Real Property Law Reporter

MIDCOURSE CORRECTION

The Dangers of Disrepair

ROGER BERNHARDT*

(Note: Fearing that I was overstating the case, I forwarded this article to my colleague Myron Moskovitz, who won all of the major landlord-tenant battles of the recent past, hoping that I would provoke a reply. I succeeded, and his thoughtful response appears after this column.)

The decision in Fairchild v Park (2001) 90 CA4th 919, 109 CR2d 442, is not one that should make attorneys rethink what they do. Although the reasoning is often astonishing, the result is quite normal, and one that attorneys probably could have warned their clients to expect.

By result, I mean the fact that a residential landlord was held liable for property damage resulting from a defective electrical system, and also for attorney fees, even though the tenants had not paid rent for the past year. In fact, I think we might see the same outcome in leased commercial premises, except possibly for the attorney fees. But the logic employed in Fairchild is so problematic that it is difficult for me to believe that any other court will ever follow it. If the reasoning is taken seriously, then we may have a lot of rethinking to do.

Liability in Tort or Contract?

On the first point—that a residential landlord is liable to his tenants for property damage they suffered due to a fire resulting from a defective electrical system—the outcome is no surprise. If the wiring “was in a state of proven disrepair,” it surely violated local building codes, thus generating standard tort liability for violation of a safety statute. The duties created by our building codes are imposed on the owners of the buildings, which makes landlords rather than tenants the ones to whom city officials look for compliance, and also makes them responsible in damages to persons injured because of the code violations. See, e.g., McNally v Ward (1961) 192 CA2d 871, 14 CR 260. For safety statute liability, commercial tenants are probably as much a protected class as residential tenants are.

The court’s logic regarding that liability is what caused the trouble in this case. Although the tenants sued for negligence and breach of the implied warranty of habitability, the trial court “barred all tort relief” on the habitability claim, and instead awarded $89,000 in property damage for breach of the “implied warranty of quiet use and enjoyment.”

It is hard to see what the trial court accomplished by rejecting tort relief for breach of one warranty and then awarding the same relief for breach of another one that, as the appellate court acknowledged, really doesn’t exist. It is an open question whether tort liability should follow breach of the habitability warranty. Courts in other jurisdictions have declined to assert that it does, opining that negligence is a better mechanism for deciding such cases. See, e.g., Favreau v Miller (Vt 1991) 591 A2d 68. But given that California defines warranty of habitability in terms of compliance with building codes and that we treat a building code violation as a species of per se negligence, there is no need to come up with a second warranty theory, which would be subject to the same analysis as the first warranty theory. And I would not bet that California courts will refuse to award tort damages for breach of the implied warranty of habitability, given our general liberality in this field. (After all, to be honest about it, the warranty of habitability is really a tort duty masquerading as a contract: It does not appear in the language of the lease and it cannot be waived, which makes it look pretty noncontractual.) Plaintiffs’ attorneys should not stop pleading traditional negligence and backup theories of implied warranty of habitability when their clients are tenants who suffered personal injuries or property losses from code violations.

What Untenantability?

One advantage of negligence theory over implied warranty theory is that negligence probably only requires plaintiffs to show that the safety statute or building code was breached, whereas the warranty of habitability is not breached unless noncompliance with the code makes the premises untenantable. In the latter case, rent ought to be reduced. Code of Civil Procedure §1174.2(a)(4) provides that when the implied warranty of habitability is breached, the court “shall order that the monthly rent be limited to the reasonable rental value of the premises as determined pursuant to this subdivision until repairs are completed.” Since the trial court here apparently awarded the landlord the entire rent that the tenants had not paid for the past year, what kind of breach occurred? I wonder, as the dissent did, just how one can say that the warranty was breached in light of the award of full back rent? Unless the electrical system went bad only on the very day the fire broke out (allowing no time to fix it), the full rent award seems inconsistent with recovery on a warranty theory.

This decision seems to ignore the requirement of tenantability, but that may become more significant in better-reasoned decisions. On the other hand, as long as a code violation underlies the damage, a pure tort theory may do just as well, as far as the consequential damages are concerned.

Attorney Fees

One virtue of a contract theory of liability over one sounding in tort is that, under the right circumstances, success will get you not only recovery for the loss, but also an award of attorney fees. In this case, we are not told how much the attorney fees were, but the property damage award was only $89,000 and I imagine the attorney fees were or will be more than that.

For attorney fees to be awarded, the lease generally must contain an attorney fees clause. In this case there was one, and it covered “breach of any of the covenants contained in this lease,” which I guess includes the implied warranties as well. Any doubt about the propriety of such fees is probably eliminated by the language of CCP §1174.2(a)(5), which makes successful assertion of a warranty-of-habitability defense a basis for awarding “costs and attorneys’ fees if provided by, and pursuant to, any statute or the contract of the parties,” although that section may be limited to unlawful detainer proceedings (which this was not). Conversely, when the theory of recovery is negligence, the attorney fees clause will be unavailing.

