local economy or period of general price inflation, a long-
term fixed-rent lease will prove to be a financial disaster for the landlord.
However, a landlord may be forced to accept fixed-rent leases over a
short period of time due to economic downturns or static rental markets.

When leasing space in larger, multi-tenant retail properties, landlords

often negotiate a rent provision that calculates the total amount of rent
the tenant will pay as a percentage of the tenant’s gross sales. Tenants
with long-term leases often agree to pay some or all of the property
taxes, insurance premiums and special assessments when the leased
premises is an industrial or single-use building.

The rent provisions in a commercial lease agreement include the:

•  dollar amount of the rent;
•  time for payment;
•  place for payment; and
•  manner of payment.

base rent.......................................................................................... pg. 437

Chapter 43 fixed-rent lease.............................................................................. pg. 437
Key Terms percentage lease........................................................................... pg. 438

Quiz 11 Covering Chapters 42-46 is located on page 654.

 Chapter 44: Adjustable rent provisions 445

Chapter
44
Adjustable rent
provisions

After reading this chapter, you will be able to: Learning

•  structure rent and expense provisions in commercial lease
agreements to protect a landlord’s capital investment;
Objectives
•  use a graduated rent provision on a short-term commercial lease
to increase the monthly rent due based on either a specific dollar
amount or percentage of the base year rent;
•  protect the property’s income by including an inflation-adjusted
rent provision in the lease agreement to keep the property’s
annual rental income increasing to match the annual rate of
inflation; and
•  use a percentage lease to have additional rent calculated as a
percent of the tenant’s gross sales year be paid separately from the
base rent due monthly.

appreciation-adjusted rent graduated rent provision Key Terms

provision
inflation-adjusted rent
base rent provision

Rent earned from leased space generates a yield on the landlord’s investment Economic
in the real estate. Conceptually, rent is economically similar to a lender’s
receipt of interest for the use of money loaned. goals of
At the end of their right-to-use periods, the real estate and the money are commercial
returned to the landlord and the lender, respectively.  landlords
Like interest rate provisions in a note, rent provisions in a commercial lease
agreement are structured to anticipate future market changes that will affect
the investment (value, income, expenses and debt). Even creditworthiness
standards applied to both are the same, based on income.  
446 Property Management, Sixth Edition

Figure 1

Excerpt from
Form 552

Commercial
Lease
Agreement
As discussed in the previous chapter, fixed-rent leases do not anticipate
Gross — Single future changes in the investment’s fundamentals. However, variable or
Tenant adjustable-rent leases do anticipate negative market changes. Properly
structured, variable- or adjustable-rent leases shift increased costs and
positive demographic influences to the tenant by way of an equal increase
in rent. 

Landlords have a financial need to protect the growth and value of their
capital investment in commercial income property. The sole method a
landlord has for maintaining the value of income property from year to year
is through rent and expense provisions in lease agreements.

To accomplish this feat, the landlord’s leasing agent anticipates the type of
rent and use-maintenance provisions for a lease agreement that will deliver
the maximum net operating income throughout the life of the lease.
Applying the care and protection owed the landlord in negotiations, the
agent will provide the landlord with future benefits of rents that stay in line
with inflation and demographic-driven appreciation.

Since net income from operations sets value and pricing, attention to any
ability to shift future cost increases to the tenant will further enhance future
value. Future capitalization rates following 2014 will play a role, driving
values inversely to the inevitably rise in rates.

Types of The three basic types of commercial rent adjustment provisions (also known
as rent escalation clauses) are:
adjustable •  graduated rent provisions [See Figure 1];
rent •  inflation-adjusted rent provisions paired with appreciation-
graduated rent
adjusted rent provisions [See Figure 2 and Figure 3]; and
provision •  percentage lease rent provisions. [See Figure 4]
A rent provision in
a commercial lease The economic goals a leasing agent reviews with their commercial landlord-
agreement which
increases the initial client when negotiating provisions for future rents include: 
monthly rent in pre-set
increments over the •  adjustments for lost purchasing power due to future consumer price
term of the lease. [See inflation; 
RPI Form 552 §4.4]
•  adjustments in rent to reflect the rate of appreciation on comparable
properties (beyond the rate of inflation), a demographics issue; and 
•  the absorption or pass-through of increased operating expenses or
interest adjustments on mortgage debt. 
 Chapter 44: Adjustable rent provisions 447

Figure 2

Excerpt from
Form 552

Commercial
Lease
Agreement

Gross — Single
Tenant
To protect the property’s income (and its value) due to inflation, rent is
adjusted periodically by including an inflation-adjusted rent provision in
the lease agreement. An inflation clause calls for annual rent increases based
on figures from an inflation index, such as the Consumer Price Index (CPI)
or the Cost of Funds Index. [See Figure 2] 

Rent may also be adjusted to reflect an increase in the property’s dollar value
brought about by local appreciation. This is accomplished in long-term leases
by including an appreciation-adjusted rent provision in the lease agreement
calling for the adjustment to be made every few years, commonly five. [See
Figure 3] 

Also, a landlord passes on increased operating and ownership costs to the

commercial tenant by shifting responsibility for payment to the tenant for: 
•  all or some of the operating expenses;
•  future increases in operating expenses; and/or  
•  a pro rata share of CAMs, property taxes and hazard insurance
premiums. [See Chapter 47] 
Future increases in the cost of carrying debt on the property due to variable
interest rate mortgage financing is passed on to the tenant as increased rent
to provide the landlord with a net lease arrangement. 

A landlord with knowledge and understanding about the economic and

financial consequences of proposed lease terms makes a more informed
financial decision whether to accept, counter or reject the tenant’s offer
to lease.  The level of negotiations is no better than the level of leasing
knowledge held by the landlord and their leasing agent.

The most common rent adjustment provision used in short-term commercial

lease agreements is the graduated rent provision. [See Figure 1] Graduated
rents from
year to year
448 Property Management, Sixth Edition

base rent
Graduated rent provisions increase the monthly rent due in the years
The minimum following the first year’s payment of a base rent. The adjustments are made
monthly rent due annually, or sometimes semi-annually. The periodic upward adjustment is
under a commercial
lease agreement. [See either:
RPI Form 552 §4.3]
•  a specific dollar amount as the rent due; or
•  a percentage of the base year rent or rent paid during the previous
period. [See Figure 1]
When setting the rent adjustment amount, be it a dollar or percentage figure,
the landlord takes into account:
•  expected rate of future inflation, say 2% as now anticipated by wisdom
of the long-term bond market;
•  local market conditions, such as expected user demand and scarcity of
like properties, demographics of increased density and incomes, traffic
counts and infrastructure improvements contributing to property
appreciation; and
•  the tenant’s evolving use and its burden on the property and
improvements.
Rather than being tied to a formal index, the rent increases set by a graduated
rent provision are negotiated. No paradigm exists, but increases of, say, 3% are
customary in some markets, as it provides returns to the landlord exceeding
inflation.

During recessionary times and recovery stages in a business cycle, graduated

Recession rent provisions are popular when the landlord seeks to incentivize tenants to
and recovery lease vacant space. The landlord agrees to a low initial teaser rent, in addition
to a few months of rent-free possession to offset the tenant’s initial set up or
relocation costs. The graduated rent provision then bumps up the rent so any
below-market rents paid in the early years are picked up in future rents that
may even exceed market rates. This is similar to the negative amortization
feature in Millennium Boom adjustable rate mortgages (ARMs).

Any up-front, rent-free period needs to be viewed as part of a vacancy and lost
rents factor since no rent is received to contribute to gross income. The cost of
any tenant improvements (TIs) the landlord pays is recovered by totaling:
•  the monthly amount of an amortized payment of the costs of the TIs
over the initial term of the lease; and
•  the amount of monthly rent the property commands before TIs.

Inflation-adjusted rent provisions keep the property’s annual rental income

Inflation- increasing to match the annual rate of consumer price inflation. An inflation
adjusted rent provision calls for annual upward rent adjustments based on figures from
an inflation index, such as the CPI or the Cost of Funds Index. [See Figure 2]
provisions
The CPI is an index of fluctuations in the dollar price the local population
pays for consumable goods and services. Use of the CPI to adjust rents
 Chapter 44: Adjustable rent provisions 449

Consider a commercial lease agreement with a use provision calling for the tenant to Case in point
operate a movie theater on the premises for ten years.
The lease agreement contains a rent appreciation clause stating the landlord will adjust Setting fair
the base rent in five years to reflect the then-current fair market rent. market rents
At the time for the appreciation adjustment five years later, the landlord determines
the fair market rent for the property by using rent amounts received by comparable
properties put to higher and better uses than a movie theater.
The tenant disputes the amount of the adjusted rent demanded by the landlord.
The tenant claims the fair market rental value of the premises is based on the present
use of the property as intended by the lease. The tenant argues that the lease agreement
does not provide for the landlord to adjust the rent to reflect a return on the fair market
value of properties that have been put to a higher and better use.
Here, the lease agreement states the tenant will use the property to operate a movie
theater for the term of the lease. The rent may only be adjusted to reflect the fair
market value of the property based on its use as a movie theater. [Wu v. Interstate
Consolidated Industries (1991) 226 CA3d 1511]

recovers the dollar’s annual loss of purchasing power to pay for goods and
inflation-adjusted
services. Occupancy of property is a service consumed by the public using rent provision
dollars to pay rent. A rent provision in
a commercial lease
The CPI-U is the value for urban consumers, and is the benchmark used to which calls for periodic
rent increases based on
adjust rents for inflation. For simplicity, we’ll refer to CPI-U as just the CPI. changes in inflation
The CPI is a widely recognized index, easily understood and inexpensive to index figures during
the period. [See RPI
administer. Form 552 §4.5]

Here are some basic guidelines to follow when using the CPI method: Implementing
•  set a base rent payable monthly during the first year of the lease, also the CPI
called the minimum rent (floor);
•  indicate the exact index to be used for the CPI adjustment figures (e.g.,
method
the Los Angeles-Riverside-Anaheim CPI);
•  indicate an alternative index if the one selected is discarded or altered;
•  note the month for the CPI figure to be used to compute annual
adjustments (the third month prior to commencement); and
•  state the month payments begin at the adjusted amount (e.g.,
anniversary month for the commencement of possession under the
lease agreement).
A good practice is to use CPI figures for the third month preceding
commencement of the lease to compute periodic adjustments. But why not
use the CPI for the month in which rent is adjusted?

When the CPI figure hasn’t been released, which will be the case when
using the figure for the month of commencement, the landlord needs to
450 Property Management, Sixth Edition

Figure 3

Excerpt from
Form 552

Commercial
Lease
Agreement

Gross — Single estimate the rent due for the anniversary month.  When the CPI figure for the
anniversary month is later released and the rent adjustment is calculated,
Tenant
the landlord then needs to account for the rent received beginning with
the anniversary month. Using a CPI figure for the third month prior to the
adjustment guarantees an actual figure is available with plenty of time to
calculate the rent adjustment and advise the tenant of the adjusted rent
amount.

Calculating Under annual rent inflation adjustment provisions, the prior year’s rent and
the CPI: Year- CPI are used to set the adjusted rent. [See Figure 2]
to-year CPI Thus, the year-to-year adjustment formula is:
adjustment (current CPI ÷ last year’s CPI) × current rent

Though widely used, CPI only addresses inflation resulting from the Federal
Reserve’s (the Fed’s) monetary policy. CPI is limited to measuring changes
in the purchasing power of the dollar as reflected in the prices of consumer
goods and services, which include rents. The CPI does not reflect changes in
the property’s actual rental value, only in the amount of rent. Thus, to capture
both inflation and long-term appreciation in rents, inflation-adjusted rent
provisions are often paired with appreciation-adjusted rent provisions.

Appreciation- Rents are also forged by public appreciation for a property’s location, the
adjusted rent result of a combination of:
provisions: •  local demographics (density and income sets the level of demand for
space);
local
•  government investments and programs in the community; and
demographics •  supply of available units or space in the local market. [See Figure 3]

Long-term commercial lease agreements need rent provisions which

capture the financial benefits these conditions create for property owners
(and tenant businesses) over time. To garner the value of evolving local
economic conditions, appreciation-adjusted rent provisions are included in
the commercial lease agreement. Through the provision, rents are adjusted
every three to five years to capture any increase in rents brought about by the
effect of local appreciation, increasing rents beyond the inflation-adjusted
increase in rent.
 Chapter 44: Adjustable rent provisions 451

Figure 4

Excerpt from
Form 552-4

Commercial
Lease
Agreement
— Percentage
Lease

The longer the lease term, the more likely an appreciation-adjusted rent appreciation-
provision will be negotiated and included in the lease agreement. [See RPI adjusted rent
Form 552 §4.5e] provision
A rent provision
found in a commercial
The amount of rent increase due to appreciation is determined by a rental lease agreement
market analysis of comparable properties at the time of the rent adjustment. which adjusts rent
every several years
This includes situations unique to the leased property, such as: to reflect an increase
in the rental value of
•  new developments or increased business activity at the location of the a property exceeding
property; the rate of inflation
brought about by local
•  demand for like properties in the immediate area; and demographics. [See
RPI Form 552 §4.5e]
•  traffic counts and patterns directly affecting the property, often
determined by the location of big anchor tenants.
Again, appreciation-adjusted rent provisions work in tandem with the
inflation-adjusted rent provisions. The inflation adjustment is annual; the
appreciation adjustment takes place every three to five years.

The percentage lease rent provision works a little differently from other rent Percentage
adjustment provisions. While using different formulas for adjusting rent,
rent provisions have one common feature – the base rent. The base rent is
lease rent
the minimum rent paid by the tenant to the landlord each month. provisions for
Percentage lease rent provisions have a formula for additional rent to be high traffic
paid separately from the monthly base rent due, called percentage rent
or overage rent. Percentage rent due is typically calculated as a percent
sites
of the tenant’s gross sales less the amount of base rent paid monthly during
the year, a natural breakpoint arrangement. Percentage lease rent provisions
are commonly negotiated with restaurants and retail tenants dependent on
high vehicular or foot traffic to drive their sales. [See Figure 4]

Pairing the base rent amount with a percentage rent formula assures the
landlord a full return at the appreciated rental value for the property due to
its location. Thus:
•  the base rent provides the landlord with a minimum return  on
investment for the tenant’s use of the property; and
 452 Property Management, Sixth Edition

•  the additional percentage rent provides the landlord with a return on

their investment based on the contribution of the property’s location to
the tenant’s operating success.
The additional rent is triggered when the tenant’s gross income from sales
exceed a negotiated dollar threshold, known as the breakpoint. The natural
breakpoint is the point at which the calculated percentage rent amount
for a period, say one year, exceeds the base rent paid during the period.
However, landlords and tenants may negotiate a higher or lower breakpoint
for the additional rent to kick in than the amount of base rent paid. A lower
breakpoint increases the rent the landlord receives.

Formulating To determine the formula for additional rent under a percentage lease rent
provision, the landlord relies on an estimate of the tenant’s gross sales for the
and first 12 months of operations, as well as:
negotiating •  the traffic count and traffic patterns at the location of the premises;
additional •  the dollar amount of anticipated sales and average dollar sales; and
•  the price range of the goods and services to be offered.
rent under a
The landlord then negotiates with the tenant to set the percentage of the
percentage tenant’s annual gross sales for calculating the additional rent. With a natural
lease breakpoint, when the percentage amount exceeds the base rent paid, the
tenant pays the excess amount as additional rent.

Percentage rent is typically due within a month or two after the end of the
year, when the tenant’s gross income for the period is known. The frequency
of the additional rent payment is negotiable, based on:
•  whether the tenant’s sales trends are constant or seasonal; and
•  the financial strength of the tenant.

Calculating Consider a landlord and tenant who agree to a base rent of $5,000 per month,
or $60,000 per year. The percentage rent provision calls for the payment of
percentage rent rent equal to 6% of the tenant’s gross income, paid monthly at the base rent
amount with the balance due annually. The landlord and tenant agree to a
natural breakpoint.

At the end of the year, the tenant has a gross income of $1,500,000. The total
percentage rent due is $90,000 ($1,500,000 x 0.06). The percentage rent exceeds
the annual base rent by $30,000.  Thus, the total rent owed to the landlord for
the year is:
•  $60,000 in base rent, paid monthly during the year; and
•  $30,000 in excess percentage rent, paid within 30 to 60 days after the
end of the year.
 Chapter 44: Adjustable rent provisions 453

Landlords have a financial need to protect the growth and value of their Chapter 44
capital investment in commercial income property. The sole method for
maintaining the value of income property from year to year is through Summary
rent and expense provisions in lease agreements.

The three basic types of commercial rent adjustment provisions are:

•  graduated rent provisions;
•  inflation-adjusted rent provisions paired with appreciation-
adjusted rent provisions; and
•  percentage lease rent provisions.
The most common rent adjustment provision used in short-term
commercial lease agreements is the graduated rent provision. Graduated
rent provisions increase the monthly rent due in the years following
the first year’s payment of a base rent. The periodic upward adjustment
is either a specific dollar amount or a percentage of the base year rent or
rent paid during the previous period.

To protect the property’s income due to inflation, rent is adjusted

periodically by including an inflation-adjusted rent provision in the
lease agreement. An inflation clause calls for annual rent increases
based on figures from an inflation index, such as the Consumer Price
Index (CPI) or the Cost of Funds Index.

Rent may also be adjusted to reflect an increase in the property’s

dollar value brought about by local appreciation. This is accomplished
by including an appreciation-adjusted rent provision in the lease
agreement.

Alternatively, percentage lease rent provisions have a formula for

additional rent to be paid separately from the base rent due monthly,
called percentage rent. Percentage rent due is typically calculated
as a percent of the tenant’s gross sales less the amount of base rent
paid monthly during the year. Percentage lease rent provisions are
commonly negotiated with restaurants and retail tenants dependent
on high vehicular or foot traffic to drive their sales.

appreciation-adjusted rent provision..................................... pg. 451 Chapter 44

base rent.......................................................................................... pg. 448
graduated rent provision........................................................... pg. 446
Key Terms
inflation-adjusted rent provision............................................ pg. 449

Quiz 11 Covering Chapters 42-46 is located on page 654.

 Chapter 45: Rent increases and CPI 455

Chapter

45
Rent increases and
CPI

After reading this chapter, you will be able to: Learning

•  understand the interrelationship between rents, inflation and
appreciation;
Objectives
•  distinguish the effect of inflation from appreciation in any
increase in a property’s rents; and
•  provide for a shift of rent inflation and appreciation to the tenant
in lease agreement rent provisions.

appreciation-adjusted rent
provision
Consumer Price Index
(CPI)
Key Terms
inflation

A long-term investment goal of an owner of rental property is to generate Coping with

future annual net operating income sufficient to keep the property’s
value rising in line with consumer inflation. inflation
An income property owner’s primary goal is to negotiate the best possible through rent
rental rate consistent with the highest occupancy rate attainable when
entering into a lease agreement. Part of this income goal is to bargain for
periodic upward rent adjustments over the life of the lease. Rent adjustments
are needed to cover the loss of purchasing power in the initial rent amount
brought on by annual consumer price inflation.

For example, rent adjustments may be set to match the annual price inflation
experienced in the region. Thus coupled with inflation, rental income will
increase from year to year to maintain the original purchasing power of the
property’s initial rental income over the life of the lease.
456 Property Management, Sixth Edition

Consumer Price For decades prior to the mid-1970s, rent adjustments in an environment of
Index (CPI) slowly rising interest rates were of little concern as inflation and appreciation
The CPI measures rates remained low. The 1980s saw marked increases in rents and operating
and tracks the rate of
consumer inflation. costs to reflect the excessive inflation of the 1970s.
This is presented as an
index of fluctuations By the early 1990s, rents declined and appreciation rates in California
in the general price
of a wide selection of
reversed, stabilizing during the late-1990s. After the turn of the century, rents
consumable products – again began to increase, exceeding the rate of inflation as reflected in the
goods and services. Consumer Price Index (CPI). By 2007, rent increases began to stabilize in
all areas and on all types of properties, as the real estate boom years of the
appreciation-
mid-2000s came to a halt.
adjusted rent
provision Unlike rent appreciation experienced by a property due to enhanced local
A rent provision demographics, rent inflation is limited by any decline in the quantity of
found in a commercial
lease agreement a consumer item a dollar will buy due to a general price increase for the
which adjusts rent same item. In this case, the item is the square footage of space which can be
every several years
to reflect an increase
purchased at a certain amount of rent.
in the rental value of
a property exceeding Inattentive landlords and agents occasionally fail to anticipate trends
the rate of inflation in inflation. They saddle themselves with long-term lease agreements
brought about by local
demographics. [See containing rent provisions which do not adjust rent for inflation or
RPI Form 552 §4.5e] appreciation. Since future rents are formulated in lease agreement rent
provisions, the worth and equity of the property can be calculated at any
inflation time during the term of the lease based on the capitalization rate then applied
The price change in by investors. [See RPI Form 552 §4.5]
consumer goods and
services, stated in
the consumer price
Unless rent is periodically increased over the life of a long-term lease or a
index (CPI) as a figure lease with renewal options, lease provisions setting future rents may be
which is reported as economically disastrous for the landlord. The periodic upward adjustments
a percentage change
over one year ago. in rent amounts to be considered include:
•  the rate of consumer price inflation; and
•  local demographic price appreciation.
A number of methods exist to keep pace over the term of a lease with consumer
inflation, property rent appreciation and increases in the landlord’s operating
and ownership expenses beyond the rate of inflation.

The best method for coping with the uncertainty of future inflation is to tie the
CPI covers amount due as future rents to figures published in the federal government’s
price inflation CPI. The monetary policy for the dollar is set by the Federal Reserve (Fed) at
2% annually. However, inflation of greater amounts may be engineered by
the Fed for a short period of time to offset declines in government spending.
This Fed action boosts consumer spending, which in turn creates more jobs,
raising employment to the level sought by the Fed.

Commercial lease agreements usually set a base monthly rent which is

constant for the first year. For the following years, annual rent is adjusted by
factoring in the annual change in local or regional CPI figures. [See Figure 1]
 Chapter 45: Rent increases and CPI 457

For residential rent increases, most rent control communities use a form of the
CPI to allow for the amount of automatic annual rent adjustments permitted
by ordinance. The rent control formulas have worked well for landlords,
especially when rents slip for reason of increased supply (construction and
SFR conversion to rentals) or reduced demand (job loss during a recession).

Residential leases only infrequently exceed one year. Thus, most residential
lease agreements do not need to address an adjustment in monthly rents
to compensate for inflation. Rent increases are negotiated at the end of the
leasing period and set based on comparable market rates or, in noncompetitive
environments due to restrictive zoning, as dictated by rent control.

CPI figures are published monthly, bi-monthly or semi-annually by the U.S. CPI and its
Bureau of Labor Statistics for numerous metropolitan areas across the states.
The CPI is the most widely used indicator of inflation. regions
The CPI measures the overall price change from month to month, positive or
negative, for a “basket” of consumer goods and services people are believed
to buy or consume. The CPI-U is based on the price of food, clothing, shelter,
fuel, transportation fares, routine medical charges, drugs and other goods
bought for day-to-day living.

Real estate lease agreements with provisions for annual adjustments based
on the rate of inflation most commonly use inflation figures from the
regional CPI-U, the CPI for the area’s urban consumers. A regional CPI-U
covers the buying habits of approximately 80% of the population within the
designated area. [See Figure 1]

The three CPI regions within California are:

•  Los Angeles-Anaheim-Riverside (issued monthly);
•  San Francisco-Oakland-San Jose (issued bi-monthly); and
•  San Diego (issued semi-annually).
If property does not fall within or near one of the regions, a landlord may
also use the CPI-U for a larger geographical area such as:
•  the West Region CPI-U; or
•  the U.S. City Average CPI-U.

The San Francisco-Oakland-San Jose CPI-U is issued bi-monthly covering Issuance date
consumer expenditures for two months — the month of issuance and the
preceding month. The bi-monthly CPI-U for the San Francisco area is issued for the CPI
on even-numbered months such as February, April, June, etc. figure
Thus, the landlord with an adjustment index tied to the January CPI-U for
the San Francisco-Oakland-San Jose area uses the CPI-U which comes out in
February.
458 Property Management, Sixth Edition

However, the landlord located in the San Francisco-Oakland-San Jose or San

Diego areas may wish to switch to a larger geographical area CPI-U index
which is issued on a monthly basis. For example, the landlord may consider
using the West Region CPI-U.

If the landlord seeks to switch to a different index after entering into the
lease agreement, the landlord and tenant needs to agree to the use of the new
index.

A few basic principles of real estate economics need to be considered when

Inflationary applying CPI figures to periodically adjust rent upward. A rent adjustment
cycles and based on consumer price inflation covers the negative effect inflation has on
the purchasing power of the landlord’s rental income. With each inflation
the CPI adjustment made in rent by the landlord, the commercial tenant in turn
passes on the rent increase to consumers when pricing the goods and services
they produce and sell.

Also, real estate rents on the reletting of comparable properties sometimes

increase in excess of consumer inflation. Any annual increase in rents
paid beyond the rate of inflation is appropriately called appreciated rents.
Appreciated rents directly translate on application of a capitalization rate
(to the NOI) to set the property’s market value. The portion of the annual
property value increase beyond the rate of inflation is the appreciated value
of the property.

The appreciation of rent amounts (and thus property value) is driven by

population density increase in the immediate area and increased personal
income beyond the rate of inflation for local residents and companies. Thus,
the location of the property is “appreciated” by more families and businesses.

Rent may not be increased during the term of a lease without an adjustment
How CPI provision in the lease agreement. For instance, rent payments under a fixed-
works rent lease remain constant over the life of the lease. In contrast, rent under a
month-to-month rental agreement may be increased by serving a notice of
change in the terms of tenancy, limited for most residential units located in
cities burdened with rent control.1

To increase rents annually for inflation, the lease needs to provide a formula
for calculating the rent increases. [See Figure 1; see Chapter 44]

A lease provision that calls for adjustments based on the CPI-U may be
worded to provide a base-to-current year increase or a year-to-year increase.
The resulting rent amount is the same under either calculation. [See Figure 1]

1 Calif. Civil Code §827

 Chapter 45: Rent increases and CPI 459

When the landlord decides to use the CPI method to raise rents, some basic guidelines CPI provision
are to be followed: checklist
• set, in advance, a base rent payable monthly during the first year of the lease
which is the “minimum” rent (floor) below which the rent will never fall;
• indicate the exact index to be used (e.g., the Los Angeles-Riverside-Anaheim
CPI-U);
• indicate an alternative index if the one selected is discarded or altered;
• note the CPI beginning month for computing annual adjustments (often the
third month before the commencement month and anniversaries of the lease);
• state the actual date for the adjusted annual graduations (e.g., September 1);
and
• include provisions to cover future changes in the property’s appreciated value
and operating costs (e.g., reappraisal, CAMs, etc.) whether the tenant has
assigned or sublet the premises, or liened their leasehold interest. [See Figure 1]

Regardless of the method of adjustment, base-to-current year or year-to-year,

the landlord will need to select a beginning CPI-U month.
Choosing the
beginning CPI
The best month to select for the CPI-U figure used to compute periodic
adjustments is the third month preceding commencement of the lease and month
each anniversary of the commencement. The CPI-U figure for the third
month prior to the adjustment is readily available by the time the rent
adjustment needs to be calculated, and the tenant is advised of the adjusted
amount of rent due.

Otherwise, if the CPI-U figure chosen is for the month in which the rent will
be adjusted, the landlord will need to estimate the CPI-U figure at the time of
the adjustment. The actual CPI-U figure for the anniversary month will not
be available for another two months. Computation of the annual adjusted
rent is either by base year CPI-U to current year CPI-U, or by year-to-year
CPI-U. [See Sidebar, “CPI provision checklist.”]

Consider a lease rent provision which provides for a base-to-current year Base-to-
adjustment. [See Figure 1]
current year
The lease commenced on January 1, 2018. The base rent is $5,000 per month
for the first year. The rent is to be adjusted each January and the CPI-U index adjustment
to be used is the Los Angeles-Anaheim-Riverside index.

The CPI-U figure for the October prior to January, the month of adjustment,
is selected as the base month figure for rent adjustments. The CPI-U figure
for the third month preceding commencement will be available to calculate
the amount of the adjusted rent before the January rent is due. The CPI-U for
October 2017 is 196.3, the base month figure.

In January 2019, the first rent adjustment takes place. The CPI-U for October
2014 is 206.9.
460 Property Management, Sixth Edition

Figure 1

Excerpt from
Form 552

Commercial
Lease
Agreement

Gross — Single
Tenant

To calculate the base-to-current year adjustment, the current CPI-U is divided

by the base CPI-U and the quotient multiplied by the base rent: (current
CPI-U ÷ base CPI-U) × base rent.

For the second year (2019) of the lease, the rent is $5,270 — (206.9 ÷ 196.3) ×
$5,000.

For 2020, the third year of the lease, the October 2019 CPI-U is 211.4. Thus, in
January 2020, the rent adjusts to $5,385 — (211.4 ÷ 196.3) × $5,000.

Under year-to-year rent adjustment provisions, the prior year’s rent, not the
Year-to-year base year’s rent, is used to set the adjusted rent. The base year’s CPI-U is not
adjustment used to make the future adjustment.

Thus, the year-to-year adjustment formula is the current CPI-U divided by

last year’s CPI-U, multiplied by the current rent: (current CPI-U ÷ last year’s
CPI-U) × current rent.

Three advantages are provided by using the CPI as a basis for rent adjustments.
CPI The first and most obvious advantage is the CPI is universally known and
advantages easily understood. Little room exists for the parties to disagree over the
amount of a rent increase if it is tied to a government published index.

Second, the CPI is inexpensive to administer. It only takes a few minutes and
a calculator to adjust the rents each year.

Third, the CPI is a widely published index and easy to locate and conform.

Despite the advantages, the CPI has its limitations. The CPI bears little to
CPI no relationship to changes in the property’s actual rental value. The CPI
limitations on only measures changes in the purchasing power of the dollar as reflected in
consumer prices, which includes residential rents (not prices). Rents are forged
yield by a combination of local demographics (density and income), government
programs and supply of available units or space. However, commercial
 Chapter 45: Rent increases and CPI 461

leasing arrangements need to be worded to capture these conditions over a

longer period of time. Residential leases do not have this concern as the term
is generally shorter. [See RPI Forms 550 and 551]

Each parcel of real estate is a unique asset. The location of a property makes the
primary difference since no two locations have exactly the same desirability
factors affecting value.

An individual property experiences an increase or decrease in rental value

for a number of reasons other than inflation, including:
•  traffic counts and access to the property;
•  tenant demand and changes in the size and wealth of the surrounding
population;
•  operating expenses;
•  mortgage interest rates and investor capitalization rates; and
•  construction starts.

The regional CPI as a factor for diminished purchasing power of a dollar takes
none of these local economic factors into consideration (other than to the
Further
extent they are reflected in residential rents, which is just one aspect of CPI). limitations of
Interest rates charged to homebuyers are indirectly included in the CPI by
using implicit rent as the cost of possession. The effect of interest rates on real
the CPI
estate values is not included since debt is capital and real estate is a capital
asset, the value of which is not itself consumed.

Cyclically, and in the short term, asset values run opposite to the direction
interest rates move. When interest rates go down, values of real estate (and
other assets) accelerate even as rents remain the same, and vice versa.

Also, the CPI does not mirror actual variations in the landlord’s operating
costs. An owner who does nothing to maintain their property can, in a high-
demand location, enjoy rent increases due to the public’s appreciation for the
property’s desirable location.

Astute tenants insist on an annual cap when rent increases are linked to CPI.
For example, if the rise in the CPI figure is greater than 4% in any year, a 4%
cap limits the increase despite a greater increase in the CPI.

The key is to analyze where inflation is headed. If inflation is expected to rise

in the future, the CPI will initially benefit the landlord. Conversely, when
inflation has topped off and is dropping, the CPI will appear to benefit the
tenant. Also, a shock to local rental market conditions, such as overbuilding
or the exodus of a rental age or business group, can completely eliminate
inflationary and interest rate effects on rent.

Again, the CPI is a good method for controlling the inflationary reduction of Alternatives
the purchasing power of the U.S. dollar received in payment of rent.
to the CPI
 d. � .
4.7
Tenant to pay a charge of � $ , or � % of the delinquent rent payment, as an
additional amount of rent, due on demand, in the event rent is not received within � 5 days, or �
days, after the due date.
4.8 If any rent or other amount due Landlord is not received within the grace period provided in Section 4.7, interest
462 Property Management, will accrue from the due date on the amount at 18% per annum until paid. On receipt of the payment of any
Sixth Edition
delinquent rent, Landlord to promptly make a written demand for payment of the accrued interest which will be
payable within 30 days of the demand.
4.9 Tenant to pay a charge of $ as an additional amount of rent, due on demand, for each
rent check returned for insufficient funds or stop payment, in which event Tenant to pay rent when due for
each of the 3 following months by cash or cashier’s check.
Figure 2 5. OPERATING EXPENSES:
5.1 Tenant is responsible for payment of utilities and services supplied to the Premises.

Excerpt from 5.2

5.3
Tenant to pay all taxes levied on trade fixtures or other improvements Tenant installs on the Premises.
As additional base rent, Tenant to pay % of the real property taxes and assessments levied by
Form 552-3 governments, for whatever cause, against the land, trees and buildings within the Project containing the Premises,
within 30 days after written demand from Landlord.
a. Tenant is not liable for increases in real property taxes and assessments resulting from a change in
ownership.
Commercial 5.4 Tenant will, on request of Landlord, authorize their utility companies to release energy consumption data directly
Lease to Landlord for Landlord's Data Verification Checklist used for energy benchmarking purposes and, upon further
request, provide energy consumption data on the Premises. [See RPI Form 552-9]
5.5 If Landlord pays any charge owed by Tenant, Tenant will pay, within 30 days of written demand, the charge as
Net — Multi- 5.6
additional rent.
As additional monthly base rent, Tenant to pay % of the common area maintenance (CAM) for the Project
Tenant - - - - - - - - - - - - -incurred
- - - - - - - - - - each
- - - - - - -month,
- - - - - - - - -within
- - - - - - - -10
- - - days
- - - - - - -of
- - -written
- PAGE 3statement
OF 5 — FORMand
552-3demand
- - - - - - - - - for
- - - - payment.
--------------------------------------------

- - - - - - - - - - - - -a.
- - - - - - - -CAMs
- - - - - - - -are
- - - - -the
- - - -cost
- - - - - -to
- - -landlord
- - - - - - - - - -of
- - -maintaining
- PAGE 2 OF 5 —and operating
FORM 552-3 - - - - -the
- - - -“Common
- - - - - - - - - - - - -Areas”
- - - - - - - - of
- - - the
- - - - -Project,
- - - - - - - - - -including
---------
all sidewalks, corridors, plazas, hallways, restrooms, parking areas, interior and exterior walls and all other
open areas not occupied by tenants.
b. CAMs include all costs incurred by Landlord relating to the operation of the Project containing the Premises
including hazard insurance premiums maintained by Landlord and charges for property management of
the Common Areas.
6. REPAIR AND MAINTENANCE:
6.1 The Premises are in good condition, � except as noted in an addendum. [See RPI Form 550-1]
6.2 Tenant will keep the Premises and its improvements in good order, condition and repair, including all equipment,
such as plumbing, HVAC components, electrical, lighting, and �
Inflation’s effect on rent amounts covered by the annual CPI adjustments .
a. Tenant’s obligations include repair, replacement or retrofitting needed to keep all improvements on the
is not the only concern of the property manager. Property appreciation
Premises in good order, condition and repair.
b. � See the attached maintenance modification addendum. [See RPI Form 552-6]
and increased operating costs need to be managed to increase, or at worst
6.3 Except as stated in Section 6.2 and subject to reimbursement under Section 5.6, Landlord will maintain in good
maintain, the property’s NOI, and thus the property’s value.
order, condition and repair the structures and common area components and equipment within the Project which
exist on the commencement of this lease agreement, including structural foundations, exterior walls, roof, parking
areas, lawns and shrubbery, sidewalks, driveways/right of ways, and common area HVAC, electrical systems,
It is advisable to add a reappraisal and rent adjustment provision to long-
plumbing, fire alarms and sprinkler systems, and �
.
term leases rather than rely solely on the CPI. However, reappraisal methods
6.4 If the cost incurred under Tenant’s obligation for any item in Section 6.2 exceeds the equivalent of 1 month’s rent
for the month prior to occurrence of the obligation, then the item is to be repaired, replaced or retrofitted and paid
are costly, time consuming and not always without argument. Managers
for by Landlord.
may feel it is too involved to reappraise the property every few years to set
a. The cost for items under Section 6.2 or of any capital improvement to the Project paid by Landlord under
Section 6.3 will be allocated over a 12-year period.
the new rents.
b. Tenant is obligated to pay an amount equal to the cost of the capital improvement borne by Landlord
multiplied by the fraction 1/144 (i.e., 1/144th of the cost per month) as additional rent each month during
the remainder of the term of this lease agreement and any subsequent lease extensions up to 12 years.
Also,
7.
appraisal provisions usually call for a reappraisal and recast of the rent
USE OF THE PREMISES:
schedule at three- to five-year intervals or on exercise of renewal options
7.1 The Tenant’s use of the Premises will be
.
when the rental rates are set to adjust to market rents. [See RPI Form 552 §4.5]
7.2 No other use of the Premises is permitted.
a. Tenant may not conduct any activity which increases Landlord’s insurance premiums.
7.3 Tenant will not use the Premises for any unlawful purpose, violate any government ordinance or building and
tenant association rules, or create any nuisance.
7.4 Tenant will not destroy, damage, or remove any part of the Premises or equipment, or commit waste, or permit
Some leases allow the landlord to use their judgment to set the rent for the
Upward shifts any person to do so.
adjustment, which needs to be exercised reasonably.
7.5 Tenant will deliver the Premises, including tenant improvements as noted in Section 11.3 and all keys to the

in rent Premises, on expiration of the lease in as good a condition as when Tenant took possession, except for reasonable
wear and tear.
A provision for the periodic adjustment of rents to current rental rates is good
7.6 Landlord warrants that the Premises comply with building codes, regulations and zoning that were in effect at the
time each improvement, or portion thereof, was constructed. Said warranty does not apply to Tenant’s intended
insurance for a landlord. It captures any upward shifts in rents paid in the
use of the Premises, modifications which may be required by the Americans with Disabilities Act (ADA) or any
similar laws as a result of Tenant’s use.
local rental market beyond those brought about by inflation.
7.7 Tenant is responsible for determining whether the building codes, zoning and regulations are appropriate for
Tenant’s intended use.
7.8 If the Premises do not comply with these warranties, Tenant is to give Landlord written notice specifying the
This periodic recast of the rent payment is economically comparable to the
nature and extent of such non-compliance, and Landlord is to promptly correct the non-compliance at Landlord’s
expense. If Tenant does not give Landlord written notice of the non-compliance with this warranty within 6 months
rollover feature some lenders include in their three- or five-year adjustable
following the commencement date, Tenant, at Tenant’s expense, will correct the non-compliance.
rate or rollover mortgages.
7.9 The Premises � has, � has not, been inspected by a Certified Access Specialist (CASp).
a. If inspected, the Premises � has, � has not, been determined to meet all applicable standards under Calif.
Civil Code §1938 and §55.53.
8. addition to base rents, CPI adjustments and rollover features, percentage
In APPURTENANCES:
8.1 Tenant has the right to use Landlord’s access of ingress and egress.
rent provisions also capture the increase in rents due to appreciation based
8.2 Tenant has the use of parking spaces for the running of its business.
9. ASSIGNMENT, SUBLETTING AND ENCUMBRANCE: [Check only one]
on a change in local demographics. [See Chapter 46]
9.1 � Tenant may not assign this lease or sublet any part of the Premises, or further encumber the leasehold.
9.2 � Tenant may not transfer any interest in the Premises without the prior consent of Landlord.
a. � Consent may not be unreasonably withheld.
If
- - - - -the
- - - - - - - - property
- - - - - - - - - - - - - - - - - - -is
- - - - -in
- - - - - -an
- - - - - - outstanding
- - - - - - - - - - - - PAGE 3 OF 5 — location,
FORM 552-3 - - - - - - - or
- - - - - -promoted
- - - - - - - - - - - - - - - - - - - - - by
- - - - - - -the
- - - - - - - -landlord
--------

resulting in an increase in the tenant’s gross income, the landlord needs to

consider negotiating a percentage rent adjustment provision to better “cash
in” on the draw of the property’s location.
 Chapter 45: Rent increases and CPI 463

Many commercial leases include an additional rent provision to reimburse Adjustments

the landlord for their operating expenses. Rent may be adjusted to include the
operating expenses and any taxes and assessments incurred by the property, for operating
called common area maintenance (CAM) expenses. [See Figure 2] expenses
CAM provisions obligate the tenant to pay a pro rata share of the costs to
maintain the common areas of the property including:
•  utilities (water, gas, heat, etc.);
•  air conditioning and venting;
•  sewage;
•  garbage;
•  janitorial services;
•  landscaping;
•  security;
•  insurance premiums;
•  management fees; and
•  real estate taxes.
The more operating costs passed on to the tenant, the closer the lease comes
to a full net lease.
464 Property Management, Sixth Edition

Chapter 45 To increase rents annually for inflation, the lease needs to provide a
formula for calculating rent increases.
Summary
A provision for the periodic adjustment of rents to current rental rates is
prudent insurance for a landlord. It captures upward shifts in rents paid
in the local rental market beyond those brought about by inflation.

The best method for coping with the uncertainty of future inflation is
to tie the amount due as future rents to figures published in the federal
government’s consumer price index (CPI).

CPI figures are published monthly, bi-monthly or semi-annually by the

U.S. Bureau of Labor Statistics for numerous metropolitan areas across
the states. The CPI is the most widely used indicator of inflation.

Chapter 45 appreciation-adjusted rent provision ................................... pg. 456

Consumer Price Index (CPI) .................................................... pg. 456
Key Terms inflation ........................................................................................ pg. 456

Quiz 11 Covering Chapters 42-46 is located on page 654.

 Chapter 46: Percentage lease rent provisions 465

Chapter

46
Percentage lease rent
provisions

After reading this chapter, you will be able to: Learning

•  implement the use of a percentage rent provision; and
•  identify retail lease situations appropriate for using a percentage
Objectives
rent provision to set the amount of rent due.

base rent percentage lease Key Terms

A landlord of a newly constructed commercial building negotiates a Rental

percentage lease with a prospective tenant. The prospective tenant intends
to operate a franchised restaurant on the premises. They prepare an estimate income driven
of the gross sales amount anticipated for the first 12 months of operations,
based on:
by gross
•  the traffic count and traffic patterns at the location of the premises;
sales
•  the volume of anticipated sales; and percentage lease
•  the nature of the product and service to be offered by the restaurant. A commercial lease
agreement for a retail
operation that sets the
The rent to be paid by the tenant comprises a base rent and additional rent. total amount of rent
the tenant will pay
The landlord and tenant agree the base rent for the first year, payable monthly, as a percentage of the
will be set at 6% of the tenant’s estimated annual gross sales. The base rent is tenant’s gross sales.
[See RPI Form 552-4]
set in the lease agreement as a specific dollar amount. The monthly base rent
amount is annually adjusted to increase at the rate of inflation as reflected
base rent
by CPI figures. The minimum
monthly rent due
The percentage lease agreement includes provisions for additional rent to under a commercial
be paid annually. The percentage rent provision is set to be triggered and lease agreement. [See
RPI Form 552 §4.3]
additional rent due if 6% of the tenant’s gross annual sales is greater in
amount than the base rent paid during the preceding 12 months.
466 Property Management, Sixth Edition

The percentage rates used to calculate the amount of additional rent to be

paid for each consecutive 12-month period of the lease are set at:
•  6% of the first $2,000,000 in gross annual sales; and
•  7% on any greater amounts during the period.
From the total dollar amount calculated by these percentages, the additional
rent due is the difference between the base rent paid during the 12 months
and the total rent owed based on these percentages of gross annual sales. The
additional rent is to be paid annually, within 45 days after the end of each
12-month period.

At the end of the first 12 months of business operation, the percentage rental
rates are applied to the tenant’s gross sales for the first year of occupancy. If
the percentage amount is greater than the base rent paid, the tenant pays
additional rent, also called percentage rent.

Base vs. The amount of rent paid for retail space in multiple tenant shopping
complexes or other high traffic locations is based on a percentage of the
percentage tenant’s gross sales. Lease agreements containing a percentage rent provision
rent are called percentage leases. [See RPI Form 552-4]

A prudent landlord negotiating a percentage lease agreement includes as

part of the rent provisions a clause calling for payment of a base rent. This
base rent serves as a minimum monthly rent a tenant pays during each year
of the lease. Base rent is payable monthly without regard to any amount
of additional annual rent called for under the percentage rent clause. [See
Figure 1]

The base rent is set by landlord/tenant negotiations, and is either:

•  calculated as a percentage of the estimated gross sales the tenant will
likely receive during the first year of operations; or
•  based on current rents paid for comparable premises.
The monthly base rent is adjusted upward on each anniversary of the lease
by either:
•  pre-set increments, called graduated rent; or
•  adjustments based on CPI figures, called adjustable rent. [See Chapter
44]
The total amount of rent the tenant will actually pay monthly, quarterly or
annually under a percentage lease is the greater of either the base rent or the
percentage rent.

Typical percentage rent rates for satellite tenants in a large shopping complex
are 4% or 10% of the tenant’s gross sales. However, the percentages for
gradations of sales depend largely on the type of merchandise and services
sold by the tenant, the pricing and volume of these sales and the traffic count
at the location. Well-branded heavy advertisers, called anchor tenants, pay
lesser rates than satellite tenants who surround the large anchor tenants.
 Chapter 46: Percentage lease rent provisions 467

Figure 1

Excerpt from
Form 552-4

Commercial
Lease
Agreement
— Percentage
Lease

A tenant who retails small ticket items at high volume in a high traffic area,
such as a kiosk in the center of a mall, will have a percentage rental rate, as
high as 20% to 30% of sales.

Conversely, a tenant who retails big ticket items in low volume, such as an
antique furniture store, will have a lower percentage rental rate.

The tenant usually pays the additional percentage rent after the rental When is
period has ended. The additional amount of the percentage rent is normally
due within 10-to-45 days after the end of the period used to calculate the percentage
percentage rent. rent paid?
Landlords and tenants agree to a monthly, quarterly, semi-annual or annual
accounting period for payment of the percentage rent depending on:
•  whether the tenant’s sales tend to be constant or seasonal; and
•  the financial strength of the tenant.
Further, percentage rent paid more than once a year is adjusted annually in
a final accounting. This determines if any percentage rent remains due or is
to be refunded to the tenant for the preceding 12 months of rental payments.

A landlord initially relies on their tenant to provide in good faith an accurate

accounting of their gross sales for the period.

However, the landlord needs to reserve in the lease agreement the right to,
on reasonable notice, audit the tenant’s books regarding sales information
and sales tax reports to the State Board of Equalization (SBOE). [See Figure 1]
468 Property Management, Sixth Edition

Gross sales The landlord and tenant also negotiate which sales will be subject to the
percentage rental rate.
defined
Gross sales is the actual price received for:
•  all merchandise or services sold, leased, licensed or delivered in or from
the premises by the tenant, for cash or on credit; and
•  “layaway” sales at the time of the layaway transaction.
For the sale of lottery tickets, the tenant receives a 5% fee which is the amount
included in the gross sales, not the price paid by the customer.1

Gross sales also include any sums received by the tenant for the licensing of
vending machines, pay telephones, public toilet locks, etc., not the price paid
to receive product from these machines.

For example, the tenant gives a vending machine operator the right to install
vending machines on the leased premises for a one-time fee. The sums
generated through the machine’s sales are not included in gross sales since
the tenant does not receive the sales proceeds.

Also, a periodic licensing fee received by a tenant from a vending machine

operator for a license to use space is correctly considered part of the tenant’s
gross sales generated as a result of subleasing the premises.2

Further, money received by the tenant and disbursed while receiving

no benefit, such as Medi-Cal funds received for direct disbursement to the
staff as additional subsidized pay, is not included in the gross sales under a
percentage lease. The funds did not increase the tenant’s business, the tenant
received no additions to sales and the funds were not for the tenant’s use.3

The same exclusion rule applies to tips received by employees.

Excluded Items customarily excluded from gross sales in a percentage lease include:

items •  the selling price of merchandise returned for full credit;

•  sums and credits received in the settlement of claims for damage to or
loss of merchandise;
•  sales tax;
•  proceeds from the sale of fixtures, trade fixtures or other personal
property used in the tenant’s trade or business that are not merchandise;
•  sales made to employees at a discount;
•  refundable deposits; and
•  uncollectible debts charged off by the tenant.
In practice, gift certificates are not considered part of the gross sales until they
are redeemed and a sale is recorded.

1 Calif. Government Code §8880.51

2 Herbert’s Laurel-Ventura v. Laurel Ventura Holding Corporation (1943) 58 CA2d 684
3 Western Medical Enterprises, Inc. v. Albers (1985) 166 CA3d 383
 Chapter 46: Percentage lease rent provisions 469

Finance charges or interest on accounts receivable held by the tenant may or

may not be included, depending on negotiations between the landlord and
tenant, and whether the receivables are administered on or off the premises.

A landlord enters into a percentage ground lease with a tenant who will build
and operate a gas station on the premises. No provision requires the tenant
A fair rent for
to actually operate a gas station on the premises. The base monthly rent is set failure to use
at $1,000 for the life of the lease without CPI or graduated adjustment. The
percentage rent is set at 6.5% of gross sales.

The tenant builds and operates the gas station on the premises. Additional
rent is paid since the amount of percentage rent always exceeds the base rent.

However, before the lease expires, the tenant closes the gas station. Then, the
tenant pays only the base monthly rent since no sales exist. The base rent
is significantly less than the percentage rent the tenant paid during the last
year of operation.

The landlord claims the tenant owes them the percentage rent as if the tenant
continued to operate their business on the premises.

The tenant claims they owe no more than the monthly base rent since the
lease agreement does not contain a provision requiring the tenant to operate
the gas station at all times during the term of the lease.

Is the tenant liable to the landlord for the same percentage rent owed the
landlord if the tenant had continued operations on the premises?

Yes! An implied covenant exists in a percentage lease as a promise to

continue to use the premises as anticipated by the lease agreement, when:
•  the base monthly rent does not represent a fair return to the landlord;
and
•  the tenant decides not to operate their business on the property.4

By entering into a percentage lease, the tenant is expected to continually Continual

operate their business during the lease term.
operation
However, due to changes in market conditions, demographics, traffic patterns
or other economic factors, the base monthly rent originally negotiated in a
percentage lease may not always represent a fair return to the landlord — a
fair rental value for the premises.

The landlord relies on the percentage rent to provide a yield on their

investment that will keep pace with local rental conditions in the future.

A tenant who ceases to use the property to operate the business as anticipated
by the use provision in a percentage lease agreement still owes percentage

4 College Block v. Atlantic Richfield Company (1988) 206 CA3d 1376

470 Property Management, Sixth Edition

rent. The amount due is based on the gross sales the tenant expected to
experience had they continued to use the property as permitted by the lease
agreement.

A prudent landlord includes a use provision in a percentage lease requiring

the tenant to operate the business for the entire term of the tenancy.

The amount of rent paid for retail space in multiple tenant shopping
Chapter 46 complexes or other high traffic locations is set as a percentage of the
Summary tenant’s gross sales. Lease agreements containing a percentage rent
clause are called percentage leases.

The amount of rent the tenant will actually pay monthly, quarterly or
annually for the percentage rent is the greater of either the base rent or
the percentage rent.

The base rent is set by landlord/tenant negotiations and either:

•  set as the dollar amount of a percentage of the estimated gross sales
the tenant will likely receive during the first year of operations; or
•  set as a dollar amount based on rents currently paid for comparable
premises.

The monthly base rent set for the first year is adjusted upward
periodically, usually on each anniversary of the lease by either:
•  pre-set increments, called graduated rent; or
•  adjustments based on CPI figures, called adjustable rent.

Chapter 46 base rent......................................................................................... pg. 465

percentage lease .......................................................................... pg. 465
Key Terms

Quiz 11 Covering Chapters 42-46 is located on page 654.

