Written By: Kayo Manson-Tompkins Published in the Fall 2014 issue of UTA Quarterly
On June 10, 2014, the Court of Appeal of California for the Sixth Appellate District (Monterey) rendered another decision in favor of the tenant in Erlach v. Sierra Asset Servicing, LLC 2014 Cal. App. Lexis 504. A prior decision on January 23, 2014 was decided by the same court in Nativi v. Deutsche Bank National Trust Co. (2014) 223 Cal. App. 4th 261. In both decisions the court refers to the overwhelming public policy to protect the rights of tenants following a foreclosure sale.
In Erlach, the appellant signed a lease with the former owner in 2009. The former owner turned off the utilities just before the foreclosure sale. As a result, and just prior to the sale, a code enforcement inspector posted a red tag for no electricity, heat or hot water. The Appellant had paid rent through the end of November 2010. The foreclosure sale occurred on November 12, 2010.
Sierra Asset Servicing had argued that it had no lease with appellant and that even if the lease were valid, the red tagging by the county terminated the lease. Sierra also argued that when the property underwent construction to lift the red tag, the property was destroyed, thereby terminating the agreement. The trial court agreed and sustained Sierra’s demurrer without leave to amend on the ground that no landlord/tenant relationship existed between Sierra and appellant. The trial court also held that any lease would have been void as unlawful and in violation of public policy due to the red tag. Furthermore, the trial court held that appellant was a squatter with no legal rights. The trial court instructed Sierra’s counsel to file a motion to dismiss, which was granted and appellant’s complaint was dismissed with prejudice. Erlach appealed the decision.
The issue on appeal was whether the trial court erred in sustaining Sierra’s demurrer without leave to amend and dismissing the case by holding that the red-tagging of the property automatically terminated the lease as void and against public policy.
The Appellate court failed to see how Sierra came to that conclusion as the law said otherwise. The Appellate court held that a tenancy was not terminated after the building inspector posted a red tag notice and ordered the tenant to vacate as the property was unsafe. The court stated, on the contrary, that the law states the exact opposite. Civil Code Section 1940.2 makes it unlawful for a landlord to commit certain acts “for the purpose of influencing a tenant to vacate a dwelling.” The purpose of this statute is to prohibit a landlord from using a “constructive self-help eviction.” Civil Code Section 1941 states that a lessor is to put the building in a condition fit for occupation and make repairs so that the building is habitable. Civil Code Section 1942.4 states that a landlord cannot demand or collect rent for a substandard dwelling that was not caused by the tenant. Although the court does not refer to Section 789.3, it states that a landlord cannot turn off the utilities as a method to remove the tenant. The eviction case law is clear that there can be no self-help to recover possession.
In Green v. Superior Court (1974) 10 Cal. 3d 616, the court held that where the occupancy is not illegal, but the property does not conform with certain housing and building codes, and the defects are correctable, the tenant may remain and is relieved of his obligation to pay rent. However, the tenant is liable for the reasonable value of his occupancy in its defective condition. Under Green, “a residential tenant may not be deemed to have exempted a landlord from the implied warranty of habitability by continuing to live in uninhabitable premises.” (See also Knight, supra, 29 Cal. 3d at 59 – “new owners of rental property are required to address outstanding code violations even if they were caused by the previous owner of the property.” Knight v. Hallsthammar (1981) 29 Cal. 3d 46; Hawthorne Savings & Loan Assn. v. City of Signal Hill (1993) 19 Cal. App. 4th 148)
In Sierra, the Appellate court concluded that at the time Sierra purchased the property at the foreclosure sale, the tenancy had not been terminated. They further held that the trial court erred in determining that the red-tagging had terminated the tenancy.
The Appellate court went on to state that to the extent Sierra claims that the lease was extinguished by the foreclosure sale, pursuant to PTFA a bona fide tenant is protected. Protecting Tenants at Foreclosure Act (“PTFA”) was originally set to expire at the end of 2012, although operation of PTFA now extends through the end of 2014. The Appellate court concluded that “solely as a matter of statutory interpretation, PTFA causes a bona fide lease for a term to survive foreclosure through the end of the lease term subject to the limited authority of the immediate successor in interest to terminate the lease, with proper notice, upon sale to a purchaser who intends to occupy the unit as a primary residence,” citing Nativi, supra 223 Cal. App. 4th at p. 270.
The Appellate court went on to state, as they concluded in Nativi, “that permitting an immediate successor in interest in a foreclosed property to invoke the general rule that illegal contracts are unenforceable would allow it to circumvent the PTFA and frustrate its fundamental public policy purpose,” Nativi, supra 223 Cal. App. 4th at p. 287.
As such, the Appellate court held that posting a red tag on a property does not terminate an existing lease, therefore they reversed and remanded for further proceedings. As in Nativi, the Sixth Appellate District has continued to protect the rights of the tenants following a foreclosure sale.