Landlord’s who are having problems paying their mortgage now have a new problem. Starting this year in California every landlord who offers to rent a unit in residential property containing one-to-four units must disclose in writing to any prospective tenant the receipt of a notice of default that has not been rescinded. A notice of default is the first step in a California non-judicial foreclosure. The disclosure must be made before executing a lease agreement and it must be given in six specified languages. If a landlord violates this law, the tenant can elect to void the lease. If voided, the tenant can recover one month’s rent or twice the amount of actual damages, whichever is greater, plus all prepaid rent, as well as any other remedies available. If the lease is not voided and the foreclosure sale has not occurred, the tenant may deduct one month’s rent from future amounts owed. A property manager will not be held liable for failing to provide the written disclosure notice unless the landlord has given the property manager written instructions to deliver the written disclosure to the tenant.
Often, when a tenant has extra space it considers whether to sublease or assign the extra space to someone else. If you are thinking about this and the person or business you are considering subleasing or assigning to may end up in bankruptcy or may simply stop paying the rent, you may want to consider how this would affect the choice of whether you assign or sublease.
In an assignment, the assignee “steps into the shoes” of the tenant and pays rent directly to the landlord. However, unless the landlord specifically releases the tenant, which is rare, the tenant remains liable to the landlord. Thus, the effect of this is that although the tenant remains liable under the lease, it no longer has the right to occupy the space and thus may not exercise any landlord/tenant remedies, like evicting the assignee, nor can it surrender the premises to the landlord if the assignee fails to do so. Further, the tenant’s liability under the lease continues into all extensions of the lease term even if the assignee extended the lease term without the tenant’s involvement. Thus, in the assignment scenario the tenant assumes much of the risk of the assignee’s behavior.
In a sublease, absent a provision of the lease that changes this outcome, the subtenant pays rent to the tenant, and the tenant retains its privity of contract and its real property rights vis-a-vis the landlord and the subtenant. The tenant becomes a sublandlord, and may then exercise landlord remedies, such as eviction, should the subtenant fail to vacate timely. However, a subtenant’s holdover for even a short period can result in the automatic extension of the lease term for another year, with the tenant remaining fully liable.
If the assignee files for bankruptcy and the lease is rejected, the tenant remains liable to the landlord but will not be able to regain possession of the leased premises because it gave up those rights. In a sublease, the sublandlord retains the ability to seek to compel the payment of rent during the bankruptcy or to try to get the sublease rejected. The sublandlord will be also be able to decide whether to accept a modification of the lease.
No one analysis can make the decision of whether to sublease or assign for any particular situation. It is always best to have your particular lease and your particular situation reviewed before deciding. These are important and potentially problematic issues, so be aware of them should you be in possession of some extra leased space.
I have recently been again handling a number of commercial evictions. Several years ago I stopped handling residential evictions, but there are a lot of similarities in the process.
In California an eviction, called an unlawful detainer, is most often initiated because the tenant fails to pay the rent when due. The first step in such instances to is review the lease to make sure that any grace period has elapsed and then to serve the tenant with 3-day notice.
There are a number of requirements mandating what must be in a 3-day notice and unlawful detainer cases are strictly construed so if you mess up, you get to start all over again. Among the key items in a 3-day notice are the name and address of the person to whom the past-due rent can be paid, the amount of rent due and an election of forfeiture of the lease in the even that payment is not made. There are other requirements as well so make sure you know what they are if you are going to do this yourself.
One of the advantages of a commercial tenancy is that the landlord can estimate the rent due in the 3-day notice. Thus, if the estimate is wrong, that is not fatal to the unlawful detainer action.
The next step is to serve the tenant. Service must be made by person or by a form of substitute service recognized under California law such as leaving a copy of the notice with someone at the premises and then mailing or posting and mailing if no one is available to leave the notice with. California law also allows for notice as provided in a commercial lease, but serving the notice in a way not specifically authorized under California law is risky.
When the notice is effective may depend on whether the tenant was personally served or served by substitute service. Clearly, if the tenant was personally served then the 3-day notice is really three days. There is a split, however, when the tenant is served by substitute service and so the safer practice is generally to add another five days from the date of mailing.
If the tenant pays in full within the three days then there is nothing left to do until the next time the tenant defaults. However, if the tenant makes a partial payment, you should be careful in deciding whether to accept it and it may depend on what you put in your 3-day notice.
Assuming the tenant has not paid, then the next step is filing the unlawful detainer action, which I will cover in a subsequent post.
The discussion above is not intended to provide legal advice to any particular individual but simply to give the readers some things to think about. If you need more information from me, please take a look at my website www.bronitsky.com.