 Chapter 47: Commercial use-maintenance provisions 471

Chapter
47
Commercial use-
maintenance provisions

After reading this chapter, you will be able to: Learning

•  act on provisions in a commercial lease regarding the
performance of tenant and landlord responsibilities for the use
Objectives
and maintenance of the leased premises; and
•  explain the remedies available to the landlord if a tenant fails to
fulfill their use and maintenance obligations.

appurtenance tenant improvements and Key Terms

alterations clause
compliance-with-laws clause
triple-net lease
destruction provision
use-maintenance provision
hold harmless provision
use-of-premises provision
rent provision
waste provision
right-to-enter provision
signage provision

A commercial lease agreement contains two basic categories of provisions Shifting

establishing the tenant’s obligations to the landlord: 
ownership
•  rent provisions for the payment of amounts owed [See Chapter 43];
and  obligations to
•  use-maintenance provisions for the use, care and preservation of the tenants
grounds and improvements. 
rent provision
Rent provisions evidence the promise to pay money owed to the landlord A provision contained
in exchange for the tenant’s exclusive possession of the leased premises. This in a lease agreement
monetary obligation is separately enforceable from the use-maintenance establishing the
tenant’s obligations
provisions. [See Chapter 43]  to pay rents for
occupancy and use of
the premises leased.
[See RPI Form 552 §4]
472 Property Management, Sixth Edition

use-maintenance Use-maintenance provisions in a commercial lease agreement establish

provision whether the landlord or the tenant is responsible for the care and maintenance
A provision in a of the premises during the lease term. [See RPI Form 552] 
commercial lease
agreement which
establishes the Use-maintenance obligations are unrelated to the payment of rent. Instead,
landlord’s and tenant’s they identify who will perform or contract for the repairs and maintenance
responsibility for the
care and maintenance
of the leased premises and who will pay for the services — the landlord or
of the premises during the tenant. 
the lease term.
If the landlord retains the majority of the maintenance obligations such as
under a gross lease agreement, the base rent the tenant will pay will likely
be higher than on a net lease. If the tenant assumes the majority of the
maintenance obligations such as under a net lease agreement, the base rent
the tenant pays will likely be lower than on a gross lease. 

Just as a tenant breaches a lease agreement by failing to pay rent, they also
breach the lease agreement when they fail to perform, or violate a use-
maintenance provision. 

The tenant’s breach of an essential use-maintenance obligation triggers

enforcement action by the landlord by serving the tenant with either: 
•  a three-day notice to perform or quit stating precisely what is to be
done by the tenant within three days; or 
•  a three-day notice to quit if the breach is incurable. [See Chapter 26] 
Recall that when the performance called for in the notice to eliminate a
curable breach is not completed prior to expiration of the notice period,
the tenant loses their right of possession (provided the notice contains a
declaration of forfeiture). When the notice to quit addresses an incurable
breach, the tenant automatically loses any right to continue in possession at
the time of the breach.1

Which use- The contents of each provision in a commercial lease agreement are fully
negotiable. The results of negotiations depend on the respective bargaining
maintenance power of the landlord and the tenant, as tempered by market conditions and
provisions to the leasing agents involved. 

include As with any negotiations, lease provisions vary, depending on the: 

•  intended use of the property; 
•  delegation of operating costs and responsibility for the property’s
physical conditions and any TIs required; and
•  length of the lease term. 
Occasionally, professional landlords and franchised tenants will use a
lease agreement form especially prepared by their respective attorneys for
repetitive use, i.e., when the landlord has many properties to let or the tenant
leases many locations. 

1 Kendall v. Ernest Pestana, Inc. (1985) 40 C3d 488

 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - PAGE 3 OF 5 — FORM 552 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

6.2Tenant will keep the Premises and its improvements in good order, condition and repair, including all fixtures
related to plumbing, HVAC components, electrical, lighting, and �
.
a. Chapter 47:
� See attached maintenance modification addendum. [See RPI FormCommercial
552-6] use-maintenance provisions 473
6.3 Except as stated in Section 6.2, Landlord will maintain in good order, condition and repair the structures and
common area components and equipment within the Premises which exist on the commencement of this lease
agreement, including but not limited to existing HVAC, plumbing and sewers, electrical systems, structural
foundations, exterior walls, store front, plate glass in exterior walls, roof, government-mandated retrofitting,
parking areas, lawns and shrubbery, sidewalks, driveways/right of ways, and � Figure 1
.
7. USE OF THE PREMISES:
7.1 The Tenant's use of the Premises will be . Excerpt from
7.2 No other use of the Premises is permitted.
a. Tenant may not conduct any activity which increases Landlord’s insurance premiums. Form 552
7.3 Tenant will not use the Premises for any unlawful purpose, violate any government ordinance or building and

7.4
tenant association rules, or create any nuisance.
Tenant will not destroy, damage, or remove any part of the Premises or equipment, or commit waste, or permit
Commercial
7.5
any person to do so.
Tenant will deliver the Premises, including tenant improvements as noted in Section 11.3 and all keys to the
Lease
Premises, on expiration of the lease in as good a condition as when Tenant took possession, except for reasonable Agreement
wear and tear.
7.6 Landlord warrants that the Premises comply with building codes, regulations and zoning that were in effect at the
time each improvement, or portion thereof, was constructed. Said warranty does not apply to Tenant’s intended
use of the Premises, modifications which may be required by the Americans with Disabilities Act (ADA) or any
Gross — Single
similar laws as a result of Tenant’s use. Tenant
7.7 Tenant is responsible for determining whether the building codes, zoning and regulations are appropriate for
Tenant’s intended use.
7.8 If the Premises do not comply with these warranties, Tenant is to give Landlord written notice specifying the
nature and extent of such non-compliance, and Landlord is to promptly correct the non-compliance at Landlord’s
expense. If Tenant does not give Landlord written notice of the non-compliance with this warranty within 6 months
following the commencement date, Tenant, at Tenant’s expense, will correct the non-compliance
7.9 The Premises � has, � has not, been inspected by a Certified Access Specialist (CASp).
a. If inspected, the Premises � has, � has not, been determined to meet all applicable standards under
Calif. Civil Code §1938 and §55.53.
8. APPURTENANCES:
8.1 Tenant has the right to use Landlord’s access of ingress and egress.
8.2 Tenant has the use of the entire Premises within the property’s legal description.
9. ASSIGNMENT, SUBLETTING AND ENCUMBRANCE: [Check only one]
However, landlords more frequently use published lease agreements that
9.1
9.2
� Tenant may not assign this lease or sublet any part of the Premises, or further encumber the leasehold.
� Tenant may not transfer any interest in the Premises without the prior consent of Landlord.
contain provisions basic to commercial lease transactions. They then attach
Use of the
premises
a. � Consent may not be unreasonably withheld.
addenda for provisions not included in the form or contrary to provisions in
b. � Consent is subject to the attached alienation provisions. [See RPI Form 552-7]
10. SIGNS AND ADVERTISING:
the form. [See RPI Form 552 through 552-8] 
10.1 Tenant will not construct any sign or other advertising on the Premises without the prior consent of Landlord.
10.2 � Landlord will maintain a directory in the lobby of the Premises displaying the name and suite number of
provision
Tenant. Landlord has the right to determine the size, shape, color, style and lettering of the directory.
Editor’s note — The following discussion of use-maintenance clauses refers
10.3 � Landlord will provide a sign to be placed on the primary door to Tenant’s suite. The fees for the cost and
to provisions in RPI Form 552 — Commercial Lease Agreement — Gross —
installation will be paid by Tenant.
use-of-premises
11. TENANT IMPROVEMENTS/ALTERATIONS:
Single Tenant.  provision
11.1 Tenant may not alter or improve the Premises without Landlord’s prior consent to include tenant improvements
necessary for Tenant to occupy. A provision contained
a. Tenant will keep the Premises free of all claims for any improvements and will timely notify Landlord to in a commercial lease
permit posting of Notices of Nonresponsibility. [See RPI Form 597] agreement which
On entering into a commercial lease agreement, a landlord and tenant agree
11.2 Any increases in Landlord’s property taxes caused by improvements made by Tenant will become additional rent establishes the single
due on demand. specified purpose for
the premises will be used by the tenant for a single specified purpose, such as
the tenant’s use of the
a -retail
- - - - - - - - - - - -clothing
- - - - - - - - - - - - - - - - - store
- - - - - - - - - - -or
- - - - - an
- - - - - - auto mechanics
- - - - - - - - - PAGE 3 OF 5 — FORM 552 shop.
- - - - - - - - - - - -This
- - - - - - - - - purpose
- - - - - - - - - - - - - - - - - -is
- - - -specified
- - - - - - - - - - - - - - - - in
leased premises.
the use-of-premises provision. [See RPI Form 552 §7.1; see Figure 1]

When lease provisions do not restrict or specify the tenant’s use of the leased
premises, the premises may be used for any lawful purpose.2 

Conversely, a lease may prohibit any change in use, or set conditions to be

met before a change from the use specified in the use-of-premises provision
may be implemented.3 

If the use provision requires the landlord’s consent to a change in use, but
gives no standard or condition to be met for the consent, the landlord needs
evidence of a commercially reasonable basis for withholding their consent to
the tenant’s proposed new use.4 

The standard of reasonableness applied to the landlord’s consent is the

same as applied to assignment and subletting restrictions — restriction-on-
transfer provisions — calling for the landlord’s consent. [See Chapter 49]
2 Calif. Civil Code §1997.210(b)
3 CC §1997.230
4 CC §1997.250
474 Property Management, Sixth Edition

Figure 2

Excerpt from
Form 552

Gross — Single
Tenant

In the use-of-premises provision, the tenant agrees to deliver up the

premises on expiration of the lease in as good condition as it was when they
took possession, less reasonable wear and tear. 

Even if the tenant’s use of the leased premises is unrestricted, the tenant
cannot impair the premises by damaging it, creating a nuisance, engaging in
illegal activities or subjecting the premises to greater wear and tear than the
use contemplated when the lease was entered into. [See Figure 1 §7.4]
Appurtenances In addition to the use allowed, the tenant agrees not to conduct any activities
to the on the property which: 

leasehold •  increase the landlord’s liability or hazard insurance premiums; or 

•  violate any laws, building ordinances or tenant association rules,
appurtenance
A right belonging
called a compliance-with-laws clause. [See Figure 1]
to real estate owned
by the landlord to
use property located Property or rights belonging to but not located within the leased space are
outside the leased
premises for purposes called appurtenances. A tenant’s use of appurtenances is often necessary
such as parking or for the use and enjoyment of the space leased.5 
access.
Leasehold appurtenances include rights belonging to real estate owned by
the landlord and located outside the leased space, such as: 

Signs and •  a right of way for vehicular travel through an industrial or office
complex; 
advertising •  parking for employees and customers; 
for •  storage space, lobbies and restrooms; and 
conformity •  access by ingress and egress from public roads to the leased premises,
such as a road or driveway.

A signage provision in the lease agreement gives a landlord control over

the size, style, content and location of signs constructed or installed on the
Tenant premises to advertise the location or existence of the tenant’s business. This
improve- allows the landlord to maintain the integrity of the building’s physical and
aesthetic appearance. [See RPI Form 552 §10; see Figure 2]
ments and
The cost of sign installation can be charged to either the landlord or tenant as
alterations negotiated and stated in the terms of the lease. 

5 CC §662
 Chapter 47: Commercial use-maintenance provisions 475

Figure 3

Excerpt from
Form 552

Gross — Single
Tenant

A tenant’s right to make alterations or further improve the premises during the
tenancy is governed by the lease provision called tenant improvements
(TIs) and alterations clause, or more simply a TI clause. [See RPI From 552
§11; see Figure 3]  signage provision
A provision in a
To ensure the landlord retains control over the structures on the leased commercial lease
agreement which gives
premises, the tenant agrees not to alter or further improve any part of the the landlord control
building without first obtaining the landlord’s written consent. The tenant over the size, style,
will pay all costs incurred in the construction (unless the lease agreement is content and location
of signs constructed or
altered to call for different treatment).  installed on the leased
premises. [See RPI
A lease agreement for retail space, especially in malls, includes provisions Form 552 §10]
which require the tenant to renovate their storefront and interior every
number of years. Renovations by tenants every four to six years will help tenant
maintain a fresh appearance which is vital to the overall success of retail improvements and
shopping centers.  alterations clause
A clause in a
commercial lease
When the landlord later consents to alterations by the tenant, the tenant is agreement which
to promptly notify the landlord of the commencement of construction so the specifies the tenant’s
landlord can post and record a notice of nonresponsibility. [See Chapter 5]  right to make
alterations or further
improve the premises
The notice of nonresponsibility is a form which releases the landlord from during the tenancy.
responsibility for any claims made by contractors for improvements the [See RPI Form 552 §11]
contractors construct on the leased premises under their contract with the
tenant.6 [See Form 597 in Chapter 5] 

The notice bars mechanic’s liens on the landlord’s fee interest and denies
contractors employed by the tenant the ability to pursue the landlord for
unpaid amounts due. 

Increases in property taxes due to alterations made by the tenant are the
tenant’s responsibility and are to be paid to the landlord on demand. 
compliance-with-
Unless otherwise agreed, tenant improvements become the property of the laws clause
A provision in a
landlord at the end of the lease term and cannot be removed by the tenant, commercial lease
with the exception of the tenant’s trade fixtures.7 [See Chapter 5]  agreement controlling
the conduct of tenant
activities on the
Further, when the tenant alters or improves the premises resulting in a property to conform
new and different use of the premises, the tenant has a duty to comply with public laws,
building ordinances
or tenant association
rules. [See RPI Form
6 CC §8444
552 §7.3]
7 Wolfen v. Clinical Data, Inc. (1993) 16 CA4th 171
476 Property Management, Sixth Edition

Government- When determining whether the landlord of the tenant is responsible for government-
ordered repairs ordered repairs, the terms of the lease agreement do not always control. Instead,
the determination of whether the landlord or the tenant is to bear the burden of
government-ordered repairs is based on the analysis of six factors:
• the ratio of the cost of repairs to the amount of rent due over the entire life of
the lease;
• the length of the lease, including renewal options;
• whether the landlord or the tenant will benefit more from the repairs in terms of
the useful life of the building and the remaining term of the lease;
• whether the repairs are structural or nonstructural;
• whether or not the repairs will substantially interfere with the tenant’s enjoyment
of the premises; and
• whether or not the government-ordered repairs were foreseeable at the time
the lease agreement was entered into by the landlord and the tenant.
Each burden-of-compliance factor is weighed based on the circumstances surrounding
the execution of the lease agreement, the text of the lease provisions and the economic
realities of the lease transaction.
For example, a landlord and tenant enter into a 15-year commercial net lease agreement.
A boilerplate use-maintenance provision transfers to the tenant all ownership duties,
including structural repairs.
Less than two years into the 15-year lease, the county discovers friable asbestos on
the premises and issues an abatement order to the tenant. Neither the landlord nor
the tenant had previous knowledge asbestos existed on the premises as it was a pre-
existing condition of the building. The tenant seals off the contaminated area and
conducts business out of another section of the building.
The costs of repairing the building is a sum roughly equal to 5% of the aggregate
amount of rent due over the entire 15-year life of the lease.
Here, the provisions in the lease agreement and the circumstances under which the
lease was entered into imply the duty to comply with the government order was
transferred to the tenant, since:
• the cost of repairs amounted to less than 5% of the aggregate amount of rent
due over the life of the lease;
• the lease was for 15 years, thus the cost of repairs are easily amortized by the
tenant during the remaining tenancy;

Who does the with all building code requirements. This responsibility is separate from the
contractual duty imposed by a compliance-with-laws clause. [See Figure
repair and 1 §7.3]
maintenance? If the tenant’s installation of improvements violates building codes and
ordinances, the tenant will be liable for the costs the landlord incurs to
conform the tenant-installed improvements to codes and ordinances.8 

8 Wolfen, supra
 Chapter 47: Commercial use-maintenance provisions 477

• the asbestos removal most benefits the tenant since the contamination was Government-
discovered less than two years into the lease; ordered repairs
• the repairs are structural and the lease clearly transfers structural repairs to the
tenant;
Cont’d
• the tenant’s use of the premises is not greatly interfered with during the
abatement; and
• neither the tenant nor the landlord had reason to believe asbestos existed on
the premises, yet the tenant was experienced in retail leasing and elected not to
investigate the premises. [Brown v. Green (1994) 8 C4th 812]
Now consider a landlord and a tenant who enter into the same commercial net lease
agreement but for a term of three years. The lease also contains an option to renew
the lease for five additional years. The net lease agreement contains the boilerplate
compliance-with-laws and use-maintenance provisions which shift the duties of
ownership to the tenant. Under these provisions, the tenant has the duty to complete
structural repairs.
After the tenant exercises their option to renew the lease for the additional five years,
the landlord receives a compliance order from the city requiring the leased premises to
be earthquake-proofed.
The cost of earthquake-proofing the building roughly equals 50% of the aggregate
amount of the rent due over the entire life of the lease, which is now in its 4th year.
Here, even though the lease agreement shifted the major burdens of ownership from
the landlord to the tenant, an application of the six-factor test determines the landlord
bears the burden of the earthquake-proofing costs. The analysis found that:
• the cost of earthquake-proofing the premises was roughly equal to 50% of the
aggregate rent due over the total eight-year term of the lease;
• the eight-year lease was short-term with little time remaining for the tenant to
amortize the cost of the repairs; and
• the earthquake-proofing primarily benefited the landlord since only a short term
remained on the tenant’s lease. [Hadian v. Schwartz (1994) 8 CA4th 836]
Thus, when entering into a commercial net lease agreement, a landlord is best served
considering the inclusion of a provision calling for the tenant to assume the cost of
compliance orders that do not regulate the tenant’s use of the premises — government-
ordered retrofitting or renovation.
Yet the landlord needs to be aware that if the economic realities of the lease agreement
are not in accord with the text of the lease agreement, the landlord may still be liable
for government-ordered repairs.

The tenant’s responsibilities for the payment of the costs to repair and
maintain the premises are of equal financial importance and effect as the
amount of rent to be paid under a commercial lease agreement. Ultimately,
the tenant bears them, either directly by incurring the costs or indirectly
through the payment of basic rent or additional rent in the form of common
area maintenance charges (CAMs). [See Chapter 14]

The extent of the maintenance and repair obligations assumed by the tenant
depends on the type of space leased, the length of the lease term and of course
market conditions of inventory and users — supply and demand issues. 
478 Property Management, Sixth Edition

The longer the lease term, including renewal options, the more likely the
obligations for maintenance will be shifted to the tenant. The shift will be
even more likely if the premises is a single-user building, such as a warehouse
or bank building as opposed to a multi-tenant project. 

The commercial tenant has a duty during the leasing period to notify the
landlord of those repairs which are needed and are the responsibility of the
landlord. 

Compliance- Some net lease agreement forms contain a compliance-with-laws clause

requiring the tenant to make any government-ordered repairs, such as
with-laws asbestos removal or seismic retrofitting. 
clause If the lease agreement containing a compliance clause is a short-term lease
agreement, the landlord will be the primary beneficiary of the government-
ordered repairs. In spite of the wording in the lease agreement placing the
financial responsibility on the tenant, the landlord may be responsible
for completing and paying for government-ordered repairs.9 [See Sidebar,
“Government-ordered repairs”]

Net lease agreements contain various provisions covering the cost of items
needing repair, replacement or maintenance which exceed one month’s
rent. [See RPI Form 552-2 and 552-3]

When the cost of tenant obligations for repair and maintenance of an item
exceeds the equivalent of one month’s rent, the landlord performs the repairs.
The cost for the repairs is initially paid by the landlord.

In turn, these provisions obligate the tenant to reimburse the landlord

by payment of a monthly additional amount of rent equal to 1/144 of the
cost the landlord incurred. The additional rent is paid each month for the
remainder of the term of the lease agreement and any lease extensions, but
not to exceed 144 months. [See RPI Form 552-2 §6.3]

Thus, costly repairs are allocated between the tenant and landlord over 144
months. Further, interest is paid by the tenant on the total amount remaining
to be reimbursed over the 144 months at an annual rate set in the provision.
To require the tenant to replace an item which is costly in the last couple of
months of a lease is unenforceable since the tenant will bear all the cost and
receive none of the benefits. [See RPI Form 552-2 §6.3]

right-to-enter
Landlord’s
provision Once a tenant acquires a leasehold interest in a commercial premises, the
A provision contained landlord no longer has the right to enter the premises for any reason, unless
right to enter
in a lease agreement
which reserves to
agreed to the contrary or an emergency exists. [See Chapter 4]
limited
the landlord the
right to enter the However, the landlord can reserve the right to enter and make any necessary
leased premises to repairs, alterations or inspections of the premises by including a right-to-
make necessary
repairs, alterations or enter provision in the lease agreement. [See RPI Form 552 §12; see Figure
inspections. [See RPI 4] 
Form 552 §12]

9 Hadian v. Schwartz (1994) 8 C4th 836

 Chapter 47: Commercial use-maintenance provisions 479

Figure 4

Excerpt from
Form 552

Gross — Single
Tenant

A landlord may need to enter the premises when: 

•  the landlord makes necessary or agreed-to repairs or alterations;
•  the landlord is supplying necessary services to the tenant; 
•  the landlord shows the premises to a prospective tenant; 
•  the tenant has abandoned or surrendered the premises; 
•  the tenant requests a pre-expiration inspection [See Chapter 19]; 
•  a court order was issued allowing the landlord to enter; or 
•  an emergency exists which endangers the property. [See Chapter 4] 

As is expected in a lease agreement, the tenant agrees not to destroy, damage

or remove any part of the premises or equipment, or permit or commit waste
Waste as a
on the premises. This clause is called the waste provision. [See RPI Form permanent
552 §7.4; see Figure 1] 
breach
If the tenant or a person permitted on the premises by the tenant commits
waste provision
waste to the property, the tenant commits an incurable breach of the lease A provision in a lease
agreement and automatically forfeits their right of possession. [See Chapter agreement in which
26 and 29]  the tenant agrees not
to destroy, damage or
remove any part of the
The landlord may serve the tenant who has committed or permitted waste leased premises. [See
to the property with a three-day notice to quit as required to initiate an RPI Form 552 §7.4]
unlawful detainer (UD) action to evict the tenant if they do not vacate.10 

A landlord and tenant may agree the tenant will purchase a liability insurance
policy to cover losses which might occur on the premises, including: 
Liability
•  property damage; and 
insurance
•  bodily injury. [See RPI Form 552 §13; see Figure 5]
The lease agreement sets the policy limits or minimum amount of liability
insurance the tenant is to obtain. These limits are set as a result of the
landlord’s discussion and analysis with an insurance agent.  [See Figure 5]

Typically, a tenant’s obligation to maintain liability insurance under a lease

is covered under the tenant’s commercial general liability insurance policy
purchased by the tenant to insure the business they operate on the premises. 
10 Calif. Code of Civil Procedure §1161(4)
480 Property Management, Sixth Edition

Figure 5

Excerpt from
Form 552

Gross — Single
Tenant

To protect the landlord from any dissipation of insurance proceeds by the

tenant, the landlord is to be named as an additional insured on the tenant’s
liability and hazard insurance policies covering the leased premises. 

A landlord ensures they are named on the insurance policy by drafting the
lease agreement to require the tenant to provide a certificate of insurance
from the carrier naming the landlord as an additional insured. [See Figure 5
§13.3] 

Under the insurance provision, both the landlord and the tenant waive
any insurance subrogation rights each might have against the other. Due to
the clause, an insurance carrier cannot seek to recover from the landlord or
tenant who was the cause of the injury or property damage.11 

Hazard In a multi-tenant building, a landlord obtains a hazard insurance policy and

passes the cost of the premiums through to the tenant, generally by way of
insurance the monthly base rent or CAMs. 

The landlord and tenant may agree the tenant will purchase a standard
hazard insurance policy for fire losses. It also covers theft and vandalism of
all personal property and the restoration of tenant improvements, including
the destruction of plate glass windows. 

Requiring the tenant to maintain a hazard insurance policy assures the

landlord that the tenant will be in the financial position necessary to
continue to operate their business if fire, theft or vandalism occurs during
the term of the lease. 

When the tenant is required to maintain an insurance policy for property

damage resulting from fire, theft or vandalism, the landlord is named by the
carrier as an additional insured. Thus, the landlord controls the use of any
insurance proceeds. 
triple-net lease In a long-term, triple-net lease where the tenant has assumed all obligations
A commercial lease
which passes the
and duties of ownership, the lease agreement shifts to the tenant: 
responsibility for all
costs and maintenance •  the obligation to maintain hazard insurance; and 
of the property to the •  the burden of repairing any destruction of the real estate, regardless of
tenant. [See RPI Form
552-2 and 552-3] the cause.

11 Gordon v. J.C. Penney Company (1970) 7 CA3d 280

 Chapter 47: Commercial use-maintenance provisions 481

Figure 6

Excerpt from
Form 552

Gross — Single
Tenant

The hold harmless provision covers the landlord for liability from injuries Hold
occurring on the premises which: 
harmless
•  arise out of the tenant’s negligent use of the premises; and 
•  are caused by the tenant, their employees or customers due to the for tenant’s
tenant’s negligence. [See RPI Form 552 §15; see Figure 6] actions
When a hold harmless provision is included in a lease agreement, the
tenant needs to purchase liability insurance coverage for the risk of loss they
have agreed is theirs — their contractual liability under the lease agreement. hold harmless
[See Figure 6] provision
A provision in a lease
Contractual liability insurance is separate from general liability insurance agreement that shifts
liability from the
covering bodily injury and property damage.  landlord to the tenant
for injuries occurring
Regardless of the type of hold harmless provision used, the landlord cannot on the premises
shift responsibility to the tenant for any liability arising from their landlord’s caused by the tenant’s
negligence. [See RPI
intentional misconduct or violation of law.12  Form 552 §15]

For example, a landlord cannot escape liability to others for injuries occurring
on the leased premises due to the landlord’s failure to maintain the premises.
[See Chapters 37 and 38]

Initially, the responsibility for the costs of making repairs to commercial

property lies with the landlord. 
Destruction
and who must
However, some or all of the responsibilities may be shifted to the tenant
through negotiations. They are also allocated between the landlord and the repair
tenant by a destruction provision in the lease agreement.

In the destruction provision, the tenant agrees to repair and pay for any
destruction to the premises: 
•  caused by the tenant;  destruction
provision
•  covered by insurance policies held by the tenant; or  A provision in a lease
agreement in which a
•  required by other lease provisions.  tenant agrees to pay for
any destruction to the
When the tenant is obligated to carry insurance covering the cost of repairs, premises caused by the
tenant, covered by the
the landlord named as an additional insured controls the disbursement of tenant’s insurance or
any insurance proceeds available to pay for the repairs. [See RPI Form 552 required by other lease
§16; see Figure 7]  provisions. [See RPI
Form 552 §16]

12 CC §1668
482 Property Management, Sixth Edition

Figure 7

Excerpt from
Form 552

Gross — Single
Tenant

On the other hand, the landlord agrees to repair and pay for any damage to
the premises which: 
•  is not caused by the tenant or covered by the tenant’s insurance policies; 
•  is insured only by the landlord’s policy; or 
•  is not insured by any policy. [See Figure 7 §16.2] 
A destruction provision typically states the lease will not terminate due
to any destruction of the premises, unless the landlord chooses to terminate
it under specified conditions, such as: 
•  the repairs cannot be completed within 30 days; 
•  the cost of restoration exceeds 70% of the replacement value of the
premises; 
•  the insurance proceeds are insufficient to cover the actual cost of the
repairs; or 
•  the premises may not be occupied by law.  [See Figure 7]
Thus, the landlord may opt to terminate the lease if the casualty is
underinsured. 

However, if the landlord fails to begin repairs which are their responsibility
or, alternatively, terminates the lease within a reasonable time, the tenant
may: 
•  abandon the premises due to a constructive eviction and be excused
from further performance under the lease13 [See Chapter 34]; or 
•  pay rent and recover from the landlord any losses suffered due to the
landlord’s failure to repair.14 

13 CC §1942
14 Ng v. Warren (1947) 79 CA2d 54
 Chapter 47: Commercial use-maintenance provisions 483

A commercial lease agreement contains two basic categories of

provisions establishing the tenant’s obligations to the landlord:
Chapter 47
•  rent provisions for the payment of amounts owed; and
Summary
•  use-maintenance provisions for the use, care and preservation of
the grounds and improvements.
Use-maintenance obligations are unrelated to the payment of rent. Use-
maintenance provisions in a commercial lease agreement establish
whether the tenant or the landlord is responsible for the care and
maintenance of the premises during the lease term.

Just as a tenant breaches a lease agreement by failing to pay rent, they

also breach the lease agreement when they fail to perform, or violate a
use-maintenance provision.

The tenant’s breach of an essential use-maintenance obligation triggers

enforcement action by the landlord by serving the tenant with either:
•  a three-day notice to perform or quit stating what needs to be
done by the tenant within three days; or
•  a three-day notice to quit if the breach is incurable.

appurtenance................................................................................ pg. 474

compliance-with-laws clause................................................... pg. 475
Chapter 47
destruction provision.................................................................. pg. 481 Key Terms
hold harmless provision............................................................. pg. 481
rent provision................................................................................ pg. 471
right-to-enter provision.............................................................. pg. 478
signage provision......................................................................... pg. 475
tenant improvements and alterations clause...................... pg. 475
triple-net lease.............................................................................. pg. 480
use-maintenance provision...................................................... pg. 472
use-of-premises provision.......................................................... pg. 473
waste provision............................................................................. pg. 479

Quiz 12 Covering Chapters 47-50 is located on page 655.

 Chapter 48: Lease renewal and extension options 485

Chapter

48
Lease renewal and
extension options

After reading this chapter, you will be able to: Learning

•  distinguish between a renewal and extension of a lease; and
•  take the proper steps to exercise an option to renew or extend a
Objectives
lease

option to extend option to renew Key Terms

A broker arranges for a tenant to lease improved commercial real estate. The Don’t forget
lease is for a three-year term and contains options to renew the lease for
additional three-year periods to avoid violation of the due-on clause in a to exercise
trust deed encumbrance. [see RPI Form 552]

The lease renewal options require the tenant to exercise each renewal option
in writing at least three months before the lease term expires. Otherwise, the
renewal options expire three months before the lease itself expires. [See Form
566 accompanying this chapter]

During occupancy, the tenant’s business improves. As a result, they make

substantial improvements to the building with the owner’s consent.

Business demands require the tenant to also lease an adjacent building. The
two buildings are operated as one complex by the tenant. The cul-de-sac
street fronting the building is even renamed after their business.

As the expiration date of the renewal option approaches, the tenant installs
new air conditioning units, again with the owner’s consent.

However, the tenant fails to give the owner the written notice required to
exercise their option to renew the lease before the renewal option expires.
486 Property Management, Sixth Edition

After the option expires, but before the lease expires, the tenant attempts to
exercise the renewal option.

The owner refuses to waive or extend the expiration date of the option to
renew. The tenant is told they need to vacate on expiration of the current
three-year term since the renewal option expired unexercised.

The tenant claims their tenant improvement activity was sufficient to place
the owner on notice of their intent to exercise the renewal option since their
improvements were inconsistent with vacating the premises on expiration
of the lease.

When the option to renew expires unexercised as agreed, does the lease
automatically expire at the end of its term?

Yes! The tenant’s further improvements of the premises prior to expiration of

the renewal option are not proper notice to the owner of the tenant’s intent
to renew. An option is an irrevocable offer, separate and independent of
the lease agreement, whether it is a provision in the lease agreement or an
addendum to it. [See Form 565 accompanying this chapter]

An option expires by its own terms, as does any offer. If acceptance is not
given by exercise as specified in the option agreement, the option expires.1

Absent an agreement to the contrary, a lease terminates automatically,

The lease without further notice, on expiration of the lease term stated in the lease
term agreement.2

A tenant who remains in possession after the lease term expires is commonly
referred to as a holdover tenant, legally called a tenant at sufferance.

A landlord subjected to a holdover may initiate an unlawful detainer

proceeding to evict the holdover tenant immediately after expiration of the
lease — no notice to quit is necessary.3

Alternatively, when a renewal option does not exist and the tenant continues
in occupancy and tenders rent which the landlord accepts, a month-to-month
tenancy is created. Consequently, the landlord needs to serve the tenant with
the appropriate notice to vacate to terminate the periodic tenancy.4

Frequently, lease agreements contain provisions or addendums which allow

Options to the tenant to continue in lawful possession after the initial lease term expires.
renew/extend A prior agreement allowing continued occupancy is called an Option to
Renew/Extend the Lease. [See Form 565]

For a tenant, a lease renewal/extension option can be financially

advantageous. The tenant has time during the option period to examine
1 Bekins Moving & Storage Co. v. Prudential Insurance Company of America (1985) 176 CA3d 245
2 Calif. Civil Code §1933(1)
3 Calif. Code of Civil Procedure §1161(1)
4 CC §§1945, 1946
 Chapter 48: Lease renewal and extension options 487

Form 565

Option to
Renew/Extend
Lease

Page 1 of 2

whether the economic and financial conditions of their trade or business at

this location favor an exercise of the option and continued possession. If not,
the tenant is under no obligation to exercise the option. If they do not exercise
the option, they need to vacate the premises on expiration of the lease.

Thus, the well-informed tenant will consider negotiating one or more

renewal/extension options when entering into a lease agreement for a short
term.

On the other hand, the landlord may not share the tenant’s enthusiasm for a
renewal/extension option since the decision seems to only benefit the tenant.
A renewal/extension option leaves the landlord in a somewhat uncertain
488 Property Management, Sixth Edition

Form 565

Option to
Renew/Extend
Lease

Page 2 of 2

position as they do not know who will occupy the premises in the future.
Meanwhile, the tenant is left to decide whether to exercise the option and
extend the occupancy or vacate on expiration of the lease.

Future One solution to the landlord’s anxiety about locating a new tenant is to set the
expiration of the renewal/extension option several months before the lease
uncertainty expires. Thus, the expiration of the option unexercised gives the landlord
sufficient time in which to locate a replacement tenant. [See Form 565 §3]

A renewal option encourages a tenant to enter into the lease in the first place
since the tenant has the right to continue in possession if the property proves
beneficial to their business. Additionally, the renewal/extension option
encourages the tenant to improve and promote the location in anticipation
of remaining in possession. Also, three-year terms do not violate the due-on
clause in any trust deed encumbering the property.

Consider a lease agreement which grants a tenant an option to renew the

lease every three years at the same rental rate. It does not state a date for
expiration of the continuing option renewal periods. When the tenant
attempts to exercise the renewal option, the landlord claims the lease is
unenforceable since the lease agreement and the option grant the tenant the
right to renew the lease forever — a violation of the rule against perpetuities.
 Chapter 48: Lease renewal and extension options 489

However, the lease is valid. Commercial lease transactions are no longer

controlled by laws governing perpetuities. The total term of the commercial
lease, including extensions or renewals, is limited to 99 years by statute if not
limited by its terms.5

A technical but obvious processing distinction exists between a renewal

and an extension of a lease.
Renew vs.
extend
An extension is a modification of the original lease term by extending its
expiration date for an additional period. On the other hand, a renewal
option to renew
requires the execution of a new lease on identical conditions to the original An agreement granting
lease agreement, not a continuation of the old lease.6 a tenant the right to
continue in possession
A renewal involves the preparation and signing of a new lease which creates upon expiration of the
existing lease under a
an entirely new tenancy. The new tenancy is subject to any change in law new lease agreement
affecting the rights and obligations of the landlord or the tenant. It is also on the same conditions
as the expiring lease
subordinate to any encumbrances which occurred during the term of the agreement on terms for
prior lease. payment of rent set out
in the option to renew.
Alternatively, an extension merely modifies the original lease by extending [See RPI Form 565]

its expiration date. Thus, the modified lease is not subject to changes in the
law or encumbrances occurring after the term of the original lease.

However, the terms are often used interchangeably, neglecting to maintain option to extend
An agreement granting
clarity of purpose, legal rights and the paperwork involved. a tenant the right to
extend possession
For instance, a lease agreement granting the tenant an “option to renew” under the original
which does not specify the manner or method for exercise of the option nor lease agreement on
terms set out in the
call for the signing of a new lease is considered an extension. As a result, the option to extend. [See
provisions of the original lease apply on exercise of the option, but with a RPI Form 565]
new expiration date by modification.7

To exercise a lease renewal/extension option, the tenant needs to notify the Exercise of
landlord of their unqualified intention to renew or extend the lease on the
terms in the option. The notice of exercise needs to be timely delivered to the the option
landlord, unequivocal and precise in its terms for the specific period offered
in the option. If not, the notice of exercise is ineffective and may be ignored
by the landlord.

Consider a tenant who enters into a lease agreement which includes a

provision or an attachment granting the tenant an option to renew the lease
for an additional two-year period.

During the period for exercise of the renewal option, the tenant notifies
the landlord of their intention to renew the lease, but notes they will only
occupy for one year.

5 Shaver v. Clanton (1994) 26 CA4th 568

6 In re Marriage of Joaquin (1987) 193 CA3d 1529
7 In re Marriage of Joaquin, supra
490 Property Management, Sixth Edition

In this example, the tenant’s notice to renew is an ineffectual attempt

to exercise the option to renew the lease. The tenant’s notice is a proposal
to renew for a different period than the period stated in the option — an
irrevocable offer to renew the lease.

Thus, the notice is not an acceptance of the offer to renew housed in the
option granted, but an attempt to alter the original terms of the option. Here,
the communication constitutes a rejection of the offer in the original option.
It is a counteroffer calling for an alternative performance by the tenant, not
an unequivocal acceptance.8

Strict Also, when the renewal/extension option agreement specifies the steps to
be taken and the time period in which they are to occur, the tenant needs to
compliance strictly comply if they intend to exercise the option.9

Usually, the tenant is required to give written notice of their exercise of the
option several months before the current term of the lease expires (often a
period of three to six months before the lease itself expires).

Advance notice requirements give the landlord ample time to locate a new
tenant when the present tenant elects not to renew/extend the lease.

The option needs to state the method for delivery of the tenant’s notice of
their intent to exercise the option to renew/extend. Notice of exercise needs
to be required in writing and personally handed or sent by certified mail to
the landlord within a specific period of time, such as a three-month window
six months prior to the lease’s expiration.

If notice is to be delivered by certified mail, the risk of the notice being lost in
the mail is on the landlord. When a receipt for certified mail is issued by the
post office, the tenant is no longer responsible for its physical delivery to the
landlord. It is unnecessary to request a return receipt.10

Failure to Failure to timely comply with delivery of a written notice of exercise within
the period for exercise of the option causes the lease to automatically expire
comply at the end of its original term. To prevent an unintended expiration of a lease,
the tenant’s broker might prepare and hand the tenant an exercise of option
to renew/extend lease form or make one available to the tenant during the
period for exercise of the option. [See Form 566]

An exercise of option to renew/extend lease form provides the tenant with

the paperwork needed to properly exercise the option. The notice of exercise
states the tenant’s intent to exercise the renewal/extension option on its
terms and conditions, without qualification or equivocation.

Usually, the broker’s fee arrangement on the original lease calls for a fee on
any extension or renewal. Not only is the exercise by the tenant a benefit for
the tenant, the leasing agent benefits by earning a fee. [See RPI Form 113]
8 Hayward Lumber & Investment Co. v. Construction Products Corp. (1953) 117 CA2d 221
9 Bekins Moving & Storage Co., supra
10 Jenkins v. Tuneup Masters (1987) 190 CA3d 1
 Chapter 48: Lease renewal and extension options 491

Form 566

Exercise of
Option to
Renew/Extend
Lease

A renewal option need not set forth the time period and manner for its
exercise. However, clarified steps ands dates make the process simple.
Continued
possession as
Consider a renewal option which is silent as to the time and manner for
exercise, simply stating the tenant has the right to renew for three years. The exercise
tenant constructs substantial improvements on the property and remains in
possession throughout the entire lease term.
492 Property Management, Sixth Edition

The lease term expires without the tenant giving any notice to the landlord
of their intent to renew the lease, yet the tenant remains in possession. The
tenant then tenders the correct amount of rent as though they had already
exercised their renewal option. The landlord refuses the tender of rent.

The landlord serves a notice to quit on the tenant claiming the tenant did not
take steps to exercise the option to renew prior to the expiration of the lease
and is unlawfully detaining the premises.

Does the tenant’s continued possession of the property after the lease expires
constitute exercise of the renewal option when delivery of a notice of intent
to exercise is not called for in the option?

Yes! When the tenant has a renewal option and the time and manner for
exercise is not specified, the tenant’s continued possession and timely tender
of rent indicates their election to renew.11

Waiver of A tenant is bound by the terms for exercise of the renewal/extension option
unless the landlord has, by their conduct, waived the requirements for
notice to exercise.12
exercise A waiver is the relinquishment by the landlord’s conduct of a known right,
claim or privilege, such as the tenant’s delivery of a notice to exercise the
option to extend, since they benefit from the right they granted.

For example, a tenant fails to exercise their option to renew the lease as called
for in the renewal option since they do not notify the landlord in writing of
their intent to renew prior to expiration of the option.

On expiration of the lease, the tenant remains in possession and tenders rent
to the landlord at the new rate called for in the option to renew. The landlord
accepts the rent.

Later, the landlord serves a 30-day notice to vacate on the tenant. The tenant
claims the renewal option has been exercised and the renewed lease bars the
landlord’s use of the 30-day notice to vacate to terminate possession since the
landlord accepted rent called for in the renewal option.

Is the landlord’s acceptance of rent when the tenant continued in possession

a waiver of the written notice to exercise?

Yes! The landlord’s acceptance of rent at the renewal rate after expiration of
the lease waived their right to object to the tenant’s prior failure to exercise
the renewal option as agreed.13

Prior Now consider a tenant whose long-term lease contains options to extend the
lease. The options will expire unless exercised in writing during a two-month
acceptance period expiring 60 days prior to the expiration of the lease.
of rent 11 ADV Corp. v. Wikman (1986) 178 CA3d 61
12 Simons v. Young (1979) 93 CA3d 170
13 Leonhardi-Smith, Inc. v. Cameron (1980) 108 CA3d 42
 Chapter 48: Lease renewal and extension options 493

The lease agreement is entered into and dated two years prior to the transfer Prior
of possession to the tenant (due to construction). The lease term is set to expire
on the fifth anniversary of the date of the lease agreement. acceptance
Five years pass after the date of the lease agreement. The tenant remains in of rent,
possession, paying the rent due during the original term of the lease. The cont’d
tenant then gives the landlord written notice to extend the lease 60 days
prior to expiration of five years after the date of possession, not the date of the
lease agreement as called for.

The tenant then remains in possession and pays rent at the increased amount
called for in the option to extend. The landlord does not object to the notice of
intent to exercise the option to extend and continues to accept rent payments.

Later, a new owner becomes the landlord.

The new landlord serves the tenant with a 30-day notice to vacate. The
landlord claims the tenant’s occupancy under the lease is a periodic month-
to-month tenancy which can be terminated at the will of the landlord since
the original lease expired without being extended due to the untimely notice
to exercise the renewal option.

The tenant claims the prior landlord’s acceptance of the tardy notice to
exercise the renewal option and the rent called for in the option waived the
landlord’s right to enforce the conditions for exercise of the option.

Did the tenant exercise their option to extend due to a waiver of the notice
requirement by the prior landlord when the landlord accepted rent after the
lease expired and failed to object to delivery of the notice of exercise?

Yes! The landlord’s prior acceptance of the rent without objection and receipt
of the untimely exercise waived the notice requirement for the exercise of
the extension option. Thus, the lease and all its terms remained in effect for
the period of extension, barring any attempts by the landlord to terminate
the tenant’s occupancy as a month-to-month tenancy.14

For the landlord to avoid waiving the requirement of a timely and No

unconditional written notice from the tenant to exercise an option to extend,
the property manager and landlord cannot accept rent from the holdover acceptance
tenant. Unless the rent is paid under a newly negotiated lease agreement of rent
unrelated to the expired lease, the landlord effectively extends the expiration
date of a lease when they accept rent and allow the tenant to remain in
possession.

When the holdover tenant refuses to vacate or refuses to accept an offer from
the landlord for a new and different tenancy, the landlord may, without
further notice, begin an unlawful detainer action to remove the holdover
tenant.

14 Oxford Properties & Finance LTD v. Engle (9th Cir. 1991) 943 F2d 1150
494 Property Management, Sixth Edition

When the tenant neglects to properly exercise the renewal option, the lease
term will itself expire without renewal or extension. The property manager
may evict the holdover tenant and relet the premises. Here, the lease has
expired and no new arrangement for continued occupancy has been agreed
to, either in writing or by the landlord’s conduct.15

Finally, to exercise the lease renewal option, the tenant needs to be in full
compliance with all conditions of the lease. Thus, the tenant may not be in
default on rent payments or allow any other material breach of the lease to
exist at the time they exercise the option.

The payment of rent is an implied condition which needs to be satisfied, in

addition to any other material conditions in the lease agreement, before the
renewal option may be properly exercised. When the tenant is in default,
their right to exercise their option is suspended.16

Notice of A leasing agent negotiating a renewal option on behalf of a tenant needs

to consider arranging for the inclusion of a notice provision. The provision
option’s requires the landlord to give the tenant notice of the option’s expiration 60 to
expiration 180 days prior to the expiration of the option.

This notice from the landlord to the tenant of the option’s expiration
eliminates the element of surprise for both landlord and tenant.

The tenant’s inadvertent failure to exercise the lease renewal option can
prove disastrous for the tenant who plans to continue in occupancy.

If the landlord will re-rent to the existing tenant despite the tenant’s failure
to exercise a renewal/extension option, the tenant will be forced to negotiate
the terms of a new lease under the existing market conditions. Thus, the
landlord may be in a position, if availability of space is extremely scarce, to
take unconscionable advantage of the tenant, a situation the landlord needs
to be careful to avoid. [See Chapter 49]

Renegotiation of rent and lease terms on expiration of a lease can result in

increased rental rates, higher common area maintenance fees and other
landlord charges. When the landlord chooses to negotiate a lease with the
holdover tenant, it may change the tenant’s responsibilities.17

Thus, a tenant’s broker needs to inform the client as to when and how the
renewal option has to be exercised, and then provide the tenant with the
necessary forms.

The leasing fee due on renewal is sufficient incentive for the broker to take
action and assist the buyer to exercise the option.

15 Simons, supra
16 Nork v. Pacific Coast Medical Enterprises, Inc. (1977) 73 CA3d 410
17 Bekins Moving & Storage Co., supra
 Chapter 48: Lease renewal and extension options 495

Frequently, lease agreements contain provisions or addendums which Chapter 48

allow a tenant to continue in lawful possession after the initial lease
term expires. A prior agreement allowing continued occupancy is called Summary
an Option to Renew/Extend the Lease.

An extension is a modification of the original lease term by extending its

expiration date for an additional period. On the other hand, a renewal
requires the execution of a new lease on identical conditions to the
original lease agreement, not a continuation of the old lease.

A renewal involves the preparation and signing of a new lease which

creates an entirely new tenancy. The new tenancy is subject to any
change in law affecting the rights and obligations of the landlord or
the tenant. It is also subordinate to any encumbrances which occurred
during the term of the prior lease.

option to extend........................................................................... pg. 489 Chapter 48

option to renew............................................................................ pg. 489 Key Terms

Quiz 12 Covering Chapters 47-50 is located on page 655.

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 Chapter 49: Lease assignments and subleases 497

Chapter
49
Lease assignments
and subleases

After reading this chapter, you will be able to: Learning

•  apply the standards for a landlord’s review of a tenant’s request
for the landlord’s consent to the tenant’s transfer of their leasehold
Objectives
interest; and
•  identify permissible landlord exactions for their consent to tenant
assignments and subletting, the subject of restriction-on-transfer
provisions in lease agreements.

assumption successor tenant Key Terms

novation tenant-mitigation provision
overriding rent transfer
restriction-on-transfer
provision

A commercial lease agreement entered into by a tenant contains an

assignment and subletting provision, called a restriction-on-transfer provision
Consent
or a restraint-on-alienation provision.  conditioned
The restriction-on-transfer provision either prohibits transfer of the tenant’s on exactions
interests or requires the landlord’s consent prior to assigning, subletting or restriction-on-
further encumbering the tenant’s leasehold interest. If the provision permits transfer provision
an assignment or subletting, it states the landlord’s consent will not be A provision in a lease
agreement calling for
unreasonably withheld. [See RPI Form 552; see Figure 1]  either the landlord’s
consent to any
Further, the lease agreement signed by the tenant contains a cancellation transfer of the tenant’s
provision. The cancellation provision allows the landlord to cancel the lease leasehold interest or
the prohibition of any
agreement and terminate the tenant’s occupancy on the landlord’s receipt of transfer of that interest.
the tenant’s written request to sublet the premises.  [See RPI Form 552
§9.2]
 498 Property Management, Sixth Edition

Figure 1

Excerpt from
Form 552

Gross — Single
Tenant

After taking occupancy, the tenant vacates the premises and relocates their
operations to another property. The tenant has no intention of returning to
the leased premises.

The tenant finds a new tenant who will pay rent at current market rates for
the space. The current market rates exceed the rent owed under the lease
agreement. The amount by which the current market rates exceed the rents
under the lease is called overriding rent.
overriding rent
The amount the The tenant requests the landlord’s consent to sublease to the new tenant. The
current market rent
rates exceed the landlord responds by cancelling the lease agreement and terminating the
rents set in the lease tenant’s leasehold interest under the cancellation provision. 
agreement, attainable
by the tenant on a
sublease to a successor
The landlord, having terminated the tenant’s leasehold by cancellation of
tenant. the lease agreement, negotiates directly with the new tenant. The landlord
enters into a lease of the premises with the new tenant at current rental rates. 

The previous tenant makes a demand on the landlord for the overriding rent
they lost due to the landlord’s refusal to consent to the sublease, claiming the
landlord’s consent was unreasonably withheld since no conditions for the
consent were agreed to that entitled the landlord to the overriding rent. 
Sublease
The landlord claims their cancellation of the lease is valid, even though
cancellation is an absolute restraint on the proposed transfer of the tenant’s
leasehold interest. The tenant and landlord bargained for the cancellation
provision that was triggered by the tenant’s request for the landlord’s consent
to a sublease. 
transfer
Any assignment, May the landlord cancel the lease agreement on receipt of the tenant’s request
sublease or further for consent to an assignment even though they agreed not to unreasonably
encumbrance of the
leasehold by the withhold their consent? 
tenant. [See RPI Form
552 §9] Yes! The two provisions in the lease, the consent-to-assignment provision
and the cancellation provision, are mutually exclusive alternative remedies.
They give the landlord a choice between two different and separate courses
of action when confronted with a request for consent to a sublease. 

Cancellation In the previous example, the landlord exercised the cancellation provision on
receipt of the tenant’s request for consent. Thus, the tenant is relieved of any
nullifies the further obligation under the lease agreement. Cancellation also terminated
need to consider the tenant’s right of possession and any potential profit between the lease
agreement rent rate and the property’s appreciated rental value. 
request for
consent
 Chapter 49: Lease assignments and subleases 499

Thus, the issue as to whether the landlord refused their consent never arises.
The landlord cancelled the lease as agreed, nullifying any need to consider
the request for consent. 

If the landlord chooses not to cancel the lease agreement and terminate the
tenancy on the tenant’s request for consent to an assignment, the landlord
is then obligated to analyze whether or not to consent. In an analysis, they
are required to be reasonable about any objection they may have to the
assignment since no other standard was set in the lease. 

The cancellation provision in the lease agreement is bargained for and not
the unconscionable result of an interference with an assignment of the lease.