So, if there is tort liability for breaching the implied warranty of habitability, attorney fees are clearly properly awarded.

The Unpaid Back Rent

The tenants had not paid their rent for over a year, and although they recovered more in property damages than they owed in back rent, their arrearages caused them trouble under the doctrine that plaintiffs in a breach of contract action must plead either their own performance or an excuse for nonperformance. The dissent believed that this condition disqualified the tenants from receiving attorney fees, but the majority (and trial court) elected to make a completely novel end run around that principle—an argument that I think most landlord-tenant lawyers will not want to take seriously.

The majority argument was that, even though the tenants had breached their covenant to pay rent, they could still recover on their habitability claim because “the implied covenant of habitability contained in the lease is independent of the covenant to pay rent” (my italics). Now that statement is rather staggering: The revolution in residential landlord-tenant law over the past 50 years has been aimed at getting rid of the old common law doctrine of independent covenants and making the covenants dependent instead. The whole basis for the rule that tenants may withhold rent for unrepaired premises is that the duty to pay rent is dependent on, not independent of, the landlord’s duties of repair. In Green v Superior Court (1974) 10 C3d 616, 635, 111 CR 704, which created the implied warranty of habitability in California, the supreme court said, “we now conclude that the tenant’s duty to pay rent is ‘mutually dependent’ upon the landlord’s fulfillment of his implied warranty of habitability.” To declare that Green makes the residential rent covenant and the implied warranty of habitability independent of each other comes close to a willful misreading of that seminal case.

(Indeed, there is some misquoting in the opinion, which might well get the lawyer responsible in serious trouble. When I read in the opinion the quote from Miller & Starr stating that the rent and repair covenants are independent, I was in such doubt that I pulled out their book to confirm and found that their text added the sentence, “However, the covenant to pay rent and the landlord’s warranty of habitability for residential premises are dependent covenants.” Sadly, that completely contradictory assertion was not included in the court’s published opinion. Either the court was attempting to bamboozle the public or one of the lawyers successfully bamboozled the court. Furthermore, this opinion quotes a very old decision, Arnold v Krigbaum (1915) 169 C 143, 146 P 423, for the proposition that lease covenants are independent, saying that Green overruled it “on another point,” when it’s pretty clear that Green directly overruled Arnold on the independence point, not some other issue.)

I would not advise any real estate lawyer to think that the old independent covenants doctrine retains any validity with regard to rent or repair covenants. Landlords who don’t comply with their repair obligations to commercial tenants can expect to lose those tenants under the constructive eviction doctrine, which lets the commercial tenants quit because their duty to pay rent is dependent on the covenant of quiet enjoyment. Similarly, landlords who don’t comply with their repair obligations to residential tenants can expect to see their rents withheld under Green, because the tenants’ duty to pay rent is dependent on the implied warranty of habitability. The contrary reasoning of this opinion should be mercifully ignored.

Mutual Dependence?

Green said that the dependence between the two duties was mutual, but I don’t believe it. Mutual dependence would mean that the landlord could stop maintaining the premises if the tenants fail to pay the rent. I think the dependence is unilateral: Tenants don’t have to pay if landlords don’t repair, but landlords have to repair anyway. The results are not symmetrical but they are livable: Landlords who are unhappy because they aren’t receiving the rents they are owed can bring unlawful detainer to evict their tenants, which is both more effective and safer than ceasing repairs.

Unilateral dependence is probably the way it is in all residential landlord-tenant relations. Under our statutory repair-and-deduct statute, CC §1941, the landlord has to maintain the premises, and although that duty is dependent on the tenants’ keeping up their own apart­ments, it is not dependent on their paying the rent. See CC §1941.2. It may be somewhat difficult to work out how tenants who are not paying rent can make repairs and then deduct their cost from the rents they didn’t pay in the first place, but I am sure that a formula can be found. Similarly, nonrepairs can lead to reduction in allowable rents under a rent control ordinance. See Sterling v Santa Monica (1985) 168 CA3d 176, 214 CR 71. Thus, not repairing in response to not receiving rents may only reduce the rent to which the landlord is entitled thereafter.

Furthermore, shutting off the utilities because the rents have stopped may get a landlord in even worse trouble. Civil Code §789.3, which prohibits landlords from willfully terminating utility services, appears to cover terminations resulting from the landlord’s failure to pay the utility bill, but does not appear to excuse a landlord on the basis of not receiving rents. Bear in mind that the costs of violating that statute can include penalties that cumulate daily (see Kinney v Vaccari (1980) 27 C3d 348, 165 CR 787) as well as attorney fees (with or without an attorney fees clause in the lease).

