A landlord was found liable under San Francisco’s
residential rent control statute for excess rent charged to a tenant by
the former landlord. In Baychester Shopping Center v. San Francisco
Residential Rent Stabilization and Arbitration Board (2008), the 1st
District Court of Appeal upheld the rent control board’s ruling that a
successor landlord can be held liable for the total of $41,414.10 in
rent overpayments made by the tenant while the nine-unit apartment
building was owned by a prior landlord.
The former owner, Hansen, had entered into a lease agreement with
Fingerhut, the tenant, in 1991 for $950 per month rent. However,
Fingerhut and Hansen then agreed that Fingerhut would manage the
building in exchange for free rent of the same unit. Ten years later,
Hansen terminated the management agreement and told Fingerhut that the
rent for that unit was now $2,000 per month. Fingerhut ultimately paid
the increased rent minus a credit of $800 after Fingerhut again agreed
to manage the property. In 2003, 2004, and 2005, the rent was raised
again. In Sept. 2005, with the rent at $2,044.76, Fingerhut notified
Hansen that he would no longer perform
the maintenance duties. In Oct. 2005, Fingerhut petitioned the
rent control board, claiming that Hansen
had unlawfully increased the rent.
On Dec. 23, 2005, Hansen sold the building to Baychester. In Jan. 2006,
Fingerhut paid less than the stated amount of the rent, and the check
was refused by Baychester. The administrative law judge found that
Baychester was liable for the rent overpayments for a period of time
from Oct. 1, 2002, through Dec. 31, 2005.
The issue on appeal was solely whether Baychester, as the successor
landlord, was liable for the rental overcharges. Under San Francisco’s
rent control ordinance, a landlord—including a successor landlord—can
be held liable for rent increases exceeding the percentage limitations
for a three-year period preceding the filing of a tenant’s petition.
Baychester argued that under California Civil Code of Procedure Section
1466, a successor owner cannot be held liable for a breach committed by
a predecessor landlord. Section 1466 deals with a breach of a covenant
running with the land. Furthermore, a covenant in the lease to pay rent
runs with the land. However, the appellate court rejected Baychester’s
argument stating, “Hansen did not breach a covenant in the lease but
rather violated provisions set forth in the rent ordinance regarding
permissible rent increases.”
California Supreme Court Tackles
Noncompetition Agreements
>> In Edwards v. Arthur Andersen (2008), an issue relevant to all
real estate brokers with employees was addressed by the California
Supreme Court—California Business and Professions Code section 16600
prohibition of employee noncompetition agreements and the exceptions.
Section 16600 states: “Except as provided in this chapter, every
contract by which anyone is restrained from engaging in a lawful
profession, trade, or business of any kind is to that extent void.” One
exception permitted under the chapter is a noncompetition
agreement in the sale or dissolution of a business. Another
exception noted by the Court was a trade secret exception. (In King v.
Gerold [1952], the former employee was not prohibited from
manufacturing house trailers, only from using his former employer’s
trailer design.)
California courts have invalidated noncompetition agreements despite
their being “narrowly tailored.” Andersen’s noncompetition agreement
prohibited the employee, Edwards, for an 18-month period, from
performing accounting services of the type he had provided while at
Andersen, for any client on whose account he had worked during the 18
months prior to his termination. In addition, Edwards was prohibited,
for a year after termination, from “soliciting” any client of
Andersen’s Los Angeles office.
The California Supreme Court concluded that Andersen’s noncompetition
agreement was invalid because it restricted [Edwards’] ability to
practice his accounting profession.
Andersen had argued that the Ninth Circuit created a “narrow-restraint”
exception to section 16600 in federal court—i.e., only restraints that
are unreasonable or overbroad are illegal. However, the California
Supreme Court emphasized that “California courts have not embraced the
Ninth Circuit’s narrow-restraint exception.”
The California Supreme Court concluded that it was up to the
“Legislature, if it chooses, either to relax the statutory restrictions
or to adopt additional exceptions to the prohibition-against-restraint
rule under section 16600.”
Q. After a lender has
foreclosed on a residential rental property, what is the notice
that must be given to the tenant to terminate a month-to-month
tenancy?
A. SB 1137 has recently changed
the law affecting residential tenants in foreclosed properties. The
law, which went into effect on Sept. 9, 2008, added California Code
of Civil Procedure section 1161b. The foreclosing lender must now
give the tenant a 60-day notice
instead of the previous 30-day notice. However, for Section 8
tenants, the notice period is not changed and remains
90 days (California Civil Code of
Procedure Section 1954.535). Furthermore, the 60-day notice period
does not apply to the owner—or any party to the note—who is
occupying the foreclosed property. The owner or party to the note
needs to be given only a three-day notice to quit (California Civil
Code of Procedure Sections 1161a(b), 1161b(b)).
Written by Sonia M. Younglove, Esq., C.A.R.
senior counsel.
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