Here, the tenant contracted away their leasehold right to retain the benefit of
increased rental value of the property by assignment or subleasing when they
included the cancellation provision in the lease agreement. The leasehold
was eliminated by the cancellation of the lease agreement. With the lease
agreement cancelled and the leasehold terminated, the right to assign or
sublet did not become an issue. Thus, the landlord did not interfere with the
tenant’s right to assign or sublet since the leasehold no longer existed to be
assigned or sublet.1 

A restriction-on-transfer provision in a lease agreement typically calls Transfer of

for the tenant to acquire consent from the landlord before the tenant may
transfer their leasehold interest.2  [See Form 552-7 accompanying this chapter; any interest
see Figure 1 §9.2]

A transfer by the tenant includes an assignment, sublease or further

encumbrance of the leasehold.3 [See Figure 1] 

An assignment of the lease agreement transfers the original tenant’s entire

interest in the property to a successor tenant, leaving no interest held by the
original tenant. However, the original tenant named on the lease agreement
remains liable for the successor tenant’s performance on the lease, even assumption
though the landlord consents to the assignment and the successor tenant The promise by a
successor tenant to
becomes primarily responsible for the lease obligations. The act of taking fully perform all
over a previous tenant’s lease agreement and right of possession is called an obligations under the
assumption.  lease agreement they
are taking over by
assignment from the
For the original tenant to be released of their liability under the lease previous tenant.
agreement on an assignment, a novation (also known as a substitution of
liability) is negotiated and entered into by the landlord and both tenants.4 
[See Form 552-7] novation
An agreement entered
into by a landlord
On the other hand, when entering into a sublease with a subtenant, the and tenant shifting
original tenant (or master tenant) transfers to the subtenant less than all of responsibility for
the master tenant’s interest in the property. Also, possession reverts back to obligations owed the
landlord under a lease
the master tenant on expiration of the sublease.  agreement to another
the tenant, releasing
the original tenant of
1 Carma Developers, Inc. v. Marathon Development California, Inc. (1992) 2 C4th 342 liability.
2 Calif. Civil Code §1995.250
3 CC §1995.020(e)
4 Samuels v. Ottinger (1915) 169 C 209
500 Property Management, Sixth Edition

The master tenant granting the sublease remains obligated to perform on

the master lease agreement. The subtenant does not assume liability of the
master lease. However, the subtenant may not act in any way that constitutes
a breach of the master lease agreement. A copy of the master lease agreement
is provided to the subtenant as an attachment to the sublease. [See RPI Form
552 §2.5]

The further encumbrance of a tenant’s leasehold interest is a transfer and

occurs when the tenant places a lien on their leasehold to secure a mortgage,
such as a trust deed or a collateral assignment. 

Editor’s note — For simplicity’s sake, the following discussion will only
refer to an assignment of a lease. However, the discussion fully applies to
transfers by any sublease or further encumbrance transaction. 

Leases include various types of restriction-on-transfer provisions, which

Various may: 
alienation •  entirely prohibit any assignment of the tenant’s leasehold interest5; 
provisions •  require the landlord’s consent prior to an assignment without
referencing approval standards or placing any monetary conditions
on the tenant for obtaining the landlord’s consent, called exactions6; 
•  require the landlord’s consent prior to an assignment, stating consent
will not be unreasonably withheld7;  
•  require the landlord’s consent, subject to conditions first being met by
the tenant8; or 
•  contain conditions for a valid assignment without requiring any
consent from the landlord.9 [See Figure 1]
Approval standards lay out the analytical process to be applied by the
landlord when judging whether or not to withhold consent. 

Monetary conditions are sums of money or modified leasing terms to be met

by the tenant as a pre-requisite to the landlord’s consent. 

Consider a lease agreement with a restriction-on-transfer provision calling

No standards for the landlord’s consent prior to the tenant’s assignment. However, the
for lease does not contain any standard or condition for the landlord’s consent. 
withholding Here, for lack of agreement to the contrary, the standards and conditions for
consent the landlord’s consent are set by law. 

5 CC §1995.230
6 CC §1995.260
7 CC 1995.250(a)
8 CC §1995.250(b)
9 CC §1995.240
 Chapter 49: Lease assignments and subleases 501

Any lease agreement entered into without stating a standard for the landlord’s
consent to an assignment, requires the landlord to have a commercially
reasonable basis for any denial of consent. The landlord cannot arbitrarily
deny consent. 

Also, the landlord may not impose conditions on the consent, such as a
higher rent rate, unless the condition was included in the lease agreement.10 

Commercial reasonability standards relate to the landlord’s ability to: 

Commercial
•  protect their ownership interest from property waste and financial
deterioration caused by the conduct of the successor tenant; and  reasonability
•  ensure the future performance of the lease by an assignment to a standards
creditworthy tenant. 
Commercially reasonable objections for withholding consent to an
assignment include: 
successor tenant
•  the successor tenant’s financial responsibility, net worth, prior On a transfer, the new
operating history and creditworthiness;  tenant who acquires
by assignment the
•  the successor tenant’s intended use, care and maintenance of the original tenant’s entire
property;  leasehold interest in
the property. [See RPI
•  the suitability of the successor tenant’s use, product marketing and Form 552 §9]
management style for the property; and 
•  the need for tenant alterations to the premises.11 
For example, the use provision in a lease agreement gives the tenant the
right to operate their service business in a landlord’s shopping center. The
landlord also runs a retail business outlet in the same shopping center. The
lease agreement restricts the tenant’s use to an “office use related to the
business” of the tenant. 

The restriction-on-transfer provision in the lease agreement requires the

tenant to obtain the landlord’s prior consent to an assignment of the lease
agreement. The provision sets no standard for withholding consent and
provides for no conditions to be met (paid/lease modification) by the tenant
for the consent. 

Later, the tenant seeks to transfer the lease to a successor who will operate a
retail business from the premises. The successor tenant’s retail business will
be in direct competition with the landlord’s retail outlet. Since the successor
tenant’s use will be a change in the use of the premises, the landlord refuses
to consent to the assignment. 

The tenant claims the landlord’s refusal is commercially unreasonable since

it amounts to economic protectionism unrelated to the landlord’s ownership
and operation of the rental property.

10 Kendall v. Ernest Pestana, Inc. (1985) 40 C3d 488

11 Kendall, supra
502 Property Management, Sixth Edition

Here, the landlord’s refusal is a commercially reasonable application of the

use restriction in the lease agreement. The landlord sought only to retain
the use originally intended by the lease. The refusal is not due to improper
economic protectionism in the management and operation of the real estate
since the landlord did not demand an exaction through an increase in rent
or other economic benefits to enhance themselves as a condition for their
consent to the assignment of the lease.12 

Also, the landlord may reasonably refuse their consent to a trust deed lien
the tenant seeks to place on the leasehold interest when the proceeds of the
mortgage are not used to enhance or improve the property.13 

Consider a commercial tenant who agrees to a percentage lease.  [See RPI

Reasonable Form 552-4]
increases in
The restriction-on-transfer provision in the lease agreement requires the
rent tenant to obtain the landlord’s consent before assigning the lease. The
provision does not include standards or conditions for the landlord’s consent
to an assignment. 

The tenant enters into an agreement to sell their business and assign the lease
to a new operator. The operator buying the tenant’s leasehold interest (and
the business) is to pay the tenant the overriding rent over the remaining life
of the lease. 

The tenant requests consent for the assignment of the lease agreement from
the landlord. On investigation, the landlord determines the operator will
manage the business in a manner that will not generate gross sales at the
same level as the current tenant. Thus, under the percentage lease, the new
operator will not become obligated to pay the amount of rent currently being
paid by the tenant seeking consent. 

However, the landlord agrees to consent to the assignment conditioned on

the landlord receiving the overriding rent premium the tenant is to be paid
for the assignment. 

The tenant claims the landlord cannot condition consent on exacting the
rent premium since no standards or conditions for consent exist in the lease
and thus cannot now be imposed. 

Here, the landlord’s conditional consent to the assignment is commercially

reasonable. When granting consent, the landlord is entitled to preserve the
rental income they currently receive from the existing tenant. The landlord
does not need to accept the certain risk of a lower monthly percentage rent
from the assignee while the original tenant receives a monthly premium.14 

12 Pay ‘N Pak Stores, Inc. v. Superior Court of Santa Clara County (1989) 210 CA3d 1404
13 Airport Plaza, Inc. v. Blanchard (1987) 188 CA3d 1594
14 John Hogan Enterprises, Inc. v. Kellogg (1986) 187 CA3d 589
 Chapter 49: Lease assignments and subleases 503

Now consider a commercial lease agreement that contains a restriction-on- Proceeds

transfer provision authorizing the landlord to demand all the consideration
the tenant will receive for an assignment of the lease as a condition for their from
consent to the assignment. 
assignment
The landlord does not bargain for any other exaction, such as key money, demanded
lease assignment-assumption fee or a portion of the purchase price the
tenant will receive on a sale of the business that the tenant operates from the
premises. 

Later, the tenant agrees to assign the lease to a new operator as part of the sale
of their business. The operator will pay the tenant a lump sum for the lease as
part of the purchase price since rent due under the lease agreement is below
market rates. 

The landlord demands the tenant pass on to the landlord the price received
for assignment of the lease as a condition for their consent to the assignment.
The tenant rejects this demand.

The tenant claims the landlord’s demand in exchange for consent is

commercially unreasonable, and thus unenforceable, since the landlord has
no lawful justification for the premium or additional rent. 

Here, the landlord may condition consent on their receipt of the payment
made for the assignment of the lease. Commercial lease agreements granting
the landlord the right to receive any consideration the tenant is to receive
related (and limited) to the value of the lease to be assigned are enforceable.15 

Absent unconscionable or discriminatory provisions, commercial landlords

and tenants are free to place commercially reasonable restrictions — limited
to the value of the leasehold, not any part of the price the tenant received on
the sale of the business — on any assignment of the lease.16 

Again, it is commercially reasonable for a commercial lease agreement to More than

provide for the landlord to receive all consideration the tenant receives for
the assignment of the lease in exchange for the landlord’s consent.17  rental value
However, the consideration the landlord may receive for their consent to an demanded
assignment is limited to financial benefits related to the value of the lease
assigned. 

For example, a tenant occupies commercial property under a lease agreement. 

The lease agreement includes a profit-shifting clause calling for the tenant
to pay the landlord 25% of the consideration the tenant receives for business
goodwill on the sale of the tenant’s business, in exchange for the landlord’s
consent to an assignment.

15 CC §1995.240
16 Carma Developers, Inc., supra
17 CC §1995.240
 504 Property Management, Sixth Edition

Both agree it is the location of the leased property which will give the tenant’s
business its goodwill value.

The tenant’s business is a success and the tenant locates a buyer for the
business and the remaining term on the lease. The tenant seeks the landlord’s
consent for an assignment of the lease. 

As agreed, the landlord demands 25% of the consideration the tenant will
receive for their business goodwill. The tenant refuses to meet the demand
and the landlord refuses to consent to the assignment. 

As a result, the sales transaction does not close. The tenant makes a demand
on the landlord for 100% of their lost profits on the sale. 

The tenant claims the landlord’s demand for a share of the profits on the
sale of the business as agreed to in the lease agreement was a commercially
unreasonable and unenforceable condition for granting consent to the
assignment. 

The landlord claims the profit-shifting provision is enforceable since all

consideration received by the tenant on a transfer of the lease, even in excess
of the value of the lease, may be agreed to and taken in exchange for consent. 

Here, the landlord’s right to receive consideration in exchange for their

consent to an assignment is limited to the consideration the tenant receives
for the value of the lease.18 

Unconscionable Now consider a subtenant who needs to negotiate a new lease with the
landlord or be evicted. The master tenant’s lease agreement has been
advantage terminated by the landlord due to no fault of the subtenant. 
situations The landlord submits a proposed lease agreement to the subtenant which
differs significantly in its terms and conditions from the wiped out sublease
agreement the subtenant held with the master tenant. When the subtenant
attempts to negotiate a reasonable rent and eliminate unacceptable
provisions, the landlord tells the subtenant to “take it or leave it.” The
subtenant is told they will be evicted if the proposed lease agreement is not
signed. 

The proposed lease agreement includes a restriction-on-transfer provision

calling for a 200% increase in rent as a condition to be met before the landlord
will consent to an assignment of the lease. 

The subtenant signs the lease. Later, the subtenant seeks the landlord’s
consent to an assignment of the lease on sale of their business. The landlord
demands a modification of the rent provision to reflect the 200% increase in
monthly rent as agreed, which the subtenant’s buyer refuses to sign. 

The tenant claims the provision was the result of an unconscionable

advantage held as a negotiating advantage by the landlord. When the lease

18 Ilkhchooyi v. Best (1995) 37 CA4th 395

 Chapter 49: Lease assignments and subleases 505

was negotiated, the tenant could not refuse to rent due to the goodwill they
had built up for their business through a heavy investment in advertising at
the location. 

The landlord claims the restriction-on-transfer provision is enforceable since

the clause was freely bargained for. 

Can the tenant avoid enforcement of the restriction-on-transfer provision? 

Yes! The restriction-on-transfer provision agreed to was the result of the

landlord taking unconscionable advantage of the subtenant’s adverse
situation. The subtenant was in possession under a wiped out sublease
without any power to freely bargain. The subtenant was already in possession
and operating a business that had developed goodwill that will be lost if they
vacate. 

Collection of future rents so hugely excessive as to effectively shift profits

from the sale of the business to the landlord for their consent to an assignment
Unconscionable
of a lease was overreaching on the landlord’s part. Thus, the restriction-on- and
transfer provision was unenforceable as the product of the unconscionable
advantage taken by the landlord.19 
unenforceable
Also, any consideration the landlord seeks which is beyond the value
of the leasehold interest or the landlord’s interest in the real estate is not
reasonable, whenever or however bargained for. The right to freely bargain
is not intended to give the landlord the right to freely fleece a tenant of the
tenant’s assets beyond the lease in the name of freedom of contract.20 

When a commercial lease agreement contains a tenant-mitigation

provision and the tenant breaches the lease, the landlord may leave the
Tenant-
lease in place and recover rent for the life of the lease. [See RPI Form 552 mitigation
§21.1; see Figure 2]
provisions
Under a tenant-mitigation provision, the breaching tenant who has vacated
the property has the duty to:
•  find a replacement tenant;
tenant-mitigation
•  pay for any tenant improvements (TIs); and provision
A provision in a
•  collect rent.21  commercial lease
agreement allowing
In other words, the tenant-mitigation provisions shifts to the tenant the the landlord to
responsibility of mitigating the landlord’s losses for the tenant’s breach. leave the tenant’s
leasehold and the lease
agreement intact on
However, if the lease agreement also provides for the landlord’s prior consent the tenant’s breach,
to an assignment of the tenant’s leasehold interest, the tenant-mitigation and then recover rent
provision is enforceable only if the landlord’s consent to an assignment is from the tenant for
the life of the lease
not unreasonably withheld.22  without the landlord
19 Ilkhchooyi, supra
first taking steps to
20 Ilkhchooyi, supra
mitigate losses. [See
21 CC §1951.4 RPI Form 552 §21.1]
22 CC §1951.4(b)(3)
506 Property Management, Sixth Edition

Figure 2

Excerpt from
Form 552

Gross — Single
Tenant

A landlord who prohibits assignments or unreasonably withholds consent

retains the duty to mitigate their loss of rents on the tenant’s breach. 

Broker’s role Restriction-on-transfer provisions become a concern of the business-

opportunity (bus-op) or industrial leasing agent when: 
in assigning •  negotiating the assignment of a lease in a bus-op sale (or negotiating a
or subletting sublease or a further encumbrance); 
•  relocating a tenant whose current lease has not yet expired; or 
•  negotiating the origination of any lease. 
A broker handling a bus-op sale or relocation of a business or industrial
tenant needs to determine the tenant’s ability to assign the existing lease to a
potential buyer or other successor tenant. 

The broker starts the analysis by ascertaining the type of restriction-on-transfer

provision the lease agreement contains. The broker can then determine the
tenant’s assignment rights. 

Now consider a leasing agent who is negotiating a lease on behalf of a

prospective tenant. The tenant’s agent limits the wording of a restriction-on-
transfer provision to include: 
•  the landlord’s consent “will not be unreasonably withheld”; and 
•  any exaction to be paid for the consent is limited to the consideration
the tenant receives for the rental value of the premises. 
Here, a prohibition against assignment is eliminated by including the “with
consent” provision. 

Compensation Conversely, the landlord’s leasing agent reviews the restriction-on-transfer

provision and suggests the tenant pay compensation to the landlord in
for consent exchange for any consent to a transfer. For example, in exchange for consent,
the landlord may:
•  adjust rents to current market rates; 
•  receive fees and costs incurred to investigate the successor tenant’s
credit; 
•  receive any overriding rent or lump sum payment the tenant receives
that is attributable to the value of the lease; 
 Chapter 49: Lease assignments and subleases 507

Form 552-7

Commercial
Lease
Agreement
Addendum
— Alienation of
Leasehold

•  require the successor tenant to pay operating expenses as additional

rent such as maintenance, utilities, insurance and taxes; or 
•  alter the terms of the lease agreement and any options to extend/renew
the lease or buy the property. 
To be enforceable, any exactions the landlord may expect or later seek for
their consent will be:
•  agreed to and set forth in the lease agreement; and
•  related solely to the value of the lease. 
508 Property Management, Sixth Edition

Brokerage fee A broker employed by a landlord under an exclusive authorization to lease

property is due a fee if the premises is rented to a tenant located by anyone
addendum during the listing period. [See Form 110 in Chapter 12] 

Likewise, a broker employed by a tenant under an exclusive authorization

to locate space is entitled to a fee when the tenant rents space sought by
the employment during the listing period. If the tenant rents and does not
provide for the landlord to pay the fee, the tenant will owe the broker the fee.
[See Form 111 in Chapter 13] 

However, brokers too often fail to insist on a written fee agreement from
either the landlord or the tenant before rendering services. To be assured a
fee when a prior written fee agreement does not exist, the broker includes
a fee provision as part of an offer to lease or letter of intent. The fee is also
included as an addendum to the proposed rental or lease agreement. [See
RPI Form 273] 

Chapter 49 A transfer by the tenant of their leasehold interest in property includes

an assignment, sublease or further encumbrance.
Summary
The restriction-on-transfer provision may either prohibit transfer of the
tenant’s interests or it may require the tenant to obtain landlord consent
prior to assigning, subletting or further encumbering the tenant’s
leasehold interest.

The cancellation provision allows the landlord to cancel the lease

agreement and terminate the tenant’s occupancy on specified events,
such as the receipt of the tenant’s written request to assign the lease or
sublet the premises.

The consent-to-assignment provision and the cancellation provision

are mutually exclusive alternatives available to the landlord. They give
the landlord a choice between two different and separate courses of
action when confronted with a request for consent to an assignment or
sublease.

Chapter 49 assumption..................................................................................... pg. 499

novation.......................................................................................... pg. 499
Key Terms overriding rent.............................................................................. pg. 498
restriction-on-transfer provision............................................. pg. 497
successor tenant............................................................................ pg. 501
tenant mitigation provision...................................................... pg. 505
transfer............................................................................................ pg. 498

Quiz 12 Covering Chapters 47-50 is located on page 655.

 Chapter 50: Commercial rent control prohibited 509

Chapter

50
Commercial rent
control prohibited

After reading this chapter, you will be able to: Learning

•  work within the limitations of local rent control; and
•  explain the differences between permitted residential rent control
Objectives
and the policy against commercial rent control.

impasse notice Key Term

Residential landlords and apartment builders in California have battled Legislative

local rent control ordinances since the mid-1970s.
purpose
Some judicial support for de-control is taking root since the societal objectives
underlying the enactment of rent control ordinances are not being met.1

Further, the California legislature enacted a scheme which will gradually

lead to a phaseout of all residential rent control. The economics of rent control
in the long term are not kind to tenants or the surrounding neighborhoods,
while investment capital is unharmed since it simply locates elsewhere.2
[See Chapter 58]

Most major metropolitan areas in California, including Los Angeles, San

Francisco, Oakland and San Jose, have some form of residential rent control.
San Diego County and Orange County do not.

However, the city of Berkeley went beyond attempts to control only

residential income properties. The city passed rent control ordinances placing
restrictions on the amount of rent landlords of commercial properties are
able to change.
1 152 Valparaiso Associates v. City of Cotati (1997) 56 CA4th 378
2 Calif. Civil Code §1954.52
510 Property Management, Sixth Edition

The stated objective supporting the Berkeley commercial rent ordinances

was to preserve the city’s older business neighborhoods without change
or evolvement. Inefficient owners with improperly located shops in high
traffic locations saw their rents rise dramatically as their space was sought by
better capitalized and more effective businessmen, a process loosely called
Economic Darwinism or creative destruction. Simply put, the landlords
were willing to rent to more efficient and productive businesses which pay
higher rent.

Local historical preservation advocates asserted rent control was the only
way to protect “mom-and-pop” shops, which otherwise are no longer
financially viable operations. Conversely, landlords felt they needed to be
allowed to rent the space to any tenant whose business operation conforms
to existing zoning ordinances.

Local community leadership is caught politically between making a policy

commitment to protect inefficient, small shop owners in historic business
districts or fostering an environment that encourages the growth of existing
businesses or their replacement by fresh, energetic businesses in the same or
newly constructed structures.

No commercial However, no California city, county or other public agency may pass and
enforce commercial rent control ordinances.3
rent control
ordinances The California legislature felt commercial rent control was economically
improper since it:
•  discouraged commercial development and open market competition;
•  benefitted one business enterprise over another; and
•  hampered business expansion.4

Rental limit The ban on commercial rent control also covers actions by all public entities
who act as landlords, as well as private landlords.5
ban
A public entity includes the state and all:
•  cities and counties;
•  public authorities and agencies; and
•  political subdivisions and public corporations.6
Thus, no public entity may control or limit commercial rental rates, directly
as owners or indirectly by ordinances. Using the power of eminent domain
to control rents is improper.

Commercial real estate includes all real estate except:

•  dwelling units;
3 CC §1954.25
4 CC §1954.25
5 CC §1954.27(a)
6 Calif. Government Code §811.2
 Chapter 50: Commercial control prohibited 511

•  residential hotels; and

•  mobilehome parks.7
Thus, the marketplace of available space for rent is left to sort out who will
occupy the space in our growth economy without unnecessary government
interference.8

To meet these ends, public agencies are prohibited from designating a specific
tenant with whom a landlord needs to negotiate to create, extend or renew
a commercial lease. Any tenant may rent any commercial space based on
negotiations unfettered by governmental imposition of rent conditions.9

The prohibition against commercial rent control covers all actions by local
governments, whether by charter, ordinance, resolution, administrative
regulations or policy statements.10

Local rent control ordinances cannot establish or dictate any of the terms
which might be negotiated in a commercial lease agreement or in the
renewal or extension of the lease.

However, not all local government powers have been curbed. What has
ended is government interference with commercial lease negotiations
between landlords and tenants.

Local governments may still regulate all facets of business location and
development such as:
Remaining
•  exercising eminent domain powers;11
local powers
•  abating nuisances;12
•  establishing zoning (use) and business licenses (policing);13 and
•  protecting historical resources.14
Also, the ban on commercial rent control does not apply to redevelopment
contracts entered into by a developer and a public agency.

Under redevelopment agreements, the developer rents to local businesses at

a set or reduced rate in exchange for participation with the public agency.15

Public agencies may establish a notice procedure for an existing Negotiations

commercial tenant to make or solicit an offer to the landlord negotiating for
a renewal or extension of the lease. by notice to
landlords
7 CC §1954.26(d)
8 CC §1954.27(a)
9 CC §1954.27(a)
10 CC §1954.27(a)
11 CC §1954.28(a)
12 CC §1954.28(b)
13 CC §1954.29(a)
14 CC §1954.28(e)
15 CC §1954.28(d)
512 Property Management, Sixth Edition

However, the agency’s action may not interfere with rights held under an
existing lease agreement. Thus, they cannot alter the lease expiration date or
the attendant obligation of the tenant to vacate on expiration or be evicted.16

For example, a lease agreement exists which does not grant an option to the
tenant to renew or extend the term of the lease, called a term-only lease.

However, the local governing agency may by ordinance create a procedure

allowing the tenant to deliver a negotiation notice to the landlord. In
the negotiation notice, the tenant makes or solicits an offer to negotiate an
extension of the term of the lease.17

A tenant who has materially breached a significant provision in the lease

agreement is not eligible to use the negotiation notice scheme.18

The negotiation notice acts as the tenant’s offer to acquire an extension or

renewal of the lease, an activity a tenant can carry out without the existence
of an enabling ordinance. Of course, the tenant does not need to use a
negotiation notice to contact their landlord.19

On the landlord’s receipt of the negotiation notice, the landlord is required

to respond if the notice is sent within 270 days before the expiration of the
lease.20

However, whether or not the landlord receives a negotiation notice from

the tenant, the landlord and the property manager have no duty to notify
the tenant the lease is expiring at the end of the term stated in the lease
agreement.

Impasse If the tenant delivers the negotiation notice within 270 days before the lease
expires, the landlord either:
notice to
•  enters into negotiations to renew or extend the lease with the tenant;
tenant or
•  delivers an impasse notice to the tenant no more than 180 days before
impasse notice
A notice advising
the lease expires, within a time period after receipt of the negotiation
the tenant the lease notice as set by the local agency.21
will expire and no
modification of the An impasse notice advises the tenant the lease will expire as called for in the
lease will be entered lease agreement and no modification of the lease will occur.22
into.

For example, a city passes an ordinance requiring a landlord to respond with

an impasse notice within 30 days of receiving a negotiation notice, but not
prior to 180 days before the lease expires.

16 CC §1954.31
17 CC §1954.31(a)(1)
18 §1954.31(b)(1)
19 CC §1954.26(j)(2)
20 CC §1954.31(a)(2)(A)
21 CC §1954.31(a)(2)(B)
22 CC §1954.26(i)
 Chapter 50: Commercial control prohibited 513

However, if the negotiation notice is received 150 days prior to expiration of

the lease, the landlord needs to respond within 30 days or they will be acting
in bad faith.

The landlord is also required to send an impasse notice when they (or
their agent) have received a negotiation notice and entered into renewal
or extension negotiations with the tenant which are later broken off. The
impasse notice indicates the lease will not be renewed or extended.

Also, negotiation and impasse notice ordinances cannot force the landlord to
deal with a tenant or to make a counteroffer to the tenant. A landlord is not
required to negotiate an additional or new term with the existing tenant and
may reject the tenant’s offer by use of the impasse notice.

One purpose served by the tenant’s notice to the landlord is to allow the
tenant time to negotiate a new or extended lease or find alternative space
Time to
before the lease term expires. In practice, tenants have always knowingly negotiate
borne these burdens as their possessory interest draws to an end.

Without conjecture as to unintended consequences, these ordinances appear

to add nothing to the leasing environment except for the landlord’s written
impasse notice in response to a prior written offer from the tenant to negotiate.

However, the notice rules do not provide guidance for landlords who
commence negotiations which become prolonged and continue beyond the
response period set by ordinances for delivery of an impasse notice. If the
landlord breaks off negotiations after the response period for delivery of the
impasse notice has passed, it is too late to deliver an impasse notice unless
the ordinance extended the time in which to respond.

The safest conduct for the landlord who receives a tenant’s negotiation
notice is to deliver an impasse notice within the response period set by the
local ordinance, and then enter into negotiations. If negotiations result in an
extension or renewal, the notice becomes irrelevant. If negotiations fail, the
landlord complied with the negotiation/impasse ordinance.

A landlord or property manager who fails to deliver an impasse notice Failure

and does not enter into negotiations after the timely receipt of the tenant’s
negotiation notice may have acted in bad faith. A non-response subjects the to deliver
landlord or property manager to liability for the tenant’s actual money losses notices
incurred due to the bad faith failure to deliver the impasse notice.23

When confronted with a bad faith claim, the landlord needs to immediately
deliver an impasse notice and extend the expiration of the lease to a date
after delivery of the impasse notice. This conduct provides the tenant with
the period of time the tenant was to have prior to expiration of the lease had
an impasse notice been timely delivered. The extension avoids loss of the
tenant’s reasonable expectations, induced by the notice ordinance, of up to a
180-day period to relocate after receipt of an impasse notice.
23 CC §1954.31(a)(3)
514 Property Management, Sixth Edition

Chapter 50 No California city, county or other public agency may pass and enforce
commercial rent control ordinances.
Summary
Public agencies are prohibited from designating a specific tenant
with whom a landlord needs to negotiate to create, extend or renew a
commercial lease. Any tenant may rent any commercial space based on
negotiations unfettered by local rent control ordinances.

Public agencies may establish a notice procedure for an existing

commercial tenant to make or solicit an offer to the landlord negotiating
for a renewal or extension of the lease.

However, the agency’s action may not interfere with rights held under
an existing lease agreement. Thus, they cannot alter the lease expiration
date or the attendant obligation of the tenant to vacate on expiration or
be evicted.

Chapter 50 impasse notice ........................................................................... pg. 512

Key Term

Quiz 12 Covering Chapters 47-50 is located on page 655.

 Chapter 51: Residential rental and lease agreements 515

Chapter
51
Residential rental and
lease agreements

After reading this chapter, you will be able to: Learning

•  distinguish the different terms for occupancy under residential
rental and lease agreements;
Objectives
•  understand the operation of provisions of residential rental
agreements and lease agreements;
•  use addenda to incorporate additional terms into residential
rental and lease agreements; and
•  identify the statutory rights and duties of landlords and tenants
as restatements in residential rental or lease agreements.

addendum rental market Key Terms

credit application waterbed addendum

Typically, residential landlords and tenants enter into either a periodic rental A review of
agreement or a fixed-term lease agreement. Residential periodic tenancies
typically take the form of month-to-month rental agreements. [See Chapter periodic vs.
3; see RPI Form 551]
fixed-term
Residential rental and lease agreements each grant and impose on the tenancies
landlords and tenants the same rights and obligations. Their differences lie
in the expectation of continued occupancy and the obligation to pay future
rent. 

Recall that a month-to-month rental agreement runs for an indefinite

period of time. It automatically renews monthly, and on the same terms,
until modified or terminated by notice. [See RPI Form 551 §3] 
516 Property Management, Sixth Edition

Periodic tenancies may be terminated by either the landlord or tenant on

30 days’ written notice. However, a residential landlord is to give the tenant
at least 60 days’ written notice if the tenant’s occupancy has exceeded one
year.1 [See Chapter 26] 

On the other hand, a lease agreement creates a tenancy that continues for a
fixed period. At the end of the fixed-period, the tenant’s right of possession
expires. The terms in the lease agreement set the expiration date, and no
further notice is required by either the landlord or tenant to terminate the
tenancy. [See Figure 1, Form 550 §3] 

Unlike a periodic tenancy, the lease agreement does not automatically

renew, unless an option to renew or extend has been written into the lease
agreement and exercised.

Rental The rental market is the market environment in which landlords seek
tenants (and vice versa). The condition of the rental market is determined by:
market •  the population of tenants;
influences •  the number of properties competing for these tenants; and
•  the comparative position of the property and its amenities in relation
to competing properties.
rental market
The market The rental market sets the amount of rent a landlord is able to charge on any
environment in
which landlords seek given day to solicit and induce prospective tenants to enter into rental or
tenants and tenants lease agreements. 
seek landlords for the
occupancy of property. Generally, tenants on month-to-month rental agreements pay higher
The rental market
sets the amount of amounts of monthly rent for a unit than do tenants with lease agreements.
rent a property will Month-to-month tenants pay a premium for the privilege of being able
command on any
given day.
to vacate the premises on 30 days’ notice, without liability exposure for
future rents. This privilege held by the tenant contributes to the landlord’s
uncertainty about their income and costs of tenant turnover, hence the rent
premium to cover the risks. 

Tenants typically pay lower rents when they enter into a lease agreement.
In stable rental markets, the longer the lease period the lower the rent. [See
Chapter 20]

Rent may, however, be subject to adjustments for future price inflation, local
appreciation and management decisions. During weak market periods of
generally high vacancy rates, price-competitive landlords may favor using
month-to-month rental agreements rather than lease agreements. When
rents begin to rise, landlords adjust rents to market by serving notice of a
change in rent rates. [See Chapter 22]

Lease Conversely, a landlord may not alter the terms of a lease agreement during
the life of the lease without consideration and the tenant’s consent. 
negotiations
on expiration 1 Calif. Civil Code §1946
 Chapter 51: Residential rental and lease agreements 517

Figure 1
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - PAGE 2 OF 4 — FORM 550 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

RESIDENTIAL LEASE AGREEMENT b. � credit card #______/______/______/______ issued by _______________________________________,

which Landlord is authorized to charge each month for rent due.

Prepared by: Agent

Broker
Phone
Email
c. � deposit into account number ________________________________________________________ at
(Financial Institution) ___________________________________________________________________________________

(Address) ___________________________________________________________________________________
Form 550
___________________________________________________________________________________
NOTE: This form is used by a leasing agent, property manager or landlord when leasing a residential property on a fixed
d. � __________________________________________________________________________________.
rental-rate basis for a specific period of time to grant the tenancy and set the amount of rents to be paid, identify who will
4.3 Tenant to pay a charge of � $_______________, or � ______% of the delinquent rent payment, as an additional
provide and pay for utilities, and the allocation of maintenance responsibilities and their costs between the landlord and

Residential
amount of rent, due on demand, in the event rent is not received within � five days, or � ________________,
tenant. after the due date.
DATE: , 20 , at , California. 4.4 If any rent or other amount due Landlord is not received within five days after its due date, interest will thereafter
Items left blank or unchecked are not applicable. accrue on the amount at 18% per annum until paid. On receipt of any past due amount, Landlord to promptly

Lease
make a written demand for payment of the accrued interest which will be payable within 30 days of the demand.
FACTS:
1. This lease agreement is entered into by ________________________________________________, as the Landlord, 4.5 Tenant to pay a charge of $______________ as an additional amount of rent, due on demand, for each rent
and ____________________________________________________________________________, as the Tenant(s), check returned for insufficient funds or stop payment, in which event Tenant to pay rent when due for each of the
1.1 regarding residential real estate referred to as ____________________________________________________, three following months by cash or cashier’s check.

Agreement
________________________________________________________________________________________, 5. POSSESSION:
1.2 including the following: 5.1 Tenant will not be liable for any rent until the date possession is delivered.
� Garage/parking space #______ 5.2 If Landlord is unable to deliver possession, Landlord will not be liable for any damage, nor will this lease terminate.
� Storage space #______ 5.3 Tenant may terminate this lease if Landlord fails to deliver possession within five days of commencement.
� Furnishings _____________________________________________________________________________ 5.4 Only the above-named Tenant(s) are to occupy the premises along with the following individuals:
1.3 The following checked attachments are part of this agreement:
________________________________________________________________________________________
� Rent control disclosures � Option to Renew/Extend Lease [See RPI Form 565]
� Lead-Based Paint Disclosure [See RPI Form 557] ________________________________________________________________________________________.
� House/Building rules
� Credit Application [See RPI Form 553] 5.5 Tenant will not assign this lease agreement or sublet, or have boarders or lodgers.
� Brokerage Fee Addendum [See RPI Form 273]
� Condition of Premises Addendum [See RPI Form 560] 5.6 Tenant(s) will have no more than ______ guests staying the greater of no more than 10 consecutive days or 20
days in a year.
� Condition/Inventory of Furnishings Addendum [See RPI Form 561]
� _______________________________________________________________________________________ 5.7 Tenant agrees the premises, fixtures, appliances, furnishings and smoke and carbon monoxide detectors are in
AGREEMENT: satisfactory and sanitary condition, except as noted in an addendum. [See RPI Form 561]
2. DEPOSIT: 5.8 Landlord to make any necessary repairs as soon as possible after notification by Tenant. If Landlord does not
2.1 Landlord acknowledges receipt of $_______________ as a security deposit. timely make necessary repairs, Tenant may have the repairs made and deduct the cost, not to exceed one
month’s rent.
2.2 The deposit is security for the diligent performance of Tenant’s obligations, including payment of rent, repair of
damages, reasonable repair and cleaning of premises on termination, and any loss, damages or excess wear 6. TENANT AGREES:
and tear on furnishings provided to Tenant. 6.1 To comply with all building rules and regulations and later amendments or modifications.
2.3 No interest will be paid on the deposit and Landlord may place the deposit with their own funds, except where 6.2 To pay for the following utilities and services: ____________________________________________________
controlled by law.
________________________________________________________________________________________
2.4 Within 21 days after Tenant vacates, Landlord to furnish Tenant with a security deposit statement itemizing any
deductions, with a refund of the remaining amount. ________________________________________________________________________________________
a. Landlord to provide and pay for: __________________________________________________________.
3. TERM OF LEASE: 6.3 To keep the premises clean, well ventilated, free of mold contaminating moisture buildup and sanitary.
3.1 This lease will begin on _____________, 20______, and continue until _____________, 20______.
a. Tenant to promptly notify Landlord of unabated moisture buildup in the premises for prevention of mold
3.2 The lease terminates on the last day of the term without further notice.
contamination.
3.3 Landlord’s acceptance of rent after expiration of the lease term creates a month-to-month tenancy. b. Tenant to properly dispose of all garbage and waste.
3.4 If Tenant holds over, Tenant to be liable for rent at the daily rate of $_______________. 6.4 To routinely check and properly maintain smoke and carbon monoxide detectors.
6.5 To properly operate all electrical, gas and plumbing fixtures and pipes, and keep them clean and sanitary.
4. RENT:
4.1 Tenant to pay, in advance, $_________________ rent monthly, on the _______________ day of each month. 6.6 � Yard maintenance included in Tenant obligations.
4.2 Rent to be paid by: 6.7 To make the premises available on 24 hours' notice for entry by Landlord to make necessary repairs, alterations
or services, or to exhibit the premises to prospective purchasers, tenants, employees or contractors.
a. � cash, � check, or � cashier's check, made payable to Landlord or his agent and delivered to:
a. In case of emergency or Tenant’s abandonment of premises, Landlord may enter the premises at any time.
_____________________________________________________________________________________
(Name)
6.8 Not to disturb, annoy, endanger or interfere with other occupants of the building or neighboring buildings.
(Address) _____________________________________________________________________________________
6.9 Not to use the premises for any unlawful purpose, violate any government ordinance, or create a nuisance.
_____________________________________________________________________________________
6.10 Not to destroy, damage or remove any part of the premises, equipment or fixtures or commit waste, or permit any
_____________________________________________________________________________________
(Phone/Email)
person to do so.
Personal delivery of rent to be accepted at Landlord’s address during the hours of ______ to ______ of the
following days: ____________________________________________________________________________. 6.11 Not to keep pets or a waterbed on the premises without Landlord’s written consent.

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a. See attached � Pet Addendum [See RPI Form 563], � Waterbed Addendum. [See RPI Form 564] 11. ____________________________________________________________________________________________
11.
6.12 Not to make any repairs, alterations or additions to the premises without Landlord’s written consent.
a. Any repairs or alterations become part of the premises.
6.13 Not to change or add a lock without written consent.
6.14 Smoking is prohibited in the following area(s) ___________________________________________________
________________________________________________________________________________________
7. GENERAL PROVISIONS:
7.1 Tenant agrees to indemnify and hold Landlord harmless from claims, demands, damages or liability arising out of
the premises caused by or permitted by Tenant, Tenant’s family, agents, employees and guests. I agree to let on the terms stated above. I agree to occupy on the terms stated above.
a. � Tenant to obtain insurance for this purpose naming Landlord as an additional insured. Date: , 20 Date: , 20
7.2 If the property contains an exercise or recreation facility, Tenant agrees to indemnify and hold Landlord harmless Landlord: Tenant:
from claims, demands, damages or liability arising from Tenant’s use of the facility.
7.3 Landlord to maintain the premises and common areas in a safe and sanitary condition and comply with all Signature: ______________________________________
applicable ordinances and regulations. Signature: Tenant:
7.4 Waiver of a breach of any provision does not constitute a waiver of any subsequent breach. Landlord’s receipt of Landord's Broker: Signature: ______________________________________
rent with knowledge of Tenant’s breach does not waive Landlord’s right to enforce the breached provision.
Broker's DRE #: Tenant's Broker:
7.5 In any action to enforce this agreement, the prevailing party will receive attorney fees.
7.6 Notice: Pursuant to Calif. Penal Code §290.46, information about specified registered sex offenders is made is the broker for: � Landord Broker's DRE #:
available to the public via an Internet Web site maintained by the Department of Justice at www.meganslaw. � both Tenant and Landlord (dual agent) is the broker for: � Tenant
ca.gov. Depending on an offender's criminal history, this information will include either the address at which the
offender resides or the community of residence and ZIP code in which he or she resides. � both Tenant and Landlord (dual agent)
Landord's Agent:
7.7 Notice: � Landlord has actual knowledge the property is located in a special flood hazard area or an area
Agent's DRE #: Tenant's Agent:
of potential flooding. Tenant may obtain information about flood and other hazards at http://myhazards.caloes.
ca.gov/. Landlord's insurance does not cover Tenant’s possessions. Tenant may purchase renter’s insurance and is � Landord's agent (salesperson or broker-associate) Agent's DRE #:
flood insurance to insure their possessions from loss. Landlord is not required to provide additional information
about flood hazards beyond this notice. � both Tenant's and Landlord's agent (dual agent) is � Tenant's agent (salesperson or broker-associate)

7.8 � See attached addendum for additional terms and conditions. [See RPI Form 250] � both Tenant's and Landlord's agent (dual agent)
Signature:
7.9 If lease exceeds one year, Tenant and Landlord acknowledge receipt of the Agency Law Disclosure. [See RPI Signature:
Form 550-2] Address:
Address:
7.10 � Landlord may terminate this lease agreement if they, their spouse, domestic partner, children, grandchildren,
parents or grandparents, unilaterally decide to occupy the residential property. Phone: Cell:
Phone: Cell:
8. DESTRUCTION: Email:
8.1 If the premises are totally or partially destroyed and uninhabitable, either Landlord or Tenant may terminate the Email:
lease upon written notice.
a. If the lease is not terminated, Landlord will repair the premises and rent will be prorated based on a 30-day FORM 550 02-20 ©2020 RPI — Realty Publications, Inc., P.O. BOX 5707, RIVERSIDE, CA 92517
month for the period the premises was uninhabitable.
9. TEMPORARY DISPLACEMENT:
9.1 Tenant agrees to temporarily vacate the premises on Landlord’s written demand to allow for invasive repairs or
fumigation of the premises which will render the premises uninhabitable, subject to local rent control law. [See
RPI Form 588]
a. Tenant to comply with instructions provided by Landlord to accommodate the work needed.
b. Tenant to receive rent credit equal to the per diem rent for the duration of the displacement.
c. Landlord to provide written notice to Tenant prior to ________ days before the date of displacement.
10. JUST CAUSE AND RENT CAP NOTICE:
California law limits the amount your rent can be increased. See Section 1947.12 of the Civil Code
for more information. California law also provides that after all of the tenants have continuously and
lawfully occupied the property for 12 months or more or at least one of the tenants has continuously
and lawfully occupied the property for 24 months or more, a landlord must provide a statement
of cause in any notice to terminate a tenancy. See Section 1946.2 of the Civil Code for more
information.
10.1 � This property is not subject to the rent limits imposed by Section 1947.12 of the Civil Code and is not subject
to the just cause requirements of Section 1946.2 of the Civil Code. This property meets the requirements of
Sections 1947.12 (c)(5); (d)(5) and 1946.2 (e)(7); (e)(8) of the Civil Code and the owner is not any of the following:
(1) a real estate investment trust, as defined by Section 856 of the Internal Revenue Code; (2) a corporation; or
(3) a limited liability company in which at least one member is a corporation.

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To extend a soon-to-expire lease agreement, the landlord may contact the

tenant and offer to:
•  enter into another lease agreement; or
•  a month-to-month rental agreement.
If the tenant desires to remain in possession when their lease expires, the
amount of rent a landlord may demand is limited only by negotiations and
economic forces in the rental market, with the exception of rent control
vicinities. 
518 Property Management, Sixth Edition

As an alternative, a landlord proactively negotiates and grants options to

renew or extend when initially entering into lease agreements. The right
to extend the occupancy may be all that is needed to induce the tenant to
remain a tenant on expiration of the lease. [See RPI Form 565] 

On locating a prospective tenant for a residential unit, the landlord establishes

Requisites the prospect’s creditworthiness before entering into either a rental or lease
to accepting agreement. This is accomplished by requiring the tenant to fill out a credit
application. [See RPI Form 302] 
tenants
The credit application is referenced and attached as an addendum to any
credit application rental or lease agreement entered into by the landlord and tenant. The
A document prepared application is part of the leasing process which persuades the landlord to
by a prospective tenant
which includes a accept the applicant as a tenant. 
provision authorizing
the landlord to Initially, the landlord uses the authorization provided by the tenant on the
investigate and
receive information
application to verify the tenant’s rental history, employment, credit standing
on the tenant’s and check-writing history. 
creditworthiness. [See
RPI Form 302] If a prospective tenant has a poor credit rating or no credit rating at all, yet
meets the landlord’s income requirements, the landlord may seek assurances
in addition to the maximum security deposit allowed. These assurances
include: 
•  a co-signer on the lease; or 
•  a guarantee agreement signed by a creditworthy person. [See RPI
Form 553-1] 
With third-party assurances, the landlord will receive full performance
on the lease agreement from others if the tenant defaults on their rent or
otherwise causes the landlord to incur a loss exceeding the security deposit.
On a default by the tenant, the landlord may hold the co-signer liable, or
collect their losses from the guarantor. [See Sidebar, “Disclosing a notice of
default”]

Every landlord has a duty to ensure the residential housing they rent is safe
Landlord’s and sanitary throughout the tenant’s occupancy. Additionally, a landlord
right to avoid has a duty to protect their tenants from foreseeable dangers.
lawsuits Since environmental tobacco smoke (ETS) poses a legislatively recognized
danger to tenants, a wise landlord takes steps to avoid claims.2

A landlord may do any of the following risk avoidance activities to alleviate

the burden of future ETS disputes:
•  relocate smokers so they will not affect non-smokers;
•  relocate non-smokers so they are not affected by the ETS of smoking
tenants; or

2 Stoiber v. Honeychuck (1980) 101 CA3d 903; Calif. Code of Civil Procedure §1174.2
 Chapter 51: Residential rental and lease agreements 519

Owners of one-to-four unit residential rental property subject to a recorded notice of Disclosing a
default (NOD) are required to disclose the NOD in writing to any prospective tenants notice of default
before entering into a lease agreement. to tenants
If a landlord does not disclose the existence of a recorded NOD, the tenant may:
• terminate the lease after a trustee’s sale and recover all prepaid rent, plus
the greater of one month’s rent or twice the amount of money lost from the
landlord; or
• if the foreclosure sale has not occurred, remain bound by the lease and deduct
the amount of one month’s future rent.
The disclosure notice is required to be provided in English, and include Spanish, Chinese,
Tagalog, Vietnamese and Korean translations.
It is the landlord’s responsibility to ensure this notice is provided in the event an NOD
has been recorded against the property. A property manager is not liable for failure to
provide this notice, unless they neglect to provide the notice after being instructed by
the landlord to do so. [Calif. Civil Code §2924.85]

•  refuse to rent to persons who will not agree to the non-smoking

provisions made a part of the rental or lease agreement.
Alternatively, the landlord may:
•  designate all of the property as smoke-free, with the exception of
any clearly defined areas where smoking will not affect others, by
amending existing rental agreements or expired lease agreements; [See
RPI Form 563-1] and
•  enforce no smoking as part of the rules and policies of occupancy of the
property through a “property policies” provision in the rental or lease
agreement, then serve tenants who breach the no-smoking rule with a
three-day notice perform (do not smoke) or quit (vacate). [See Figure 1,
Form 550 §6.12; see RPI Form 576]

The above policies may be agreed upon by the landlord and tenant by the
use of a Non-Smoking Addendum when entering into a rental or lease
Nonsmoking
agreement. The Non-Smoking Addendum either prohibits smoking on the addendum
entire premises, or notes the specific location on the property where smoking
is permitted. [See RPI Form 563-1 §3]

A non-smoking policy may not be imposed on tenants under an existing

fixed-term lease until renewal of the lease is negotiated, at which point
the addendum may be attached. However, the use of a property policies
provision in a lease agreement is a method for changing the rules on tenants
during the term of a fixed-term lease.

However, tenants occupying under a month-to-month (periodic) rental

agreement or an expired lease agreement may be given a 30-day Notice
of Change in Rental Terms containing the non-smoking provision as the
change. [See RPI Form 570 §7]
520 Property Management, Sixth Edition

The tenant receiving a 30-day Notice of Change in Rental Terms does

not need to sign a non-smoking addendum. The tenant, by remaining in
possession and not giving notice to vacate, has by remaining silent agreed
to the non-smoking provision. The non-smoking condition is enforceable on
the running of 30 days from delivery of the notice.

Condition A residential landlord has the statutory duty to maintain the rented premises
in a habitable condition at all times. Similarly, a tenant has the statutory duty
of premises to refrain from damaging the premises and advising the landlord of adverse
conditions which come about during the tenancy.3 
addendum
To avoid disputes over who is responsible for any damage to the premises, the
residential landlord and tenant complete and sign a condition of premises
addendum before the tenant is given possession. [See Form 560 in Chapter
37; see Chapter 38] 

Before a tenant takes possession, the landlord or their manager needs to

inspect the unit with the tenant. Recall this is called a walk-through.
Together, the landlord (or resident manager) and the tenant will use a
condition of premises addendum to note: 
•  the premises is in satisfactory condition; 
•  any existing damage to the premises; and 
•  any repairs the landlord is to make to the premises. 
If the unit is furnished, the landlord and tenant complete and sign an
additional form on their walk-through called a condition of furnishings
addendum. The condition of furnishings addendum notes: 
•  the inventory of furnishings located in the unit; 
•  the current condition of the furnishings; and 
•  the tenant’s acceptance of the furnishings.  [See Form 561 in Chapter 36] 
Within thirty days before the end of a residential tenancy, the condition
of premises addendum is reviewed during the pre-expiration inspection
to help establish tenant responsibility for excess wear and tear to the unit
rented. [See Chapter 19]

Any provisions agreed to but not included in the boilerplate provisions of

Pet pre-printed lease or rental agreements are included in an addendum to
addendum the rental or lease agreement. The additional or conflicting provisions are
entered on the addendum. The addendum is then referenced in the body of
addendum
the rental or lease agreement as attached.
An attachment to
a rental or lease One such addendum is the pet addendum. If a landlord allows pets, they
agreement for often: 
incorporating any
provision agreed to
•  impose restrictions on the type or size of the pet; and 
but not included in the
boilerplate provisions
of the agreement. [See
3 CC §§1941; 1941.2
RPI Form 250]
 Chapter 51: Residential rental and lease agreements 521

•  require the landlord’s written consent to keep the pet on the premises.
[See RPI Form 551 §6.9 and Form 550 §6.9] 
The landlord and tenant may sign and attach a pet addendum that states: 
•  the type of pet and its name; 
•  the security deposit to be charged for the pet (but limited as part of the
maximum security deposit allowed); and 
•  the tenant’s agreement to hold the landlord harmless for any damage
caused by the pet. [See RPI Form 563] 
A landlord may not prohibit a disabled person from keeping a specially
trained guide dog on the premises.4  

Additionally, a landlord who allows pets may not: Additional

•  favor declawed or devocalized animals in any advertisement; rules
•  refuse to rent or negotiate for rent to a tenant because their pet has not
been declawed or devocalized; or
regarding
•  require tenants’ pets to be declawed or devocalized as a condition of pets
renting the property.5
Editor’s note — Although landlords may not favor declawed or devocalized
pets, they may still protect against property damage or noise by including a
lease provision barring specific pet behavior or prohibiting pets altogether.

Lease agreements and month-to-month rental agreements also prohibit

a tenant from keeping a waterbed or other liquid-filled furnishings on the
Waterbed
premises without the landlord’s written consent. [See RPI Form 551 §6.9 and addendum
Form 550 §6.9] 

When a tenant has a waterbed, the landlord may require the tenant to sign a
waterbed addendum
waterbed addendum. [See RPI Form 564]  An addendum to
a rental or lease
The waterbed addendum indicates:  agreement setting the
additional security
•  the additional security deposit the tenant will be required to provide deposit and insurance
coverage the tenant
for keeping a waterbed on the premises (in addition to the maximum will provide the
security deposit allowed); and  landlord to keep a
waterbed on the
•  the tenant’s agreement to maintain an insurance policy to cover premises. [See RPI
potential property damage when the waterbed leaks or bursts.   Form 564]

Other addenda which may be incorporated into a residential rental or lease Other
agreement include: 
addenda
•  house or building rules; and 
•  any rent control disclosures required by local rent control
ordinances. [See Chapter 58]

4 CC §54.1(b)(5)
5 CC §1942.7
522 Property Management, Sixth Edition

A residential landlord seeking to sell a property may also grant the tenant
an option to purchase the property. [See Form 161 in Chapter 6] 

However, no portion of any option money or the rent may be applied to the
purchase price. When the terms of the lease agreement or option agreement
provide for any credit to be applied toward the purchase price, or to a down
payment on the purchase price, the tenant has acquired an equitable
ownership interest in the property and cannot be evicted. 

This is called a lease-option sale, and is a masked sale of the property

typically entered into in violation of all the single family residence (SFR)
disclosures to the buyer/tenant, mortgage lender and county assessor. The
lease-option sale also lacks the protective formalities and fees involved in
an escrowed grant deed transfer of ownership.

Terms of Residential tenants typically provide a security deposit to the landlord to

cover the cost to clean the unit or remedy any damage caused to the unit
residential beyond reasonable wear and tear. [See RPI Form 551 §2 and Form 550 §2; see
occupancy Chapter 19] 

In return for the use and possession of the premises, the tenant pays the
landlord rent until expiration of the lease, or periodic tenancy. The tenant
agrees to pay a late charge if rent is not paid on the due date, or within the
established grace period. [See RPI Form 551 §4 and Form 550 §4; see Chapter
25] 

Also, the number of guests the tenant may have in their unit and the period
of time over which their guests may visit is limited. [See RPI Form 551 §5.6
and Figure 1, Form 550 §5.6]

The tenant agrees to comply with all building or project rules and regulations
established by any existing covenants, conditions and restrictions (CC&Rs)
or the landlord. [See RPI Form 551 §6.1 and Form 550 §6.1] 

The landlord and tenant agree who will pay or how they will share the
financial responsibility for the unit’s utilities. Landlords of apartment
buildings or complexes often retain the responsibility of providing water to
the units. [See RPI Form 551 §6.2 and Form 550 §6.2] 

In both rental and lease agreements, the tenant agrees to hold the landlord
harmless from all liability for damages caused by the tenant or their guests.
[See RPI Form 551 §7.1 and Form 550 §7.1] 

Statutory Residential rental and lease agreements often contain provisions that restate
the landlord’s and tenant’s statutory rights and duties. 
rights and
For example, the rental agreement reiterates the landlord’s statutory
duties obligation to furnish a tenant with: 
•  a security deposit refund; 
 Chapter 51: Residential rental and lease agreements 523

•  a notice of the tenant’s right to a joint pre-expiration inspection of the

unit and delivery of an itemized statement of repairs/cleaning [See
Chapter 19]6; and 
•  a statement of security deposit accounting and an itemization of any
deductions.7 [See RPI Form 551 §2.4 and Form 550 §2.4; see Chapter 19] 
Also, rental and lease agreements often advise tenants of their limited
statutory right to make necessary repairs to the premises and deduct the
cost from the rent when the landlord fails to make the repairs the tenant has
brought to the landlord’s attention.8 [See RPI Form 551 §6.2 and Figure 1,
Form 550 d§6.2] 

A rental or lease agreement prohibits a tenant from: 

•  using the premises for an unlawful purpose; 
•  creating a nuisance; and 
•  committing waste. [See RPI Form 551 §6.7, §6.8 and Form 550 §6.7, §6.8;
See Chapter 26] 
Even if the lease or rental agreement does not restate these statutory
prohibitions, a tenant who carries on any of these prohibited activities may
be evicted with a three-day written notice to quit, no alternative performance
being available to the tenant.9 [See Chapter 26]

6 CC 1950.5(f)
7 CC 1950.5(g)(1)
8 CC 1942
9 CCP 1161(4)

The rental market is the market environment in which landlords seek

tenants (and vice versa). The condition of the rental market is determined
Chapter 51
by: Summary
•  the population of tenants;
•  the number of properties competing for these tenants; and
•  the comparative position of the property and its amenities in
relation to competing properties.
The rental market sets the amount of rent a residential landlord is able
to charge on any given day.

A month-to-month rental agreement runs for an indefinite period of

time. It automatically renews monthly, and on the same terms, until
modified or terminated by notice. Tenants typically pay lower rents
when they enter into a fixed-term lease. In stable rental markets, the
longer the lease, the lower the rent.
524 Property Management, Sixth Edition

On locating a prospective tenant for a residential unit, the landlord

establishes the prospect’s creditworthiness by requiring the tenant to
fill out a credit application.

Every landlord has a duty to ensure the housing they rent remains safe
and sanitary. Additionally, a landlord has a duty to protect their tenants
from foreseeable dangers.

Any provisions agreed to but not included in the boilerplate provisions

of pre-printed lease or rental agreements maybe included in an
addendum to the rental or lease agreement, such as a:
•  pet addendum;
•  non-smoking addendum; and
•  waterbed addendum.

addendum....................................................................................... pg. 520

Chapter 51 credit application......................................................................... pg. 518
Key Terms rental market................................................................................. pg. 516
waterbed addendum.................................................................... pg. 521

Quiz 13 Covering Chapters 51-54 is located on page 656.

 Chapter 52: Foreign-language residential leases 525

Chapter

52
Foreign-language
residential leases

After reading this chapter, you will be able to: Learning

•  identify requirements for real estate transactions conducted in
foreign languages; and
Objectives
•  understand how to apply these requirements to lease negotiations.

right of rescission Key Term

A bilingual real estate broker negotiates a residential lease agreement with a A written
tenant who is only able to speak Spanish. The lease has an initial term which
exceeds one month. Thus, it is not a month-to-month rental agreement. [See translation
RPI Form 550]
addendum
While negotiations between the broker and the prospective tenant are in
Spanish, the lease agreement is on a form written in English.

The tenant signs the English-language lease and takes occupancy. The tenant
does not receive a written Spanish translation of significant provisions in the
lease.

Later, the tenant decides to relocate to another landlord’s property. However,

the lease entered into with the broker obligates the tenant to occupy and pay
rent for its remaining term.
right of rescission
The tenant hands the broker a notice of rescission of the lease agreement The right to cancel a
completed transaction
and vacates the unit. The tenant claims the lease is void since the tenant did such as sale or letting
not receive a written Spanish-language translation when they entered into of property, including
restoration, after the
the English-language lease. transaction has been
closed.
526 Property Management, Sixth Edition

Can the tenant rescind the lease and avoid future rent obligations since the
broker failed to provide a written Spanish-language translation with the
written English-language lease?

Yes! A written translation is required to be delivered to the tenant in the

language used to negotiate a residential real estate lease. The translation is
to be handed to the tenant at the time and place the tenant signs the lease
agreement when it:
•  is a residential lease agreement for an initial term which exceeds one
month [See RPI Form 550]; and
•  is negotiated primarily in Spanish, Chinese, Tagalog, Vietnamese or
Korean by a broker, landlord, resident manager, their employee or a
person (interpreter) provided by them.

Lease The written translation requirement to deliver a non-English language

translation applies only to lease agreements, not month-to-month or
agreements shorter periodic rental agreements, on a residential dwelling, apartment,
only mobilehome or other residential unit.1 [See RPI Form 551]

The only remedy available to a tenant who does not receive the required
written Spanish, Chinese, Tagalog, Vietnamese or Korean language translation
is to rescind the lease agreement and vacate by returning possession to the
landlord. No money losses are recoverable by the landlord based on the lack
of the additional written translation. Simply put, the tenant is not bound by
the lease agreement.2

Transactions A written translation of a lease is not required if the tenant’s interpreter

assists in negotiating the lease.
exempt
from written However, the tenant’s interpreter needs to:

translations •  be 18 years of age or older;

•  be fluent in both English and the language in which the lease is
negotiated; and
•  not be employed or located by the broker or landlord (or their
employees) involved in the negotiations.3
Also, other real estate transactions exempt from the written translation
requirement include:
•  real estate purchase agreements [See RPI Form 150];
•  real estate mortgages, except for small private lender mortgages
brokered under California Business and Professions Code §10245 which
have their own translation requirements;
•  month-to-month rental agreements [See RPI Form 551]; and
•  home improvement agreements.4
1 Calif. Civil Code §1632(b)(3)
2 CC §1632(k)
3 CC §1632(h)
4 CC §1632
 Chapter 52: Foreign-language residential leases 527

Also, addenda ordinarily attached to leases do not need to be translated when

referenced in the lease. Ordinary addenda include documents for the rules
and regulations for the occupancy, inventories for furnishings, brokerage
fees, the condition of the premises and furnishings, and waterbed and pet
addenda.

The terms of a lease agreement written in English set and control the rights
and obligations of a landlord and tenant. This version of the lease agreement
Reliance on
controls over a Spanish, Chinese, Tagalog, Vietnamese or Korean translation the English
of its significant provisions.
agreement
The written translation of the lease provided to the non-English speaking
tenant may only be used to void the English lease agreement if substantial
differences exist between the two documents regarding significant terms and
conditions of the English-language lease.5

When the lease is rescinded by the tenant, the tenant needs to return the
premises to the landlord. The landlord needs to then refund any unearned
rent and security deposit to the tenant. Thus, on rescission the landlord loses
a tenant but incurs no liabilities beyond the refund.

When a lease controlled by the translation rule is negotiated, documents later Subsequent
delivered to the tenant which alter the rights and obligations of the tenant,
such as three-day and 30-day notices, need to be accompanied by a written notices to the
translation in the language the lease was negotiated, whether Spanish,
Chinese, Tagalog, Vietnamese or Korean.6
tenant
However, documents authorized by the original agreement which will be
later delivered and do not alter the rights and obligations of the parties do not
need to be translated. These include receipts, changes in rules and regulations
of occupancy and notices to enter for repairs.7

5 CC §1632(j)
6 CC §1632(g)
7 CC §1632(g)
528 Property Management, Sixth Edition

Chapter 52 The written translation requirement to deliver a non-English language

translation applies only to leases, not month-to-month or shorter
Summary periodic rental agreements, on a residential dwelling, apartment,
mobilehome or other residential unit.

When a lease agreement controlled by the translation rule is negotiated,

documents later delivered to the tenant which alter the rights and
obligations of the tenant, such as three-day and 30-day notices, need to
be accompanied by a written translation in the language the lease was
negotiated, whether Spanish, Chinese, Tagalog, Vietnamese or Korean.

However, documents authorized by the original agreement which

will be later delivered and do not alter the rights and obligations of the
parties do not need to be translated. These include receipts, changes in
rules and regulations of occupancy and notices to enter for repairs.

Chapter 52 right of rescission ........................................................................ pg. 525

Key Term

Quiz 13 Covering Chapters 51-54 is located on page 656.

 Chapter 53: Lead-based paint disclosures 529

Chapter
53
Lead-based paint
disclosures

After reading this chapter, you will be able to: Learning

•  use the federal lead-based paint (LBP) disclosure to timely disclose
the existence of a lead-based paint hazard on residential properties
Objectives
built prior to 1978;
•  determine when to deliver the LBP disclosure to a buyer; and
•  advise owners and buyers on the conditions of the LBP disclosure.

lead-based paint lead-based paint hazard Key Terms

An agent, prior to meeting with the owner to list an older SFR property for Crystal clear
sale, gathers facts about the property, its ownership and its likely market
value.  transparency
As the first step, the agent pulls a property profile on the SFR from a title
company website. On receipt of the profile, the agent confirms their suspicion
that the structure was built prior to 1978. The agent is now aware the
property is the target of separate state and federal environmental protection
disclosure programs designed to prevent the poisoning of children by the
presence of lead-based paint.  lead-based paint
Any surface coating
containing at least 1.0
The agent meets with the owner to review the requisite listing and milligram per square
marketing requirements laid down by the agent’s broker. To prepare for centimeter of lead, or
0.5% lead by weight.
the meeting, the agent fills out the listing agreement and attaches all the [See RPI Form 313]
information disclosure forms needed to properly market the property and
locate a buyer, called a listing package. 
530 Property Management, Sixth Edition

Disclosure Among other informational forms for this pre-1978 SFR property, the agent
includes two forms which address lead-based paint conditions on the
of lead- property: 
based paint •  the Federal Lead-based Paint (LBP) disclosure [See RPI Form 313];
conditions and 
•  the California Transfer Disclosure Statement (TDS). [See RPI Form
304]
On review of the listing agreement with the owner, the agent explains the
owner’s legal obligation, owed to prospective buyers and buyer’s agents,
to provide them with all the information:
•  known to the owner or readily available to the owner’s agent on
observation or inquiry; and
•  which might adversely affect the value of the property. 
By making the full-transparency presentation about a property to
prospective buyers before the owner enters into a purchase agreement, later
renegotiations due to delayed disclosures are avoided, including demands
for a price reduction, renovation or cancellation.1

Duties of the A full disclosure to the prospective buyer about adverse conditions on
the property does not entail a review or explanation by the seller’s agent
seller’s agent about their effect on the buyer or the property once the facts are disclosed.
Application of the facts disclosed and the potential consequences flowing
from the facts which may affect the prospective buyer’s use, possession
or ownership of the property are not among the seller’s agent’s duties of
affirmative disclosure. 

However, federal LBP rules do require the seller’s agent to advise the owner
about the requirements for disclosures to be made to prospective buyer before
they enter into a purchase agreement. It is the seller’s agent who insures
compliance by the owner before entering into a purchase agreement.

Editor’s note — Regarding the LBP disclosures, the owner has no obligation
to have the property inspected or a report prepared on the presence of
lead-based paint or any lead-based paint hazards. Also, the owner need not
perform any corrective work to clean up or even eliminate the lead-based
paint conditions, unless agreed to with the buyer.2
Lead-based
paint hazard Thus, the owner cooperates in the LBP disclosure and their agent’s other
marketing efforts by: 
•  filling out and signing the federal LBP disclosure form required on all
pre-1978 residential construction [See RPI Form 313]; 
•  filling out and signing the TDS containing the lead-based paint,
environmental and other property conditions [See RPI Form 304]; 

1 Jue v. Smiser (1994) 23 CA4th 312

2 24 Code of Federal Regulations §35.88(a); 40 CFR §745.107(a)
 Chapter 53: Lead-based paint disclosures 531

•  making a physical home inspection report available to prospective

buyers as an attachment to the TDS form; and 
•  providing the seller’s agent with copies of any reports or documents
containing information about lead-based paint or lead-based paint
hazards on the property. 

Lead-based paint, defined as any surface coating containing at least 1.0

milligram per square centimeter of lead, or 0.5% lead by weight, was banned
Lead-based paint
by the Federal Consumer Product Safety Commission in 1978.3  and hazards
A lead-based paint hazard is any condition that causes exposure to lead lead-based paint
hazard
from lead-contaminated dust, soil or paint which has deteriorated to the Any condition that
point of causing adverse human health effects.4  causes exposure
to lead from lead-
Editor’s note — A list of statewide laboratories certified for analyzing lead contaminated dust,
soil or paint which
in hazardous material, including paint, is available from the National has deteriorated to
Lead Information Center at (800) 424-LEAD. Lists are also available on the the point of causing
web at http://www.leadlisting.com/lead.html and http://www.dhs.ca.gov/ adverse human health
effects. [See RPI Form
childlead.  313]

The LBP disclosure form includes the following:  LBP

•  the Lead Warning Statement as written in federal regulations [See RPI disclosure
Form 313 §1]; 
•  the owner’s statement disclosing the presence of known lead-based
content
paint hazards or the owner’s lack of any knowledge of existing lead-
based paint [See RPI Form 313 §2]; 
•  a list of records or reports available to the owner which indicates a
presence or lack of lead-based paint, which have been handed to the
seller’s agent [See RPI Form 313 §2.2]; 
•  the buyer’s statement acknowledging receipt of the LBP disclosure,
any other information available to the owner and the lead hazard
information pamphlet entitled Protect Your Family From Lead in
Your Home [See Form RPI 313 §3.1; see RPI Form 316-1]; 
•  the buyer’s statement acknowledging the buyer has received a 10-day
opportunity to inspect the property or has agreed to reduce or waive
the inspection period [See Form RPI 313 §3.2]; 
•  the seller’s agent’s statement noting the owner has been informed of
the owner’s disclosure requirements and that the agent is aware of
their duty to ensure the owner complies with the requirements [See
Form RPI 313 §4]; and 
•  the signatures of the owner, buyer and seller’s agent.5 

3 24 CFR §35.86; 40 CFR §745.103

4 24 CFR §35.86; 40 CFR §745.103
5 24 CFR §35.92(a)(7); 40 CFR §745.113(a)(7)
532 Property Management, Sixth Edition

The owner and the seller’s broker each keep a copy of the disclosure statement
for at least three years from the close of escrow on the sales transaction.6 

Further, the disclosure form is to be written in the language of the purchase

agreement. For example, if the purchase agreement is in Spanish, then the
LBP disclosure will also be in Spanish.7 

A prospective buyer of a residence built prior to 1978 is put on notice of LBP

Opportunity conditions by handing them the disclosure forms before they make an offer.
to evaluate The disclosures advise them they have a 10-day period after their offer is
risk accepted to evaluate the lead-based paint risks involved. The buyer may
agree to a lesser period of time or simply waive all their rights to the federally
permitted risk evaluation period.

However, disclosures about the SFR property cannot be waived by the use of
an “as-is” sale provision or otherwise.8 [See RPI Form 313] 

Consider a prospective buyer who indicates they want to make an offer to

Pre-contract buy pre-1978 residential property. The seller’s agent hands the prospective
disclosure buyer a lead-based paint disclosure signed by the owner of the property
which discloses that lead-based paint is known to exist on the property. 
avoids
cancellation The prospective buyer is also handed independent reports and documents
related to the existence of the lead-based paint on the property. 

The prospective buyer enters into a purchase agreement offer, but does not
waive the 10-day lead-based paint risk evaluation period, wishing instead
to inspect and confirm the accuracy of the owner’s disclosure since the
owner’s disclosure of the property condition is not a warranty guaranteeing
the actual condition of the property. 

After the owner’s acceptance of the offer, the buyer has the property
inspected. The inspector’s report states lead-based paint exists as stated in the
owner’s disclosure documents. The buyer now seeks to cancel the purchase
agreement due to the presence of lead-based paint. 

May the buyer refuse to complete the purchase of the property due to the
existence of the lead-based paint as previously disclosed by the owner? 

No! The buyer had full knowledge of the presence of lead-based paint and
any lead-based paint hazards prior to the owner’s acceptance of the purchase
agreement offer. Thus, the buyer purchased the property as disclosed. Also,
the purchase agreement did not contain conditions calling for removal or
abatement of the lead-based paint. The risk evaluation period only enabled
the buyer to cancel had the owner not disclosed the presence of any lead-
based paint or lead-based paint hazards prior to acceptance. 

6 24 CFR §35.92(c); 40 CFR §745.113(c)

7 24 CFR §35.92(a); 40 CFR §745.113(a)
8 40 CFR §745.110(a)
 Chapter 53: Lead-based paint disclosures 533

Thus, prior to the buyer entering into the purchase agreement, the buyer was
put on notice – transparency – about the presence of lead-based paint on the
SFR property. When timely disclosed, the buyer may not later, when under
contract, use the existence of lead-based paint as justification for cancellation. 

Exempt from the Federal LBP disclosures are foreclosure sales of residential
property.9 
Disclosure
exemption
Yet, a foreclosing lender still has a common law duty to disclose property
defects known to them at the time of the foreclosure sale. A foreclosing lender
is not protected from liability for intentional misrepresentation (negative
fraud by omission – deceit) when the property is sold “as-is” at a foreclosure
sale and the foreclosing lender previously fails to disclose a known defect to
the bidders.10

However, the LBP foreclosure exemption does not apply to the resale of
housing previously acquired by the lender at a foreclosure sale, commonly
called real estate owned (REO) property, or to the resale by a third party
bidder who acquired the property at a foreclosure sale.

Thus, if a lender or other bidder who acquired property at a foreclosure sale is

reselling it, the resale needs to comply with the lead-based paint disclosure
requirements.11 

9 24 CFR §35.82(a)
10 Karoutas v. HomeFed Bank (1991) 232 CA3d 767
11 61 Federal Register 9063

Lead-based paint, defined as any surface coating containing at least 1.0

milligram per square centimeter of lead, or 0.5% lead by weight, was
Chapter 53
banned by the Federal Consumer Product Safety Commission in 1978. Summary
A lead-based paint hazard is any condition that causes exposure to lead
from lead-contaminated dust, soil or paint which has deteriorated to the
point of causing adverse human health effects.

An owner of residential property built prior to 1978 cooperates in the

lead-based paint (LBP) disclosure and their agent’s other marketing
efforts by:
•  filling out and signing the federal LBP disclosure form required
on all pre-1978 residential construction;
•  filling out and signing the TDS containing the lead-based paint,
environmental and other property conditions;
•  making a physical home inspection report available to prospective
buyers as an attachment to the TDS form; and
534 Property Management, Sixth Edition

•  providing the seller’s agent with copies of any reports or

documents containing information about lead-based paint or
lead-based paint hazards on the property.
A prospective buyer of a residence built prior to 1978 is put on notice of
LBP conditions by handing them the disclosure forms before they make
an offer. The disclosures advise them they have a 10-day period after
their offer is accepted to evaluate the lead-based paint risks involved.

Exempt from the Federal LBP disclosures are foreclosure sales of

residential property. Yet, a foreclosing lender still has a common law
duty to disclose property defects known to them at the time of the
foreclosure sale.

Chapter 53 lead-based paint .......................................................................... pg. 529

lead-based paint hazard ............................................................ pg. 531
Key Terms

Quiz 13 Covering Chapters 51-54 is located on page 656.

 Chapter 54: Permitting pets and waterbeds 535

Chapter

54
Permitting pets and
waterbeds

After reading this chapter, you will be able to: Learning

•  identify limitations to a tenant’s right to keep a pet; and
•  implement rules regulating a tenant’s use of a waterbed.
Objectives

security deposit waterbed addendum Key Terms

Landlords and their property managers are frequently confronted with Role of the
acceptable, prospective tenants who own pets or liquid-filled furniture
which might not be so acceptable. security
However, landlords may not automatically refuse to rent to a prospective deposit
tenant whose furnishings include liquid-filled furniture. Further, they
may not deny an existing tenant the use of liquid-filled furniture, such as a
waterbed, on the premises.

On the other hand, landlords may, as a matter of general policy, refuse to

accept any prospective tenant who wants to occupy a unit with their pet,
unless the tenant is disabled and uses:
•  a guide dog, which is a seeing-eye dog trained by a licensed person to
aid a blind person;
•  a signal dog, trained to alert a deaf or hearing-impaired person to
intruders or sounds; or
•  a service dog, trained to aid a physically disabled person by protection
work, pulling a wheelchair or fetching dropped items.1

1 Calif. Civil Code §54.1(b)(6)

536 Property Management, Sixth Edition

Disabled persons accompanied by a specially trained dog are to keep the

dog leashed and licensed by an identification tag issued by the county clerk,
animal control department or some other authorized agency.

The disabled tenant accompanied by a tagged guide, signal or service dog

security deposit
may not be required by the landlord to pay any extra rent, charge or security
A source of funds to deposit for the right to keep the dog on the premises.
pay tenant obligations
owed the landlord on However, the owner of a guide, signal or service dog is liable for the cost to
the tenant’s default
in the rental or lease repair any damages brought about by the dog’s activities.2
agreement.[See RPI
Form 550 §2.1 and 552 Any public agency owning and operating rental accommodations is to
§1.2]
permit any person over 60 years of age to keep two pets or fewer (i.e., dog, cat,
bird or fish). The elderly pet owner is responsible for any damages caused by
the pets.3

Pet A property manager allowing a tenant to occupy a unit with a pet needs to
enter into and attach a pet addendum to the rental or lease agreement. [See
addendum Form 563 accompanying this chapter]

The pet addendum establishes the responsibilities of the pet owner and the
acceptable behavior standards for the pet. To avoid misunderstandings as to
size, type and number of pets allowed on the premises, a careful description
of the pet needs to be entered on the form.

The property manager may charge an additional security deposit for the pet
to offset any expenses or losses caused by the pet, unless:
•  the rules for disabled persons and their trained dog apply; or
•  the security deposit ceiling is exceeded.
A standard deposit for a pet is one-third of the first month’s rent, with an
extra $100 to $200 for each additional pet, limited to the ceiling amount for
residential security deposits. [See Chapter 19]

Thus, the total security deposit for an unfurnished residential unit, including
the pet deposit, may not exceed an amount equal to two months’ rent (in
addition to the first month’s rent).

For a furnished unit, the security deposit, including the pet deposit, may not
exceed three months’ rent (in addition to the first month’s rent).4

Also, if a pet’s behavior does not conform to the terms of the pet addendum,
the rental or lease agreement is breached by the tenant. The property manager
may serve a three-day notice to the tenant to correct the activity or vacate the
premises, called a three-day notice to perform or quit.5 [See Chapter 26]

2 CC §54.2(a)
3 Calif. Health and Safety Code §19901
4 CC §1950.5(c)
5 Calif. Code of Civil Procedure §1161(3)
 Chapter 54: Permitting pets and waterbeds 537

A landlord permits a residential tenant to keep a dog on the premises. The landlord is
not aware the dog is vicious. No “Beware of Dog” notice is posted by the tenant. Case in point
A utility serviceman properly enters the backyard to check the meter. The dog attacks Landlord liability
and injures the serviceman. The serviceman attempts to recover their losses due to the
for pets
injury from the landlord.
Will the serviceman recover their losses from the landlord since the landlord allowed
the tenant to keep a pet that was actually dangerous?
No! The landlord is not responsible for injury caused by dangerous domestic pets when
the landlord has no actual knowledge of their ferocity. Also, the landlord has no duty
to investigate or inspect the rental unit to determine if the pet is dangerous. [Lundy v.
California Realty (1985) 170 CA3d 813; see Chapters 38 and 41]
However, if the landlord has actual knowledge of the dangerousness of a tenant’s pet
and fails to serve the tenant with a three-day notice to remove the pet or to vacate the
unit, then the landlord is liable for injuries inflicted by the dangerous pet. [Uccello v.
Laudenslayer (1975) 44 CA3d 504]
Also, a landlord has no responsibility to warn a prospective tenant of a dangerous
pet located on a neighboring property, even when the landlord has knowledge of the
ferocity of the neighbor’s pet. [Wylie v. Gresch (1987) 191 CA3d 412]

The use of waterbeds or other liquid-filled bedding in a rental unit is not Qualifying to
grounds for refusal to rent to a prospective tenant.6
maintain a
If the prospective tenant is otherwise qualified to rent, the landlord has to
rent to the tenant if the waterbed is qualified to be placed in the unit. For a waterbed
waterbed to qualify, the landlord may establish conditions for the use of the
waterbed on the premises, as long as the conditions meet the standards set by
California waterbed state law.
waterbed addendum
These requirements are itemized in the waterbed addendum that is An addendum to
attached to the rental or lease agreement. [See Form 564 accompanying this a rental or lease
chapter] agreement setting the
additional security
deposit and insurance
The waterbed conditions a landlord may impose on the tenant to qualify coverage the tenant
their waterbed include: will provide the
landlord to keep a
•  an insurance policy against property damage; waterbed on the
premises. [See RPI
•  a special waterbed frame; Form 564]

•  specific methods of installation and maintenance;

•  a written receipt of installation by the manufacturer, retailer or movers;
•  an increase in the maximum security deposit permitted; and
•  a requirement the tenant comply with specific methods of installation
or remove the bed on three-day written notice to perform or quit.7

6 CC §1940.5
7 CC §1940.5
538 Property Management, Sixth Edition

Form 563

Pet Addendum

The floor of any residence has a limited capacity for weight centralized in
one area.

Since a waterbed is considerably heavier than a regular bed, the weight of

the waterbed is not to exceed the weight limitation of the floor, especially if
it is on an upper level.

Also, to ensure proper distribution of the weight, the tenant is required to

provide an adequate bed frame specially designed to support and distribute
the weight of a waterbed.8
8 CC §1940.5(b)
 Chapter 54: Permitting pets and waterbeds 539

When a tenant qualifies to maintain a waterbed on the premises, the landlord Waterbed
may increase the tenant’s security deposit up to an additional one-half
month’s rent. The waterbed deposit is in addition to the maximum security addendum
deposit otherwise allowed. [See Chapter 19]

The landlord may also charge a reasonable administrative fee to cover the
time, effort and money expenditures necessary to process the waterbed
paperwork, such as $50 to $100.9

The amounts of both the additional security deposit and administrative

charges are set forth in the waterbed addendum. [See Form 564 §§2; 3]

The tenant may be required to provide the landlord with a waterbed

insurance policy or certificate of insurance for property damage caused by
the waterbed. The policy needs to name the landlord as an additional insured
to eliminate any question over the disbursement of funds from a claim.

The waterbed insurance policy is to be accepted by the landlord when specific

conditions are met, including:
•  the policy is issued by a company licensed in California;
•  the company possesses a Best Insurance Report rating of B or better;
and
•  the policy offers coverage of no less than $100,000.10
The tenant is to ensure the policy remains valid and enforceable throughout
the period the waterbed is located on the premises. The landlord has the right
to demand proof of insurance from the tenant at any time. If the tenant fails to
provide proof of insurance when requested, a three-day notice to perform or
quit may be served on the tenant to deliver the policy, remove the furniture
or vacate.

Consider the insurance policy a tenant holds on their waterbed expiring two No insurance
months before they vacate. The tenant does not renew the policy since they
will soon be moving. The landlord fails to purchase coverage and charge the policy
tenant for the premium or serve the tenant with a three-day notice to get
insurance, remove the bed or vacate.

Sometime after the policy expires, a liner patch from a prior leak ruptures,
releasing its water. The whole apartment is flooded, causing hundreds of
dollars in losses as well as damage to the units and personal property on
lower floors.

The landlord repairs the damage and demands payment from the tenant for
all of their losses caused by the waterbed. The tenant claims the landlord had
the responsibility to obtain coverage if the tenant did not.

May the landlord collect the losses from the tenant?

9 CC §1940.5(g)
10 CC §1940.5(a)
540 Property Management, Sixth Edition

Form 564

Waterbed
Addendum

Yes! Any damage resulting from the waterbed not covered by an insurance
policy is the responsibility of the tenant. The landlord has no obligation to
procure coverage even though they have authority to do so on the tenant’s
failure to provide coverage.

Further, if for some reason the tenant’s waterbed liability policy is canceled,
expires or is not renewed, the tenant is obligated to give the landlord a ten-
day notice of cancellation or nonrenewal of the insurance policy.11

The notice is automatically given to the landlord by the insurer when the
landlord is an additional insured on the waterbed policy.
11 CC §1940.5(a)
 Chapter 54: Permitting pets and waterbeds 541

It is the tenant’s responsibility to ensure the waterbed is properly installed

and maintained.
Installation
and care of
The tenant is to give the property manager 24 hours’ notice if they intend to
move, install or remove a waterbed. the waterbed
If anyone other than the tenant installs the waterbed, specifically the
manufacturer, a retailer or a moving company, the tenant is to provide the
landlord with a written receipt that contains the installer’s name, address
and place of business.12

To ensure safety at all times, the tenant is to comply with the manufacturer’s
specifications for proper use of the bed.13

When a landlord suspects the tenant is not meeting the provisions in the
waterbed addendum, they have the right to enter the residence to inspect the
waterbed and ensure it is being maintained properly. However, they need
to give the tenant a 24-hour notice of entry before the inspection.14 [See RPI
Form 567; see Chapter 4]

The landlord may give the tenant a three-day notice to either comply with
installation and maintenance standards or remove the bed from the premises
(or vacate) if:
•  the landlord finds the waterbed is not being properly maintained; or
•  the waterbed has not been properly installed.15
The landlord may serve a three-day notice to perform or quit on the tenant, as
long as the tenant is given the option of either curing the installation defects
or removing the bed as performance in lieu of vacating. If the tenant fails to
perform either alternative within three days, they are to vacate the premises.
[See Chapter 26]

In lieu of the notice to perform or quit, the landlord may serve an “advisory”
letter giving notice to perform.

However, the landlord will have to later serve a three-day notice to perform
or quit if the tenant fails to either repair or remove the bed.

Finally, the landlord does not lose their right to make an insurance claim
if they fail to exercise any of their rights to police the tenant’s care and
maintenance of the waterbed.16

12 CC §1940.5(c)
13 CC §1940.5(e)
14 CC §§1940.5(f); 1954
15 CC §1940.5(f)
16 CC §1940.5(h)
542 Property Management, Sixth Edition

Chapter 54 A property manager allowing a tenant to occupy a unit with a pet needs
to enter into and attach a pet addendum to the rental or lease agreement.
Summary
The property manager may charge an additional security deposit for the
pet to offset any expenses or losses caused by the pet, unless:
•  the rules for disabled persons and their trained dog apply; or
•  the security deposit ceiling is exceeded.

A standard deposit for a pet is one-third of the first month’s rent, with an
extra $100 to $200 for each additional pet, limited to the ceiling amount
for residential security deposits.

The use of waterbeds or other liquid-filled bedding in a rental unit is not

grounds for refusal to rent to a prospective tenant.

If the prospective tenant is otherwise qualified to rent, the landlord has

to rent to the tenant if the waterbed is qualified to be placed in the unit.
For a waterbed to qualify, the landlord may establish conditions for the
use of the waterbed on the premises, as long as the conditions meet the
standards set by California waterbed state law.

Chapter 54 security deposit ........................................................................... pg. 536

Key Terms waterbed addendum .................................................................. pg. 537

Quiz 13 Covering Chapters 51-54 is located on page 656.

 Chapter 55: Civil rights and fair housing laws 543

Chapter
55
Civil rights and fair
housing laws

After reading this chapter, you will be able to: Learning

•  recognize discriminatory practices prohibited under the Federal
Fair Housing Act (FFHA);
Objectives
•  ensure equal access is provided to residential rental units for
disabled tenants;
•  determine when to disclose a prior death on a property; and
•  understand how federal and California anti-discrimination laws
affect the management of residential and commercial rental
property.

blockbusting familial status Key Terms

Civil Rights Act Federal Fair Housing Act
disabled individual Steering
Dwelling Unruh Civil Rights Act

Regardless of race, all citizens of the United States have the right to rent real Property
estate under the federal Civil Rights Act.1 
rights and an
Further, all individuals within the United States, regardless of race or legal
status, are given the same rights to make and enforce contracts (rental and individual’s
lease agreements), sue, be sued, enjoy the full benefits of law and be subject status
to the same punishments, penalties, taxes and licenses.2 
Civil Rights Act
The federal Civil Rights Act applies to race discrimination on the rental of A federal law
which provides
all types of real estate, both residential and commercial. Racially motivated broad protections
activities in any real estate leasing transaction are prohibited.  to all persons in the
United States against
discriminatory
1 42 United States Code §1982
activities.
2 42 USC §1981
544 Property Management, Sixth Edition

Federal protection against racial discrimination given under the Civil Rights
Act is a broad protection which applies to types of discrimination prohibited
in all activities between individuals present in the country. 

Anti- While the federal Civil Rights Act provides general protection against all
discrimination prohibited discriminatory activity, the Federal Fair Housing Act (FFHA)
protections specifically limited to dwellings, including rental housing.3 
in residential
A dwelling includes any building or structure that is occupied, or designed
property to be occupied, as a residence by one or more families. A dwelling also
includes vacant land offered for lease for residential dwelling purposes, such
Federal Fair as a lot or space made available to hold a mobilehome unit.4 
Housing Act
A collection of The FFHA bars the use of any discriminatory actions a landlord or property
policies designed to
prevent the arbitrary manager might take against a prospective tenant when handling a residential
restriction of access to rental based on an individual’s: 
housing based on an
occupant’s inclusion in •  race or color; 
a protected class.
•  national origin; 
dwelling •  religion; 
A building occupied
or designed to be •  sex; 
occupied as a residence
by one or more •  familial status; or 
families.
•  handicap.5
Familial status refers to whether a household includes individuals under
familial status
A status which
the age of 18 in the legal custody of a parent or legally designated guardian.6 
indicates a household
includes individuals Handicapped persons are individuals who have: 
under the age of 18.
•  a physical or mental impairment which substantially limits the
individual’s life activities; or 
•  a record of, or are regarded as having, a physical or mental impairment.7 
The term “handicap” excludes individuals who illegally use a controlled
substance. However, alcoholics and individuals who are considered
“recovering or recovered addicts” are protected as handicapped individuals.8 
Civil Rights Act

The FFHA prohibits a landlord or property manager from unlawfully

discriminating against individuals during solicitations and negotiations for
Qualifying the rental of a dwelling.9 
and Thus, a landlord or property manager may not: 
processing •  refuse to rent a dwelling or to negotiate the rental of a dwelling for
tenants prohibited discriminatory reasons; 
3 42 USC §§3601 et seq.
4 42 USC §3602(b)
5 42 USC §3602
6 42 USC §3602(k)
7 42 USC §3602(h)
8 United States v. Southern Management Corporation (4th Cir. 1992) 955 F2d 914
9 42 USC §3604(a)
 Chapter 55: Civil rights and fair housing laws 545

•  impose different rental charges on a dwelling for prohibited

discriminatory reasons; 
•  use discriminatory qualification criteria or different procedures for
processing applications in the rental of a dwelling; or 
•  evict tenants or tenants’ guests for prohibited discriminatory reasons.10 

For example, a broker is hired by a residential apartment landlord to perform

property management activities. One of the broker’s duties as a property
Religiously
manager is to locate tenants to fill vacancies.  motivated
A tenant from a religious minority group contacts the broker about the actions
availability of an apartment. 

The broker (or their agent) informs the prospective tenant of the monthly
rent. However, the rate the broker communicates to the prospective tenant
is higher than the rent nonminority tenants are asked to pay for similar
apartments. 

When the prospective minority tenant asks the broker for an application, the
broker informs the tenant a nonrefundable screening fee is charged to process
the application. The creditworthy minority tenant fills out the application,
pays the fee and is told the processing will take several days. 

In the meantime, a nonminority tenant inquires about the rental of the

same or similar apartment. The monthly rent rate the broker quotes the
nonminority is lower than the rent rate the minority tenant was quoted,
even though the nonminority tenant is not as creditworthy as the minority
tenant. Further, the nonminority tenant is not charged a screening fee with
their application. The apartment is immediately rented to the nonminority
tenant.

Here, the broker’s actions were racially or religiously motivated, a violation

of the FFHA. The broker misrepresented the availability of the apartment
based on the tenant’s ethnicity or religion by using different procedures and
qualification standards in accepting and processing the tenant’s application.11 

A landlord or property manager may not discriminate against an individual Different

by setting different terms, conditions or privileges for their rental of a dwelling,
or by providing substandard services and facilities for the dwellings than are terms,
made available to other individuals.12  different
For example, consider a prospective tenant who is a member of a protected privileges
class, one who is guarded from unequal or unfair treatment based on certain
characteristics, such as race or ethnicity. The prospective tenant responds
to an advertisement soliciting tenants for the rental of a unit in a housing
project. 

10 24 Code of Federal Regulations §100.60(b)

11 United States v. Balistrieri (7th Cir. 1992) 981 F2d 916
12 42 USC §3604(b)
546 Property Management, Sixth Edition

Federal The Department of Housing and Urban Development (HUD) released new guidance for
protections the  Fair Housing Act (FFHA) in 2016 prohibiting landlords from enforcing a  blanket
against a blanket ban against renting to all prospective tenants with any criminal record.
ban on tenants Landlords are to consider a tenant’s criminal history on a case-by-case basis and may
with a criminal exclude tenants with specific convictions. Landlords are required to be able to prove
history their screening policy justifiably serves a substantial nondiscriminatory interest, e.g.,
when a prospective tenant’s criminal conviction poses a demonstrable threat to fellow
tenants. [24 Code of Federal Regulations §100.500]

When reviewing a tenant’s criminal conviction, landlords need to consider:

• the nature and severity of a conviction; and

• the amount of time that has passed since the crime occurred. [Green v. Missouri
Pacific R.R. (1975) 523 F.2d 1290]

HUD recommends landlords also consider additional information about a tenant be-
yond the contents of a criminal record, such as:

• facts and circumstances surrounding the criminal conduct;

• the age of the tenant at the time of the crime;
• the tenant’s rental history before and after the conviction; and
• evidence of rehabilitation.

To ensure a screening policy does not run contrary to the new guidance under the
FFHA, landlords need to universally apply their screening methodology to all prospec-
tive tenants equally. A landlord who uses criminal history as an alleged reason for de-
nying housing to a member of a protected group, but fails to apply the same standard
to members of other groups, is involved in perpetuating a discriminatory practice, a
violation of Fair Housing laws.

The only exception to these guidelines occurs when a tenant has a conviction for
the manufacturing or distribution of controlled substances. [42 USC §3607(b)(4)]

The prospective tenant informs the broker they are interested in renting the
property. 

The prospective tenant is informed they cannot rent this particular unit. Due
to the prospect’s minority status, the property manager and the landlord
believe it will become more difficult to rent other units in the project with a
tenant from a minority group occupying a unit. 

The property manager offers to show the tenant a unit in another area of the
housing project. 

Here, the property manager has unlawfully discriminated against the

prospective tenant. The property manager improperly refused to rent the
unit to the tenant based on the tenant’s status as a member of a protected
class of people.13 

13 United States v. Pelzer Realty Company, Inc. (5th Cir. 1973) 484 F2d 438
 Chapter 55: Civil rights and fair housing laws 547

Selective reduction of tenant privileges, conditions, services and facilities Selective

offered to protected individuals is also prohibited. Selective reduction
takes the form of:  reductions
•  providing for different terms for leasing, such as the rent rate charged, and steering
security deposit amount and the term of the lease, than offered by
other individuals; 
•  delaying or failing to perform maintenance; 
•  limiting use of privileges, services or facilities to different classes of
individuals; or 
•  refusing or failing to provide services or facilities due to an individual’s
refusal to provide sexual favors.14 
steering
Further, the landlord or property manager may not discriminate based on an The discriminatory
individual’s status by representing that a dwelling is not available for rent in practice of restricting
the rental or
order to direct the individual to a particular Section 8 project or neighborhood, ownership of a
when the dwelling is available. This practice is called steering.  property to a specific
class of people to
Steering involves the redirecting of an individual seeking to rent a dwelling perpetuate segregated
housing.
in a community, neighborhood or development to another property when
the guidance perpetuates segregated housing patterns.15 

A broker or their agent releasing and publishing information when handling

the rental of a dwelling unit is barred from using any wording that indicates
Discrimination
a discriminatory preference or limitation against individuals of protected in
classes of people.16 
advertisement 
The prohibition against prohibited discriminatory advertisements applies to
all oral and written statements. 

Releases and publications include any applications, flyers, brochures, deeds,

signs, banners, posters and billboards used to advertise the availability of a
dwelling for rent. 

A residential landlord or property manager may not induce others to offer or Blockbusting
refuse to offer a dwelling to specific classes of people to prevent their entry
into the neighborhood. This prohibited practice is known as blockbusting.17  for
Further, a landlord’s or agent’s actual financial gain is not necessary to exploitation
establish blockbusting conduct. The mere profit motivation is sufficient to
establish blockbusting activity.18 
blockbusting
The prohibited practice
of a residential
landlord inducing
or attempting to
induce a person to
offer, or abstain from
14 24 CFR §100.65(b) offering a dwelling to
15 42 USC §3604(d); 24 CFR §100.70 prevent the entry of a
16 42 USC §3604(c) class of people into a
17 42 USC §3604(e) neighborhood.
18 24 CFR §100.85(b)
548 Property Management, Sixth Edition

Examples of blockbusting activities by a landlord or property manager

include: 
• encouraging an owner-occupant to offer their home for rent by
insinuating that a neighborhood is undergoing or is about to undergo
a change in the race, color, religion, sex, handicap, familial status or
national origin of its residents; or
• discouraging an owner-occupant from offering their home for rent by
claiming the entry of individuals of a particular race, color, religion, sex,
familial status, handicap or national origin will result in undesirable
consequences for the neighborhood or community, such as an increase
in criminal activity or a decline in schools and other facilities.19

Aiding in Landlords and their property managers may not use any tactics to interfere
with the occupancy or enjoyment of a dwelling by any person from a
discriminatory protected class of people.20 
activities Consider a mobilehome park which effectively operates as a senior citizen
housing development under local rent control ordinances. The park owner
never officially declares the park a senior citizen housing development
exempt from the FFHA. 

Later, local rent control ordinances are amended, allowing the park
management to rent vacated spaces to new residents without rent control
restrictions. The park owner then decides to open the park to families with
children. 

Senior tenants currently renting mobilehome spaces in the park file an

application with the city seeking a rent reduction, claiming families with
children cause a reduction in their use of available services. The city awards
the tenants the reduction in rent they sought due to the familial status of
other tenants. 
Blockbusting
The park owner claims the city violated the FFHA since the rent reduction
for existing tenants was a prohibited discriminatory interference. The city’s
action financially inhibits the owner’s decision to rent to families with
children. 

The city claims it did not violate the FFHA since the park met the requirements
of a senior citizen housing development, and was therefore exempt from the
FFHA. 

The court found the city did violate the FFHA by interfering with the owner’s
rental of the mobilehomes to families with children. The older tenants were
not entitled to a reduction in rent based on the occupancy of spaces by
families.

19 24 CFR §100.85(c)
20 42 USC §3617
 Chapter 55: Civil rights and fair housing laws 549

The owner’s rental of mobilehome spaces to families with children cannot be

the basis for reducing rent paid by tenants who do not have children. Further,
only an owner, not a governmental agency, can claim a housing development
is exempt from the FFHA under the senior housing exemption.21 

There are exemptions to the FFHA discrimination prohibitions. A landlord Exemptions

who rents out a single family residence is exempt from FFHA discrimination
prohibitions if they:  from
•  own three or fewer single-family residences;  prohibited
•  do not use a real estate licensee to negotiate or handle the tenancy; and  discrimination
•  do not use a publication, posting or mailing for any discriminatory
advertisement.22 
Thus, the FFHA prohibitions only apply to the promotion of rentals by
anyone in the business of renting dwellings.23 

A person is in the business of renting dwellings if the person:  FFHA anti-

•  has participated within the past 12 months as a principal in three or discrimination
more transactions involving the rental of any dwelling or interest in
a dwelling;  rules
•  has participated within the past 12 months as an agent, negotiating two
or more transactions involving the rental of any dwelling or interest in
a dwelling, excluding the agent’s personal residence; or 
•  is the owner of a dwelling structure intended to be occupied by five or
more families.24 
When a broker is the agent for either the landlord or the tenant in a residential
rental transaction, the FFHA anti-discrimination rules apply without
concern for any FFHA exemption available to the landlord. 

Consider a landlord who is also licensed by the Department of Real Estate Exemptions
(DRE) as a real estate broker or sales agent. When the licensee acting as a
landlord distributes their real estate office phone numbers, cards or rental limited and
signs linking the soliciting of tenants for their SFR rentals in any way with
their real estate office or licensee status implies to prospective tenants that the
defined
landlord owes the tenant licensee duties. It is this implication that dissolves
the exemption for active licensees since soliciting business with a public
image is a vital component of earning a living acting as a real estate licensee.

However, attorneys, escrow agents, title companies and professionals other

than brokers who are employed by a landlord to complete a transaction
do not bring the transaction under the FFHA, unless they participate in
negotiations with the tenant.25 
21 United States v. City of Hayward (9th Cir. 1994) 36 F3d 832
22 42 USC §3603(b)(1)
23 42 USC §3603
24 42 USC §3603(c)
25 42 USC §3603(b)(1)(B)
550 Property Management, Sixth Edition

Also, the landlord of a one-to-four unit residential rental property is exempt

from discrimination prohibition rules if the landlord occupies one of the
units.26 

Religious organizations who limit the rental or occupancy of dwellings to

individuals of the same religion are also exempt, provided the dwelling
is owned for noncommercial reasons. No religious exemption exists if the
religion is restricted to individuals of a particular race, color or national
origin.27

Private clubs which provide their members with residential dwelling space
for noncommercial purposes may limit rental or occupancy of the dwellings
to members. 

Finally, housing qualified for older citizens which excludes children is not
considered a prohibited discrimination against tenants with children based
on familial status. However, for housing to exclude children it needs to first
qualify as housing for the elderly.28  

Failure to Any individual who claims they have been injured by a prohibited
discriminatory housing practice under the FFHA or believes they will be
comply with injured by such a practice is considered an aggrieved individual.29 
the FFHA An aggrieved individual may file a complaint with the Secretary of
Housing and Urban Development (HUD), within one year of the alleged
discriminatory housing practice.30 

HUD then attempts to resolve the dispute by having the parties enter into
informal negotiations, called mediation.31 

If mediation is not successful, a judicial action may be initiated by HUD as

a complaint to resolve the issue of discrimination. The dispute will then be
resolved by an administrative law judge. 
Click to watch
Any party to the complaint may elect to have the claims decided in a civil
action before a court of law in lieu of using an administrative law judge.32 

When a real estate broker subjected to a judicial action is found guilty of

discriminatory housing practices, HUD is to notify the DRE and recommend
disciplinary action.33 

When a court determines discriminatory housing practices have taken place,

actual and punitive amounts of money awards may be granted. Also, an
order may be issued preventing the landlord or broker from engaging in any
future discriminatory housing practice.34 
26 42 USC §3603(b)(2)
27 42 USC §3607(a)
28 42 USC §3607(b)
29 42 USC §3602(i)
30 42 USC §3610(a)
31 42 USC §3610(b)
32 42 USC §3612(a)
33 42 USC §3612(g)(5)
34 42 USC §3613(c)(1)
 Chapter 55: Civil rights and fair housing laws 551

Further, if California’s Attorney General commences a civil action against an

individual for prohibited discriminatory housing practices, the court may
award: 
•  relief preventing further discriminatory housing practices such as an
injunction or restraining order; 
•  money losses; and 
•  civil penalties of no more than $50,000 for the first violation and no
more than $100,000 for any subsequent violation.35 

California’s Unruh Civil Rights Act, another anti-discrimination law, California’s

prohibits discrimination by a business establishment based on numerous
status classifications, including: an individual’s sex, race, color, religion, business
ancestry, national origin, disability or medical condition.36 
related Unruh
However, age restriction is a legitimate discrimination as long as the restriction Civil Rights Act
is in a project that qualifies as a senior citizen housing development. 

The Unruh Civil Rights Act applies to anyone in the business of providing Unruh Civil Rights
housing. Brokers, developers, apartment owners, condominium owners and Act
A California law
single-family residential owners renting or selling are considered to be in the which prohibits
business of providing housing.  discrimination by a
business establishment
based on sex, race,
As business establishments, landlords may not boycott, blacklist, refuse color, religion,
to lease or rent because of the race, creed, religion, color, national origin, ancestry, national
sex, disability or medical condition of an individual’s, or that individual’s origin, disability or
medical condition.
business partners, members, stockholders, directors, officers, managers,
agents, employees, business associates or customers.37  

A blind prospective tenant has a guide dog and seeks to rent an available Full and
unit in a multi-unit residential dwelling structure. 
equal access
The landlord refuses to rent a unit to the blind tenant, claiming the guide
dog violates the building’s pet restriction in the covenants, conditions and guaranteed
restrictions (CC&Rs). 

The blind tenant claims the landlord is discriminating against them due to
their disability since the landlord denied them housing on account of the
guide dog. 

Here, a landlord may not refuse to rent residential property to a blind tenant
because of inclusion of the tenant’s guide dog. Landlords are also prohibited
from discriminating against tenants with dogs specially trained to assist deaf
and other disabled individuals.38 

35 42 USC §3614(d)
36 Calif. Civil Code §§51; 51.2; 51.3
37 CC §51.5
38 CC §54.1(b)(6)
552 Property Management, Sixth Edition

Housing Disabled individuals are protected from discrimination when renting or

leasing California residential real estate. A disabled individual is anyone
opportunities who: 
for disabled •  has a physical or mental impairment which significantly limits major
individuals life activities; 
•  has a record of a disability; or 
•  is regarded as being disabled.39 
disabled person
Anyone who has a
People with disabilities are entitled to full and equal access to housing
physical or mental accommodations offered for rent.40 
impairment which
significantly limits The only exception is the rental of no more than one room in a single-family
major life activities,
has a record of residence.41 
disability, or is
regarded as being The examples of the blind tenant and their seeing-eye dog illustrate how
disabled.
a landlord might attempt to avoid anti-discrimination laws. While the
landlord claims to justify their behavior based on their equal application of a
single pet restriction rule to pet owners (an unprotected class of people), the
refusal to rent to a disabled tenant for reason they rely on a trained dog is a
prohibited discrimination. 

A landlord is not required to structurally modify existing residential rental

Accommodating property to meet the special needs of disabled tenants.42 
the
Although not required to modify the structure for a disabled tenant, the
disabled landlord is to allow the tenant to make reasonable modifications themselves
or pay the landlord to do so. The landlord may require the disabled tenant
who modifies the structure to restore the property to its original condition
when the tenancy is terminated.43 

Anti-discrimination laws require new residential properties consisting of four

or more units per building to be built to allow access by disabled individuals.
Required improvements include kitchens and bathrooms designed to allow
access to disabled tenants in addition to wheelchair ramps. 

Failure to provide the disabled with access to a newly constructed residential

property with four or more units is prohibited discrimination.44 

Remedies to An individual’s primary remedy for discrimination based on their physical

disability is to seek an injunction to stop the discriminatory activity. The
stop injunction may be sought by the disabled individual being discriminated
discrimination against, or by the city attorney, district attorney or Attorney General.45 

39 CC §54(b)
40 CC §54.1(b)(1)
41 CC §54.1(b)(2)
42 CC §54.1(b)(4)
43 Calif. Government Code §12927
44 Gov C §12955.1
45 CC §§55; 55.1
 Chapter 55: Civil rights and fair housing laws 553

An ethnic or religious minority tenant seeks to rent an apartment. The landlord informs Case in point
the prospective tenant they cannot rent the apartment until they complete a credit
check. The landlord also declines to accept a deposit from the tenant. Unlawful
Later the same day, a nonminority tenant seeks to rent the same apartment. The landlord discrimination
agrees to rent the apartment to the nonminority tenant without first requiring a credit
check, and immediately accepts the tenant’s check for a deposit on the apartment. The
minority tenant is informed the apartment has been rented to another individual.
The minority tenant files a complaint against the landlord, claiming the landlord
discriminated against them based on their ethnicity or religion by refusing to rent them
an apartment. The landlord claims no discrimination occurred since they were entitled
to require a credit check of prospective tenants.
However, requiring a credit check of minority tenants, but not nonminority tenants, is
a prohibited discriminatory practice which allows the minority tenant to recover their
money losses. [Stearns v. Fair Employment Practice Commission (1971) 6 C3d 205]

Property owners who discriminate against disabled individuals are further

liable for the disabled individual’s money losses. In addition to actual money
losses, treble that dollar amount may be awarded as punitive damages,
along with attorney fees. The minimum award of money damages for
discrimination against a disabled individual is $1,000.46 

California prohibits discrimination in the sale or rental of housing

accommodations based on an individual’s: race, color, religion, sex, sexual
California
orientation, marital status, national origin, ancestry, familial status, source of prohibitions
income or disability. This list of protected individuals is more extensive than
all others.47  against
Discriminatory activities and conduct include: 
housing
•  making a written or oral inquiry into the race, sex, disability, etc. of any
discrimination
individual seeking to rent housing; 
•  ads or notices for rental of housing which state or infer preferences or
limitations based on any of the prohibited discrimination factors; 
•  a broker refusing to represent an individual in a real estate transaction
based on any prohibited factor; and 
•  any other practice that denies housing to a member of a protected
class.48 
The denial of housing based on the landlord or broker’s perception that a
prospective tenant, or any associates of the prospective tenant, has any of
the protected characteristics is absolutely prohibited. An individual who
has been the victim of discriminatory housing practices may recover their
money losses.49 [See Case in point, “Unlawful discrimination”] 

46 CC §54.3
47 Gov C §12955
48 Gov C §12955
49 Gov C §12955(m)
554 Property Management, Sixth Edition

Income Standards of conduct applied equally by a broker to all individuals are

not classified as prohibited discrimination against a protected group of
standards for individuals as they are considered reasonable and thus permitted. 
tenants For example, to qualify a tenant for occupancy based on their creditworthiness
(which is not a prohibited discrimination), a landlord or property manager
may establish income ratios or standards to determine a tenant’s ability to
pay the rent. The higher the ratio of income to rent established by a landlord,
the less the risk of loss of rent borne by the landlord. The lower the income
ratio established by the landlord, the greater the risk of their loss of rent.
However, once set, the ratio is applied to all prospective tenants equally. 

However, two or more individuals who desire to live in the same unit
might apply to rent a unit. Whether related or unrelated, married or not, the
income of all tenants is to be treated as the total income used by the landlord
to determine their collective eligibility to qualify to pay the rent amount
sought for the unit. 

Separately, each prospective tenant may be unable to qualify by meeting

the income standard for the total rent sought by the landlord. However, if
aggregating the income of all who intend to occupy the unit and enter into
the rental or lease agreement results in total income sufficient under the ratio
applied to qualify a tenant or tenants for occupancy, the tenants collectively
qualify.50 

Also, under rent subsidy programs, such as Section 8 housing arrangements,

the landlord or property manager evaluate the tenant’s income when
determining their qualifications based on the portion of the rent that is not
subsidized.51

The source of income for each prospective tenant includes any income
lawfully received by the tenant and verifiable, whether it is directly received
by the tenant or received by a representative of the tenant.52

Consider a disabled tenant dependent on their spouse for financial support.

Dependency The disabled tenant and their spouse seek to rent an apartment. Both will
on spouse’s sign the application and lease agreement. The spouse’s income meets the
landlord’s minimum requirement to qualify to pay the rent. 
income
However, the landlord refuses to rent an apartment to the couple, claiming
the disabled tenant does not also meet minimum income requirements. 

Here, the landlord may not deny housing to the disabled tenant based on the
tenant being financially dependent on their spouse. The combined incomes
of the tenant and their spouse meet the landlord’s minimum income
requirements for the payment of the rent amount. 

50 Gov C §12955(n)
51 Gov C §12955(o)
52 Gov C §12955(p)
 Chapter 55: Civil rights and fair housing laws 555

The landlord’s refusal to rent an apartment to the disabled tenant based on the
tenant’s dependency on their spouse’s income is unlawful discrimination. If
one tenant qualifies to rent a unit, both tenants are qualified.53   

Recall that familial status in anti-discrimination law refers to whether Familial

children under the age of 18 will be living with a parent or guardian on the
premises.54  status
Rental policies excluding children under the age of 18 are classified as
prohibited discrimination under state, as well as federal laws, unless the
property qualifies as senior citizen housing.55 

Consider a landlord who refuses to rent an apartment to an unmarried couple Marital

based on the landlord’s religious beliefs developed about such conduct. 
status of co-
The couple files a complaint with California’s Fair Employment and Housing
commission, claiming the landlord violated fair housing laws that prohibit applicants for
discrimination based on marital status.  housing
The landlord claims they are exempt since renting to an unmarried couple
violates the landlord’s religious beliefs regarding the cohabitation of
unmarried couples. 

However, the landlord’s refusal to rent to unmarried couples violates the fair
housing laws. The key to the ruling is that the landlord’s religious beliefs do
not also require them to participate in the business of renting dwelling units. 

Thus, fair housing laws prohibiting discrimination based on marital beliefs

do not interfere with the practice of the landlord’s religion. The landlord
faithful to religious dictates is free to go into a business that does not violate
their religious convictions.56 

DRE regulations prohibit discriminatory practices by real estate brokers

acting on behalf of a client. A broker or their agent engaging in discriminatory
Conduct
business practices which generate a complaint may be disciplined by the guidelines for
DRE.57 
the broker
Prohibited practices include any situation in which a broker, while acting
as an agent, discriminates against anyone based on race, color, sex, religion,
ancestry, disability, marital status or national origin.

Examples of discriminatory practices include: 

•  refusing to negotiate for the rental of real estate; 

53 CC §54.1(b)(7)
54 Gov C §12955.2
55 Gov C §12955.9
56 Smith v. Fair Employment and Housing Commission (1996) 12 C4th 1143
57 Department of Real Estate Regulations §2780
556 Property Management, Sixth Edition

•  refusing to show property or provide information, or steering clients

away from specific properties; 
•  refusing to accept a rental listing; 
•  publishing or distributing advertisements that indicate a discriminatory
preference; 
•  any discrimination in the course of providing property management
services; 
•  agreeing with a client to discriminate when leasing the client’s
property, such as agreeing not to show the property to members of
particular minority groups; 
•  attempting to discourage the rental of real estate based on
representations of the race, sex, disability, etc. of other inhabitants in
an area; and 
•  encouraging or permitting employees to engage in discriminatory
practices. 
For example, a broker is aware a licensed care facility for disabled people is
located in a single family residence near a residence the prospective tenant
is interested in renting. 

The presence of the facility might influence the tenant’s decision to rent the
property. However, for the broker or their agents to inform the tenant of the
facility would be unlawful discrimination. The broker may not attempt to
influence the tenant’s decision based on representations of the disability of
other inhabitants in the area.58 

However, on a direct inquiry from a tenant, the broker or agent are required
to respond based on their knowledge of the existence of a care facility. 

The broker’s A broker has a duty to advise their employees of anti-discrimination rules,
including DRE regulations, the Unruh Civil Rights Act, the California Fair
duty to Employment and Housing Act, and the FFHA.59 
manage The broker, in addition to being responsible for their personal conduct, owes
employees the public a duty to ensure their employees follow anti-discrimination
regulations when acting as agents on the broker’s behalf. 

A property manager negotiates the rental of a residential unit to a prospective

Disclosure of tenant. The previous occupant of the property was afflicted with AIDS.
HIV/AIDS Neither the property manager nor the landlord disclose the prior occupant’s
AIDS affliction, whether or not asked by the prospective tenant. 

The tenant rents the property and later discovers the previous occupant was
afflicted with AIDS while residing on the property. The tenant claims the
property manager had a duty to disclose the previous occupant had AIDS. 

58 73 Ops. Cal. Atty. Gen. 58 (1990)

59 DRE Reg. §2725(f)
 Chapter 55: Civil rights and fair housing laws 557

However, the tenant has no basis for a claim against the property manager
for the property manager’s failure to disclose any prior occupant was infected
with the HIV virus or afflicted with AIDS. No duty exists to disclose the prior
tenant’s affliction.60 

Further, California public policy prohibits a broker from responding to a

tenant’s inquiry for disclosure of a prior occupant’s affliction with AIDS.61 

Individuals afflicted with the HIV virus are considered handicapped and are
protected by the FFHA.62 

A landlord or property manager occasionally has reason to believe a death

on the premises offered for rent might affect a prospective tenant’s decision
Disclosing a
to lease. Here, they will voluntarily disclose to the prospective tenant when death
negotiating the lease of a dwelling the death of a prior occupant on the
premises which occurred more than three years earlier.

Further, the landlord or property manager will disclose their knowledge of

any deaths which took place on the property in response to a direct inquiry
by a prospective tenant.

Consider a tenant who asks the property manager if any AIDS-related deaths
occurred on the property.63 

If the property manager is aware an AIDS-related death occurred on the

property, they have a duty on direct inquiry from the tenant to disclose: 
•  the prior occupant’s death; and 
•  the death was AIDS-related. 
If the property manager has no knowledge of any AIDS-related deaths
occurring on the property, they will disclose: 
•  their lack of knowledge; and 
•  whether or not they intend to undertake an investigation to determine
if an AIDS-related death occurred on the property. 
However, consider a property manager who is aware a death, from any
cause, occurred on the property within three years of the commencement of
a tenant’s lease agreement. The tenant has not inquired if any deaths have
occurred on the property. 

Here, the property manager will need to determine if the death on the
property is a material fact which might affect the tenant’s decision to lease
and occupy the property. 

The property manager as good practice discloses any death occurring on the
property within three years when they have reason to believe the fact might

60 CC §1710.2(a)
61 CC §1710.2(d)
62 24 CFR §100.201
63 CC §1710.2(d)
558 Property Management, Sixth Edition

affect the tenant’s decision to lease. However, on inquiry from the tenant, the
property manager discloses their knowledge of any death, including AIDS-
related deaths, which occurred on the property within the last three years.

Chapter 55 A broker has a duty to inform their agents and employees of anti-
discrimination rules, including Department of Real Estate (DRE)
Summary regulations, the Unruh Civil Rights Act, the California Fair Employment
and Housing Act, and the Federal Fair Housing Act.

California law prohibits discrimination in the sale or rental of housing

accommodations based on race, color, religion, sex, sexual orientation,
marital status, national origin, ancestry, familial status, source of income
or disability.

The federal Civil Rights Act applies to race discrimination on the rental
of all types of real estate, both residential and commercial. Racially
motivated activities in any real estate leasing transaction are prohibited.

The Federal Fair Housing Act prohibits any discriminatory actions a

landlord or property manager may take in the handling of a residential
rental based on an individual’s race or color, national origin, religion,
sex, familial status or handicap.

Disabled individuals are protected from discrimination when renting

or leasing California residential real estate. However, a landlord is not
required to structurally modify existing residential rental property to
meet the special needs of disabled tenants.

Rental policies excluding children under the age of 18 are classified as

prohibited discrimination, unless the property qualifies as senior citizen
housing.

Chapter 55 blockbusting.................................................................................. pg. 547

disabled person............................................................................. pg. 552
Key Terms dwelling.......................................................................................... pg. 544
familial status................................................................................ pg. 544
Civil Rights Act............................................................................. pg. 543
Federal Fair Housing Act........................................................... pg. 544
steering............................................................................................ pg. 547
Unruh Civil Rights Act............................................................... pg. 551

Quiz 14 Covering Chapters 55-58 is located on page 657.

 Chapter 56: Adults-only policies prohibited in housing 559

Chapter

56
Adults-only policies
prohibited in housing

After reading this chapter, you will be able to: Learning

•  identify various fair housing laws; and
•  understand the protections and limitations of fair housing laws as
Objectives
they relate to a tenant’s familial status.

California Fair
Employment and Housing
Federal Fair Housing Act
(FFHA)
Key Terms
Act (FEHA) senior citizen housing
familial status Unruh Civil Rights Act

The landlord of a residential property may not adopt an “adults-only” or “no Familial
children” policy, regardless of the number of units on the property, unless the
housing development qualifies as senior citizen housing. status is
A development qualifies as senior citizen housing when: protected
•  the housing units are occupied solely by persons 62 years of age or social activity
older; or
senior citizen
•  the housing units are intended and operated for occupancy by persons housing
55 years of age or older, and at least 80% of the occupied units have one Housing intended for
or more residents at least 55 years old.1 [See Chapter 57] persons 55 or 62 years
of age or older.
State and federal anti-discrimination laws prohibit a landlord’s screening
policies from discrimination based on a tenant’s familial status. Specifically, familial status
landlords may not prevent children from living in non-exempt residential A status which
property. indicates a household
includes individuals
under the age of 18.

1 42 United States Code §3607(b)(2)

560 Property Management, Sixth Edition

Conversely, senior citizen housing is exempt from unlawful discrimination

based on familial status provided it meets the senior housing criteria.2 [See
Federal Fair
Housing Act (FFHA) Chapter 55]
A collection of policies
designed to prevent Rental policies or conduct excluding pregnant women or families that
discrmination in the
access to housing contain one or more children under the age of 18 discriminate against a
based on an occupant’s tenant based on familial status. Thus, residential policies resulting in “adults-
inclusion in a only” tenants are unlawful.
protected class.

An individual submitting an application to rent may not be discriminated

California Fair
against if the individual is the parent, legal custodian or a person authorized
Employment and by written permission to take care of a child who will reside with the
Housing Act (FEHA) individual on the premises.3 [See RPI Form 302]
Legislation which
prohibits landlords
from using The Federal Fair Housing Act (FFHA) also prohibits a landlord from
discriminatory rental using rental screening policies that discriminate against a tenant based on
policies to avoid familial status.4
renting to a tenant
based on familial
status. Further, the California Fair Employment and Housing Act (FEHA)
prohibits landlords from using discriminatory rental policies to avoid renting
to a tenant based on familial status.5
Unruh Civil Rights
Act
A California law Additional California tenant protection under the Unruh Civil Rights Act
which prohibits prohibits a business establishment (landlord) from discriminating against a
discrimination
by a business
tenant based on their age, unless the property is qualified as senior housing.6
establishment based
on sex, race, color, Each of these acts provides a variety of remedies and recoveries for a tenant
religion, ancestry, who, since they reside with a child, has been discriminated against by a
national origin,
disability or medical landlord. With the exception of senior housing, discrimination in the rental
condition. A real estate of housing based on familial status violates all three acts. For a landlord,
practice is a business
establishment.
property manager or resident manager, these violations may result in civil
liability, civil penalties and suspension of a real estate license.

Consider the landlord of a two-bedroom residential unit. The unit is vacant

Discrimination and is advertised for rent.
prohibited
A prospective tenant contacts the landlord regarding the rental unit. Before
agreeing to show the tenant the property, the landlord asks the tenant how
many family members will occupy the unit.

The prospective tenant informs the landlord they, their spouse and a child
will occupy the unit. The landlord informs the tenant they do not qualify
to rent the unit since families with children increase maintenance costs by
causing excessive wear and tear to the property. The tenant is forced to look
elsewhere for housing.

2 Calif. Civil Code §51.2(a)

3 Calif. Government Code §12955.2; 42 United States Code §3602(k)
4 42 USC §3602
5 Gov C §12955(k)
6 Calif. Civil Code §51.2(a)
 Chapter 56: Adults-only policies prohibited in housing 561

Has the landlord unlawfully discriminated against the tenant by refusing to

rent the unit to the tenant based on their familial status?

Yes! A residential landlord unlawfully discriminates against a potential

tenant when they refuse to rent a residential unit to a tenant based solely on
the fact a child will occupy the unit — a violation of FEHA.7

Also, FEHA prohibits a residential landlord from inquiring, as part of the

screening process, into whether a prospective tenant has children when the
No targeting
purpose of the inquiry is to exclude families.8 of families in
However, a landlord who targets families with children as prospective the selection
tenants is not necessarily acting in a prohibited discriminatory manner when process
they inquire about children. They may be intending to push advantages their
property offers to tenants who have children, such as playground facilities or
day care.

Whether or not an inquiry into familial status was made with discriminatory
intent is shown by the landlord’s subsequent behavior, i.e., refusal to rent, a
higher security deposit, an increase in rent to anyone with children or the
“steering” of families to other units or facilities.

The California Unruh Act prohibits a business establishment from The Unruh
discriminating in the rental of housing based on an occupant’s age.9
Act and the
Owners of apartment complexes and condominium associations fall
under the definition of a business establishment for purposes of unlawful
FFHA
discrimination.10

Editor’s note — Landlords of one-to-four units fall under California’s FEHA,

as well as the state’s Unruh Act. The term “business establishment” under
the Unruh Act applies in the broadest reasonable manner, which includes
landlords.11

While it does cover condominium projects (CIDs), California’s Unruh Act

does not control mobilehome park owners.12

However, a mobilehome park owner discriminating against tenants based

on familial status violates federal law and California’s FEHA, unless the ft Senior Citizen
Housing
mobilehome park is operated as qualified senior citizen housing.13

Discrimination based on familial status is permitted under all these laws

when the housing qualifies as senior citizen housing.14

7 Gov C §§12955(a), 12955(k)

8 Gov C §12955(b)
9 CC §51.2(a)
10 CC §51.2(b)
11 O’Connor v. Village Green Owners Association (1983) 33 C3d 790
12 Schmidt v. Superior Court (1989) 48 C3d 370
13 CC §798.76; Gov C §12955.9; 42 USC §3607(b)
14 CC §§51.2, 51.10; Gov C §12955.9; 42 USC §3607(b)(1)
562 Property Management, Sixth Edition

Rental Landlords, property managers and resident managers regularly engage in

proper discrimination when the purposes are legitimate, such as in screening
discrimination potential tenants for their rental units.
under the For example, a potential tenant’s income, credit rating, rental and
FFHA employment history are properly considered by the landlord as a basis for
creditworthiness. The landlord’s tenant analysis is intended to reduce the
risk of lost rent when renting a unit to a tenant.

Landlords become less (or more) discriminatory when analyzing

creditworthiness and risk based on economic conditions. In economic
downturns, landlords tend to be more lenient in their rental practices,
lowering rental deposits and rates, and relaxing credit requirements. They
tend to accept less-qualified tenants than they might otherwise accept in
better economic times.

Conversely, when activity in the real estate rental market turns up and
multiple-family starts do not keep up with demand, landlords become more
selective in the screening process to reduce the risk they take with a tenant.
Landlords raise rental rates and tighten credit standards during a strong
demand for units.

However, as credit standards are raised, they are to be equally applied to all
prospects. Some landlords in strong rental markets overstep by cultivating an
exclusive living atmosphere desired by older, wealthier tenants. This conduct
is similar in result to application of criteria used in the screening process that
tends to prevent families with children from renting.

Prohibited Prohibited discriminatory rental practices toward families include the direct
refusal to rent. Also prohibited is the use of different rental or credit analyses
rental or qualification criteria between competing tenants, such as:
practices •  using different income standards for competing tenants;
•  applying a different credit analysis to competing tenants;
•  using different tenant screening and approval procedures to file a
vacancy; or
•  imposing different rental charges on tenants competing for the same
vacant units.15
Thus, a landlord may not require tenants with children to have a higher
family income or a better credit rating than tenants without children.

Also, a landlord who rents to a tenant with children may not include different
terms in the lease or rental agreements, such as higher security deposits or
rental rates.16

15 24 Code of Federal Regulations §100.60

16 24 CFR §100.65(b)
 Chapter 56: Adults-only policies prohibited in housing 563

Consider a landlord of an apartment complex who has a policy limiting occupancy of Case in point
units to two persons. Each unit has two bedrooms and two baths. A prospective tenant
contacts the property manager of the apartment complex. The tenant intends to rent a Discriminatory
unit for them, their spouse and two children. intent not
The property manager advises the prospective tenant an application will not be required
processed even though units are available, since the complex has a policy limiting
occupancy of each unit to two persons. The prospective tenant is not shown any of the
units in the complex.
The tenant files an action against the landlord to recover money losses incurred in their
extended search for housing, claiming the landlord violated the Fair Housing Act based
on their refusal to rent a two-bedroom apartment to a family of four.
The landlord claims their two-or-less occupancy restriction is not discriminatory since
the restriction is even-handedly applied to all rental applicants with the intent of
preventing excessive wear to the units, reducing maintenance costs and increasing the
property’s value.
Is the landlord liable for the costs incurred by the tenant to find new housing since the
landlord’s refusal to rent is based on a two-tenant occupancy restriction?
Yes! The landlord’s occupancy restriction limiting use of a two-bedroom residential unit
to two persons automatically results in discrimination against families with children.
Economically, this conduct leads also to an improper allocation of national wealth
to oversized units. [Fair Housing Council of Orange County, Inc. v. Ayres (1994) 855
F.Supp. 315]
Nationally, a landlord may not refuse to rent to families with children or adopt rental
policies that result in discrimination against families with children. Households with
children have to be free to move about the country. [24 CFR §100.60(b)]

Any rental practice or policy that has the effect of discouraging or preventing
families with children from renting a dwelling violates federal and state
discrimination laws.17

A landlord’s intent to discriminate against children is not necessary for them

to violate the Fair Housing Act. An occupancy restriction needs only to result
in discrimination against families with children, regardless of intent.18

An occupancy restriction limiting the number of persons allowed to reside Occupancy

in the unit is enforceable if reasonable and applied equally to all tenants.
However, the restriction becomes an unlawful discriminatory housing restrictions
practice when it has a negative effect on the availability of suitable rental
units for families with children.
allowed if
uniformly
For example, a parent and their child locate a one bedroom unit they want
to rent in an apartment complex. The apartment complex has a longstanding applied to all
practice of only renting one bedroom units to a single occupant out of concern tenants
for the lack of parking in the complex. Thus, the property manager refuses to
show the prospective tenant the available unit. The local zoning ordinances
require a minimum of 250 square feet for two persons in a unit, and the one
bedroom unit has 650 square feet.
17 Marina Point, Ltd. v. Wolfson (1982) 30 C3d 721
18 Fair Housing Council of Orange County, Inc. v. Ayres (1994) 855 F.Supp. 315
564 Property Management, Sixth Edition

Here, the occupancy standard of the owner, which applies to all prospective
tenants equally, violates the Fair Housing Act. The occupancy by one is
unreasonable since it results in an adverse impact on a protected class of
people: family groups. Thus, the restrictions denied the family housing for
impermissible reasons — parking availability for the second occupant, who
is a child.19

Number-of- Now consider an owner of several single-family residences (SFRs) which they
operate as rentals. The owner imposes a five-person occupancy restriction on
occupants some of their rentals.
restriction One rental unit has a four-person restriction. It has a small yard and 1,200
square feet of living space, which includes two modestly-sized bedrooms, a
den opening onto the living room, a large kitchen and one large bathroom.

The unit becomes vacant and is advertised for rent by the owner’s property
manager. A prospective tenant is shown the rental. The prospective tenant
completes a rental application, makes a deposit and passes the credit
screening.

The property manager informs the owner they have located a family of five
as tenants for the unit. The landlord advises the property manager they will
only rent this unit to a family of four and rejects the application, claiming
the family is too large to occupy the property. The tenant files a complaint
with the Secretary of Housing and Urban Development (HUD), claiming the
landlord discriminated against them since they had children.

The landlord claims the occupancy restriction is not intended to and does
not discriminate against families with children, but is the result of a business
decision necessary to prevent excessive wear and tear to property which is
not designed to accommodate a family larger than three or four members.

Is the landlord liable for the tenant’s losses and the civil penalty because of
their occupancy restriction?

No! Here, the landlord is able to demonstrate that their occupancy restriction
does not unreasonably limit or exclude families with children. The landlord’s
occupancy restriction is based on the size of the residence. Therefore, it is a
reasonable means of preventing dilapidation of the property without barring
families.20

The purpose of limiting the number of occupants is to preserve the economic

value of a property designed to house fewer occupants. Families with
children are not prohibited. Therefore, the landlord may properly impose a
reasonable numerical occupancy restriction.

19 United States v. Badgett (8th Cir. 1992) 976 F2d 1176

20 Pfaff v. U.S. Department of Housing and Urban Development (1996) 88 F3d 739
 Chapter 56: Adults-only policies prohibited in housing 565

State and federal anti-discrimination laws prohibit a landlord’s Chapter 56

screening policies from discrimination against a tenant based on
familial status. This includes preventing children from living in the Summary
rented property. Conversely, senior citizen housing is exempt from
unlawful discrimination based on familial status provided it meets the
senior housing criteria.

A residential landlord unlawfully discriminates against a potential

tenant when they refuse to rent a residential unit to a tenant based
solely on the fact a child will occupy the unit — a violation of FEHA.

A landlord may only impose an occupancy restriction as a reasonable

means of preventing dilapidation of the property without barring
families.

California Fair Employment and Housing Act (FEHA) ... pg. 560 Chapter 56
familial status ............................................................................. pg. 559
Federal Fair Housing Act (FFHA) ........................................... pg. 560
Key Terms
senior citizen housing .............................................................. pg. 559
Unruh Civil Rights Act ............................................................. pg. 560

Quiz 14 Covering Chapters 55-58 is located on page 657.

 Friends don't let friends
read stale real estate news!
Help your friends stay on top of current
market trends and new housing laws: tell
them to read the first tuesday Journal.

Check it out
 Chapter 57: Seniors-only housing 567

Chapter

57
Seniors-only housing

After reading this chapter, you will be able to: Learning

•  identify a qualified senior citizen housing project; and
•  apply the limitations on age discrimination to senior citizen
Objectives
housing projects.

senior citizen housing Unruh Civil Rights Act Key Terms

A landlord of an apartment complex with an “adults-only” rental policy California’s

enters into a lease agreement with a pregnant tenant. The lease contains
an exclusion provision prohibiting individuals under 18 years of age from fair housing
residing in the leased unit.
laws
The tenant gives birth to a child prior to the expiration of the lease.

The landlord immediately serves the tenant with a three-day notice to

remove the child from the premises or vacate. The tenant does neither. [See
RPI Form 576]

The landlord files an unlawful detainer action to evict the tenant since the
tenant remains in possession and has failed to perform under the notice.

The tenant claims they may not be evicted since the “adults-only” policy is
an unlawful discriminatory practice and violates the child’s civil rights.

May the tenant avoid the landlord’s “adults-only” policy agreed to in the
lease agreement and remain in the unit with the child?
568 Property Management, Sixth Edition

Unruh Civil Rights Yes! The landlord may not refuse to rent to an individual based on age unless
Act the individual may be excluded under senior citizen housing laws. The
A California law landlord’s “adults-only” policy violates California’s Unruh Civil Rights
which prohibits
discrimination Act since it does not qualify as senior citizen housing.1
by a business
establishment based When locating, negotiating with or handling tenants for the occupancy of
on sex, race, color,
religion, ancestry,
real estate, civil rights and fair housing laws prohibit landlords, property
national origin, managers and leasing agents from discriminating against protected
disability or medical individuals. These class discrimination rules apply to both residential and
condition. A real estate
practice is a business commercial real estate. [See Chapter 55]
establishment.
However, discrimination is allowable so long as it is not based on a tenant’s
protected status.

Discriminatory standards not based on a protected status include ensuring

the tenant:
•  is financially able to pay the rent based on equally-applied
creditworthiness standards;
•  will not damage the property, based on prior conduct as a tenant or
owner of property; or
•  will properly conduct themselves in the use and enjoyment of the
leased premises.

Senior citizen A lease or rental agreement provision is void if it prohibits the use or
occupancy of real estate based on an individual’s actual or perceived:
housing
•  age;
senior citizen •  sex;
housing
Housing intended for
•  race;
persons 55 or 62 years •  color;
of age or older.
•  religion;
•  ancestry;
•  national origin;
•  disability;
•  medical condition;
•  genetic information;
•  citizenship;
•  primary language;
•  immigration status;
•  marital status; or
•  sexual orientation.2

1 Marina Point, Ltd. v. Wolfson (1982) 30 C3d 721

2 Calif. Civil Code §§51, 53
 Chapter 57: Seniors-only housing 569

However, if the lease provision relates to the age of occupants in qualified Qualified
senior citizen housing, age discrimination is allowed within specific
parameters. retirement
Senior citizen housing is housing intended for occupancy: communities
•  only by individuals 62 years of age or older; or
•  by at least one person 55 years of age or older.3
Landlords and owners of qualified retirement communities or senior citizen
apartment complexes may exclude children to meet the particular needs of
older individuals.

To qualify as senior citizen housing, the development or renovation project

needs to have at least 35 dwelling units and obtain a public report issued by
the Department of Real Estate (DRE).4

For a housing development to qualify as senior citizen housing with the

DRE, the project needs to provide:
•  access throughout for individuals using a wheelchair;
•  railings or grab-bars in common areas;
•  bright common area lighting for individuals with difficulty seeing;
•  access throughout without the need to use stairs;
•  a common room and open space for social contact; and
•  compliance with the Federal Fair Housing Act (FFHA) and Americans
with Disabilities Act (ADA).5

Qualified senior housing may limit occupancy to individuals who are 62 Qualified
years of age or older under an exemption from federal anti-discrimination
law. senior citizen
A housing project qualifies as senior housing by limiting the occupancy housing
exclusively to individuals 62 or older.6

Qualified senior housing projects may allow management employees and

their families under 62 years of age to live on the premises. The employees
need to perform substantial duties directly related to the management or
maintenance of the housing.7

The age restriction may exclude all individuals under the age of 62, even if
one spouse is 62 or older and the other is not.8

If a project owner elects not to qualify or cannot qualify for the 62-or-older
exemption, the project may still qualify under the broader 55-or-older
exemption.
3 CC §51.3(b)(1); 42 United States Code §3607(b)
4 CC §51.3(b)(4)
5 CC §51.2(d)
6 24 Code of Federal Regulations §100.303(a)(1), (2)
7 24 CFR §100.303(a)(3)
8 24 CFR §100.303(b)
570 Property Management, Sixth Edition

The 55-or- To qualify for the federal 55-or-older exemption, the housing project needs to
have 80% of the units occupied by at least one individual 55 years of age or
older 80% older.9
rule For newly constructed projects, the 80% occupancy requirement does not
apply until the real estate is 25% occupied.10

If a residential complex is renovated for senior citizen housing, it needs to

be used for that purpose immediately following the renovation in order to
qualify for senior citizen housing.11

An underage individual may occupy a residential unit in a seniors-only

Underage project, other than a mobilehome park, if the individual:
occupants •  resides with a senior citizen prior to the senior’s death, prolonged
absence or their divorce; and
•  is at least 45 years of age, a cohabitant, or an individual providing
primary economic or physical support for the senior citizen.12
A family member or employee may reside with the senior citizen if they act
as caregiver to the senior.13

Also, a disabled child or grandchild may live with the senior citizen if their
disabilities require it.14

Also, a mobilehome park may not discriminate against a 55-or-older tenant

who is married to a younger occupant. Federal law does not allow any
discrimination when one occupant is at least 55 years of age.15

A leasing agent found guilty of discrimination may be liable for damages of

Penalties for no less than $4,000 and no more than three times the amount of the actual
discrimination damages and any attorney fees.16

9 24 CFR §100.305(a)
10 24 CFR §100.305(d)
11 CC §51.3(f)
12 CC §51.3(b)(2)
13 CC §51.3(b)(7)
14 CC §51.3(b)(3)
15 CC §798.76
16 CC §52(a)
 Chapter 57: Seniors-only housing 571

When locating, negotiating with or handling tenants for the occupancy Chapter 57
of real estate, civil rights and fair housing laws prohibit landlords,
property managers and leasing agents from discriminating against Summary
protected individuals. These class discrimination rules apply to both
residential and commercial real estate.

However, if leasing conditions relate to the age of occupants in qualified

senior citizen housing, age discrimination is allowed within specific
parameters.

Senior citizen housing is housing intended for occupancy:

•  only by individuals 62 years of age or older; or
•  by at least one person 55 years of age or older.
An underage individual may occupy a residential unit in a seniors-only
project, other than a mobilehome park, when the individual:
•  resides with a senior citizen prior to the senior’s death, prolonged
absence or their divorce; and
•  is at least 45 years of age, a cohabitant, or an individual providing
primary economic or physical support for the senior citizen.

senior citizen housing ............................................................... pg. 568 Chapter 57

Unruh Civil Rights Act .............................................................. pg. 568
Key Terms

Quiz 14 Covering Chapters 55-58 is located on page 657.

 Chapter 58: Residential rent control 573

Chapter
58
Residential
rent control

After reading this chapter, you will be able to: Learning

•  understand the purpose and function of local rent control
ordinances;
Objectives
•  apply rent adjustments to properties subject to rent control; and
•  establish a landlord’s good cause for evicting a tenant in a rental
control community.

general adjustment rent control Key Terms

individual adjustment strict rent control
police power vacancy decontrol

A city’s or county’s ability to establish rent control by passing ordinances Police power
comes from the authority of its police power. 
and rent
Police power is the basis for enacting local ordinances such as zoning, traffic,
health and safety regulations, and rent control, as long as the ordinances
control
enacted are for the public’s benefit.1  police power
The basis for enacting
To be valid, rent control ordinances need to be reasonably related to the local ordinances such
prevention of excessive rents and maintaining the availability of existing as zoning, traffic,
health and safety
housing. No case has yet found an ordinance lacking in this purpose, regulations and rent
regardless of its inability to attain, much less come close to, its stated purposes.2 control.

1 Calif. Constitution Article XI §7

2 Santa Monica Beach, Ltd. v. Superior Court (1999) 19 C4th 952
574 Property Management, Sixth Edition

Application Before increasing rent on residential rentals located within rent control
communities, a prudent property manager determines: 
for rent
•  Is this rental unit subject to any rent control ordinances? 
increases •  Does the unit fall within an exemption? 
•  What type of rent adjustment does the ordinance allow? 

Units covered Frequently, rent control ordinances do not cover all the rental units in a
city. Examples of the types of property that may be exempt from a rent control
by controls ordinance in a city include: 
•  owner-occupied buildings; 
rent control
Local ordinances that •  single family residences (SFRs) and duplexes; 
are reasonably related
to the prevention of •  luxury apartments; 
excessive rents and
maintaining the •  condominiums; or 
availability of existing
housing. [See RPI •  substantially rehabilitated buildings. 
Form 550 §1.3]
Rent control ordinances may also exempt newly constructed units from
regulations to stimulate construction of additional housing. Zoning
ordinances permitting sufficient new construction to keep up with demand
for all price and rent tiers of housing eliminates the need for rent control
ordinances.

Types of rent Despite the complexity and variety of rent control ordinances, two primary
types exist: 
control
•  strict rent control; and 
strict rent control
A type of rent control •  vacancy decontrol. 
ordinance that limits
rent increases on all Under strict rent control, rent increases are limited on all residential
rental units. dwellings. The restrictions on rent amounts apply to landlords renting to
either new or existing tenants. Even when a tenant vacates and a new one
vacancy decontrol moves in, the rent restrictions continue to apply to the unit. 
A type of rent control
ordinance that applies
rent ceilings only to
The more common type of rent regulation is vacancy decontrol. Under
existing tenants. vacancy decontrol, the rent ceilings apply only to existing tenants as long as
they choose to remain in occupancy of the unit. When the tenant vacates, the
landlord may raise the rent and charge the new tenant market level rents. 

Rent Once the property manager determines a unit is governed by a rent control
ordinance, the manager then determines the type of rent adjustments
adjustment allowed.
standards Under a general adjustment, rents in all rental units in the city are adjusted
using: 
•  an amount tied to an economic index, such as the Consumer Price
Index (CPI); 
 Chapter 58: Residential rent control 575

Facts: An owner purchases a mobile home park in a location governed by a rent control Case in point
ordinance. The ordinance limits the increase in monthly rent charged to new buyers to
75% of the change in the consumer price index (CPI). Is a rent control
Claim: The owner sought money damages, claiming the rent control ordinance was an
ordinance
unconstitutional taking of profit from the owner since the ordinance limited the ability limiting the
of the owner to charge fair market rent for their mobile home lots. increase
Counter claim: The city sought to enforce the rent control ordinance, claiming the owner in rent an
purchased the property when the rent control ordinance was already in effect, and unconstitutional
thus, no taking occurred as the owner did not experience an unforeseeable economic taking?
disadvantage.
Holding: A California court of appeals held the rent control ordinance was not an
unconstitutional taking since the owner purchased the property when the rent control
ordinance was already in effect and the owner did not experience unforeseeable
economic disadvantage. [MHC Financing Limited Partnership v. City of San Rafael (9th
Cir. 2013) 714 F3d 1118]

individual
•  a maximum annual percentage rate increase; or  adjustment
A type of rent
•  an amount determined at the discretion of the rent control board.  adjustment sought by
a landlord when the
However, in most rent control cities, a landlord or property manager may general adjustment
established by local
also seek an individual adjustment from the rent control board (RCB). rent control ordinances
The individual adjustment is usually determined at a hearing before a rent fails to provide a
control board.  fair return on their
residential property.

Individual adjustments are sought when the general adjustment fails to

provide a fair return on the residential property.  general adjustment
A type of rent
Rent increases may be based on:  adjustment under
rent control which
•  cash flow requirements to cover mortgage payments and operating uniformly adjusts rents
for all rental units. [See
expenses;  RPI Form 552 §4.4
•  a percentage of the net operating income (NOI); or  and 4.5]

•  a set return on value. 

Also, almost all rent control cities allow individual adjustments for capital
improvements made to upgrade the units. 

When a rent control ordinance bases rent increases for existing tenants on Reasonable
NOI, the landlord’s operating expenses include fees and costs incurred by the
landlord for professional services used to seek the rent increases. Thus, the expenses
cost of the procedure for getting the increase in rent is paid for by the tenant recovered as
through higher rents.3 
rent
Reasonable fees incurred by the landlord in successfully obtaining a judicial
reversal of an adverse administrative rent control decision on a petition for
upward adjustment in rents will be paid by the public agency that issued
the adverse decision, not by the tenant. Unrecovered fees cannot be used to
calculate the net operating income on the property.4
3 Calif. Civil Code §1947.15(b)
4 CC §1947.15(c)
576 Property Management, Sixth Edition

Case in point Facts: A landlord of a residential unit governed by rent control laws decreases tenant
services by lowering the temperature of a common area hot tub and shortening its
Rent control and heating cycle. Upon the tenant’s petition, the city rent control board (RCB) orders the
reduction of landlord to decrease the rent, reducing their resulting profit to comply with rent control
tenant services limits.
Claim: The landlord sought to avoid the RCB’s order, claiming they were wrongly
required to decrease the tenants’ rent since no evidence was presented to prove the
landlord profited from the decreased tenant services.
Counter claim: The RCB claimed the landlord must lower the rent since a landlord’s
profits can reasonably be presumed to increase beyond rent control thresholds as a
result of decreased operating expenses related to tenant services.
Holding: A California appeals court held the landlord was not required to decrease rents
since no evidence was presented to prove the decreased services increased their profit.
[Santa Monica Properties v. Santa Monica Rent Control Board (2012) 203 CA4th 739]
Editor’s note — The reduction of tenant services in this case was so minor that an
increase in the landlord’s profit could not be presumed. A RCB bases any reduction of
rent on the dollar amount of the increase in the landlord’s profit due to a reduction in
services.

When the landlord’s appeal of an adverse administrative decision is frivolous,

the public agency will be awarded its reasonable expenses incurred to defend
against the landlord’s action. These expenses include attorney fees.5 

When a landlord’s petition for a rent increase is without merit and the
landlord is assisted by attorneys or consultants, the tenant will be awarded a
reduction in the rent to compensate for the costs incurred to defend against
the landlord’s petition.6 

In addition to restricting rent increases, rent control ordinances restrict the

Evicting landlord’s ability to evict existing tenants. 
Section 8 In communities free of rent control, the landlord does not need to give a
tenants reason for serving a 30-day notice to vacate on a month-to-month tenant.7 [See
Chapter 30]

A residential landlord is required to provide good cause for terminating the

tenancy of a tenant whose rent is subsidized by HUD’s Section 8 housing
voucher program. The good cause is to be set forth as the reason for the
termination of tenancy, either in a notice to vacate or a notice to quit.

Good cause for termination includes:

•  the tenant’s violations of the terms and conditions of the lease (i.e.
failure to pay rent);
•  the tenant’s violations of federal, state or local law in connection with
the occupancy or use of the premises;
5 CC §1947.15(h)(2)
6 CC §1947.15(h)(1)
7 CC §827
 Chapter 58: Residential rent control 577

•  criminal activity; and

•  other good cause.8

Criminal activity may also be grounds for termination, including: Criminal

•  criminal drug activity on or near the premises by the tenant, household activity
member, guest of the tenant or any person under the tenant’s control;
•  patterns of illegal drug use that interfere with the health, safety or right
to peaceful enjoyment of the premises by other residents;
•  any other criminal activity that threatens the health, safety or right to
peaceful enjoyment of the residence by other occupants of the premises
(including property management staff) or residents in the immediate
vicinity;
•  the tenant’s avoidance of prosecution, custody or confinement for
a crime, after a conviction or an attempt to commit a crime, which is
considered a felony under local laws from which the tenant is fleeing;
and
•  the tenant’s violation of the conditions of probation or parole imposed
by federal or state law.9
However, a landlord may only terminate a tenancy due to criminal activity
if the lease provides that the criminal activity in question is grounds for
termination.10

Editor’s note — RPI’s rental and lease agreement forms require the
tenant to agree not to use the premises for unlawful purposes, violate any
government ordinance or create a nuisance.

State and local ordinance ultimately control what is considered “other

good cause.” However, during the initial lease term (established by Section
“Other good
8 as at least one year, unless shortened for good reason by the local public cause”
housing agency (PHA)) “other good cause” may only be based on the tenant’s
behavior, such as:
•  disturbing the neighbors; or
•  destruction or damage of the premises.11
After the initial lease term ends, “other good cause” includes:
•  the tenant’s failure to accept the offer of a new lease or revision;
•  the owner’s intent to use the residence for personal or family use; and
•  business or economic reasons, such as sale of the property, renovations
or the landlord’s desire to lease the unit at a higher rental rate.12

8 24 Code of Fed. Regs. §982.310(a)

9 24 CFR §982.310(c)
10 24 CFR §982.310(c)
11 24 CFR §982.310(d)(2)
12 24 CFR §982.310(d)
578 Property Management, Sixth Edition

Case in point Facts: A landlord of a rent-controlled property intends to move into a currently occupied
unit. The landlord and the tenant enter into a buyout agreement in which the tenant
Terminating a agrees to vacate in exchange for an agreed-upon sum of money to avoid an owner
rent-controlled move-in eviction under the rent control ordinance. The tenant vacates and the landlord
tenancy under moves in. A year after taking occupancy, the landlord vacates, then rents the unit to a
a buyout new tenant at a higher price.
agreement Claim: The former tenant seeks to rescind the buyout agreement, claiming the landlord
misrepresented their intention to occupy the unit in accordance with the rent control
ordinance since the landlord later rented the unit to a new tenant at a higher price in
violation of the ordinance.
Counter claim: The landlord claims they did not misrepresent their intent to occupy and
the buyout cannot be rescinded since the landlord occupied the unit, and the ordinance
only applies in the event of an owner move-in eviction.
Holding: A California court of appeals holds the buyout agreement cannot be rescinded
since the landlord did not mislead the tenant about their intent to occupy the unit,
and the rent ordinance does not apply as the buyout agreement avoided the move-
in eviction procedures under the ordinance. [Geraghty v. Shalizi (January 24, 2017)
_CA4th_]

Written Prior to termination for any reason, the landlord is required to first provide
the tenant with a written notice of good cause informing the tenant their
notice specific conduct constitutes a basis for termination of tenancy. This notice
may be served with the notice to vacate.13

The landlord is required to also provide the local PHA with a copy of the
notice to vacate.14

Phase-out of When a city’s rent control laws conflict with state law, state law controls. 

rent control The Legislature enacted rent control phase-out measures to provide a more
economically efficient statewide housing policy than allowed by local rent
control. 

The economics of local rent control and zoning ordinances have generally
debilitated investment in new and existing apartments. Rent control limits
market rental rate returns on investments. Further, archaic zoning restrictions
deprive local markets of sufficient housing needed to meet demand. Thus,
rents go up, driven by excessive unfulfilled demand for housing. 

However, any state law to the contrary overrides local rent control ordinances.
One such state law allows landlords of residential rental property to establish
rent for each unit, provided the unit: 
•  was newly constructed and exempt from rent control on or before
February 1, 1995; 
•  was issued a certificate of occupancy after February 1, 1995; or 

13 24 CFR §982.310(e)
14 24 CFR §982.310(e)(2)(ii)
 Chapter 58: Residential rent control 579

•  is a separately described parcel of real estate (single-family residence or

condominium unit) or a unit in a community apartment project, stock
operative or limited-equity housing cooperative.15 
Also, the landlord of a single family residence (SFR) or condominium unit
may set rental rates for all new tenancies when the prior tenant’s occupancy
was entered into on or before December 31, 1995.16 

However, the landlord of an SFR or condo unit may not set the rental rates
even though the previous tenant occupied before 1996, when: 
•  that previous tenancy was terminated by a 30-day notice to vacate or a
30-day notice of change of rental terms; or 
•  it is a condominium unit still owned by the subdivider.17 
Further, when any residential tenant vacates (other than on a 30-day notice
to vacate from the landlord), abandons the property or is evicted, the landlord
may establish the rent rate without concern for rent control. 

A landlord who maintains a unit that has been previously cited for violations
of health, fire or building codes may not increase the rent charged to new
tenants when the violation is not corrected at least six months before the
unit is vacated.18 

Further, the landlord may not set new rental rates when the landlord has
contracted with a local agency to establish low-income housing.19 

Rental units located in rent control communities and sublet under an

agreement entered into before January 1, 1996 do not fall under State law
allowing landlords to set rental rates.20

A landlord who wants to demolish a rental building, whether or not it is Demolition

under rent control, is required to apply to a local governmental agency for a
demolition permit.  of residential
A landlord is entitled to demolish a unit since they may not be compelled rentals
to continue to provide residential rentals when the landlord chooses to
withdraw their property from the market.21 

Before applying for a demolition permit, the residential landlord needs to

first give a written notice of their intent to apply for a permit to all tenants in
the structure which will be demolished.22 

15 CC §1954.52(a)
16 CC §1954.52(a)(3)(C)(ii)
17 CC §1954.52(a)(3)(B)
18 CC §§1954.52(d); 1954.53(f)
19 CC §1954.52(b)
20 CC §1954.53(d)
21 Calif. Government Code §7060(a)
22 CC §1940.6(a)(2)
580 Property Management, Sixth Edition

A residential landlord who has applied for a demolition permit gives written
notice to prospective tenants about the application before accepting the
tenant’s application to rent, a screening or other fee, or entering into a rental
or lease agreement.23 

This notice includes the earliest possible approximation of the date the
demolition is to occur and the approximate date the tenants’ occupancy will
be terminated by the landlord.24

23 CC §1940.6(a)(1)
24 CC §1940.6(b)

Chapter 58 Despite the complexity and variety of rent control ordinances, two
primary types exist:
Summary •  strict rent control; and
•  vacancy decontrol.
Once the property manager determines a unit is governed by a rent
control ordinance, the manager then determine the type of rent
adjustments allowed.

Under a general adjustment, rents in all rental units in the city are
adjusted using:
•  an amount tied to an economic index, such as the Consumer Price
Index (CPI);
•  a maximum annual percentage rate increase; or
•  an amount determined at the discretion of the rent control board.
However, in most rent control cities, a landlord or property manager
may also seek an individual adjustment from the rent control board.

Further, in rent control communities, the landlord may only evict a

tenant for good cause.

Chapter 58 general adjustment...................................................................... pg. 575

individual adjustment................................................................ pg. 575
Key Terms police power................................................................................... pg. 573
rent control..................................................................................... pg. 574
strict rent control.......................................................................... pg. 574
vacancy decontrol........................................................................ pg. 574

Quiz 14 Covering Chapters 55-58 is located on page 657.

 Chapter 59: Leaseholds as security for mortgages 581

Chapter

59
Leaseholds as security
for mortgages

After reading this chapter, you will be able to: Learning

•  identify different reasons for a tenant to encumber their leasehold;
and
Objectives
•  understand how to encumber a leasehold as security for a
mortgage.

Key Terms
leasehold estate trust deed
note

A commercial tenant holding a long-term lease on real estate needs financing Financing
to fund the construction of tenant improvements and the purchase of
equipment to accommodate their expanding business. business
As a condition for originating the mortgage, a commercial lender wants expansions
security in the form of:
•  the new equipment;
•  the tenant’s inventory, tools and trade fixtures;
•  existing equipment, furniture and accounts receivable; and
•  a lien on the real estate.
The tenant’s real estate broker advises the tenant to offer the lender a trust
leasehold estate
deed lien on their leasehold interest since it will have far greater value on The right to possess a
completion of the improvements. The tenant thought only fee ownership parcel of real estate,
interests in real estate, such as the landlord’s interest, may be encumbered by conveyed by a fee
owner (landlord) to a
a trust deed as security for a mortgage. tenant.
582 Property Management, Sixth Edition

The broker explains any marketable interest in real estate can be given
as security for a mortgage, including a tenant’s leasehold interest in the
premises they occupy, such as a ground lease.
note
A document, often
secured by a trust
Can a mortgage be secured by a trust deed lien on a commercial tenant’s
deed on real estate, leasehold interest in the premises where they conduct their business?
evidencing an
obligation to pay Yes! A fee estate is not the only real estate interest which can be encumbered
money to a creditor,
usually a lender or by a trust deed. Any marketable interest in real estate which is transferable
carryback seller. [See can be used to secure a mortgage.1
RPI Form 421 and 424]
The two operative and coupled documents used in real estate mortgage
financing are the note and trust deed.
trust deed
A security device
which attaches a The note is evidence of an obligation to pay money to a creditor — usually
money obligation as a lender or carryback seller. The trust deed secures the money obligation by
an encumbrance on a encumbering some marketable interest in real estate, be it the fee, a leasehold
marketable interest in
real estate. [See RPI or a life estate, with a lien in favor of the lender.
Form 450]
The lender needs to determine whether the market value of the tenant’s
remaining term under the lease, on completion of improvements, has
sufficient value to satisfy the lender’s mortgage condition of a trust deed lien
on the tenant’s interest in the real estate.

Estates as a The phrase “transferable interest in real estate” is applied broadly. An interest
in real estate which is transferable includes the right to exclusive possession
transferable and is legally called an estate.
interest Each estate in property is fully capable of being encumbered with a lien by
the owner of the estate.2

In California, four recognized estates exist in real estate:

•  fee simple (simply called a fee);
•  life estates;
•  leaseholds; and
•  estates at will.3
Each estate can be vested as one’s sole property, or in a co-ownership such as:
•  a tenancy-in-common;
•  joint tenancy;
•  community property, with or without the right of survivorship; or
•  limited liability company (LLC), corporation, real estate investment
trust (REIT) or partnership entity vestings.4
The fact the ownership of the estate has been fractionalized between several
concurrent co-owners does not automatically destroy each co-owner’s
1 Calif. Civil Code §2947
2 CC §2947
3 CC §761
4 CC §682
 Chapter 59: Leaseholds as security for mortgages 583

ability to encumber their interest in the real estate. The separately vested
interests may be individually encumbered. However, community property
or property used in a partnership for the mutual benefit of all the co-owners
may not be individually encumbered.

Tenants in common are often partners who hold title for the benefit of the
group venture. No co-owner may individually encumber partnership assets
they hold in their name.

Also, a spouse with a vested interest in title cannot encumber that interest if
it is community property unless the other spouse consents.5

Even contract rights to buy an ownership interest in real estate, such as an

option to buy, may be encumbered by placing a lien on the option.6

A trust deed lien on real estate encumbers only the interest in the real estate
held by the person executing the trust deed.
Encumbering
real estate
A trust deed describing a parcel of real estate signed by the tenant occupying
the property under a lease creates a lien only on the tenant’s leasehold interests
interest. The trust deed cannot attach as a lien to the landlord’s fee interest in
the described real estate — unless the landlord also signs the trust deed and
the description does not exclude their fee.

When the tenant defaults on a mortgage secured by their leasehold, the

lender forecloses on the tenant’s leasehold estate. A trustee’s sale or judicial
foreclosure sale is used to repossess the right to possession owned by the
tenant under the lease. The foreclosing lender, as the successful bidder at
the foreclosure sale, becomes the tenant entitled to occupy the property as
the new owner of the leasehold interest, which was security for their trust
deed lien.

The lender, as the new tenant, is required to make the lease payments and
otherwise fully perform under the lease to avoid a forfeiture of the leasehold
interest by the landlord on a default. The lender who is now the tenant may
retain the leasehold interest.

Alternatively, they may sell the lease to a user of the property, or sublet the
property. They now own the leasehold interest, subject to the provisions in
the lease agreement limiting alienation.

Occasionally, a tenant holds an option to buy the leased real estate. If a tenant Option to
with a trust deed lien on their leasehold later acquires fee title to the real
estate, the fee acquired automatically becomes security for the mortgage. The buy leased
two possessory interests in the real estate, the leasehold and the fee, owned
by the same individual merge into the greater interest — the fee. Thus, the
property
leasehold is extinguished and the lender automatically becomes secured by
the fee.7

5 Calif. Family Code §1102

6 Chapman v. Great Western Gypsum Co. (1932) 216 C 420
7 Chapman, supra
584 Property Management, Sixth Edition

On the merger, the lender’s security interest attaches to the fee. The fee is the
only interest remaining in the property held by the trustor who signed the
trust deed describing the real estate.8

Leases as Commercial tenants encumber their leasehold interest with a trust deed
when borrowing funds to:
security for
•  acquire an existing business opportunity together with the lease to the
financing premises occupied by the business;
•  construct improvements on vacant ground or in airspace controlled by
the tenant under a long-term lease;
•  expand the tenant’s existing business and facilities on the leased
premises; or
•  acquire a home or investment property under an existing ground lease.
For example, an investor wants to acquire the current master tenant’s
leasehold position in the ownership of a shopping center.

To finance the acquisition, the investor arranges a purchase-assist mortgage

as if they were buying the shopping center under a grant deed conveyance.

At the close of the purchase escrow, the tenant under the master lease they
are selling assigns their leasehold ownership interest in the center to the
investor.

The investor delivers mortgage documents to the lender which includes a

trust deed to encumber the leasehold interest the investor will acquire by
assignment. The lender funds the purchase-assist mortgage.

The tenant and lender obtain separate American Land Title Association
(ALTA) title insurance policies on their respective interests in the recorded
leasehold estate.

The tenant defaults on the mortgage and the lender forecloses. The successful
bidder at the trustee’s sale becomes the new master tenant, since they
purchased ownership of the leasehold estate at the trustee’s sale.

The foreclosure does not wipe out the fee ownership interest which remains
unaffected. The fee was not security for the mortgage.

However, the successful bidder at the lender’s foreclosure sale of the leasehold
steps into the shoes of the leasehold tenant (as of the date the trust deed was
recorded). The tenant’s interest in the real estate, the right to possess or sublet
to users of the premises, was sold to the highest bidder as authorized by the
tenant under the trust deed’s power of sale provision.

8 CC §2930
 Chapter 59: Leaseholds as security for mortgages 585

A landlord may restrict a tenant’s right to encumber the lease with a trust deed Restricting
lien or collaterally assign the lease as security for a mortgage. If encumbrance
restrictions are not written into the lease, the tenant may assign or encumber the right to
their leasehold as they choose.9
encumber
A landlord includes a provision in the lease which defines the conditions
under which the tenant may encumber the lease. These conditions are
defined in the lease’s alienation provision. [See Chapter 49; see Figure 1; see
RPI Form 552-7]

In the alienation provision in the lease, the landlord may:

•  prohibit the tenant from encumbering the leasehold10 [See Figure 1];
•  allow the tenant to encumber the leasehold subject to previously
agreed conditions, such as the payment of a fee or higher rent11 [See
Figure 1]; or
•  require the landlord’s consent before the tenant may encumber the
leasehold.12 [See Figure 1]
If the lease requires the landlord’s consent to encumber the leasehold,
conditions for the payment of money contained in the alienation provision
need to be met before the landlord grants consent. If no conditions for the
landlord’s consent are stated in the lease, consent needs to be granted unless
a commercially reasonable basis exists for the denial of consent.13 [See Figure
1; see RPI Form 552-7] ft Encumbrance

Conversely, a tenant may require the landlord’s consent to be subject to the

standard of reasonableness by writing a provision into the lease.14

It is commercially reasonable for the landlord to withhold consent when the

encumbrance interferes with their interest, such as the tenant’s:
•  poor business track record;
•  lack of creditworthiness;
•  damage to property; or
•  inadequate management skills.

Consider a commercial tenant who borrows money to expand their business.

The security devices available to secure the mortgage include:
Financing
•  a trust deed;
a business
•  a collateral assignment of the lease; or expansion
•  a lease hypothecation, such as a UCC-1 financing statement. [See RPI
Form 436-1]

9 CC §1995.210
10 CC §1995.230
11 CC §1995.240
12 CC §1995.250
13 CC §1995.260
14 CC §1995.250(a)
586 Property Management, Sixth Edition

Figure 1

Excerpt from
Form 552

Gross — Single
Tenant When a lender agrees to accept a lease as security, the trust deed is the
preferred security device used to document the lender’s lien on the real
estate. The secured lender or carryback seller of a leasehold interest who uses
a trust deed as the security device may foreclose on the leasehold estate by a
trustee’s sale.

Use of any type of security device not containing a power of sale provision
will require judicial foreclosure if the tenant defaults.15

Financing Consider a buyer of a business opportunity who makes a down payment on

the purchase price. The seller carries back the balance of the price on a note
a business secured by the business equipment and furniture, the trade fixtures, and the
opportunity lease on the premises.

purchase The buyer signs a UCC-1 financing statement to impose a lien on the personal
property (equipment, furniture, trade fixtures and accounts receivable) and
a collateral assignment of the lease on the premises (or a trust deed). The
documents are delivered to the seller as security for the carryback note. [See
RPI Form 436-1]

Later, the buyer defaults on the note. The lease and the business have no
remaining value. The seller sues directly on the promissory note to enforce
collection without concern for the lien of the leasehold.

Can the seller waive the leasehold as security and sue directly on the note?

No! The seller cannot first sue on the note since the debt is secured by an
interest in real estate (the leasehold). The seller needs to first foreclose on the
lease (unless it has been exhausted by termination of the leasehold estate on
a forfeiture declared by the landlord). The lease of the premises, as an interest
in real estate, requires the lender holding the lease as security to foreclose
judicially to enforce collection of the mortgage before a money judgment can
be awarded, called the one-action rule.16

15 CC §2924
16 Calif. Code of Civil Procedure §726
 Chapter 59: Leaseholds as security for mortgages 587

Any marketable interest in real estate which is transferable can be used Chapter 59
to secure a mortgage.
Summary
If ownership of an estate has been fractionalized between several
concurrent co-owners, this does not automatically destroy each co-
owner’s ability to encumber their interest in the real estate. The
separately vested interests may be individually encumbered. However,
community property or property used in a partnership for the mutual
benefit of all the co-owners may not be individually encumbered.

To restrict or control a tenant’s ability to encumber their leasehold

interest, a landlord includes a provision in the lease which defines the
conditions under which the tenant may encumber the lease. These
conditions are defined in the lease’s alienation provision.

A trust deed lien on real estate encumbers only the interest in the real
estate held by the person executing the trust deed.

leasehold estate ......................................................................... pg. 581 Chapter 59

note ................................................................................................ pg. 582
trust deed ...................................................................................... pg. 582
Key Terms

Quiz 15 Covering Chapters 59-63 is located on page 658.

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 Chapter 60: Attornment clauses in commercial leases 589

Chapter
60
Attornment clauses in
commercial leases

After reading this chapter, you will be able to: Learning

•  identify the mortgage lender’s use of attornment, lender
subordination, future subordination and nondisturbance clauses
Objectives
in commercial lease agreements; and
•  properly apply the use of provisions as a landlord or lender to
alter the priorities of leaseholds and trust deed liens.

attornment clause nondisturbance clause

Key Terms
future subordination clause nondisturbance agreement
lender subordination clause

Consider a mortgage lender who holds a recorded trust deed lien on the fee Altering
interest in a parcel of commercial income-producing real estate. The trust
deed contains a due-on clause that states the landlord may not sell, lease priorities for
or encumber the secured property without the prior written consent of the
lender. [See Chapter 62]
lenders
The lender has advised the landlord it will consent to new leases under
the due-on clause, provided the lease agreements contain an attornment
clause and a lender subordination clause. [See RPI Form 552-8]

A tenant later enters into a lease agreement with the landlord that
contains an attornment clause. The lease agreement is approved by the
lender. 
590 Property Management, Sixth Edition

The The attornment clause states the tenant will:

attornment •  recognize the buyer who purchases the property at a foreclosure sale
on a trust deed of record as the new landlord under the tenant’s lease
clause in agreement entered into with the current landlord; IF
application •  the buyer exercises their right to restore the leasehold interest and
enforce the lease agreement as the substitute landlord. [See Figure 1;
see RPI Form 552-8 §3] 
Later, the landlord defaults on the lender’s trust deed. The lender notices a
foreclosure sale and acquires the property. 

On taking title to the property, the lender mails a written notice to the
tenant stating: 
•  the lender is the new landlord under the lease agreement; and 
•  the tenant is to pay rent to the lender. 
The tenant does not pay rent and vacates the premises. 

The lender claims the tenant is required to accept the lender as the new
landlord under the attornment clause in the tenant’s lease agreement with
the prior landlord.

The tenant claims the attornment clause is unenforceable since the lease
agreement that contained the clause was junior to the lender’s trust deed and
was eliminated by the lender’s foreclosure sale. 

Is the tenant required to accept the lender as the new landlord and
perform under the lease? 

Yes! The lease agreement is a contract and remains enforceable after the
foreclosure sale. Further, the real property leasehold interest held by the
tenant was eliminated from title by the foreclosure sale. However, on notice
from the lender that the lender is enforcing the lease agreement under
its attornment clause, the tenant is bound to recognize the lender as the
substitute landlord. 

Since the lender purchased the property at the foreclosure sale and declared
itself to be the landlord under the lease agreement, the tenant now pays rent
to the substitute landlord and abides by the lease agreement. 

Restored and By the lender’s (or other purchaser’s) notice to be the substitute landlord by
their exercise of the attornment clause, the leasehold interest under the lease
reattached agreement is restored and reattached to title.1 

The attornment clause contracts around the permanent elimination of a

tenant’s junior leasehold interest on completion of a foreclosure sale by
a senior trust deed lender. The clause allows the purchaser at the lender’s
foreclosure sale to restore the extinguished leasehold as though it was
unaffected by the foreclosure sale.

1 Miscione v. Barton Development Company (1997) 52 CA4th 1320

 Chapter 60: Attornment clauses in commercial leases 591

Figure 1

Excerpt from
Form 552-8

Lender
Subordination
and Attornment
Provisions

A tenant’s leasehold interest, whether or not the lease agreement granting Priority on
the property interest is recorded, has priority on title over an interest in the
property held by another person when:  foreclosure
•  the lease agreement is recorded before the other interest is recorded
or, if unrecorded, is actually known to the person holding the other
interest2; or 
•  the tenant takes possession before the other interest is recorded or the
tenant’s right of possession is actually known to the person holding the
other interest.3 
For example, a trust deed is recorded junior in time to a tenant’s occupancy of
the secured real estate. The trust deed is foreclosed. The tenant’s lease, being
prior in time, is undisturbed by the foreclosure — the tenancy established by
the lease agreement remains in full effect. 

Thus, the buyer at the foreclosure sale of a junior trust deed acquires title
“subject to” the lease. Since the leasehold right of possession held by the
tenant has priority, the buyer will perform the landlord’s obligations under
the lease agreement.

Now consider a leasehold interest acquired by a tenant under a lease

agreement entered into after a trust deed or judgment lien is recorded on the
Tenant’s
property. Later, the trust deed or judgment lien is foreclosed.  leasehold
Here, the tenant’s leasehold is wiped out by the foreclosure of the trust deed interest is
lien or judgment lien. The tenant’s leasehold interest in title is junior in junior in time
time and subordinate to the lien. Again, the lease agreement remains intact
as a contract.

On elimination of a junior leasehold by a foreclosure sale of the premises

under a lien with priority, the tenant loses their leasehold interest, the right
to possession of the premises.4 

After foreclosure by the senior lienholder, the tenant’s continued use and
possession of the property is an unlawful detainer (UD) and the tenant can be
evicted. A three-day notice to quit due to foreclosure is served. On expiration
of the notice, a UD action may be filed and the occupant evicted. [See RPI
Form 578] 
2 Calif. Civil Code §1214
3 Gates Rubber Company v. Ulman (1989) 214 CA3d 356
4 Hohn v. Riverside County Flood Control and Water Conservation District (1964) 228 CA2d 605
592 Property Management, Sixth Edition

Editor’s note — Different rules apply to a residential rental property sold

in foreclosure. The new landlord serves the tenant with a 90-day notice to
vacate to terminate a prior month-to-month tenancy, but not a prior lease
agreement with more than 90 days remaining. When the buyer intends to
occupy the residential property as their primary residence, the 90-day notice
terminates the tenant’s right to occupancy after foreclosure.

Altering the Consider a commercial tenant who enters into a lease agreement with a
provision permitting the mortgage lender to unilaterally alter the priority of
priorities the tenant’s leasehold and the lender’s trust deed liens on the property.5 

Commercial lease agreements often contain boilerplate provisions relating

to the priority of the leasehold against trust deeds, present and future. These
provisions include:
•  attornment clauses [See Figure 1; see RPI Form 552-8 §3];
•  lender subordination clauses [See Figure 2; see RPI Form 552-8 §2];
•  future subordination clauses [See Figure 3; see RPI Form 552 §17]; and
•  nondisturbance clauses.  
The attornment clause allows an owner-by-foreclosure who acquires title
at a foreclosure sale on a trust deed senior to the tenant’s leasehold interest
to unilaterally avoid the automatic elimination and unenforceability of a
junior leasehold interest by the foreclosure sale. 

The lender subordination clause gives a senior trust deed lender the right
to unilaterally subordinate the lender’s trust deed to a previously junior
leasehold interest by written notice to the tenant prior to the foreclosure sale.
Thus, the leasehold interest in title is not wiped out by a foreclosure of the
lender’s trust deed; the trust deed has been subordinated and the leasehold
has priority. 

Under a future subordination clause, the tenant agrees to subordinate

their leasehold interest in the property to a trust deed to be recorded in the
future. Here, the tenant remains involved since they need to sign a specific
subordination agreement to give the later recorded trust deed priority to their
leasehold interest in the property. 

The nondisturbance clause when included in a lease agreement is coupled

with a future subordination clause. These two clauses, paired together, allow
the tenant’s leasehold interest in the property to remain unaffected for its
full term even though the tenant subordinates their leasehold to the lender’s
trust deed. 

A knowledgeable lender will require the landlord’s lease agreements to

include both a lender subordination clause and an attornment clause as a
condition for the lender’s consent to the landlord’s leasing of space or units
in the mortgaged property.  The future subordination clause is included in a
lease agreement for the benefit of the landlord only.
5 Dover Mobile Estates v. Fiber Form Products, Inc. (1990) 220 CA3d 1494
 Chapter 60: Attornment clauses in commercial leases 593

To enforce a lease agreement which includes an attornment clause and The

reinstate the leasehold wiped-out by the foreclosure sale, the owner-by-
foreclosure notifies the tenant they have elected to be the substitute landlord attornment
under the tenant’s lease agreement. Thus, the tenant’s leasehold interest is
restored. However, the owner-by-foreclosure need not exercise their right to
clause and
enforce the lease agreement, leaving the wiped-out tenant with no interest foreclosure
in the property. 

A commercial landlord has financial justification to include an attornment

attornment clause
clause in a lease agreement. When a senior trust deed lender forecloses, it is A lease agreement
essential for the landlord losing ownership by foreclosure to maintain the provision which
allows an owner-
property’s value. In the event the lender judicially forecloses, the future rents by-foreclosure to
collectible under an advantageous lease agreement reduces the potential of unilaterally avoid
a deficiency judgment for lost property value. [See Figure 1; see RPI Form the automatic
elimination of a junior
552-8 §3]  leasehold interest by
a foreclosure sale and
A financially advantageous lease agreement, enforceable by new owners become a substitute
landlord under
after a foreclosure, will help maintain the value of the property. On the other the tenant’s lease
hand, when a financially advantageous lease agreement does not contain agreement. [See RPI
an attornment clause, the property’s market value will be lower than had the Form 552-8 §3]
owner-by-foreclosure been able to enforce the lease agreement and restore
the tenant’s leasehold interest. 

When an owner-by-foreclosure elects to enforce a financially advantageous

lease agreement under its attornment clause, the lease agreement remains
effective to enforce collection of rent for the remainder of its term as scheduled
in the lease agreement.

Thus, the owner-by-foreclosure who makes the attornment election becomes

the substitute landlord. As the new landlord, they will perform the obligations
of the landlord under the lease agreement.6 

Before the foreclosing lender or other purchaser at a foreclosure sale

chooses to become the successor landlord, they will consider whether the
lease agreement provides for rents at or above market rates. To help make
the attornment decision, the owner-by-foreclosure: 
•  obtains the equivalent of a tenant estoppel certificate (TEC) from
each tenant to discover if the prior landlord has breached their lease
agreement [See RPI Form 598]; and 
•  inspects the property to be assured its physical condition is acceptable
to the owner-by-foreclosure. 

Lease agreements allowing a tenant to sublet the use and occupancy of all or Subleases
portions of the property to others, known as subtenants, contain restriction-
on-transfer provisions. These are also known as restraint-on-alienation and
provisions, transfer restrictions or assignment and subletting provisions. attornment
[See Chapter 49; see RPI Form 552-7] 

6 Miscione, supra
594 Property Management, Sixth Edition

Under a prohibition of subletting, the tenant is to first obtain the landlord’s

consent to sublet. When setting up the guidelines for consenting to a sublease
agreement, the landlord requires an attornment provision to be included in
the lease agreement with the subtenant.

If the landlord ever terminates the master tenant’s right of possession under
a three-day notice and forfeiture, the landlord may enforce the sublease
agreement by exercising their right to be the substitute landlord provided by
the attornment clause. 

The landlord electing to enforce the sublease agreement under the

attornment election is substituted as the landlord (sublessor) under the
lease agreement. Due to the election, the subtenant will continue paying
rent as agreed, but to the new landlord. 

No assurance Conversely, an attornment clause does not give the tenant the reciprocal right
to enforce the lease agreement against the buyer at the foreclosure sale. The
of continued attornment agreed to by the tenant to recognize the buyer as their landlord is
not triggered until the owner-by-foreclosure elects to enforce the provision. 
occupancy
Thus, a tenant who enters into a lease agreement with an attornment clause,
whose leasehold is junior to a lender’s trust deed, has no assurance the
leasehold will be restored on the lender’s foreclosure.

Yet tenants, when agreeing to an attornment clause, believe the clause

states the obvious — the tenant will perform on the lease agreement for
anyone who becomes the new owner of the property. The tenant views it
as a nondisturbance agreement with the lender, but it is not. The lender
is not a party to a subordinate lease agreement and has agreed to nothing
contained in it. 

However, when a junior leasehold is eliminated at a foreclosure sale, the

owner-by-foreclosure is unlikely to elect to enforce the lease agreement if: 
•  the owner-by-foreclosure acquired the property to occupy it as a user;
or 
•  the rents due under the exhausted lease agreement are significantly
less than the rents available in the market. 

The tenant Further, a tenant will regret the inclusion of an attornment clause when:

protects their •  rents called for in the lease agreement exceed market rates at the time
of foreclosure, as in a time of recession; or
interest •  the location or premises are no longer desirable for the tenant when
a foreclosure sale occurs, such as economic obsolescence. 
All these foreclosure related events typically converge during
economically depressed times for all involved, not when the lease
agreement is entered into. 
 Chapter 60: Attornment clauses in commercial leases 595

For a tenant to avoid the unilateral adverse economic impact of an attornment Avoidance of
clause upon entering into a long-term lease, the tenant is best served by a
leasing agent who:  the adverse
•  obtains an abstract of title or lessee’s policy of title insurance to ascertain impact of an
the trust deeds and other liens of record and the risk of loss they present
to the tenant, after initially pulling a title profile from a title insurance
attornment
company; 
•  obtain beneficiary statements or other assurance of mortgage balances
and defaults on the mortgages/liens of record; 
•  records a request for notice of default (NOD) [See RPI Form 412 and
412-1]; and 
•  records a request for notice of delinquency (NODq) on the lender. [See
RPI Form 412 and 412-2] 
With the information from these documents, the tenant is positioned to take
timely steps to protect their interest when the landlord defaults on senior
liens or the underlying ground lease, long before any foreclosure sale occurs
to terminate the tenant’s lease. 

An owner-by-foreclosure elects to enforce the tenant’s lease agreement under Notifying the
an attornment clause. The owner-by-foreclosure gives the tenant a written
notice:  tenant
•  stating the owner-by-foreclosure is exercising their right to enforce the
lease agreement under the attornment clause; and 
•  instructing the tenant to make all future rent payments due under the
lease agreement to the owner-by-foreclosure.7 
The attornment clause indicates a specific time period within which the
owner-by-foreclosure is to notify the tenant it they elect to enforce the lease.
[See Figure 1] 

The owner-by-foreclosure loses the right to enforce the attornment clause

when: 
•  the attornment clause does not contain a specific time period for
enforcing recognition of the owner-by-foreclosure as landlord; and
•  the owner-by-foreclosure does not elect to enforce the lease agreement
within a reasonable period of time. 

Instead of exercising the right to retain a lease, the owner-by-foreclosure of a

commercial property may choose to serve the tenant with a three-day notice
to quit due to foreclosure. This notice gives the landlord the right to evict the
tenant by unlawful detainer (UD) when the tenant remains in possession
past the three-day notice period.8 [See RPI Form 578]

7 Miscione, supra
8 Calif. Code of Civil Procedure §1161a(b)
596 Property Management, Sixth Edition

No right to The three-day notice is served as soon as possible to avoid conduct by the
landlord or property manager that could be construed as an enforcement of
continued the lease.
occupancy For example, an owner-by-foreclosure under a senior trust deed who elects
not to enforce the lease agreement may not accept rent from the tenant.
Accepting rent in the amount called for in the lease agreement may indicate
the owner-by-foreclosure intends to accept the lease under its attornment
clause, regardless of the owner-by-foreclosure’s actual intent.9 

When the owner-by-foreclosure accepts rent payments from a tenant

following the sale of the property under a senior trust deed and an attornment
clause does not exist in the extinguished lease, a periodic tenancy is created.
Here, neither the tenant nor the owner-by-foreclosure can enforce the lease
agreement since the tenant’s leasehold interest has been eliminated.10 

A commercial lender requiring an attornment clause in a lease agreement

Lender will also require the landlord to include a lender subordination clause
subordination in the lease agreement. The lender subordination clause allows the lender to
elect to subordinate its trust deed lien to leases the landlord enters into after
clauses the trust deed is recorded. [See Figure 2; see RPI Form 552-8 §2] 

A lease agreement containing both a lender subordination clause and an

attornment clause gives the lender flexibility to: 
•  subordinate its trust deed to the leasehold before the foreclosure sale
under the lender subordination clause and then enforce the lease
agreement after foreclosure;  
•  complete a foreclosure sale and exercise the attornment clause
to enforce the lease agreement by acting within the attornment
election period; or
•  do neither and treat the tenant as a holdover in unlawful
possession.
Some attornment clauses are worded to state the lender acquires the premises
“subject to” the leasehold at the time of the foreclosure sale. 

No automatic Occasionally, an attornment clause in a lease agreement literally states

the lender is to acquire the property “subject to” the lease. However, the
subordination attornment clause does not automatically subordinate the trust deed to the
leasehold when a foreclosure sale occurs since the lender is not a party to the
lease agreement. The lender did not agree to the terms of the lease agreement,
even when the lender previously reviewed it and waived due-on clause
enforcement by consenting to the lease. 

When the lender notifies the tenant prior to the foreclosure sale of its
election to subordinate its trust deed lien to the tenant’s lease, the election
need not be recorded to give public notice. The change in priority only
9 Rubin v. Los Angeles Federal Savings and Loan Association (1984) 159 CA3d 292
10 Colyear v. Tobriner (1936) 7 C2d 735
 Chapter 60: Attornment clauses in commercial leases 597

Figure 2

Excerpt from
Form 552-8

Lender
Subordination
and Attornment
Provisions
affects the parties to the agreements, namely the lender, the tenant and their
successors who are charged with knowledge of the provision’s existence in
the lease agreement.11 

A trust deed that becomes junior to a tenant’s leasehold interest in the

property by the lender’s election to subordinate prior to foreclosure gives the
leasehold priority over the trust deed. Thus, the tenant’s leasehold interest is
not eliminated from title by the foreclosure sale under the now-junior trust
deed. 

When the leasehold is not wiped out at the foreclosure sale because of the
lender’s prior election to subordinate, a later election under the attornment
clause after foreclosure becomes unnecessary.

When a lender elects to subordinate its trust deed to the lease, the high bidder
at the foreclosure sale acquires the property “subject to” the tenant’s leasehold
interest since the leasehold has priority over the trust deed. 

After the foreclosure sale, by either a prior election by the lender to

subordinate or a later election to have the tenant attorn to the owner-by-
foreclosure, the lease agreement becomes enforceable by both the tenant and
the new landlord.12 

Now consider a lender holding a first trust deed on commercial real estate. Electing to
After the trust deed is recorded, the landlord enters into a lease agreement
granting a tenant a leasehold interest in the property.  subordinate
The lease agreement contains a lender subordination clause, included to
satisfy the lender’s conditions for waiver of the due-on clause in their trust
deed as consent to the landlord entering into a lease agreement with a term
greater than three years. 

During the term of the lease, the landlord defaults on the lender’s trust deed.
The lender records an NOD, initiating a trustee’s foreclosure. The lender has
the property appraised and discovers the rent due over the remaining term of
the tenant’s lease exceeds current prevailing rental rates. 

For the same economic reasons that cause the lender to decide to preserve
the lease agreement, the tenant wants out of the lease agreement. 

11 CC §1217
12 Miscione, supra
598 Property Management, Sixth Edition

Before holding the trustee’s sale, the lender becomes aware of negotiations
between the landlord and the tenant to modify the lease agreement. The
lender does not want the landlord to alter the agreement prior to foreclosure
and an attornment. The lender serves written notice on the tenant of its
exercise of the election to subordinate the trust deed to the tenant’s lease.
This notice alters priorities, subordinating the lender’s trust deed to a position
junior to the tenant’s leasehold interest and the terms of the lease agreement.

After receipt of the notice of subordination, the tenant and the landlord
modify the lease agreement, granting the tenant the right to terminate the
leasehold and cancel the lease agreement at any time on 30 days’ written
notice, in exchange for the tenant paying the landlord a modification fee. 

The trustee’s sale is held and the lender acquires the property. The lender
notifies the tenant that the lender is the owner-by-foreclosure of the property
and all rent payments under the lease agreement are to be made to the lender.
The tenant serves the lender with a written 30 days’ notice exercising the
tenant’s election to terminate the leasehold and cancel the lease agreement
under the lease modification agreement. 

The lender claims the tenant cannot terminate the leasehold or cancel the
lease agreement since the modification agreement, but not the original lease
agreement, was rendered ineffective as against the lender by the foreclosure
sale. 

Lender Can the tenant in the previous example terminate the leasehold by canceling
the lease agreement under the conditions stated in the lease modification
subordination entered into prior to the landlord’s loss of the property to foreclosure? 
prior to No! The original terms of the lease agreement and the right of occupancy
modification held by the tenant remain unaffected by the foreclosure sale. The lender had
elected to subordinate their trust deed to the leasehold and lease agreement
prior to the tenant entering into the modification of the lease agreement.
Thus, the agreement modifying the lease agreement for termination of the
leasehold is unenforceable against the subordinate lender.

The modification agreement was junior in time to the subordination of the

trust deed. On subordination, the leasehold became a senior (unrecorded)
encumbrance on title to the property with priority to the lender’s trust deed,
a condition unalterable without the lender’s consent.13

By the lender subordinating its trust deed to the tenant’s leasehold, the lender
acted to maintain the property’s value based on future rents scheduled in the
lease agreement at the time of the subordination. Subordination allows the
lender to avoid the effect of any later modification of the lease agreement
prior to foreclosing and acquiring ownership at the trustee’s sale. 

13 In re 240 North Brand Partners, Ltd. (9th Cir. BAP 1996) 200 BR 653
 Chapter 60: Attornment clauses in commercial leases 599

Figure 3

Excerpt from
Form 552

Gross — Single
Tenant

In the event the lender proceeds with a judicial foreclosure, the landlord
would normally prefer for the property to remain encumbered by a financially
advantageous lease agreement to avoid a deficiency in the property’s value
as insufficient to satisfy the mortgage at the time of a judicial foreclosure sale. 

Thus, the risk of loss due to a deficiency in the value of the property at the time
of the remaining judicial foreclosure sale is reduced for both the lender and
the landlord. The tenant, however, is required to pay future rent as scheduled
in the leasing agreement. 

A landlord’s ability to further encumber or refinance their property during Future

the term of a lease is greatly diminished unless the lease agreement contains
a future subordination clause. [See Figure 3]  subordination
Like the attornment clause and lender subordination clause, a future clauses
subordination clause is an agreement to alter priorities on title. Under a
future subordination clause, the tenant agrees to subordinate their leasehold
(right of possession) to a trust deed to be recorded by the landlord sometime future
in the future.  subordination
clause
A lease agreement
Thus, the tenant agrees to place their leasehold in a financially junior position provision in which
on title, whether or not the lease agreement is recorded, than they enjoyed the tenant agrees to
at the time they entered into the lease agreement and took possession. The subordinate their
leasehold interest in
tenant’s leasehold will be subordinated to a new trust deed based on the property to a trust deed
terms agreed to in the future subordination clause.  to be recorded in the
future. [See RPI Form
For a future subordination clause to be enforceable at the time the landlord 552 §17]

arranges a new trust deed lien, the clause needs to specify: 

•  the use of the mortgage proceeds, such as refinancing existing
encumbrances or improving the property; 
•  the dollar amount of the mortgage or the loan-to-value ratio of the
financing; 
•  the payment schedule; 
•  the interest rate; and 
•  the due date.14 

14 Handy v. Gordon (1967) 65 C2d 578

 600 Property Management, Sixth Edition

The clause also contains any other terms that might be unique to the future
financing that would, if agreed to by the tenant, further impair the tenant’s
lease. 

When the landlord later arranges financing for the property on terms within
the parameters agreed to in the subordination clause, the tenant is obligated
to sign a specific subordination agreement. The agreement to subordinate
needs to set out the specifics of the mortgage to which the tenant’s leasehold
will be subordinate. A title company will not insure the priority of the new
trust deed over the tenant’s recorded or unrecorded leasehold interest without
a tenant-executed subordination agreement.  Automatic subordination
agreements are not enforceable.

However, the tenant may properly refuse to sign a subordination agreement

Tenant when the financing terms are not substantially similar or within the
refusal to parameters of the subordination clause in the lease agreement. The tenant
has not agreed to subject their lease to the uncertainties of a greater risk of
sign loss than the risks established by the terms of the lease agreement’s future
subordination clause. 

Editor’s note — When the landlord wants to record a new trust deed to
secure a mortgage and the tenant refuses to sign a specific subordination
agreement, the landlord’s primary recourse is to serve a three-day notice to
perform or quit. When performance is not forthcoming, the landlord may
file a UD action to evict the tenant or file an action against the tenant for
declaratory relief and specific performance of the future subordination
clause in the tenant’s lease agreement. 

Nondisturbance A nondisturbance clause gives the tenant the right to require a new
trust deed lender to enter into a written agreement with the tenant, called
and a nondisturbance agreement. The nondisturbance agreement states the
tenant’s leasehold interest will remain in effect for its full term under the
subordination lease agreement after the leasehold is subordinated to a new mortgage. 
clauses
A nondisturbance clause is included in a lease agreement only when the
lease agreement also contains a future subordination clause. The tenant is
nondisturbance the primary beneficiary of the nondisturbance clause. 
clause
A lease agreement
provision which is
A nondisturbance clause is typically used by the landlord and leasing agents
coupled with the to avoid negotiating the terms of a subordination clause with the tenant
future subordination when initially hammering out the terms of the lease agreement. 
clause to allow
a tenant’s junior
leasehold interest to When the nondisturbance clause and an enforceable future subordination
remain unaffected by clause are included in a lease agreement, the tenant may refuse to sign
a lender’s foreclosure a subordination agreement unless the lender provides the tenant with a
under a senior trust
deed. [See RPI Form nondisturbance agreement. Any standoff between the tenant and the lender
552-8] poses a serious problem to a landlord attempting to record financing. 

Informed lenders on originating a mortgage secured by a first trust deed are

not likely to provide a tenant with a nondisturbance agreement when a
 Chapter 60: Attornment clauses in commercial leases 601

tenant has agreed to subordinate their leasehold to the lender’s trust deed nondisturbance
lien. Without the subordination of the leasehold to the new trust deed, no agreement
reason exists for the tenant to have a nondisturbance agreement. An agreement with
mortgage lender
providing for the
A nondisturbance agreement negates the effect of the subordination tenant’s lease
agreement by reversing the very priorities agreed to by subordinating the agreement to remain
in effect for its full term
leasehold to the trust deed, a sort of self-destruct provision. The lease, in after the leasehold is
effect, will not be subordinate to the lender’s trust deed if the lender agrees to subordinated to a new
recognize the continued existence of the leasehold after a foreclosure of the mortgage.
trust deed. 

A knowledgeable landlord, contrary to the needs of a tenant, does not want Future
a nondisturbance clause in the lease agreement. Landlords are better served
by an enforceable future subordination clause.  subordination
Unlike the purpose of an attornment clause, a leasehold that is subject clause
to a nondisturbance agreement will not be eliminated by foreclosure benefits the
nor need to be later restored by election of the owner-by-foreclosure. The
nondisturbance agreement states the leasehold will remain in effect for its landlord
full term without regard to foreclosure. 

Since the leasehold subject to a nondisturbance agreement with the lender

is not extinguished by foreclosure, it cannot also be junior to the trust deed. 

Thus, a subordination of the leasehold to the trust deed does not occur when
the lender concurrently enters into a nondisturbance agreement.

Also, when a new lender executes a nondisturbance agreement, an attornment

clause serves no purpose for the lender’s trust deed rights. Like many clauses
in some lease agreements, it makes other provisions superfluous. 

The tenant’s possession and lease agreement when subject to a nondisturbance

agreement remains undisturbed and continuously enforceable by both the
tenant and the owner-by-foreclosure after the foreclosure sale. 

By entering into a nondisturbance agreement, the lender (or other high-

bidder at the foreclosure sale) is forced to become the landlord under the
lease agreement if the lender forecloses. 

A landlord eliminates the issue of a nondisturbance clause in a lease

agreement by their leasing agent negotiating an enforceable future
subordination clause outlining the mortgage parameters acceptable to both
the landlord and the tenant when entering into the lease. By doing so, the
landlord placates both the tenant and any future lenders that might otherwise
balk at a lease agreement requiring the landlord to deliver a nondisturbance
agreement from a new lender.
602 Property Management, Sixth Edition

Chapter 60 Commercial lease agreements often contain boilerplate provisions

relating to the priority of the leasehold against trust deeds, present and
Summary future. These provisions include:
•  attornment clauses;
•  lender subordination clauses;
•  future subordination clauses; and
•  nondisturbance clauses.
An attornment clause allows an owner-by-foreclosure who acquires
title at a foreclosure sale on a senior trust deed to unilaterally avoid the
automatic elimination and unenforceability of a junior leasehold by
the foreclosure sale.

A lender subordination clause gives a senior trust deed lender the right
to unilaterally subordinate the lender’s trust deed to a previously junior
leasehold interest by written notice to the tenant.

Under a future subordination clause, the tenant agrees to subordinate

their leasehold interest in the property to a trust deed to be recorded in
the future.

A nondisturbance clause, when coupled with a detail-deficient future

subordination provision, allows a tenant’s junior leasehold interest to
remain unaffected by a foreclosure under a new trust deed which is
given priority to the lease.

Chapter 60 attornment clauses...................................................................... pg. 593

lender subordination clauses................................................... pg. 596
Key Terms future subordination clauses.................................................... pg. 599
nondisturbance clause................................................................ pg. 600
nondisturbance agreement....................................................... pg. 601

Quiz 15 Covering Chapters 59-63 is located on page 658.

 Chapter 61: Tenant estoppel certificate 603

Chapter

61
Tenant estoppel
certificate

After reading this chapter, you will be able to: Learning

•  understand the obligations imposed by a Tenant Estoppel
Certificate (TEC); and
Objectives
•  use a TEC on the sale or financing of tenant-occupied property.

annual property operating Tenant Estoppel Certificate Key Terms

data sheet (APOD) (TEC)

A real estate broker representing an owner who wants to sell or refinance Protection for
their tenant-occupied property customarily prepares an annual property
operating data sheet (APOD) form to be included in the marketing package. buyers and
The completed APOD is handed to prospective buyers and lenders to induce
them to enter into a transaction with the owner. [See RPI Form 352]
lenders
An APOD prepared on a due diligence review of the property provides annual property
operating data sheet
buyers and lenders with an accurate summary of financial information on (APOD)
the operating income and expenses generated by the property. A worksheet used
when gathering
Buyers and lenders who rely on APOD figures need to corroborate the income income and expenses
on the operation of
and expense numbers and other leasing arrangements prior to closing. an income producing
A strategic method is to condition the closing on their receipt and further property, to analyze
approval of Tenant Estoppel Certificates (TEC), one signed and returned its suitability for
investment. [See RPI
by each tenant occupying the property. [See Form 598 accompanying this Form 352]
chapter]

The TEC summarizes the financial and possessory terms of the tenant’s lease
agreement, and whether the landlord and tenant have fully performed their
obligations.
604 Property Management, Sixth Edition

Tenant Estoppel The objective of the TEC is to confirm the current status of:
Certificate (TEC)
A statement which •  rent schedules;
summarizes the
monetary and
•  security deposits;
possessory terms of a •  possessory and acquisition rights; and
lease agreement, and
whether the landlord •  the responsibility for maintenance and other operating or carrying
and tenant have
fully performed their
costs.
obligations. [See RPI
Form 598]
Thus, the TEC will reveal any option or first refusal rights held by the tenant
to:
•  extend or renew the lease;
•  buy the property;
•  lease other or additional space; or
•  cancel the lease on payment of a fee.
However, the lease agreement needs to contain a TEC provision before the
owner may require a tenant to sign and return a TEC to confirm the leasing
arrangements. [See Figure 1; see RPI Form 552 §18]

The TEC provision calls for the tenant to:

•  sign and return a TEC, which has been filled out and sent to them,
within a specific period of time after its receipt; or
•  waive their right to contest its contents if the tenant fails to sign and
return the TEC submitted for their signature.

Tenant In addition, a TEC includes a statement indicating a buyer or lender will rely
on the information provided by the TEC when making a decision to lend or
response on purchase. [See RPI Form 598 §10]
receipt of a In the TEC, the tenant acknowledges the accuracy of its contents by either:
TEC •  signing and returning it; or
•  failing to respond, which waives the right to contest the accuracy of its
contents.
Either way, a buyer or lender may rely on the TEC’s content as complete and
correct statements on the terms and condition of the lease.1

The properly submitted TEC prevents any later claims made by the tenant
in a dispute with the buyer or lender that its terms are in conflict with the
contents of the lease agreement.

A buyer or lender asserts their right to rely on and enforce the terms stated
in the TEC by presenting the tenant’s TEC as a defense to bar contrary claims
made by the tenant, called estoppel. Thus, the tenant is estopped from
denying the truth of the information in the TEC or later claiming conflicting
rights.

1 Calif. Evidence Code §623

 Chapter 61: Tenant estoppel certificate 605

Figure 1

Excerpt from
Form 552

Gross — Single
Tenant

Lease agreements entered into by tenants and the seller of income property Security
are assigned to a buyer by the seller on the close of a sale. As part of the
adjustments and prorates at closing, the buyer requires the seller, through deposits
escrow, to account for any security deposits collected from the tenants. The
amount of the remaining security deposits goes to the buyer as part of the
confirmed
escrow process, called adjustments.

With a TEC, the tenant confirms the accounting and dollar amount of security
remaining on deposit with the seller. Thus, the TEC avoids the transfer of
insufficient amounts of security deposits on closing and establishes the
extent of the buyer’s liability for refunds due the tenant.

The buyer needs to condition their purchase on receipt of TECs to confirm

the current accounting of the security deposits. Otherwise, the buyer may
be required to pay tenants more than the security deposit amounts they
received from the seller on closing.2

Any deficiency in the amount of credit the buyer receives on closing for
security deposits the buyer is later required to pay to the tenants is recovered
by pursuing the seller.

A completed APOD form received by a buyer presents an accounting TEC

summary of a property’s income and expenses. It represents the present
income flow and operating expenses a prospective buyer can expect the substantiates
property to generate in the immediate future.
prior
Prior to closing, the buyer needs to: representations
•  review and analyze all the lease agreements the owner has entered
into with the tenants;
•  compare the results of an analysis of rent and maintenance provisions
in the lease agreements to the figures in the APOD received before the
offer was submitted; and
•  confirm the rent schedules, possessory rights, maintenance obligations
and expiration of the leases by serving conforming TECs on the tenants
and reviewing their responses before closing.

2 Calif. Civil Code §1950.5(i)

606 Property Management, Sixth Edition

Form 598

Tenant Estoppel
Certificate

Close on When signed and delivered to the buyer, the TEC statement reflects the
financial and possessory arrangements existing at the time the tenant signs
receipt of and returns the TEC.
TECs Consider a tenant who signs and returns a TEC that is reviewed and approved
by the buyer. However, before escrow closes, the seller breaches, modifies or
enters into other leasing arrangements with the tenant.

The seller’s post-TEC activities are not noted on the TEC, and will be unknown
to the buyer when escrow closes unless brought to the buyer’s attention. Thus,
on receiving the TECs, a buyer or lender needs to review them and close the
transaction as soon as possible to avoid a change in conditions in the interim.
 Chapter 61: Tenant estoppel certificate 607

The Tenant Estoppel Certificate (TEC) verifies the following: Figure 2

• whether possession is held under a lease or rental agreement; Status of the
• the current monthly amount of rent and the basis for rent increases; lease
• the date rent is paid each month;
• the date to which rent has been paid;
• any incentives given to obtain the tenant;
• whether the tenant has prepaid any rents;
• the term of the lease and whether an early cancellation privilege exists;
• whether and in what manner the lease/rental agreement has been modified;
• whether the tenant holds any options to renew or extend, acquire additional or
substitute space, or a right of first refusal to rent vacated space;
• whether the tenant holds any options to buy the real estate;
• the amount and status of any security deposit;
• any improvements the tenant needs to or can remove on vacating the premises;
• any landlord commitments to further improve the premises;
• whether the landlord or tenant is in breach of the lease or the rental agreement;
and
• whether the tenant has assigned or sublet the premises, or liened their leasehold
interest.

A buyer or lender may be confronted at the time of closing with a tenant

who has not signed and returned a TEC. Before closing, it is good practice for Consequence
the buyer and their agent to investigate whether differences actually exist of no TEC
between the owner’s representations on the TEC and the tenant’s expectations
under the lease agreement.

The buyer or lender may legally rely on the contents of an unreturned TEC
when the tenant’s lease agreement contains a TEC clause. However, an
inquiry by the buyer or their agent into the tenant’s failure to return the TEC
is a prudent measure to prevent future surprises.

Consider an owner of income-producing real estate who needs to generate

cash. They will do so by borrowing money using the equity in their property
as security for repayment of the mortgage.

Tenants occupy the property under lease agreements that include options to
renew at fixed rental rates. The lender does not condition the origination of
the mortgage on the lender’s receipt and approval of TECs from each tenant.
The lender, unfamiliar with real estate ownership interests, makes the
mortgage based on the value of comparable properties without regard for a
schedule of the tenants’ rent. [See RPI Form 380]

The owner defaults. The lender forecloses and acquires the property at the
trustee’s sale. As the new owner, the lender reviews the rent being paid by
the tenants.
608 Property Management, Sixth Edition

Case in point Consider a tenant who signs and returns unaltered a Tenant Estoppel Certificate
(TEC) on the landlord’s sale of commercial property. The TEC is erroneously prepared,
Signing an stating an expiration date earlier than the date for termination provided in the lease
erroneous TEC agreement.

The buyer relies on the TEC and purchases the property. The tenant remains in
possession of the premises after the expiration date stated in the TEC. The buyer seeks
to enforce the expiration date in the TEC by filing an unlawful detainer (UD) action to
evict the tenant.

The tenant claims the buyer cannot enforce the expiration date in the TEC by a UD
action since the TEC was not a written agreement modifying the lease, binding them
to a different expiration date than actually stated in the lease agreement. The buyer
claims the tenant is barred from contradicting the expiration date stated in the TEC.

Here, the new landlord may enforce the expiration date in the TEC and evict the tenant
by a UD action. The TEC is a statement signed by the tenant certifying facts with respect
to the lease which were relied on by the buyer. Thus, the tenant is barred from later
using the contrary provision in the lease agreement to contradict the TEC. [Plaza
Freeway Limited Partnership v. First Mountain Bank (2000) 81 CA4th 616]

The new owner decides to increase the rents to current market rates in order
Consequence to bring the property’s market value up to prices recently received on the sale
of no TEC, of comparable properties. However, the tenants who occupied the premises
before the lender’s trust deed was recorded claim their lease agreements,
cont’d which provide options to extend at old rental rates, are enforceable against
the lender as the new owner.

The lender claims their foreclosure sale wiped out all the owner’s rights in
the property and established the lender as the new title holder with priority
over the leases. Further, the lease agreements were not recorded.

May the tenants who occupied the property prior to the recording of the
lender’s trust deed enforce their renewal options even though their pre-
existing lease agreements were not recorded?

Yes! The lender originating a trust deed mortgage on income-producing

property they now own by foreclosure recorded the trust deed after the
tenants were in possession of the property. Thus:
•  the tenants’ rights and obligations under lease agreements, recorded or
not, retain priority over the lender’s trust deed lien recorded after the
tenants were in possession; and
•  the lender is bound by the rent schedules in the pre-existing lease
agreements and renewal/extension options because of the seniority of
the leases.3
The tenants’ occupancy of the premises prior to originating the mortgage puts
the lender on constructive notice, or knowledge, of the lease agreements,
renewal options and rent schedules.4
3 CC §1214
4 Evans v. Faught (1965) 231 CA2d 698
 Chapter 61: Tenant estoppel certificate 609

The condition for funding a motgage requiring lender approval of a TEC

from each tenant informs the lender of the tenants’ rights and obligations to
occupy and pay rent and other amounts under their lease agreements.

The owner’s scheduled future income needs to represent amounts the

tenants expect to pay. Every buyer or lender acquiring an interest in income-
producing real estate needs to require tenant approval of TECs based on lease
arrangements the owner/seller purports to hold with each tenant.

Now consider a purchase agreement for commercial rental property that

requires the seller to provide the buyer with TECs for the buyer’s further
The
approval or cancellation of the purchase agreement. erroneous,
One tenant’s lease agreement does not state the rent amounts but contains a unsigned TEC
formula for calculating rent. The seller instructs the buyer on how to calculate
the rent due from the tenant based on the provisions in the tenant’s lease
agreement.

The seller enters the rent amounts on the TEC based on the same calculations
given the buyer and sends it to the tenant to be signed and returned to the
buyer.

The tenant refuses to sign the TEC since the tenant is not obligated under
their lease agreement to provide a TEC. The seller hands the buyer a copy of
the tenant’s unsigned TEC to satisfy the purchase agreement condition. The
buyer accepts it without further investigation and confirmation.

After escrow closes, the buyer discovers the tenant’s actual rent is significantly
lower than the seller’s estimate. The buyer makes a demand on the seller for
the difference between the actual rent paid by the tenant under the lease and
the rent amounts calculated by the seller to be paid by the tenant.

Is the seller liable for the difference in the rent?

Yes! The buyer recovers lost rent from the seller in the amount of the difference
between the seller’s calculated estimate of rent and the actual amount
owed by the tenant. The seller is obligated under the purchase agreement
to provide the buyer with an accurate TEC. The buyer based their decision to
purchase the property on representations made by the seller, not on the rent
provisions in the lease agreement.5

A seller avoids liability for errors in the TEC prepared and sent to tenants by
including a TEC clause in the tenant’s lease agreement, calling for the tenant
Sellers avoid
to sign and return a TEC on request. The failure of the tenant to provide the liability
TEC as called for in the lease agreement is conclusive evidence any contrary
information contained in the TEC is correct. [See Figure 1]

Thus, a tenant’s refusal to sign a TEC when a TEC clause exists in the lease
agreement results in the tenant, not the seller, being liable for the erroneous
rent amount stated in the TEC prepared by the seller.
5 Linden Partners v. Wilshire Linden Associates (1998) 62 CA4th 508
610 Property Management, Sixth Edition

Chapter 61 The Tenant Estoppel Certificate (TEC) summarizes the monetary and
possessory terms of the lease agreement, and whether the landlord and
Summary tenant have fully performed their obligations.

The objective of the TEC is to confirm the current status of:

•  rent schedules;
•  security deposits;
•  possessory and acquisition rights; and
•  the responsibility for maintenance and other operating or carrying
costs.

Thus, the TEC will reveal any option or first refusal rights held by the
tenant to:
•  extend or renew the lease;
•  buy the property;
•  lease other or additional space; or
•  cancel the lease on payment of a fee.

Chapter 61 annual property operating data sheet (APOD) ................... pg. 603
Key Terms Tenant Estoppel Certificate (TEC) ........................................... pg. 604

Quiz 15 Covering Chapters 59-63 is located on page 658.

 Chapter 62: Due-on-leasing regulations 611

Chapter
62
Due-on-leasing
regulations

After reading this chapter, you will be able to: Learning

•  explain a lender’s right to call or modify a mortgage under a due-
on clause in a trust deed when the landlord leases the property
Objectives
for a period of more than three years or enters into a lease for any
period when the lease is coupled with an option to buy;
•  understand a lender’s impetus to enforce the due-on clause in
order to increase the interest yield on their portfolio in times of
consistently rising interest rates;
•  negotiate a waiver of the lender’s due-on rights when entering
into a lease, or limitation on the lender’s due-on rights on
origination of the mortgage; and
•  discuss the liability imposed on a leasing agent who assists the
landlord or tenant to hide the lease and purchase option from the
lender in an effort to avoid due-on enforcement.

call recast
Key Terms
due-on clause retroactive interest
differential

A property encumbered by a first trust deed containing a due-on clause

is offered for sale or lease. The owner locates a tenant for the property. The Rising
tenant enters into a two-year lease agreement with an option to purchase interest rates
the property. 
bring lender
Does the lease agreement and option to buy trigger the due-on clause in the
trust deed and allow the lender to call the mortgage secured by the trust deed
interference
lien on the property? 
612 Property Management, Sixth Edition

Yes! A trust deed’s due-on clause is triggered by a lease agreement for any
period of time when coupled with an option to buy the property. Thus, the
trust deed lender may call the mortgage on discovery of the lease-with-
option transaction, and foreclose if not paid in full.1

Interference When real estate is encumbered by a trust deed containing a due-on clause,
the transfer of any interest in the real estate allows the lender to enforce the
under federal clause under federal mortgage law. Thus, by preemption, Californians are
deprived of their state law right to lease, sell or further encumber real estate
mortgage law free of unreasonable lender interference.2

For the landlord of property encumbered by a trust deed, due-on enforcement

call
A lender’s demand
is triggered by:
for the balance of
the mortgage to be
•  leasing the property for a period of more than three years; or
immediately paid in •  entering into a lease agreement for any period of time when coupled
full. [See RPI From
418-3] with an option to buy.
On the trust deed lender’s discovery of these leasing arrangements, the lender
recast may either: 
A mortgage holder’s
demand to modify the •  call the mortgage, also known as accelerating the mortgage, by
note terms and receive
payment of additional demanding the remaining balance be paid in full; or 
fees in exchange for
waiving the due-
•  recast the mortgage, requiring the mortgage terms be modified and
on clause in their additional fees be paid as a condition for the lender’s consent to the
mortgage. triggering event, called a formal assumption. 

Economics In times of consistently rising interest rates (as expected over the next two
or three decades), lenders will seize on any opportunity to enforce the due-
of the due-on on clause as a method of increasing the interest yield on their portfolios.
This enforcement shifts the lender’s risk of loss due to rising interest rates
clause to the property owner by increasing their payments. Federal policy favors
this interference on the sale, lease or further encumbrance of any type of
mortgaged real estate as a means of maintaining mortgage lender solvency. 
due-on clause A real estate interest, be it an owner’s fee simple or a tenant’s leasehold estate,
A trust deed provision
used by lenders to call
when encumbered by a due-on trust deed becomes increasingly difficult to
the mortgage due and transfer to new owners and tenants as interest rates rise. Lender interference
immediately payable, is then virtually guaranteed in a relentless cyclical pursuit for ever higher
a right triggered by
the owner’s transfer of portfolio yields.  
any interest in the real
estate. The increasing inability of owners to lease their properties and retain
existing financing has an adverse economic effect on real estate sales, equity
financing and long-term leasing. Ultimately, as mortgage rates rise bringing
on lender interference, many buyers, equity lenders and long-term tenants
will be driven out of the market. The result is an increase in depressed property
values due to the reduced ability to sell, lease, assign a lease or encumber an
equity in real estate. 
1 12 Code of Federal Regulations §591.2(b)
2 12 United States Code §1701j-3; Calif. Civil Code §711
 Chapter 62: Due-on-leasing regulations 613

Unless the existing lender’s consent is obtained, the possibility of due-on

enforcement and a call creates uncertainty for the landlord when leasing
property with an initial or extension period longer than three years. The risk
a lender will call rise as interest rates increase. 

To best represent landlords and tenants, leasing agents need to understand

which events trigger the lender’s due-on clause, which do not, and how to
avoid or handle the lender’s consent. 

Consider a landlord with a short-term interim construction mortgage on Due-on-

commercial rental property who obtains a conditional mortgage commitment
from a lender for long-term, take-out financing. leasing
Editor’s note — Take-out financing is a commitment to provide permanent clauses
financing after a construction project has been completed and the requisite
occupancy has been attained.

Funding of the take-out mortgage is conditioned on the property being 80%

occupied by tenants with initial lease terms of at least five years. 

The landlord locates tenants for 80% of the newly constructed property, all
with lease terms of five years or more. The condition is met and the lender
funds the mortgage. The trust deed securing the mortgage contains a due-on
clause. 

The five-year leases already entered into to qualify for the refinancing
precede the recording of the refinancing. Thus, the leases do not trigger the
due-on clause in the new lender’s trust deed. 

However, after recording the trust deed, the landlord continues to lease space
on their property for five-year terms. None of the new leases are submitted
to the lender for approval. Thus, no waiver of the due-on clause is obtained
before entering into these leases. 

In a few months, mortgage interest rates rise. Then, an officer of the lender
visits the property or requests a rent roll and discovers new tenants. The
officer learns the new tenants have five-year leases. 

The lender sends a letter informing the landlord that the lender is calling the
mortgage since “It has recently come to our attention...” that the landlord has
entered into lease agreements with terms longer than three years without
first obtaining the lender’s consent. This is an incurable violation of the due-
on clause in the trust deed. 

The landlord claims the lender cannot call the mortgage since the lender
required medium-term leases as a condition for funding the mortgage. Thus,
the lender is estopped from invoking the due-on clause.

Can the lender call the mortgage due or demand a recast of its terms? 
614 Property Management, Sixth Edition

Yes! Requiring leases with terms exceeding three years as a condition for
funding the mortgage did not waive the lender’s right to later call or recast
the mortgage when the landlord entered five-year leases after the trust deed
was recorded. 

When a trust deed lien encumbers income property, the landlord prior to
It has entering into a lease agreement is to:
recently •  obtain consent from the lender before leasing;
come to our •  lease the property for an initial three-year period with options to
attention... extend for three-year periods; or
•  negotiate the elimination of the due-on clause from the trust deed. 

Assignment The tenant’s assignment of their leasehold interest in property does not
trigger the due-on clause in a trust deed encumbering the landlord’s fee
or interest. However, a modification of an existing lease agreement triggers the
modification due-on clause if:

of the lease •  the modification extends the term beyond three years from the date of
modification;
•  the modification adds a purchase option. 
For example, consider a landlord who enters into a long-term lease agreement
with a tenant. Later, the landlord takes out a mortgage secured by a trust deed
containing a due-on clause. 

After the trust deed is recorded, the tenant assigns their leasehold interest in
the property which has more than three years remaining to another person
who will take occupancy, all with the landlord’s approval, as agreed to in the
lease agreement. 

Here, the lender’s due-on clause is not triggered by the lease assignment.
The lender’s trust deed only encumbers the landlord’s fee interest, subject to
the outstanding leasehold. The trust deed does not encumber the leasehold
interest owned by the tenant (which if it did would produce a different result).
Thus, the tenant’s assignment of their unencumbered leasehold does not
trigger the lender’s due-on clause in the trust deed lien on the fee ownership.
The leasehold assignment was not a transfer of the fee interest which is the
lender’s security. 

However, consider a landlord who enters into a release of liability with

the original tenant, releasing the tenant from all liability under the lease
agreement as part of an assumption of the lease by a new tenant. A trust deed
with a due-on clause encumbers the landlord’s fee interest, whether the trust
deed is junior or senior to the lease. 

Here, the release of the original tenant from the lease agreement coupled
with an assumption of the lease agreement by the new tenant creates a
 Chapter 62: Due-on-leasing regulations 615

novation. The novation legally cancels the original lease agreement and
establishes a new lease agreement with the landlord conveying an interest
in the secured property to the new tenant on the same terms.3 

Thus, the lender’s due-on clause has been triggered if the lease “assumed”
by the tenant on the novation has a remaining term of over three years or
includes an option to purchase. 

With the federal due-on regulation, lenders have the power to dictate the
fate of most long-term real estate leasing transactions since most real estate is
Negotiations
encumbered by trust deeds.  and conduct
However, a landlord intending to lease their real estate and avoid lender as waiver
interference needs to consider: 
•  eliminating or placing some limitation on a lender’s due-on-clause use
when negotiating the origination of the trust deed mortgage; or 
•  negotiating a waiver of the lender’s due-on rights when entering into
a lease.  [See Chapters 42 and 51]
Waiver agreements are basically trade-offs. The lender will demand some
consideration in return for waiving or agreeing to an elimination or
limitation of its future due-on rights. This consideration can take the form
of increased points on origination, additional security, increased interest, a
shorter due date and an assumption fee for each consent. [See RPI Form 410] 

The lender’s waiver of its due-on rights applies only to the current lease
transaction under review for consent. Unless additionally agreed, any later
leasing of the property will again trigger the due-on clause, allowing the
lender to call or recast the mortgage again, due in part to the nonwaiver
provision in the trust deed. 

Besides obtaining a written waiver agreement, waiver of the lender’s due-on

rights may occur by conduct. When a lender fails to promptly enforce its due-
on rights upon gaining knowledge of a lease transaction, the lender loses its
right to later enforce the clause based on that lease. 

For example, a landlord enters into a lease agreement for a term exceeding
three years. The leased property is encumbered by a mortgage secured by a
trust deed containing a due-on clause. The lender is informed of the leasing
arrangements by letter or during an annual audit. 

The lender then calls the mortgage under its due-on clause based on the
lease transaction disclosed or delivered. However, the lender continues to
accept payments from the landlord for 12 months after the call, stating it is
unilaterally reserving its due-on rights. The lender has no further contact
regarding the call. 

Here, the lender by its conduct waived the right to enforce the due-on clause.
The lender accepted payments from the landlord for an extended period of
time after calling the mortgage.4 
3 Wells Fargo Bank, N.A. v. Bank of America NT & SA (1995) 32 CA4th 424
4 Rubin v. Los Angeles Federal Savings and Mortgage Association (1984) 159 CA3d 292
616 Property Management, Sixth Edition

Again, a lender can call the mortgage only when it discovers a lease agreement
Broker with a term longer than three years, or a lease with an option to buy. 
liability If the tenant’s option to purchase is not recorded and the lease agreement
for due-on is for a term under three years, the lender might not discover the transfer
which triggered its due-on clause. 
avoidance
However, if the lender later discovers the lease with its option to purchase,
the lender’s only remedy against the landlord or the tenant is to call the
mortgage due, or agree to recast the mortgage as a condition for retroactively
waiving its right to call.

The lender cannot recover any retroactive interest differential from the
landlord or tenant for a higher rate they would have charged at the time the
clause was actually triggered. Also, if the lender calls the mortgage, it cannot
add the retroactive interest differential to the mortgage payoff amount.5 
retroactive interest
differential However, an advisor, such as a leasing agent or attorney, assisting the
The mortgage holder’s landlord or tenant to hide the lease and option to purchase from the lender
losses, calculated
based on the interest to avoid due-on enforcement may be found to have wrongfully interfered
differential between with the lender’s legal right to call or recast the mortgage.
the note rate and the
market rate on the
date of a third party’s
Thus, the advisor may be held liable for the lender’s losses, called tortious
unlawful interference interference with prospective economic advantage. 
with the mortgage
holder’s right to call a The advisor’s liability is dependent upon:
mortgage.
•  the extent the actions were intended to conceal the lease agreement
and prevent a call by the lender; and
•  the foresight that the advisor had regarding the lender’s likely losses
due to the concealment.6 
The lender’s losses caused by the advisor’s wrongful interference are
calculated based on the interest differential between the note rate and the
market rate at the time the lease commenced, retroactive to the date of the
commencement. Hence, the title of retroactive interest differential.

5 Hummell v. Republic Fed. Savings and Mortgage Assn. (1982) 133 CA3d 49
6 J’Aire Corporation v. Gregory (1979) 24 C3d 799
 Chapter 62: Due-on-leasing regulations 617

In times of consistently rising interest rates, lenders seize on any Chapter 62

opportunity to enforce the due-on clause in order to increase the interest
yield on their portfolios. Summary
For the landlord of property encumbered by a trust deed, due-on
enforcement is triggered by:
•  leasing the property for a period of more than three years; or
•  entering into a lease agreement for any period of time when the
lease agreement is coupled with an option to buy.
When the trust deed lender discovers these leasing arrangements, the
lender may either call or recast the mortgage.

A landlord intending to lease their real estate and avoid lender

interference needs to consider:
•  eliminating or placing some limitation on a lender’s due-on-
clause use when negotiating the origination of the mortgage; or
•  negotiating a waiver of the lender’s due-on rights when entering
into a lease.

due-on clause................................................................................. pg. 612 Chapter 62

call.................................................................................................... pg. 612
recast................................................................................................ pg. 612
Key Terms
retroactive interest differential............................................... pg. 616

Quiz 15 Covering Chapters 59-63 is located on page 658.

 Chapter 63: Gaining possession after foreclosure 619

Chapter

63
Gaining possession
after foreclosure

After reading this chapter, you will be able to: Learning

•  understand how to evict tenants using proper notices; and
•  identify special protections granted to tenants of a foreclosed
Objectives
property.

owner-by-foreclosure unlawful detainer Key Terms

A residential income property is encumbered by a recorded trust deed. Notice

Tenants occupy the property under month-to-month rental agreements
entered into after the trust deed was recorded. [See RPI Form 551] required
Payments on the trust deed note are delinquent, causing the lender to initiate to remove
a trustee’s foreclosure. occupants
Prior to the foreclosure sale, the lender employs a broker to inspect the
physical condition of the improvements and determine the property’s fair
market value for immediate resale.

Based on the broker’s inspection and market review, they advise the lender
to:
•  complete the foreclosure proceedings;
•  evict all tenants;
•  renovate the property;
•  relet the property to creditworthy tenants at market rates; and
•  sell the property.
The lender acquires the property at the trustee’s sale.
620 Property Management, Sixth Edition

To meet the resale objectives recommended by the broker, the lender wants
the tenants to immediately vacate the property. The property now owned by
the lender is referred to as real estate owned (REO) property.

The broker has each tenant served with a 90-day notice to quit due to
foreclosure. [See Form 573 accompanying this chapter]

Have the tenants been properly notified and thus required to vacate the
owner-by- premises?
foreclosure
The winning bidder Yes! The residential tenants whose unexpired month-to-month rental
at a trustee’s sale
who takes title to the
agreements were junior (in time) to the recording of the trust deed, and thus
property sold on a eliminated by the foreclosure sale, are entitled to 90 days written notice to
trustee’s deed. vacate.1

After the expiration of the 90-day notice to vacate, a residential tenant under
unlawful detainer
The unlawful a month-to-month rental agreement who does not vacate the foreclosed
possession of a property, may be evicted by the owner-by-foreclosure in an unlawful
property. [See RPI detainer (UD) action. This general rule does not apply to rent controlled or
Form 575 -578]
Section 8 properties.

Evicting A rental or lease agreement entered into after a trust deed is recorded is wiped
out on completion of a foreclosure sale on the trust deed.
occupants
after If a prior owner or occupant under a junior rental or lease agreement remains
in possession after a foreclosure sale, the new owner-by-foreclosure may
foreclosure serve the appropriate notice to quit due to foreclosure. They may remove the
occupants, residential or commercial, in a UD eviction action.

An owner-by-foreclosure is defined as a buyer of real estate which is sold at:

•  a sheriff’s sale on a judgment lien;
•  a judicial foreclosure sale; or
•  a trustee’s foreclosure sale.2
An owner-by-foreclosure follows different rules to evict occupants remaining
in possession of the foreclosed property under a wiped-out lease or month-to-
month rental agreement.

Evicting A tenant who occupies a residential property under a periodic tenancy at

the time the property is sold in foreclosure needs to receive at least 90 days’
residential written notice to quit.
tenants
Residential tenants with a fixed-term lease entered into prior to the
foreclosure sale have the right to possess the rented property until the end of
their lease, unless:
•  the new owner will use the property as their primary residence;

1 Calif. Code of Civil Procedure §1161b

2 CCP §1161a(b)
 Chapter 63: Gaining possession after foreclosure 621

•  the tenant is the owner of the property who defaulted on the mortgage;
•  the tenant is the child, spouse or parent of the owner who defaulted;
•  the lease was not the result of an arm’s length transaction; or
•  the rent was substantially less than fair market rent without
subsidization or reduction per court order.
A fixed-term tenancy can be terminated for any of the above reasons by
serving the tenant with a 90-day notice to quit. [See RPI Form 573]

The new owner bears the burden of proof in establishing the tenant is not
eligible to possess the property through the end of the lease term.

This law will sunset on December 31, 2019.3

Additionally, tenants living in Section 8 housing or rent control communities

are protected from unqualified termination of their occupancy after a
foreclosure sale.

The appropriate period of notice to vacate due to foreclosure depends on

whether:
•  the property is residential or commercial; and
•  the occupants are former tenants or former owners.

Unlike a residential tenant, a commercial tenant whose junior lease is wiped Evicting
out by a foreclosure is only entitled to a three-day notice to quit, regardless of
whether the tenant paid rent monthly, quarterly or annually.4 commercial
A former owner who remains as an occupant is only entitled to a three-day tenants
notice to quit, whether the property is residential or commercial.5

Thus, to remove a commercial tenant or the former owner of a property, the

owner-by-foreclosure serves them with a three-day notice to quit due to
foreclosure. On expiration of the three days after service of the notice and the
failure of the prior owner or the tenant to vacate, a UD is established. Thus,
the tenant may be evicted by court order. [See RPI Form 578]

A notice to quit due to foreclosure is served in the same manner as a three-

day notice to pay rent or quit.6 [See Chapter 25]
Service of
notice
An attempt at personal service on the occupant is first made at both the
occupant’s residence and place of business, if known.7

3 CCP §1161b(f)
4 CCP §1161a(b)
5 CCP §1161a(b)
6 CCP §1161a(b)
7 CCP §1162
622 Property Management, Sixth Edition

Form 573

90-Day Notice
to Quit Due to
Foreclosure

If the occupant cannot be located for personal service, the server may leave
the notice with a person of suitable age and discretion at the occupant’s
residence or business address, and mail the notice to the occupant’s residence,
called substituted service.8

Finally, if no person of suitable age or discretion is available at either the

occupant’s residence or place of business, the server may post the notice on
the leased premises and mail a copy to the premises, called service by “nail
and mail.”9
8 CCP §1162(a)(2), §1162(b)(2)
9 CCP §1162(a)(3), §1162(b)(3)
 Chapter 63: Gaining possession after foreclosure 623

The day after the notice is served is day one of the period during which the
occupant needs to vacate.10

In a UD action, an owner-by-foreclosure is entitled to recover rent from UD award of

the occupant. The amount recoverable is the reasonable rental value of
the property for the period the occupant resides on the property after the rental value
foreclosure sale, not the penalty holdover rate.11

The secured lender who acquires the premises at the foreclosure sale cannot
collect unpaid pre-foreclosure rents in a UD action.

However, any rents which were due and unpaid by a tenant before the
foreclosure sale belong to the lender under an assignment of rents provision
in the lender’s trust deed. These unpaid rents are collectable in a separate
action unrelated to the UD action, called specific performance of the
assignment of rents provision.

When residential income property subject to local rent control ordinances or UD action as
a Section 8 contract is acquired by an owner-by-foreclosure, the owner-by-
foreclosure needs to comply with the ordinances and Section 8 rules. a remedy, not
Consider a trust deed lender who forecloses on residential rental units
a right
by a trustee’s sale and acquires the property at the foreclosure sale. The
lender wants to remove the former tenants under wiped-out rental or lease
agreements. The lender intends to renovate the property and resell it.

The lender, now the owner-by-foreclosure, serves each tenant with a statutory
90-day notice to quit due to foreclosure. However, the property is located in
a rent control community.

The occupants claim they cannot be evicted by the lender since the rent
control ordinance does not permit eviction on a change of ownership. The
rent control ordinances limit the circumstances which are cause for a tenant
to be evicted. Change of ownership for any reason is not a permitted basis for
eviction of a tenant protected by rent control.

The lender claims the tenants can be evicted due to foreclosure since the local
ordinance is preempted by state law allowing a tenant to be evicted after a
foreclosure sale.

Can the tenants be evicted by the lender since the lender is an owner-by-
foreclosure?

No! Residential tenants protected under rent control ordinances cannot be

evicted after a foreclosure, except as permitted by local ordinances. The 90-
day notice requirement for evicting a residential tenant after a foreclosure
sale in a UD action does not preempt the local rent control ordinance. [See
Form 573]

10 Calif. Civil Code §10

11 CCP §1174(b)
624 Property Management, Sixth Edition

No tenancy An occupant of property whose leasehold or ownership interest has been eliminated
for wiped-out by foreclosure has no right to possession and is not a tenant. Any landlord/tenant
occupants relationship under the rental agreement or lease which was junior to the foreclosing
lienholder is wiped out at the foreclosure sale.
No tenancy in real estate is recognized for occupants who lost their possessory interest
due to a foreclosure. The wiped-out occupant, whether they are a prior owner or held
a tenancy interest in the property, is not a holdover tenant, and thus is not a tenant-
at-sufferance.
Also, the occupant is not a tenant-at-will since they did not occupy the property with
the owner-by-foreclosure’s consent.
Even though no landlord/tenant relationship exists, an owner-by-foreclosure is
permitted to remove occupants from the foreclosed property by evicting them in an
unlawful detainer (UD) action. [CCP §1161a(b)]
However, a buyer at a foreclosure sale does not qualify as an owner-by-foreclosure for
a UD eviction of a prior occupant when the property is purchased at:
• a federal or state tax lien sale;
• a property tax lien sale; or
• a Mello-Roos sale, or sale under other improvement bonds or government
agency assessments.
Purchasers of property at tax sales or improvement bond sales which are occupied:
• are not permitted to remove occupants by filing a UD action; and
• are limited to filing an ejectment action against the occupant to recover
possession of the premises

While an ejectment action and a UD action are alternative remedies for recovering
possession from occupants, the UD action is faster and less expensive, and thus more
desirable for the owner-by-foreclosure.

The UD notice and eviction process merely provides a legal remedy for a
lender who has grounds to recover possession from the tenants, in lieu of
using self-help to remove tenants. Under rent control, it is the ordinance
which establishes the grounds for the eviction of a tenant.12

12 Gross v. Superior Court (1985) 171 CA3d 265

 Chapter 63: Gaining possession after foreclosure 625

A rental or lease agreement entered into after a trust deed is recorded is Chapter 63
wiped out on completion of a foreclosure sale on the trust deed.
Summary
If a prior owner or occupant under a junior rental or lease agreement
remains in possession after a foreclosure sale, the new owner-by-
foreclosure can serve the appropriate notice to quit due to foreclosure.
They may remove the occupants, residential or commercial, in a UD
eviction action.

A tenant who occupies a residential property under a periodic tenancy

at the time the property is sold in foreclosure needs to receive at least 90
days’ written notice to quit.

Unlike a residential tenant, a commercial tenant whose junior lease is

wiped out by a foreclosure is only entitled to a three-day written notice
to quit, regardless of whether the tenant paid rent monthly, quarterly or
annually.

owner-by-foreclosure ............................................................... pg. 620 Chapter 63

unlawful detainer ...................................................................... pg. 620
Key Terms

Quiz 15 Covering Chapters 59-63 is located on page 658.

 Glossary 627

Glossary
A
abandonment������������������������������������������������������������������������������������������������������������������������������������������������������ 323
A unilateral termination of a tenancy by forfeiture, delivered by the landlord based on notices from
the landlord. [See RPI Form 581]
accommodation party��������������������������������������������������������������������������������������������������������������������������������������� 228
An individual who signs a note to include liability for a debt evidenced by the note and receives no
direct benefit from the debt.
ad valorem taxes ������������������������������������������������������������������������������������������������������������������������������������������������ 433
Real estate taxes imposed on property based on its assessed value. [See RPI Form 552-2 §5.1]
addendum ������������������������������������������������������������������������������������������������������������������������������������������������������������ 520
An attachment to a contract, rental or lease agreement for incorporating any provision agreed to
but not included in the boilerplate provisions of the agreement. [See RPI Form 250]
agency duty���������������������������������������������������������������������������������������������������������������������������������������������������������� 138
The fiduciary duty a broker owes a client to use diligence in attaining the client’s real estate goals.
[See RPI Form 305]
agent-for-service clause �������������������������������������������������������������������������������������������������������������������������������� 118
A section in the property management agreement which appoints the owner’s agent-for-service.
[See RPI Form 590 §11.3]
agent-for-service process ������������������������������������������������������������������������������������������������������������������������������ 117
An individual who acts on behalf of the owner, accepting service of legal documents and notices
initiated by tenants.
annual property operating data sheet (APOD)������������������������������������������������������������������������������������ 603
A worksheet used when gathering income and expenses on the operation of an income producing
property to analyze its suitability for investment. [See RPI Form 352]
anti-competition clause �������������������������������������������������������������������������������������������������������������������������������� 348
A provision in the commercial lease agreement stating the landlord will not lease space in a
commercial complex to competitors of the tenant.
applicant screening fee ��������������������������������������������������������������������������������������������������������������������������������� 175
A nonrefundable fee charged to the tenant to reimburse the landlord for the cost to obtain the
tenant’s credit report.
appreciation-adjusted rent provision ��������������������������������������������������������������������������������������������451, 456
A provision found in a commercial lease agreement which adjusts rent every several years to
reflect an increase in the rental value of a property exceeding the rate of inflation brought about by
local demographics. [See RPI Form 552 §4.5(e)]
appurtenance ������������������������������������������������������������������������������������������������������������������������������������������������������� 474
A right belonging to real estate owned by the landlord to use property located outside the leased
premises for purposes such as parking or access.
assignment ���������������������������������������������������������������������������������������������������������������������������������������������������������� 263
A tenant’s sublease of a portion of the leased premises.
assumption ����������������������������������������������������������������������������������������������������������������������������������������������������������� 499
The promise by a successor tenant to fully perform all obligations under the lease agreement they
are taking over by assignment from the previous tenant.
attorney fees provision ������������������������������������������������������������������������������������������������������������������������������������430
A provision in an agreement permitting the prevailing party in a dispute to receive attorney fees
when litigation arises due to the agreement. [See RPI Form 552 §23.2]
628 Property Management, Sixth Edition

attornment clause �������������������������������������������������������������������������������������������������������������������������������������������� 593

A lease agreement provision which allows an owner-by- foreclosure to unilaterally avoid the
automatic elimination of a junior leasehold interest by a foreclosure sale and become a substitute
landlord under the tenant’s lease agreement. [See RPI Form 552-8 §3]

B
balance sheet ������������������������������������������������������������������������������������������������������������������������������������������������������� 178
An itemized, dollar-value presentation for setting an individual’s net worth by subtracting debt
obligations (liabilities) from asset values. [See RPI Form 209-3]
base rent ���������������������������������������������������������������������������������������������������������������������������������������������� 437, 448, 465
The minimum monthly rent stated in a commercial lease agreement. [See RPI Form 552 §4.3]
blockbusting ������������������������������������������������������������������������������������������������������������������������������������������������������� 547
The prohibited practice of a residential landlord inducing or attempting to induce a person to
offer, or abstain from offering a dwelling to prevent the entry of certain classes of people into a
neighborhood.
bona fide lease agreement ���������������������������������������������������������������������������������������������������������������������������� 308
A lease agreement with a fair market rent held by a residential tenant when ownership of a
property is transferred by a foreclosure sale. [See RPI Form 550]
bona fide purchaser ����������������������������������������������������������������������������������������������������������������������������������������� 421
A buyer of leased real estate who lacks knowledge that a lease agreement exists and purchases the
property for valuable consideration or accepts the real estate as security for a debt.
business goodwill ����������������������������������������������������������������������������������������������������������������������������������������������� 45
The earning power of a business.

C
call ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 612
A lender’s demand for the balance of the loan to be immediately paid in full. [See RPI Form 418-3]
call option ��������������������������������������������������������������������������������������������������������������������������������������������������������������� 63
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 RPI Form 161]
California Fair Employment and Housing Act (FEHA) ����������������������������������������������������������������� 560
Legislation which prohibits landlords from using discriminatory rental policies to avoid renting to
a tenant based on familial status.
cancellation provision ����������������������������������������������������������������������������������������������������������������������������������� 300
A lease agreement provision permitting the tenant to terminate their occupancy and rent
obligation by paying a set sum of money.
certified CID manager ��������������������������������������������������������������������������������������������������������������������������������������� 76
A non-required professional designation certifying an individual has met legislated educational
requirements specific to managing common interest developments.
choice-of-law provision �������������������������������������������������������������������������������������������������������������������������������� 431
A clause which sets the state law applicable in the event of a dispute. [See RPI Form 552 §23.4]
Civil Rights Act �������������������������������������������������������������������������������������������������������������������������������������������������� 543
A federal law which provides broad protections to all persons in the United States against
discriminatory activities.
commingling ������������������������������������������������������������������������������������������������������������������������������������������������������ 101
The mixing of personal funds with client or third-party funds held in trust.
common area maintenance charge ���������������������������������������������������������������������������������������������������������� 149
Property operating expenses incurred by a commercial landlord and paid by the tenant as rent
additional to the base rent, adjustments and percentages. [See RPI Form 552 §6]
 Glossary 629

common interest developments ������������������������������������������������������������������������������������������������������������������ 85

Condominium projects, cooperatives or single family residences in a planned unit development.
[See RPI Form 135]
comparative cost analysis ����������������������������������������������������������������������������������������������������������������������������� 146
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 RPI Form 562]
comparative negligence ������������������������������������������������������������������������������������������������������������������������������� 412
An injured person’s share of the negligence causing their injury when the injured person’s lack of
care for themselves contributes to the injury.
compliance-with-laws clause �������������������������������������������������������������������������������������������������������������������� 475
A provision in a commercial lease agreement controlling the conduct of tenant activities on the
property to conform with public laws, building ordinances or tenant association rules. [See RPI
Form 552 §7.3]
compounded base rent ������������������������������������������������������������������������������������������������������������������������������������ 419
Rent that adjusts yearly by a certain percentage of the prior year’s rent.
constructive eviction �������������������������������������������������������������������������������������������������������������������������������������� 346
A termination of the tenant’s right of possession and cancellation of the lease agreement on
vacating due to the landlord’s failure to maintain the premise as stated in the lease. [See RPI Form
552 §6]
constructive notice ������������������������������������������������������������������������������������������������������������������������������������������� 422
To be charged with the knowledge observable or recorded conditions exist on the property. When a
tenant occupies a property under a lease agreement, a buyer is charged with constructive notice of
the tenant’s leasehold interest by the occupancy.
consultation fee ������������������������������������������������������������������������������������������������������������������������������������������������ 138
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 RPI Form 111 §4.2]
Consumer Price Index (CPI) ������������������������������������������������������������������������������������������������������������������������� 456
The CPI measures and tracks the rate of consumer inflation. This is presented as an index of
fluctuations in the general price of a wide selection of consumable products – goods and services.
contingency fee ���������������������������������������������������������������������������������������������������������������������������������������������������� 75
An incentive bonus paid upon successfully completing or hitting certain benchmarks, or received
as compensation on the occurrence of an event.
contingency fee clause ���������������������������������������������������������������������������������������������������������������������������������� 130
A provision in an offer-to-lease which states the broker’s fee is payable on the transfer of possession
to the tenant. [See RPI Form 556 §15]
corporate resolution ��������������������������������������������������������������������������������������������������������������������������������������� 432
A document from a corporation’s board of directors which gives the officers of a corporation the
authority to sign and bind the corporation to a lease.
covenant of quiet enjoyment ���������������������������������������������������������������������������������������������������������������������� 348
An implied lease provision which prohibits the landlord from interfering with the tenant’s agreed
use and possession of a property.
credit application ���������������������������������������������������������������������������������������������������������������������������������������������� 518
A document prepared by a prospective tenant which includes a provision authorizing the
investigation and receipt of information on the applicant’s creditworthiness. [See RPI Form 302]
credit reporting agency ���������������������������������������������������������������������������������������������������������������������������������� 170
A private agency which collects and reports information regarding an individual’s credit history.
curable breach ���������������������������������������������������������������������������������������������������������������������������������������������������� 256
A breach of the lease agreement which can be remedied by action from the tenant.
630 Property Management, Sixth Edition

D
declaration of forfeiture provision ���������������������������������������������������������������������������������������������������������� 232
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 RPI Form 575 §5]
default remedies provision ������������������������������������������������������������������������������������������������������������������������� 232
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 RPI Form 550 §3.1
and 552 §2.1]
delinquency ��������������������������������������������������������������������������������������������������������������������������������������������������������� 247
A tenant’s or borrower’s failure to pay the agreed amounts on or before the due date or expiration of
any grace period.
destruction provision ��������������������������������������������������������������������������������������������������������������������������������������� 481
A provision in a lease agreement in which a tenant agrees to pay for any destruction to the
premises caused by the tenant, covered by the tenant’s insurance or required by other lease
provisions. [See RPI Form 552 §16]
disabled persion ������������������������������������������������������������������������������������������������������������������������������������������������ 552
Anyone who has a physical or mental impairment which significantly limits major life activities,
has a record of disability, or is regarded as being disabled.
dominant tenement ���������������������������������������������������������������������������������������������������������������������������������������������� 9
The property benefitting from an easement on a servient tenement.
dual agency ���������������������������������������������������������������������������������������������������������������������������������������������������������� 140
The agency relationship that results when a broker represents both the buyer and the seller in a real
estate transaction. [See RPI Form 117]
due date ������������������������������������������������������������������������������������������������������������������������������������������������������������������ 248
The date provided in the rental or lease agreement on which rental payments are due. [See RPI
Form 550 §4.1 and 552 §4.1]
due-on clause ������������������������������������������������������������������������������������������������������������������������������������������������������ 612
A trust deed provision used by lenders to call the mortgage immediately due and payable, a right
triggered by the owner’s transfer of any interest in the real estate, with exceptions for intra-family
transfers of their home.
dwelling ���������������������������������������������������������������������������������������������������������������������������������������������������������������� 544
A building occupied or designed to be occupied as a residence by one or more families.

E
early termination clause ������������������������������������������������������������������������������������������������������������������������������ 128
A provision which assures payment of the broker’s fee if the owner withdraws the property from
the market during the listing period. [See RPI Form 110 §3.1(c)]
early-termination fee �������������������������������������������������������������������������������������������������������������������������������������� 317
A fee paid to the landlord by the tenant to cancel the lease agreement in exchange for returning
possession. [See RPI Form 587 §2.2]
eminent domain ������������������������������������������������������������������������������������������������������������������������������������������������ 430
The right of the government to take private property for public use on payment to the owner of the
property’s fair market value.
entire agreement clause �������������������������������������������������������������������������������������������������������������������������������� 431
A clause in a lease agreement which limits the tenant’s ability to imply terms into the lease based
on oral statements made before entering into the lease.
estate ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 2
The ownership interest a person may hold in real estate.
eviction ������������������������������������������������������������������������������������������������������������������������������������������������������������������� 226
An unlawful detainer action filed to physically remove a tenant from actual possession.
 Glossary 631

exclusive authorization to lease �������������������������������������������������������������������������������������������������������������� 124

A written agreement between a broker and client employing the broker to render services in
exchange for a fee on the leasing of the property to a tenant located by anyone. Also known as a
listing. [See RPI Form 110]
exclusive authorization to locate space ��������������������������������������������������������������������������������������� 136, 153
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 RPI
Form 111]
exclusive right-to-collect clause ��������������������������������������������������������������������������������������������������������������� 128
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 landlord accepts. [See RPI Form 110 §3.1(a)]

F
familial status ������������������������������������������������������������������������������������������������������������������������������������������� 544, 559
A status which indicates a household includes individuals under the age of 18.
Federal Fair Housing Act (FFHA) ����������������������������������������������������������������������������������������������������� 544, 560
A collection of policies designed to prevent discrimination in the access to housing based on an
occupant’s inclusion in a protected class.
fee estate ��������������������������������������������������������������������������������������������������������������������������������������������������������������������� 2
An indefinite, exclusive and absolute legal ownership interest in a parcel of real estate.
final inspection ������������������������������������������������������������������������������������������������������������������������������������������������� 193
An inspection of the premises conducted by the landlord within 21 days after a residential tenant
vacates the property. [See RPI Form 585]
fixed-rent lease �������������������������������������������������������������������������������������������������������������������������������������������������� 437
A lease agreement with monthly rent payments set at a specific dollar amount for the life of the
lease. [See RPI Form 550 and 552]
fixed-term tenancy ������������������������������������������������������������������������������������������������������������������������������������������������ 5
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 RPI Form 550 and 552]
floor rent ���������������������������������������������������������������������������������������������������������������������������������������������������������������� 420
A minimum rent rate the landlord receives throughout the lease term.
forcible entry ��������������������������������������������������������������������������������������������������������������������������������������������������������� 41
The unlawful entry of any party into a rented property without permission, prior notice or
justification.
forfeiture of possession ���������������������������������������������������������������������������������������������������������������������������������� 233
A termination of the tenant’s right of possession triggered by a declaration of forfeiture in a notice
to quit. [See RPI Form 575 §5]
full listing offer �������������������������������������������������������������������������������������������������������������������������������������������������� 127
A buyer’s or tenant’s offer to buy or lease on terms substantially identical to the employment terms
in the owner’s listing agreement with the broker. [See RPI Form 556]
full-service gross lease ����������������������������������������������������������������������������������������������������������������������������������� 433
A commercial lease specifying that the landlord retains the responsibility for payment of all costs of
care and maintenance, unless modified, including the tenant’s utilities and janitorial services. [See
RPI Form 552 and 552-1]
further-approval contingency �������������������������������������������������������������������������������������������������������������������� 149
A provision in an offer to rent property which allows the tenant time to investigate and confirm
the property information disclosed by the landlord.
632 Property Management, Sixth Edition

futher-improvements provision ������������������������������������������������������������������������������������������������������������������ 48

A commercial 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 RPI Form
552 §11.3]
future subordination clause ����������������������������������������������������������������������������������������������������������������������� 599
A lease agreement provision in which the tenant agrees to subordinate their leasehold interest in
property to a trust deed to be recorded in the future. [See RPI Form 552 §17]

G
general adjustment ����������������������������������������������������������������������������������������������������������������������������������������� 575
A type of rent control rent adjustment which uniformly adjusts rents for all rental units. [See RPI
Form 552 §4.4 and §4.5]
general duty �������������������������������������������������������������������������������������������������������������������������������������������������������� 138
The duty a licensee owes to non-client individuals to act honestly and in good faith with up-front
disclosures of known conditions which adversely affect a property’s value. [See RPI Form 305]
grace period ���������������������������������������������������������������������������������������������������������������������������������������������������������� 248
The time period following the due date for a payment during which payment received by a lender
or landlord is not delinquent and a late charge is not due. [See RPI Form 550 §4.3 and 552 §4.7]
graduated rent provision ������������������������������������������������������������������������������������������������������������������������������� 446
A rent provision in a commercial lease agreement which periodically increases the initial monthly
rent in pre-set increments over the term of the lease. [See RPI Form 552 §4.4]
gross lease �������������������������������������������������������������������������������������������������������������������������������������������������������������� 433
A commercial lease specifying that the tenant pays for their utilities and janitorial fees, but unless
modified is not responsible for any other care, maintenance or carrying costs of the property. [See
RPI Form 552 and 552-1]
ground lease �������������������������������������������������������������������������������������������������������������������������������������������������������������� 6
A leasehold interest for which rent is based on the rental value of the land, whether the parcel is
improved or unimproved.

H
habitability defense ���������������������������������������������������������������������������������������������������������������������������������������� 384
A tenant’s pursuit of a legal remedy due to a landlord’s failure to maintain habitable conditions on
the rented premises.
habitable condition ���������������������������������������������������������������������������������������������������������������������������������������� 381
The minimum acceptable level of safety, utility and sanitation permitted in a residential rental.
heirs, assigns and successors clause �������������������������������������������������������������������������������������������������������� 431
A clause in a lease agreement which binds those who later take the position of landlord or tenant
to the existing agreement. [See RPI Form 552 §23.3]
hold harmless provision �������������������������������������������������������������������������������������������������������������������������������� 481
A provision in a lease agreement that shifts responsibility from the landlord to the tenant for
injuries occurring on the premises caused by the tenant’s negligence. [See RPI Form 552 §15]
holdover rent ��������������������������������������������������������������������������������������������������������������������������������������������������������� 24
Rent owed by a holdover tenant for the tenant’s unlawful detainer of the rented premises as a
tenant-at-sufferance. [See RPI Form 550 §3.3]
holdover rent provision �������������������������������������������������������������������������������������������������������������������������������� 232
A rental or lease agreement provision which sets the rent rate during a tenant holdover period. [See
RPI Form 550 §3.3 and 552 §2.3]
holdover tenant ��������������������������������������������������������������������������������������������������������������������������������������������������� 24
A tenant who retains possession of the rented premises after their right of possession has been
terminated, called a tenant-at-sufferance.
 Glossary 633

I
impairment ���������������������������������������������������������������������������������������������������������������������������������������������������������������� 4
The act of injuring or diminishing the value of a fee interest.
impasse notice ��������������������������������������������������������������������������������������������������������������������������������������������������� 512
A notice advising the tenant the lease will expire and no modification of the lease will be entered
into.
implied warranty of habitability ��������������������������������������������������������������������������������������������������������������� 380
An unwritten provision, included by statute, in all residential lease agreements requiring the
landlord to provide safe and sanitary conditions in the rental unit.
incurable breach ������������������������������������������������������������������������������������������������������������������������������������������������ 246
Nonmonetary defaults in leases or mortgages that cannot be cured or undone. [See RPI Form 577]
individual adjustment ���������������������������������������������������������������������������������������������������������������������������������� 575
A type of rent adjustment sought by a landlord when the general adjustment established by local
rent control ordinances fails to provide a fair return on their residential property.
inflation ���������������������������������������������������������������������������������������������������������������������������������������������������������������� 456
The price changes over time in consumer goods and services, stated in the consumer price index
(CPI) as a figure which is reported as a percentage change over one year ago.
inflation-adjusted rent provision ������������������������������������������������������������������������������������������������������������� 449
A rent provision in a commercial lease which calls for periodic rent increases based on changes in
inflation index figures during the period. [See RPI Form 552 §4.5]
irrevocable license ��������������������������������������������������������������������������������������������������������������������������������������������� 16
The right to enter and use property when the specific activity granted by the license is maintained
by the licensee’s ongoing expenditure of money or equivalent labor, and remains feasible.
itemized statement of deductions ������������������������������������������������������������������������������������������������������������ 195
A document accounting for the tenant’s security deposit, delivered by the landlord to a residential
tenant after the tenant vacates. [See RPI Form 585 §4.3]

J
joint pre-expiration inspection ������������������������������������������������������������������������������������������������������������������ 189
An inspection conducted by a residential landlord or the property manager to advise a tenant of
the repairs the tenant needs to perform to avoid deductions from their security deposit. [See RPI
Form 567-1]

L
landlord-initiated disposition procedure �������������������������������������������������������������������������������������������� 335
The process of a landlord mailing a notice of the right to reclaim personal property to a tenant who
vacated and left personal property on the premises. [See RPI Form 581 and 584]
late charge notice ���������������������������������������������������������������������������������������������������������������������������������������������� 295
A landlord’s written notice demanding payment of a late charge on a delinquent rent payment.
[See RPI Form 586]
late charge provision ��������������������������������������������������������������������������������������������������������������������������������������� 249
A provision in the lease agreement which imposes an additional administrative charge if rent
payments are not received when due or within a grace period for payment.
late payment clause ����������������������������������������������������������������������������������������������������������������������������������������� 289
A provision in a rental or lease agreement establishing the landlord’s right to demand and receive a
late charge when a rent payment becomes delinquent. [See RPI Form 550 §4.3 and 552 §4.7]
634 Property Management, Sixth Edition

lead-based paint ������������������������������������������������������������������������������������������������������������������������������������������������ 529

Any surface coating containing at least 1.0 milligram per square centimeter of lead, or 0.5% lead by
weight. [See RPI Form 313]
lead-based paint hazard �������������������������������������������������������������������������������������������������������������������������������� 531
Any condition that causes exposure to lead from lead-contaminated dust, soil or paint which has
deteriorated to the point of causing adverse human health effects. [See RPI Form 313]
lease agreement ��������������������������������������������������������������������������������������������������������������������������������������������������� 21
The written document which sets the terms of a fixed-term tenancy. [See RPI Form 550 and 552 —
552-4]
lease guarantee �������������������������������������������������������������������������������������������������������������������������������������������������� 223
An agreement committing a person other than the tenant to pay all monies due the landlord under
the lease agreement. [See RPI Form 553-1]
leasehold estate ��������������������������������������������������������������������������������������������������������������������������������������������� 5, 581
The right to possess a parcel of land, conveyed by a fee owner (landlord) to a tenant.
leasing agent ������������������������������������������������������������������������������������������������������������������������������������������������������� 123
A broker who markets the availability of space to rent and locates and negotiates the terms of a
lease with suitable tenants.
legal description ����������������������������������������������������������������������������������������������������������������������������������������������������� 2
The description used to locate and set boundaries for a parcel of real estate.
lender subordination clause ���������������������������������������������������������������������������������������������������������������������� 592
A lease agreement provision which gives a lender with a trust deed interest senior to the tenant’s
leasehold interest the right to unilaterally subordinate the lender’s trust deed to the tenant’s
leasehold by written notice to the tenant.
letter of intent ������������������������������������������������������������������������������������������������������������������������������������������� 148, 165
A non-binding proposal signed and submitted to a property owner to start negotiations to rent or
buy a property. [See RPI Form 185]
liability ������������������������������������������������������������������������������������������������������������������������������������������������������������������ 393
A financial debt or obligation owed to others.
license �������������������������������������������������������������������������������������������������������������������������������������������������������������� 10, 423
The personal, unassignable right held by an individual to the non-exclusive use of property owned
by another.
life estate �������������������������������������������������������������������������������������������������������������������������������������������������������������������� 4
An interest in a parcel of real estate lasting the lifetime of the life tenant.
liquidated damages provision �������������������������������������������������������������������������������������������������������������������� 201
A rental agreement provision which acts as a penalty payment for returning possession before a set
date.
loss mitigation ��������������������������������������������������������������������������������������������������������������������������������������������������� 238
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.

M
managing agent ��������������������������������������������������������������������������������������������������������������������������������������������������� 85
A broker who manages membership, common areas and accounting for a common interest
development.
mandatory improvement ��������������������������������������������������������������������������������������������������������������������������������� 50
An improvement required to be made by the tenant under the terms of the rental or lease
agreement.
master lease ��������������������������������������������������������������������������������������������������������������������������������������������������������������� 6
A leasehold interest granted to a master tenant with the right to sublease a property in exchange for
rent paid to the fee owner.
 Glossary 635

material breach ������������������������������������������������������������������������������������������������������������������������������������������������� 245

Failure to pay rent or perform other significant obligations called for in the rental or lease
agreement.
mechanic’s lien ����������������������������������������������������������������������������������������������������������������������������������������������������� 56
A lien entitling a contractor or subcontractor to foreclose on a job site property to recover the
amount due and unpaid for labor and materials they used.
minor breach ������������������������������������������������������������������������������������������������������������������������������������������������������� 246
Failure to pay late charges, interest penalties, bad check charges or security deposits.
monetary breach ����������������������������������������������������������������������������������������������������������������������������������������������� 256
A tenant’s failure to timely pay rent or other money obligation due.
money action ������������������������������������������������������������������������������������������������������������������������������������������������������ 234
Litigation which seeks to recover future rents and any previously unpaid rent earned but not
included in an unlawful detainer judgment.

N
negligence ������������������������������������������������������������������������������������������������������������������������������������������������������������ 365
The failure to behave with the level of care that someone of ordinary prudence would have
exercised under the same conditions.
net lease ���������������������������������������������������������������������������������������������������������������������������������������������������������������� 433
A commercial lease which transfers to the tenant the obligation, unless modified, to pay some or
all of the costs of ownership in addition to utilities and janitorial services. [See RPI Form 552-2 and
552-3]
net operating income ��������������������������������������������������������������������������������������������������������������������������������������� 198
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 RPI
Form 352 §4]
nondelegable duty ������������������������������������������������������������������������������������������������������������������������������������������� 375
A duty which cannot be transferred or assumed by another person. In the case of a landlord, a
nondelegable duty cannot be assumed by a property manager or contractor.
nondisturbance agreement �������������������������������������������������������������������������������������������������������������������������� 601
An agreement with the mortgage lender for providing for the tenant’s lease agreement to remain in
effect for its full term after the leasehold is subordinated to a new mortgage.
nondisturbance clause ����������������������������������������������������������������������������������������������������������������������������������� 600
A lease agreement provision which is coupled with the future subordination clause to allow a
tenant’s junior leasehold interest to remain unaffected by a lender’s foreclosure under a senior trust
deed. [See RPI Form 552-8]
nonmonetary breach �������������������������������������������������������������������������������������������������������������������������������������� 256
A tenant’s breach of any obligation other than an obligation to pay money.
nonrecurring deposits or charges ������������������������������������������������������������������������������������������������������������ 145
One-time costs for which the tenant is responsible. [See RPI Form 550 §2]
nonwaiver of rights provision �������������������������������������������������������������������������������������������������������������������� 209
A commercial lease or rental agreement provision containing the landlord’s reservation of rights.
[See RPI Form 552 §20]
nonwaiver provision �������������������������������������������������������������������������������������������������������������������������������������� 265
A provision in the lease agreement that states a landlord’s waiver of a tenant’s breach of the lease is
not a waiver of similar or future breaches. [See RPI Form 550 §7.4 and 552 §20.1]
note �������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 582
A document, often secured by a trust deed on real estate, evidencing an obligation to pay money to
a creditor — usually a lender or carryback seller. [See RPI Form 421 and 424]
636 Property Management, Sixth Edition

notice of change in rental terms ��������������������������������������������������������������������������������������������������������������� 214

Written notice served on the tenant noting changes in the terms or conditions of a month-to-month
rental agreement. [See RPI Form 570 and 574]
notice of entry ������������������������������������������������������������������������������������������������������������������������������������������������������� 34
A document served on a tenant giving them advance notice of a landlord’s intent to enter a
tenant’s unit to perform maintenance, repair or inspect. [See RPI Form 567]
notice of intent to vacate ������������������������������������������������������������������������������������������������������������������������������ 218
A tenant’s notice to the landlord signifying their intent to vacate the leased property. [See RPI
Form 571 and 572]
notice of nonresponsibility ���������������������������������������������������������������������������������������������������������������������������� 56
A notice used by a landlord to declare they are not responsible for any claim arising out of the
improvements their tenant is constructing on their property. [See RPI Form 597]
notice of right to reclaim personal property ������������������������������������������������������������������������������ 327, 334
A landlord’s notice mailed to a former tenant informing the tenant of their right to reclaim or
abandon personal property remaining on the premises. [See RPI Form 583 and 584]
notice to landlord to surrender personal property �������������������������������������������������������������������������� 336
A written request submitted by a former tenant to a landlord for the return of personal property left
in the vacated unit. [See RPI Form 582]
notice to pay rent or quit ��������������������������������������������������������������������������������������������������������������������� 243, 281
A notice served on a tenant by the landlord which states the amount of delinquent rent and any
other delinquent amounts owed the landlord under a rental or lease agreement. [See RPI Form 575
and 575-1]
notice to perform or quit ������������������������������������������������������������������������������������������������������������������������������� 258
A notice requiring a tenant to perform an action to remedy a curable nonmonetary breach of the
lease agreement. [See RPI Form 576]
notice to quit �������������������������������������������������������������������������������������������������������������������������������������������������������� 260
A notice to vacate served on a tenant for an incurable breach of a rental or lease agreement or due
to a statutory breach of the tenancy. [See RPI Form 577]
notice to vacate ��������������������������������������������������������������������������������������������������������������������������������������������������� 300
A written document used by a tenant or landlord to terminate a periodic tenancy. [See RPI Form
569 and 569-1]
novation ����������������������������������������������������������������������������������������������������������������������������������������������������������������� 499
An agreement entered into by a landlord and tenant shifting responsibility for obligations owed
the landlord under a lease agreement to another tenant, releasing the original tenant from liability.
nuisance ���������������������������������������������������������������������������������������������������������������������������������������������������������������� 261
An action which is injurious to health, offensive to the senses, or obstructs the use and enjoyment
of surrounding property. [See RPI Form 550 §6.7 and 552 §7.3]

O
offer to lease �������������������������������������������������������������������������������������������������������������������������������������������������������� 162
A document which sets forth all crucial elements typically negotiated to bring the landlord and
tenant together in final leasing arrangements. [See RPI Form 556]
open listing ���������������������������������������������������������������������������������������������������������������������������������������������������������� 126
An employment entered into by a broker to render real estate services on a best-effort basis under
which a fee is due the broker if they achieve the client’s objective of the employment before
the client or another broker separately first meets the objective, such as the sale or locating of a
property.
operating expenses ������������������������������������������������������������������������������������������������������������������������������������������� 144
The total annual cost incurred to maintain and operate a property for one year. [See RPI Form 352
§3.21]
 Glossary 637

option period ��������������������������������������������������������������������������������������������������������������������������������������������������������� 63

The time period during which an optionee/buyer may exercise their right to buy under an option
agreement. [See RPI Form 161 §4]
option to buy ���������������������������������������������������������������������������������������������������������������������������������������������������������� 62
An agreement granting an irrevocable right to buy property within a specific time period. [See RPI
Form 161]
option to extend ������������������������������������������������������������������������������������������������������������������������������������������ 62, 489
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 RPI Form 565]
option to renew ������������������������������������������������������������������������������������������������������������������������������������������� 64, 489
An agreement granting a tenant the right to continue in possession upon expiration of the existing
lease under a new lease agreement on the same conditions as the expiring lease agreement on
terms for payment of rent set out in the option to renew. [See RPI Form 565]
overriding rent ��������������������������������������������������������������������������������������������������������������������������������������������������� 498
The amount the current market rent rates exceed the rents under the lease agreement, attainable by
the tenant on a sublease to a successor tenant.
owner-by-foreclosure ����������������������������������������������������������������������������������������������������������������������������� 307, 620
The winning bidder at a trustee’s sale who takes title to the property sold by a trustee’s deed.

P
parcel ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 2
A three-dimensional portion of real estate identified by a legal description.
partial payment agreement ������������������������������������������������������������������������������������������������������������������������ 205
An agreement for receipt of partial rent, specifying the amount of deferred rent remaining unpaid
and the date for its payment. [See RPI Form 558 and 559]
percentage lease ��������������������������������������������������������������������������������������������������������������������������������������� 438, 465
A commercial lease agreement for a retail operation that sets the total amount of rent the tenant
will pay as a percentage of the tenant’s gross sales. [See RPI Form 552-4]
periodic tenancy �������������������������������������������������������������������������������������������������������������������������������������������������� 22
A leasehold interest which lasts for automatic successive rental periods of the same length of time,
terminating upon notice from either party. [See RPI Form 551 and 552-5]
permissive improvement ��������������������������������������������������������������������������������������������������������������������������������� 52
A nonmandatory improvement the tenant is authorized to complete without further landlord
consent.
police power �������������������������������������������������������������������������������������������������������������������������������������������������������� 573
The basis for enacting local ordinances such as zoning, traffic, health and safety regulations and
rent control.
power of attorney ������������������������������������������������������������������������������������������������������������������������������������������������� 73
A temporary authority granted to an individual to perform activities during a period of the owner’s
incapacity or travel. [See RPI Form 447]
present value ������������������������������������������������������������������������������������������������������������������������������������������������������ 239
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.
pro rata rent ��������������������������������������������������������������������������������������������������������������������������������������������������������� 218
Rental payment amount due for the portion of the rental period remaining after a change in the
rent amount due. [See RPI Form 552 §4.1]
profit a prendre �������������������������������������������������������������������������������������������������������������������������������������������������������� 3
The right to remove minerals from another’s real estate.
638 Property Management, Sixth Edition

profit and loss statement ������������������������������������������������������������������������������������������������������������������������������� 178

A type of financial statement which discloses the tenant’s business income, expenses and net
operating income. [See RPI Form 209-2]
property expense profile �������������������������������������������������������������������������������������������������������������������������������� 149
An itemized analysis of the costs a tenant or landlord will incur to operate and maintain a
particular property. [See RPI Form 562]
property management agreement �������������������������������������������������������������������������������������������������������������� 80
An employment agreement setting the rights, responsibilities and expectations of both the property
manager and the landlord. [See RPI Form 590]
property operating data ��������������������������������������������������������������������������������������������������������������������������������� 148
The actual costs of operating a property for its intended use. [See RPI Form 306, 352 and 562]
property profile ���������������������������������������������������������������������������������������������������������������������������������������������������� 91
A report from a title company providing information about a property’s ownership, encumbrances,
use restrictions and comparable sales data.
prudent investor standard ������������������������������������������������������������������������������������������������������������������������������ 90
A property management standard reflecting the expectations of a well-informed investor for
efficient and effective management of rental income and expenses.
public policy �������������������������������������������������������������������������������������������������������������������������������������������������������� 297
A system of laws maintained by local, state or federal government for the conduct of its people.
punitive damages ������������������������������������������������������������������������������������������������������������������������������������������������� 45
Monies awarded in excess of actual money losses in order to deter unlawful actions.

R
real estate fixture ������������������������������������������������������������������������������������������������������������������������������������������������� 54
Personal property attached to the real estate as an improvement, which becomes part of the
conveyable real estate.
reasonable belief ���������������������������������������������������������������������������������������������������������������������������������������������� 341
The actual knowledge a landlord has of the ownership of personal property without investigating.
reasonable certainty ��������������������������������������������������������������������������������������������������������������������������������������� 425
The degree of certainty expected from a reasonable person.
reasonable person test ������������������������������������������������������������������������������������������������������������������������������������ 268
A judicial test used to determine reasonable behavior between two parties.
reasonably foreseeable ����������������������������������������������������������������������������������������������������������������������������������� 400
The possibility a crime or danger may occur due to a previous crime on the premises. A landlord has
a duty to take reasonable measures to prevent harm to persons on the property or to warn tenants
of the prior criminal activity.
recast ����������������������������������������������������������������������������������������������������������������������������������������������������������������������� 612
A mortgage holder’s demand to modify the note terms and receive payment of additional fees in
exchange for waiving the due-on clause in their mortgage.
recurring operating expenses �������������������������������������������������������������������������������������������������������������������� 145
The regular and continuing costs of using and maintaining a property.
reformation action ������������������������������������������������������������������������������������������������������������������������������������������� 435
A court action by a tenant seeking to reform the terms of a lease agreement to include prior
agreements, oral or written, intended to be part of the lease agreement.
reinstatement period �������������������������������������������������������������������������������������������������������������������������������������� 235
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.
 Glossary 639

remedies provision ������������������������������������������������������������������������������������������������������������������������������������������ 348

A provision in a commercial lease agreement stating the nonbreaching party’s available actions
upon a breach of the lease agreement. [See RPI Form 552]
rent ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 184
Compensation received by a landlord in exchange for the tenant’s use, possession and enjoyment of
the property.
rent control ���������������������������������������������������������������������������������������������������������������������������������������������������������� 574
Local ordinances that are reasonably related to the prevention of excessive rents and maintaining
the availability of existing housing. [See RPI Form 550 §1.3]
rent provision ������������������������������������������������������������������������������������������������������������������������������������������������������� 471
A provision contained in a lease agreement establishing the tenant’s obligations to pay rents for
occupancy and use of the premises leased.
rental agreement ������������������������������������������������������������������������������������������������������������������������������������������������� 22
The written document which sets the terms and conditions of a periodic tenancy. [See RPI Form
551 and 552-5]
rental market ������������������������������������������������������������������������������������������������������������������������������������������������������ 516
The market environment in which landlords seek tenants and tenants seek landlords for the
occupancy of property. The rental market sets the amount of rent a property will command on any
given day.
repair and deduct remedy ������������������������������������������������������������������������������������������������������������������� 356, 374
An option available to a residential tenant when the landlord fails to repair leased property which
allows the tenant to make the repairs and deduct their cost from the next month’s rent payment.
reservation agreement ��������������������������������������������������������������������������������������������������������������������������������������27
The written document which sets the terms of a transient occupancy. [See RPI Form 593]
reservation of rights clause �������������������������������������������������������������������������������������������������������������������������� 206
A clause in the nonwaiver of rights provision in commercial 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 RPI Form 552 §20 and 558 §7]
resident manager ����������������������������������������������������������������������������������������������������������������������������������������������� 106
An individual employed by the property manager or landlord to live onsite at the managed
property and handle its daily operations. [See RPI Form 591]
resident manager agreement ����������������������������������������������������������������������������������������������������������������������� 107
An employment agreement which establishes the rights and duties of a resident manager and the
obligations of the property manager and landlord. [See RPI Form 591]
restitution ��������������������������������������������������������������������������������������������������������������������������������������������������������������� 44
The return of possession of the rented premises to a wrongfully removed tenant.
restriction-on-transfer provision ��������������������������������������������������������������������������������������������������������������� 497
A provision in a lease agreement calling for either the landlord’s consent to any transfer of the
tenant’s leasehold interest or the prohibition of any transfer of that interest. [See RPI Form 552 §9.2]
retaliatory eviction �������������������������������������������������������������������������������������������������������������������������������� 269, 356
The wrongful eviction attempted by a landlord against a tenant for lawfully exercising any of their
rights.
retroactive interest differential ����������������������������������������������������������������������������������������������������������������� 616
The mortgage holder’s losses, calculated based on the interest differential between the note rate and
the market rate on the date of a third party’s unlawful interference with the mortgage holder’s right
to call a mortgage.
reversion ������������������������������������������������������������������������������������������������������������������������������������������������������������������ 54
The conveyance of real estate fixtures from a tenant to landlord on expiration of a lease.
reversionary interest ��������������������������������������������������������������������������������������������������������������������������������������� 418
A landlord’s temporarily suspended right to occupy property leased to a tenant during a lease term.
640 Property Management, Sixth Edition

right of first refusal ��������������������������������������������������������������������������������������������������������������������������������������������� 62

A pre-emptive right to buy a property if the owner decides to sell. [See RPI Form 579]
right of rescission ���������������������������������������������������������������������������������������������������������������������������������������������� 525
The right to cancel a completed transaction such as sale or letting of property, including restoration,
after the transaction has been closed.
right-to-enter provision ��������������������������������������������������������������������������������������������������������������������������������� 478
A provision contained in a lease agreement which reserves to the landlord the right to enter the
leased premises to make necessary repairs, alterations or inspections. [See RPI Form 552 §12]

S
safety clause �������������������������������������������������������������������������������������������������������������������������������������������������������� 129
A provision in an exclusive listing agreement earning the broker a fee during an agreed safety
period after expiration of the employment for marketing efforts with identified buyers, tenants
or properties, if the client sells the listed property to an identified buyer or purchases or leases an
identified property during the safety period. [See RPI Form 102 §3.1(d), 103 §4.1(c) and 110 §3.1(d)]
Section 8 housing ����������������������������������������������������������������������������������������������������������������������������������������������� 306
A government housing program for low income households which provides qualifying tenants
with rent subsidies and minimum habitability standards.
security deposit ���������������������������������������������������������������������������������������������������������������������������������������� 183, 536
A source of funds to pay tenant obligations owed the landlord on the tenant’s default in the rental
or lease agreement. [See RPI Form 550 §2.1 and 552 §1.2]
self-help �������������������������������������������������������������������������������������������������������������������������������������������������������������������� 38
A landlord’s own method of recovering possession from a tenant outside the legal eviction process.
senior citizen housing ��������������������������������������������������������������������������������������������������������������������������� 559, 568
Housing intended for persons 55 or 62 years of age or older.
servient tenement �������������������������������������������������������������������������������������������������������������������������������������������������� 9
A property burdened by a license or easement.
signage provision ���������������������������������������������������������������������������������������������������������������������������������������������� 475
A provision in a commercial lease agreement which gives the landlord control over the size, style,
content and location of signs constructed or installed on the leased premises. [See RPI Form 552
§10]
start-up fee �������������������������������������������������������������������������������������������������������������������������������������������������������������� 98
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.
statement of deficiencies ������������������������������������������������������������������������������������������������������������������������������ 193
A document a residential landlord presents to a vacating tenant specifying any repairs or cleaning
to be completed by the tenant to avoid deductions from their security deposit. [See RPI Form 567-3]
statutory breach ������������������������������������������������������������������������������������������������������������������������������������������������� 260
A breach of the lease agreement which automatically forfeits the tenant’s right of possession.
“stay-or-pay” clause ����������������������������������������������������������������������������������������������������������������������������������������� 198
An unenforceable provision calling for the residential tenant to forego a return of their security
deposit if they move before a set date.
steering ������������������������������������������������������������������������������������������������������������������������������������������������������������������ 547
The discriminatory practice of restricting the rental or ownership of a property to a specific class of
people to perpetuate segregated housing.
strict liability ������������������������������������������������������������������������������������������������������������������������������������������������������ 363
To be liable for another’s injuries without concern for fault.
strict rent control ���������������������������������������������������������������������������������������������������������������������������������������������� 574
A type of rent control ordinance that limits rent increases on all rental units.
 Glossary 641

sublease������������������������������������������������������������������������������������������������������������������������������������������������������������������������ 7
A leasehold interest subject to the terms of a master lease.
substituted service �������������������������������������������������������������������������������������������������������������������������������������������� 282
In place of personally serving the tenant, a notice is personally delivered to a person of suitable age
at the tenant’s residence or place of business and is mailed to the leased premises, or posted on and
mailed to the premises.
successor tenant ������������������������������������������������������������������������������������������������������������������������������������������������ 501
On a transfer, the new tenant who acquires the original tenant’s leasehold interest in the property.
[See RPI Form 552 §9]
surrender ����������������������������������������������������������������������������������������������������������������������������������������������������� 314, 323
A mutual cancellation of a lease agreement by the landlord and tenant, written or by their conduct,
when the tenant vacates the leased premises. [See RPI Form 587]

T
tenancy-at-sufferance ������������������������������������������������������������������������������������������������������������������������������������������ 5
A leasehold interest created when a tenant retains possession of the rented premises after the
tenancy has terminated. [See RPI Form 550 § 3.3]
tenancy-at-will �������������������������������������������������������������������������������������������������������������������������������������������������������� 5
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.
Tenant Estoppel Certificate (TEC) ��������������������������������������������������������������������������������������������������������������� 604
A statement which summarizes the monetary and possessory terms of a lease agreement, and
whether the landlord and tenant have fully performed their obligations. [See RPI Form 598]
tenant improvements ��������������������������������������������������������������������������������������������������������������������������������������� 47
Improvements made to a leased property to meet the needs of the occupying tenant. [See RPI Form
552 §11]
tenant improvements and alterations cause �������������������������������������������������������������������������������������� 475
A clause in a commercial lease agreement which specifies the tenant’s right to make alterations or
further improve the premises during the tenancy. [See RPI Form 552 §11]
tenant lease worksheet ���������������������������������������������������������������������������������������������������������������������������������� 155
A document the leasing agent uses to analyze the tenant’s current financial condition and needs
for leased space. [See RPI Form 555]
tenant-initiated recovery procedure ������������������������������������������������������������������������������������������������������ 336
The recovery process initiated by a tenant to retrieve personal property from a landlord within 18
days after vacating rental property. [See RPI Form 582]
tenant-mitigation provision ������������������������������������������������������������������������������������������������������������� 328, 505
A provision in a commercial lease agreement allowing the landlord to leave the tenant’s leasehold
and the lease agreement intact on the tenant’s breach, then recover rent from the tenant for the life
of the lease without the landlord first taking steps to mitigate losses. [See RPI Form 552 §21.1]
termination-of-agency clause �������������������������������������������������������������������������������������������������������������������� 127
A provision in an exclusive listing agreement which calls for a broker fee to be earned and payable
when the client cancels the employment without cause. [See RPI Form 102 §3.1(c), Form 103 §4.1(b)
and Form110 §3.1(c)]
trade fixture ������������������������������������������������������������������������������������������������������������������������������������������������������������ 54
A fixture used to render services or make products in the trade or business of a tenant.
transfer �������������������������������������������������������������������������������������������������������������������������������������������������������������������� 498
Any assignment, sublease or further encumbrance of the leasehold by the tenant. [See RPI Form
552 §9]
642 Property Management, Sixth Edition

transient occupancy ������������������������������������������������������������������������������������������������������������������������������������������ 27

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 fewer. [See RPI Form 593]
trespasser ����������������������������������������������������������������������������������������������������������������������������������������������������������������� 20
A person who occupies a property without the owner’s transfer of the right to occupy.
triple net lease ����������������������������������������������������������������������������������������������������������������������������������������������������� 480
A commercial lease which passes the responsibility for all costs and maintenance of the property to
the tenant. [See RPI Form 552-2 and 552-3]
trust account ���������������������������������������������������������������������������������������������������������������������������������������������������������� 88
An account separate and apart and physically segregated from a broker’s own funds, in which the
broker is required by law to deposit all funds received for clients.
trust deed �������������������������������������������������������������������������������������������������������������������������������������������������������������� 582
A security device which attaches a money obligation as an encumbrance on a marketable interest
in real estate. [See RPI Form 450]
trust funds ��������������������������������������������������������������������������������������������������������������������������������������������������������������� 98
Items which have or evidence monetary value held by a broker for a client when acting in a real
estate transaction.

U
unlawful detainer �������������������������������������������������������������������������������������������������������������������������������������� 20, 620
The unlawful possession of a property. [See RPI Form 575-578]
Unruh Civil Rights Act ��������������������������������������������������������������������������������������������������������������� 551, 560, 568
A California law which prohibits discrimination by a business establishment based on sex, race,
color, religion, ancestry, national origin, disability or medical condition.
use-maintenance provision ������������������������������������������������������������������������������������������������������������������������� 472
A provision in a commercial lease agreement which establishes the landlord’s and tenant’s
responisibility for the care and maintenance of the premises during the lease term. [See RPI Form
552 §7.1]
use-of-premises provision ���������������������������������������������������������������������������������������������������������������������������� 473
A provision contained in a commercial lease agreement which establishes the single specified
purpose for the tenant’s use of the leased premises. [See RPI Form 552 §6]

V
vacancy decontrol �������������������������������������������������������������������������������������������������������������������������������������������� 574
A type of rent control ordinance that applies rent ceilings only to existing tenants.

W
waste ����������������������������������������������������������������������������������������������������������������������������������������������������������������������� 263
The intentional destruction or neglect of property which diminishes its value. [See RPI Form 550
§6.8 and 552 §7.4]
waste provision �������������������������������������������������������������������������������������������������������������������������������������������������� 479
A provision in a lease agreement in which the tenant agrees not to destroy, damage or remove any
part of the leased premises. [See RPI Form 552 §7.4]
waterbed addendum ������������������������������������������������������������������������������������������������������������������������������ 521, 537
An addendum to a rental or lease agreement setting the additional security deposit and insurance
coverage the tenant will provide the landlord to keep a waterbed on the premises. [See RPI Form
564]
 Quizzes 643

Property Management, Sixth Edition Quizzes

Instructions: Quizzes are open book. All answers are Multiple Choice.
Answer key is located on Page 650.

Quiz 1 —­Chapters 1-4, Pages 1-46

____ 1.  Four types of estates exist in real estate, including:

a. family estates. c. personal estates.
b. leasehold estates. d. None of the above.
____ 2.  A ______ lasts for a specific period of time agreed to in a lease agreement between a
landlord and tenant.
a. periodic tenancy c. fixed-term tenancy
b. tenancy-at-sufferance d. tenancy-at-will
____ 3.  A lease conveys a(n) _______ in real estate to a tenant.
a. exclusive possessory interest
b. personal privilege
c. nonexclusive possessory interest
d. irrevocable privilege
____ 4.  When a broker offers space in their office under a written agreement providing for
lockable office space and a specific period for occupancy, the agreement is a:
a. lease. c. Both a. and b.
b. license. d. None of the above.
____ 5.  The characteristic(s) of a tenancy-at-will include:
a. no provision for the payment of rent.
b. possession for an indefinite and unspecified period.
c. possession delivered to the tenant with the landlord’s knowledge and consent.
d. All of the above.
____ 6.  A tenant-at-sufferance is also known as a(n):
a. nuisance. c. landlord.
b. tenant-at-will. d. holdover tenant.
____ 7.  When a landlord accepts rent from a holdover tenant after a fixed-term tenancy
expires, the expired lease agreement is _____ on the same terms except for the period
of occupancy.
a. cancelled c. Both a. and b.
b. renewed d. Neither a. nor b.
___ 8.  A landlord may not permit the police to enter and search a tenant’s unit without a:
a. previous request from the police.
b. warrant.
c. written notice delivered in advance to the tenant.
d. None of the above.
644 Property Management, Sixth Edition

____ 9.  A 24-hour notice of entry to a tenant’s unit or space may reasonably be served by:
a. handing a written notice to the tenant personally.
b. posting the notice on the entry door.
c. Neither a. nor b.
d. Both a. and b.
___ 10.  A landlord is prohibited from entering a unit unless:
a. the tenant’s right of possession has been terminated.
b. the tenant has vacated the unit.
c. Both a. and b.
d. Neither a. nor b.

Quiz 2 — Chapters 5-8, Pages 47-86

____ 1.  If a tenant fails to make mandated improvements that are to remain with the property
on expiration of the lease, the tenant is liable to the landlord for _______ incurred by
the landlord to make the improvements.
a. none of the cost c. the full cost
b. half the cost d. None of the above.
____ 2.  Tenant improvements become part of the leased property and remain with the
property on expiration of the lease unless:
a. the landlord and tenant previously agreed otherwise.
b. the tenant paid for the improvements.
c. the landlord does not intend to use the improvements.
d. All of the above.
____ 3.  _______ revert(s) to the landlord on expiration of the lease.
a. The tenant’s furniture c. The security deposit
b. Real estate fixtures attached to the property d. None of the above.
____ 4.  A(n)________ is a preemptive right to purchase property if the owner later decides to
sell the property.
a. surrender c. offer to purchase
b. notice of abandonment d. right of first refusal
____ 5.  When options to renew or extend a lease are included in the lease terms, the expiration
of the option to buy is tied to:
a. the expiration of the initial lease term. c. Either a. or b.
b. the expiration of any renewal or extension. d. Neither a. nor b.
____ 6.  The tenant’s right of first refusal is ________ when the landlord agrees to sell the
property on terms different from those terms offered to the tenant.
a. renewed c. reinstated
b. extended d. cancelled
____ 7.  A temporary manager of real estate who has __________ is not required to hold a real
estate broker’s license.
a. past experience in property management
b. a personal relationship with the landlord
c. a leasehold interest in the property
d. power of attorney
 Quizzes 645

____ 8.  Anyone who receives a percentage or contingency fee for continuously locating
tenants or managing income properties for another:
a. needs to hold a DRE license.
b. needs to hold a DRE license only if the fee is greater than $1,500.
c. needs to hold a DRE license only if the fee is greater than $2,500.
d. does not need a DRE license.
____ 9.  The property management agreement authorizes the property manager to:
a. locate tenants. c. collect rents.
b. enter into rental and lease agreements. d. All of the above.
___ 10.  A landlord is entitled to a statement of accounting:
a. at least once every quarter. c. Both a. and b.
b. when the property management agreement d. Neither a. nor b.
is terminated.

Quiz 3 — Chapters 9-13, Pages 87-142

____ 1.  A property manager’s obligations to a landlord include:

a. serving notices on tenants and filing unlawful detainer (UD) actions as needed.
b. advertising for prospective tenants.
c. negotiating and executing rental and lease agreements.
d. All of the above.
____ 2.  A property manager is required to deposit all funds collected on behalf of a landlord
into a(n)________ within three business days of receipt.
a. trust account c. general savings account
b. impound account d. checking account
____ 3.  A resident manager who continues to occupy a unit after their employment is
terminated becomes a(n):
a. tenant-at-will. c. occupant-in-capacity.
b. holdover tenant. d. equity purchase (EP) investor.
____ 4.  Apartment buildings with _______ or more units need to have a landlord, resident
manager or responsible caretaker living on the premises to manage the property.
a. 12 c. 16
b. 14 d. 18
____ 5.  Tax-wise, the rental value of an apartment unit is not reportable income for the
resident manager when the unit they occupy is:
a. for the property manager’s or landlord’s convenience.
b. located on the premises managed.
c. occupied by the manager as a condition of their employment.
d. All of the above.
____ 6.  Addresses given to residential tenants for the landlord, property manager and
resident manager need to be:
a. street addresses. c. identified on a plot map.
b. email addresses. d. clarified using a metes and
bounds description.
646 Property Management, Sixth Edition

____ 7.  Without the _________ promising to pay, the broker cannot enforce collection of an
orally promised fee.
a. broker’s signature c. broker’s documentation of
the oral agreement
b. client’s signature d. client’s cooperative conduct
____ 8.  The ______ grants a broker the right to a fee if, within a fixed period after the exclusive
authorization period expires, the property is leased to a tenant the broker dealt with
during the listing period.
a. right of first refusal c. Both a. and b.
b. safety clause d. Neither a. nor b.
____ 9.  Under a(n) ____________, a broker has earned a fee if the tenant enters into a lease
agreement.
a. option listing c. exclusive authorization to
locate space
b. net listing d. None of the above.
___ 10.  A broker acting as an agent on behalf of both the landlord and tenant is a:
a. single agent. c. double agent.
b. dual agent. d. None of the above.

Quiz 4 — Chapters 14-18, Pages 143-182

____ 1.  The amount of the common area maintenance (CAM) cost of a property is a(n)
_________ a broker needs to disclose to a prospective tenant who agrees to pay these
costs.
a. assessment c. material fact
b. CC&R d. immaterial fact
____ 2.  A leasing agent best determines the tenant’s intentions for leasing property by
preparing a(n):
a. tenant lease worksheet. c. property management
agreement.
b. offer to lease. d. disclosure form.
____ 3.  An offer to lease contains four sections, including:
a. identification of the parties and premises.
b. rental payment schedules and period of occupancy.
c. property maintenance and terms of possession (use).
d. All of the above.
____ 4.  A(n) ______________ is a non-binding proposal signed and submitted to a property
owner to start negotiations to rent or buy a property.
a. lease agreement c. letter of intent (LOI)
b. offer to lease d. Both a. and b.
 Quizzes 647

____ 5.  In order to form a binding agreement, an offer or counteroffer:

a. needs to be accepted in its entirety and without conditions.
b. may be accepted with minor changes in conditions.
c. may be accepted with minor changes in conditions if both parties agree to
address the conditions within 15 business days.
d. None of the above.
____ 6.  Property managers advising landlords on tenants’ creditworthiness need to subscribe
to the services available from a:
a. prior landlord. c. personal reference.
b. credit reporting agency (CRA). d. employer.
____ 7.  Credit checks on prospective tenants can only be used to establish eligibility for:
a. employment purposes. c. the rental of a dwelling unit.
b. personal, family or household purposes. d. All of the above.
____ 8.  A tenant is entitled to request a clarification by a credit reporting agency of the results
of a(n) _________ against the tenant if the report is true but misleading.
a. unlawful detainer (UD) action c. traffic violation
b. criminal conviction d. None of the above.
____ 9.  A residential landlord may charge a fee to cover the costs of obtaining a prospective
tenant’s:
a. employment history. c. financial statements.
b. former street address. d. credit report.
___ 10.  A property manager needs to consider a prospective tenant’s _________ before
agreeing to lease commercial property.
a. race and sexual orientation c. religion and net worth
b. business acumen and style of marketing d. business plan and gender

Quiz 5 — Chapters 19-21, Pages 183-212

____ 1.  A residential landlord who sets the security deposit amount based on creditworthiness
needs to apply these credit standards equally to:
a. all prospective tenants.
b. all senior citizen housing tenants.
c. all prospective tenants without children.
d. None of the above.
____ 2.  A landlord _________ security deposits with other funds in a general account.
a. is prohibited from commingling c. may spend
b. may commingle d. Either a. or b.
____ 3.  The notice advising the tenant of their right to a joint pre-expiration inspection is best
given to the tenant at least __ days prior to the end of the lease term.
a. 10 c. 30
b. 15 d. 45
648 Property Management, Sixth Edition

____ 4.  On completion of the joint pre-expiration inspection, the landlord gives the tenant
an itemized:
a. statement of deficiencies. c. notice of delinquency.
b. trust account ledger. d. statement of inventory.
____ 5.  Within ____ after a residential tenant vacates, the landlord needs to provide the
tenant with an itemized statement of all deductions from the security deposit.
a. two weeks c. 21 days
b. 20 days d. 24 hours
____ 6.  A residential landlord who fails to refund a tenant’s security deposit in bad faith may
be subject to a penalty of up to _____ the amount of the security deposit.
a. twice c. four times
b. three times d. five times
____ 7.  A stay-or-pay clause which calls for a tenant to forfeit their security deposit is:
a. illegal. c. enforceable if the tenant
stays less than 180 days.
b. unenforceable. d. Both a. and b.
____ 8.  The landlord’s best method for recovering turnover costs is to:
a. require a security deposit equal to eight months’ rent.
b. include a “stay-or-pay” clause in the lease agreement.
c. rent only to month-to-month tenants.
d. rent to creditworthy tenants on a lease agreement with a one-year term or longer.
____ 9.  A commercial landlord can accept a partial payment of rent after serving a three-day
notice and before eviction under a(n):
a. subordination agreement. c. reservation of rights clause.
b. windfall provision. d. attorney fees provision.
___ 10.  A residential unlawful detainer (UD) action based on a three-day notice which
overstates the amount of the delinquent rent due is:
a. valid.
b. invalid.
c. valid if two or more tenants occupy the property.
d. invalid unless the landlord holds a broker license.

Quiz 6 — Chapters 22-24, Pages 213-242

____ 1.  _______ in a residential or commercial month-to-month rental agreement may be

changed on 30 days’ written notice by the landlord.
a. Addendums c. Clauses and terms
b. Provisions and conditions d. All of the above.
____ 2.  Upon receipt of a 30-day notice of change in terms on a periodic rental agreement,
the new terms take effect ________ after the expiration of the notice.
a. immediately c. 15 business days
b. 15 days d. 30 days
 Quizzes 649

____ 3.  A residential landlord subject to rent control can make adjustments to rents based on:
a. the maximum percentage of the consumer price index (CPI) as set by ordinance.
b. the maximum percentage set by ordinance.
c. the maximum amount previously set by the rent control board.
d. All of the above.
____ 4.  In a small claims action for recovery against a guarantor, the amount of recovery is
limited to ______ or less.
a. $1,500 c. $3,500
b. $2,500 d. $4,500
____ 5.  In a municipal court action, the landlord seeking to recover unpaid rents may:
a. represent themselves. c. perjure themselves.
b. be represented by an attorney licensed d. Both a. and b.
in California.
____ 6.  An unlawful detainer occurs when a tenant refuses to pay rent and _________ the
property after the expiration of a three-day notice to pay rent or quit.
a. remains in possession of c. terminates possession of
b. vacates d. None of the above.
____ 7.  When a tenant remains in possession of a property without a valid right of possession,
this is referred to as:
a. waste. c. Both a. and b.
b. a holdover tenancy. d. Neither a. nor b.
____ 8.  After mitigating their losses by reletting the premises, a landlord has a right to recover
future rents without a default remedies provision in the lease agreement under the
theory of:
a. loss mitigation. c. statutory recovery.
b. unlawful detainer (UD). d. attorney fees provision.
____ 9.  The landlord who recovers future rent under an unexpired lease agreement is only
awarded _________ of the unearned future rents.
a. the present value c. a partial value
b. the future accumulated value d. None of the above.
___ 10.  A landlord is entitled to recover ________ after the tenant fails to perform on the lease.
a. costs to clean up the property
b. legal fees to find a new tenant
c. permit fees to construct necessary renovations
d. All of the above.

Quiz 7 — Chapters 25-29, Pages 243-298

____ 1.  A tenant’s failure to pay late charges, interest penalties, bad check charges or security
deposits is known as a(n):
a. material breach. c. minor breach.
b. incurable breach. d. None of the above.
650 Property Management, Sixth Edition

____ 2.  After a landlord serves a tenant with a three-day notice to pay rent or quit containing
a declaration of forfeiture provision, the tenant needs to cure the breach in __________
to avoid forfeiture.
a. three business days c. one week
b. three calendar days d. one month
____ 3.  Rent does not become delinquent until:
a. the business day following the due date, unless a grace period exists.
b. the business day following the last calendar day of the grace period.
c. 15 days after mailing if posted within the grace period.
d. Either a. or b.
____ 4.  A landlord needs to allow a tenant to cure a material breach of the lease when the
tenant is capable of curing the breached provision within:
a. three days. c. one month.
b. 15 days. d. two months.
____ 5.  A tenant may be evicted for maintaining a(n) _______ the property.
a. unlawful use of
b. nuisance on
c. unorthodox or unprofessional business style on
d. Both a. and b.
____ 6.  What changes did the Tenant Protection Act (TPA) make to the rights of landlords
and tenants on targeted properties?
a. The TPA capped annual rent increases at 5%, plus the rate of inflation.
b. The TPA requires just cause to evict tenants in place for 12 months or more.
c. The TPA requires relocation assistance for all evictions.
d. Both a. and b.
____ 7.  A three-day notice cannot be upheld when:
a. the notice is incorrectly prepared.
b. a proof of service form is not completed.
c the notice is not properly served to the tenant.
d. All of the above.
____ 8.  Personal service is accomplished when ______ signs the postal receipt acknowledging
receipt of the three-day notice in the mail.
a. the landlord c. Either a. or b.
b. the tenant d. Neither a. nor b.
____ 9.  A three-day notice to pay or quit may include:
a. delinquent rent. c. Both a. and b.
b. unpaid amounts due under the lease d. Neither a. nor b.
which are not labeled rent.
___ 10.  A late charge is only permissible when the amount is _________ cost of collecting the
delinquent rent and the loss due to the delay in its receipt.
a. greater than the c. reasonably related to the
b. less than the d. None of the above.
 Quizzes 651

Quiz 8 — Chapters 30-33, Pages 299-344

____ 1.  Once the 30-day notice to vacate expires and the month-to-month tenant does not
vacate, the landlord may file a(n) ______ to evict the tenant without further notice.
a. unlawful detainer (UD) action c. offer to surrender
b. three-day notice to vacate d. notice of termination
____ 2.  To evict a tenant under HUD’s Section 8 program, the landlord needs to state a valid
reason for the eviction in:
a. the notice to vacate.
b. the lease agreement.
c. the three-day notice to perform or quit.
d. None of the above.
____ 3.  A(n) ___________ reconveys the real estate to the landlord in exchange for cancellation
of the lease agreement.
a. notice of termination c. impasse notice
b. notice to vacate d. surrender
____ 4.  A surrender may only occur by the:
a. mutual consent of the landlord and tenant. c. conduct of the tenant.
b. operation of law. d. Both a. and b.
____ 5.  General abandonment and surrender rules apply to:
a. residential property. c. Both a. and b.
b. commercial property. d. Neither a. nor b.
____ 6.  A Notice of Abandonment expires __ days after the date the notice is sent by first-
class mail.
a. 5 c. 18
b. 10 d. 30
____ 7.  A tenant, after being served a Notice of Belief of Abandonment, may stop the
abandonment procedure by:
a. reoccupying the property.
b. handing a written statement of no intent to abandon the property to the landlord.
c. accepting the Notice of Belief of Abandonment.
d. None of the above.
____ 8.  After a tenant pays storage costs to the landlord, the tenant needs to pick up their
personal property within __ hours.
a. 72 c. 12
b. 24 d. 2
____ 9.  Abandoned personal items worth _____ or more may be sold at a public sale by the
landlord if they are not reclaimed.
a. $1,000 c. $700
b. $500 d. $1,700
___ 10.  Personal property subject to a public sale needs to be surrendered to the tenant:
a. at no time. c. 15 days after the public sale.
b. two business days after receiving request d. any time prior to the sale.
for the return of the property from the tenant.
652 Property Management, Sixth Edition

Quiz 9 — Chapters 34-37, Pages 345-378

____ 1.  A constructive eviction occurs when the tenant vacates the premises due to:
a. waste committed on the property by the tenant.
b. the landlord’s substantial interference with the tenant’s use and enjoyment of
their property during the term of the rental or lease agreement.
c. the neighbor’s substantial interference with the tenant’s use and enjoyment of
their property
d. eminent domain.
____ 2.  When a tenant vacates due to a constructive eviction, they may recover:
a. relocation expenses. c. loss of business goodwill.
b. unaccrued prepaid rent and security deposits d. All of the above.
held by the landlord.
____ 3.  Any waiver or limitation on the remedies for breach of the covenant of quiet
enjoyment for ___________ is void as against public policy.
a. residential properties c. Both a. and b.
b. commercial properties d. Neither a. nor b.
____ 4.  In an unlawful detainer (UD) action, residential tenants are allowed to raise two
defenses, retaliatory eviction and:
a. breach of the warranty of habitability. c. refusal to reimburse tenant
for cost of repairs.
b. eminent domain. d. None of the above.
____ 5.  Actions by a residential landlord are considered retaliatory acts if initiated by the
landlord after the tenant:
a. organizes or becomes a member of a tenants’ c. commits waste.
association or tenants’ rights group.
b. exercises the statutory repair and deduct d. Both a. and b.
remedy.
____ 6.  After prevailing in an unlawful detainer (UD) action, a residential tenant is entitled
to______ of protection against eviction without cause.
a. 90 days c. 180 days
b. 30 days d. 60 days
____ 7.  In addition to a tenant’s actual money losses incurred due to the landlord’s retaliatory
act, the tenant is also entitled to recover ___ for each retaliatory act where the landlord
acts maliciously with respect to the retaliation.
a. punitive losses between $100 and $500 c. punitive losses between
$1,200 and $1,500
b. punitive losses between $50 and $1,000 d. punitive losses between $100
and $2,000
____ 8.  A landlord who is confronted with a known dangerous condition and does not act to
correct the condition is:
a. negligent. c. wasteful.
b. retaliatory. d. malicious.
 Quizzes 653

____ 9.  A residential tenant has a duty of care and maintenance in the use of leased property,
which includes:
a. disposing of all waste in a sanitary manner.
b. properly operating all electrical, gas and plumbing fixtures.
c. using the property for the purpose it is intended to be used.
d. All of the above.
___ 10.  A residential tenant may make necessary repairs that the landlord fails to make and
deduct _______ from the rent.
a. the full costs of the repairs
b. a partial cost of the repairs
c. the cost of the repairs limited to one month’s rent
d. no amount of the cost of repairs

Quiz 10 — Chapters 38-41, Pages 379-416

____ 1.  Part of a residential tenant’s entitlement to a safe and sanitary dwelling includes:
a. marble flooring. c. a hot and cold running water
system.
b. an external air-conditioning unit. d. new carpeting.
____ 2.  A tenant who successfully raises a warranty of habitability defense in an unlawful
detainer (UD) action may:
a. retain possession of the premises. c. recover attorney fees and the
costs of litigation.
b. pay a reduced amount of rent. d. All of the above.
____ 3.  _______ are to be installed and maintained in all dwelling units intended for human
occupancy.
a. A washer and dryer c. Smoke detectors
b. Dead bolt locks d. None of the above.
____ 4.  Security bars on residential bedroom windows do not need to have release
mechanisms if the bedroom has:
a. a window leading out of the premises. c. Either a. or b.
b. a door leading out of the premises. d. Neither a. nor b.
____ 5.  Landlords owe a duty to care for and protect the tenant by:
a. providing security measures in the common areas.
b. providing the tenant with a firearm.
c. offering on-site self-defense classes.
d. hiring a private investigator.
____ 6.  When criminal activity is ______, the landlord has a duty to take reasonable measures
to prevent harm to persons on the property from future similar criminal activities.
a. decreasing in the area c. remotely possible
b. reasonably foreseeable d. reasonably unforeseeable
654 Property Management, Sixth Edition

____ 7.  The landlord’s duty of care to protect a tenant from injury is derived from their ability
to prevent the existence of dangerous conditions from existing on:
a. the property they control.
b. adjacent properties.
c. public right of ways over which they have not taken control .
d. All of the above.
____ 8.  Liability is imposed on a landlord for an injury suffered by any person on the property
if:
a. the type of injury suffered by the individual is foreseeable.
b. the injury suffered is closely connected to the landlord’s conduct.
c. Both a. and b.
d. Neither a. nor b.
____ 9.  A landlord has a duty to __________ a leased premises when they enter the premises
for any single purpose.
a. repair all minor defects in c. reasonably inspect
b. thoroughly inspect d. fumigate
___ 10.  When an injured tenant’s lack of care for themselves contributes to their injury,
recovery for their losses is limited to the percentage of the negligence attributed to
them, called:
a. comparative negligence. c. nondelegable negligence.
b. constructive negligence. d. reasonable negligence.

Quiz 11 — Chapters 42-46, Pages 417-470

____ 1.  To be valid, a lease agreement needs to:

a. designate the size and location of the c. state the rental amount.
leased premises.
b. set forth a term for the tenancy conveyed. d. All of the above.
____ 2.  On expiration of a lease, a holdover tenancy is created when the tenant remains in
possession of the property and:
a. enters into a new lease agreement with the landlord.
b. is subject to an eminent domain action.
c. the landlord refuses to accept further rent payments.
d. All of the above.
____ 3.  The right to receive a condemnation award on the leased property can be contracted
away by a:
a. landlord. c. government agency.
b. tenant. d. None of the above.
____ 4.  If a tenant has a history of writing bad rent checks due to insufficient funds, the
landlord may serve a 30-day notice on the tenant requiring them to:
a. vacate the property on expiration of the notice.
b. forfeit their security deposit.
c. tender payment of future rents in cash or by money order.
d. All of the above.
 Quizzes 655

____ 5.  ______ are typically based on the ratio between space leased by the tenant and the
total rentable space in a project.
a. Common area maintenance (CAM) charges c. Fair market rent
b. Operating expenses d. None of the above.
____ 6.  Types of rent adjustment provisions found in commercial leases include:
a. graduated rent provisions. c. appreciation-adjusted rent
provisions.
b. inflation-adjusted rent provisions. d. All of the above.
____ 7.  Graduated rents are _________ on a periodic basis.
a. adjusted to accommodate for an increase in local appreciation
b. decreased in pre-set increments
c. increased in pre-set increments based on a specific dollar amount or a
percentage of the base year rent
d. None of the above.
____ 8.  Inflation adjustments are usually made:
a. annually c. daily
b. monthly d. None of the above.
____ 9.  Under __________ rent adjustment provisions, the prior year’s rent, not the base
year’s rent, is used to set the adjusted rent.
a. base-to-current year c. base-to-future
b. year-to-year d. Both a. and b.
___ 10.  _______ is the actual price received for all merchandise or services sold, licensed,
leased or delivered for purposes of percentage rent calculations.
a. Gross sales c. Median sales
b. Net sales d. Total receipts

Quiz 12 — Chapters 47-50, Pages 471-514

____ 1.  Leasehold appurtenances include rights in real estate owned by the landlord located
outside the leased space, such as:
a. a right of way for vehicular travel through an industrial or office complex.
b. parking for employees and customers
c. storage space, lobbies and restrooms.
d. All of the above.
____ 2.  A __________ relieves a landlord’s property from becoming security for any claims
made by contractors for improvements they construct on the leased premises.
a. notice of forfeiture c. notice of default
b. notice of abandonment d. notice of nonresponsibility
____ 3.  If not limited by its terms, the total term of a commercial lease, including extensions
or renewals, is limited to ____ years by statute.
a. 99 c. 101
b. 100 d. 130
656 Property Management, Sixth Edition

____ 4.  When the terms of a lease are ________, a new lease is created.
a. extended c. cancelled
b. renewed d. negotiated
____ 5.  For a tenant to be released from liability on the assignment of their lease agreement,
a(n) ______ needs to be negotiated and entered into by the landlord and both tenants.
a. novation c. subrogation agreement
b. substitution of liability d. Either a. or b.
____ 6.  Unless unconscionable or discriminatory, commercial landlords and tenants are free
to place __________ restrictions, limited to the value of the leasehold, on the tenant’s
assignment of the lease.
a. commercially unreasonable c. economically damaging
b. commercially reasonable d. economically unreasonable
____ 7.  No _____ may pass and enforce commercial rent control ordinances.
a. city c. public agency
b. county d. All of the above.
____ 8.  Commercial real estate includes all real estate except:
a. industrial property. c. dwelling units.
b. commercial property. d. warehouse space.
____ 9.  Local governments can regulate all facets of business location and development,
such as:
a. abating nuisances. c. protecting historical
resources.
b. exercising eminent domain powers d. All of the above.
___ 10.  After receiving a commercial tenant’s __________ under a local ordinance, the
landlord needs to enter into negotiations to renew or extend the lease with the
tenant.
a. negotiation notice c. offer to lease
b. letter of intent (LOI) d. impasse notice

Quiz 13 — Chapters 51-54, Pages 515-542

____ 1.  Some landlords allow pets but frequently:

a. impose restrictions on the type or size of the pet.
b. require the landlord’s written consent to keep the pet on the premises.
c. Both a. and b.
d. Neither a. nor b.
____ 2.  A lease or rental agreement may prohibit a tenant from:
a. creating a nuisance. c. committing waste.
b. using the premises for an unlawful purpose. d. All of the above.
____ 3.  A written translation of a residential lease agreement is required to be delivered to
the tenant if its term exceeds ____ and is negotiated primarily in Spanish, Chinese,
Vietnamese, Korean or _____.
a. one year; Japanese c. one year; Russian
b. one month; Tagalog d. one month; German
 Quizzes 657

____ 4.  Real estate transactions exempt from the written translation requirement include:
a. purchase agreements. c. home improvement
agreements.
b. month-to-month rental agreements. d. All of the above.
____ 5.  The mandated lead-based paint disclosure laws do not obligate a landlord to:
a. abate or remove any lead-based paint. c. Both a. and b.
b. conduct an inspection to determine d. Neither a. nor b.
whether any lead-based paint exists.
____ 6.  A lead-based paint disclosure is required for all _______ residential units which have
not been certified as lead-based paint free.
a. post-1970 c. pre-1975
b. pre-1978 d. post-1982
____ 7.  A ___________ is any condition that causes exposure to lead from lead-contaminated
dust, soil or paint which has deteriorated to the point of causing adverse human
health effects.
a. lead-based paint hazard c. seismic activity hazard
b. lead-based paint disclosure d. dangerous off-site condition
____ 8.  Landlords can refuse to accept tenants who want to occupy a unit with their pet
unless the tenant is disabled and the pet is a:
a. signal dog. c. guide dog.
b. service dog. d. All of the above.
____ 9.  For a furnished unit, the security deposit, including the pet deposit, may not exceed:
a. one month’s rent.
b. two month’s rent (in addition to first month’s rent).
c. three month’s rent (in addition to first month’s rent).
d. three month’s rent.
___ 10.  A tenant needs to give the property manager ___ if they intend to move, install or
remove a waterbed.
a. 24 hours’ notice c. reasonable notice
b. 3 weeks’ notice d. None of the above.

Quiz 14 — Chapters 55-58, Pages 543-580

____ 1.  Handicapped persons refer to individuals who have:

a. a physical or mental impairment which substantially limits the person’s life
activities.
b. a record of having a physical or mental impairment.
c. relatives who have a record of having a physical or mental impairment.
d. Both a. and b.
____ 2.  A person who believes they have been discriminated against needs to file a complaint
with the Secretary of Housing and Urban Development (HUD) within _______ of the
alleged discriminatory practice.
a. 24 hours c. one month
b. 12 days d. one year
658 Property Management, Sixth Edition

____ 3.  A broker found guilty of discrimination by the Secretary of Housing and Urban
Development (HUD) may face disciplinary action from the:
a. Department of Real Estate (DRE). c. Department of Motor
Vehicles (DMV).
b. local police department. d. All of the above.
____ 4.  A landlord of newly constructed ________ unit residential property needs to provide
disabled access.
a. four or more c. eight or more
b. four or less d. 12 or more
____ 5.  Rental policies excluding children under the age of 18 are considered ________ unless
the property qualifies as senior citizen housing.
a. reasonable c. lawful discrimination
b. unlawful discrimination d. None of the above.
____ 6.  Requiring families with children to _________ than other prospective tenants when
screening rental applications is prohibited.
a. have a higher family income c. have a better credit rating
b. pay a higher security deposit d. All of the above.
____ 7.  Senior citizen housing is property:
a. intended for occupancy only by individuals c. Both a. and b.
62 years of age or older.
b. intended for occupancy by at least one d. Neither a. nor b.
person of 55 years of age or older.
____ 8.  A senior citizen and their disabled _________ may live in senior citizen housing.
a. child c. Both a. and b.
b. grandchild d. Neither a. nor b.
____ 9.  Two primary types of rent control ordinances exist, called:
a. strict rent control and variable rent control.
b. market rent control and vacancy decontrol.
c. vacancy decontrol and strict rent control.
d. variable rent control and market rent control.
___ 10.  In addition to restricting rent increases, rent control ordinances restrict the landlord’s:
a. ability to enter a tenant’s unit. c. Both a. and b.
b. ability to evict existing tenants. d. Neither a. nor b.

Quiz 15 — Chapters 59-63, Pages 581-625

____ 1.  In addition to fee estates, there are three other estates which exist in California,
including:
a. life estates c. estates at will.
b. leaseholds d. All of the above.
 Quizzes 659

____ 2.  In the alienation provision in a lease, the landlord may:

a. prohibit the tenant from encumbering the leasehold.
b. allow the tenant to encumber the leasehold subject to previously agreed
conditions.
c. require the landlord’s consent before the tenant may encumber the leasehold.
d. All of the above.
____ 3.  Examples of boilerplate provisions in commercial lease agreements which relate to
the priority of the lease against trust deeds are:
a. future subordination clauses. c. nondisturbance clauses.
b. attornment clauses. d. All of the above.
____ 4.  A _________ gives a tenant the right to require a new trust deed lender to enter into
a written agreement which states the tenant’s lease agreement will remain in effect
for its full term after the lease is subordinated to a new mortgage.
a. nondisturbance clause c. future subordination clause
b. self-destruct provision d. power of sale provision
____ 5.  A _______ confirms the correct amount of security deposit held by the seller.
a. UCC-1 Financing Statement c. notice of default (NOD)
b. Tenant Estoppel Certificate (TEC) d. None of the above.
____ 6.  On the discovery of a long-term leasing arrangement which triggers due-on
enforcement under the lender’s trust deed, the lender may:
a. call the mortgage. c. Either a. or b.
b. recast the mortgage. d. Neither a. nor b.
____ 7.  The due-on clause is triggered when an owner of property secured by a due-on trust
deed enters into a lease:
a. with a term over two years or an option to purchase.
b. with a term under three years without an option to purchase.
c. with a term over three years or an option to purchase.
d. with a term under two years without an option to purchase.
____ 8.  A broker who advises a buyer not to disclose a sale to a lender secured by a trust
deed on the property may be held liable by the _______ for their right to additional
interest.
a. buyer c. seller
b. lender d. All of the above.
____ 9.  Residential tenants whose month-to-month rental agreements were junior to the
recording of the trust deed, and thus eliminated by the foreclosure sale, are entitled
to a ________ written notice to vacate.
a. three-day c. 90-day
b. 25-day d. one-year
___ 10.  Tenants living in ____________ are protected from unqualified termination of their
occupancy after a foreclosure sale.
a. Section 8 housing c. Both a. and b.
b. rent control communities d. Neither a. nor b.
660 Property Management, Sixth Edition

Answer References

The following are the answers to the quizzes for Property Management,
Sixth Edition and the page numbers where they are located.

Quiz 1 Quiz 2 Quiz 3 Quiz 4 Quiz 5

1. b 2 1. c 49 1. d 89 1. c 148 1. a 185
2. c 5 2. a 53 2. a 98 2. a 155 2. b 187
3. a 12 3. b 54 3. b 106 3. d 162 3. c 191
4. a 15 4. d 62 4. c 107 4. c 165 4. a 192
5. d 23 5. c 63 5. d 110 5. a 167 5. c 193
6. d 24 6. c 68 6. a 118 6. b 170 6. a 195
7. b 26 7. d 73 7. b 125 7. d 174 7. d 198
8. b 32 8. a 75 8. b 127 8. a 173 8. d 202
9. d 34 9. d 80 9. c 136 9. d 175 9. c 206
10. c 38 10. c 82 10. b 140 10. b 178 10. b 208

Quiz 6 Quiz 7 Quiz 8 Quiz 9 Quiz 10

1. d 214 1. c 246 1. a 302 1. b 347 1. c 382
2. a 217 2. b 246 2. a 306 2. d 348 2. d 384
3. d 218 3. d 248 3. d 315 3. a 352 3. c 394
4. b 223 4. a 258 4. d 315 4. a 356 4. c 396
5. d 224 5. d 260 5. c 324 5. d 357 5. a 400
6. a 230 6. d 273 6. c 325 6. c 358 6. b 400
7. b 231 7. d 266 7. b 326 7. d 361 7. a 403
8. c 236 8. b 287 8. a 338 8. a 365 8. c 405
9. a 237 9. c 290 9. c 342 9. d 371 9. c 408
10. d 238 10. c 292 10. d 342 10. c 373 10. a 412

Quiz 11 Quiz 12 Quiz 13 Quiz 14 Quiz 15

1. d 420 1. d 474 1. c 520 1. d 544 1. d 582
2. c 429 2. d 475 2. d 523 2. d 550 2. d 585
3. b 429 3. a 489 3. b 526 3. a 550 3. d 592
4. c 440 4. b 489 4. d 526 4. a 552 4. a 600
5. a 442 5. d 499 5. c 530 5. b 555 5. b 605
6. d 446 6. b 501 6. b 530 6. d 562 6. c 612
7. c 448 7. d 510 7. a 531 7. c 569 7. c 616
8. a 448 8. c 510 8. d 535 8. c 570 8. b 616
9. b 460 9. d 511 9. c 536 9. c 574 9. c 620
10. a 468 10. a 512 10. a 541 10. b 57 6 10. c 621