In short, Fairchild may be all wrong in terms of what it says about the independence of rent and repair duties, but no residential landlord in California should think she can safely let her premises go unrepaired.

 

The Danger of Dicta

MYRON MOSKOVITZ*

Fairchild v Park (2001) 90 CA4th 919, 109 CR2d 442, provides a fascinating illustration of the careless use of language. So does its progenitor, Green v Superior Court (1974) 10 C3d 616, 111 CR 704. And both serve as excellent examples of why we don’t treat dicta as binding. Both courts came to proper results, but both used sloppy language that could lead to trouble.

In Green, the supreme court stated that, “in keeping with the contemporary trend to analyze urban residential leases under modern contractual principles, we now conclude that the tenant’s duty to pay rent is ‘mutually dependent’ upon the landlord’s fulfillment of his implied warranty of habitability.” 10 C3d at 635. The court used the word “mutual” several times in its opinion. In fact, however, the court held only that a residential tenant’s duty to pay rent is dependent on the landlord’s prior performance of his or her duties under the newly-adopted implied warranty of habitability (and that the tenant may defend against an unlawful detainer action based on a claim of nonpayment of rent by proving that the landlord breached this warranty).

If the word “mutual” were given literal effect, a landlord would have no duty to provide habitable premises to a tenant who had failed to pay the rent: Because the tenant breached a condition precedent to the landlord’s duty, the landlord would thereafter have no duty to perform. The court in Green never considered this question, however, because it was not raised by the petition presented, which asked only whether the tenant’s duty to pay rent was abated by the landlord’s prior failure to provide habitable premises. 10 C3d at 619.

It seems clear from the Green court’s reasoning that if it had considered this question, it would have held that a landlord is required to comply with the implied warranty at all times during the tenant’s possession of the premises—even while the tenant is in breach.

I deduce this from the court’s stated basis for its opinion. Although the decision does include language about the “contractual” nature of the modern lease (10 C3d at 624), the court found that a warranty of habitability was implied primarily by certain public policies rather than from the presumed actual intent of the parties. First, the court relied on a policy chosen by the legislature: to require landlords to comply with certain building and maintenance standards, enforceable by the government itself. 10 C3d at 627. These requirements continue to operate even after the tenant fails to pay the rent. The implied warranty is designed, in part, to further this policy.

Second, the court invoked a policy of protecting a party with substantially weaker bargaining power from the superior bargaining power of the other party. 10 C3d at 619. In general, landlords have more bargaining power than tenants. Although this might not induce a court to invalidate all provisions in a rental agreement “negotiated” by such parties (e.g., the amount of rent), it would incline a court to invalidate any provision that forced the tenant to “waive” rights under the newly-created warranty. 10 C3d at 626 n9. (In a later case, the court held that the tenant does not lose the benefit of the implied warranty even by accepting the premises with knowledge of existing defects. Knight v Hallsthammar (1981) 29 C3d 46, 54, 171 CR 707.)

Third, it seems apparent (and must have been apparent to the court) that the tenants most likely to be in this inferior bargaining posture, and most likely to face landlords who might be inclined to violate housing codes, would be poor tenants—the people most likely to fall behind in their rent payments occasionally. (Justice Ortega’s dissent in Fairchild relies on the “standard contract principle” that “a party who has breached a contract without justification or excuse may not enforce the contract.” 109 CR2d at 453. But Green did not rely on “standard contract principles” applicable to parties of presumably equal bargaining power.)

Putting all this together, I divine that a court using such reasoning would not have absolved a landlord of his duty to comply with the implied warranty of habitability after his tenant failed to pay the rent. Such an absolution would undermine enforcement of housing codes, allow landlords to take advantage of superior bargaining power, and remove the protection of the implied warranty from those tenants who might need it the most.

The Green court’s unfortunate use of the word “mutual” implied otherwise, but that was a mistake. The reason for the mistake was this: The court was faced with older precedent that said that the tenant’s covenant to pay rent and any express covenants by the landlord were “independent” of each other, i.e., neither was a condition precedent to the other. 10 C3d at 634. The opposite of “independent” is “mutual,” so the court used the word “mutual” to express its rejection of the “doctrine of independent covenants.” In fact, what the court held (and should have said) was that the tenant’s duty to pay rent was dependent on the landlord’s fulfillment of his duty to comply with the implied warranty of habitability—period. That is what the court meant, and that was all that needed to be said to resolve the issue before the court in Green.

The Fairchild court committed a similar mistake. The court held that the landlord’s duty to comply with the implied warranty was not dependent on the tenant’s fulfillment of her duty to pay rent. As I indicated above, this was a correct reading of the underlying reasoning of Green and what the supreme court likely would have held had it confronted this issue. But the Fairchild opinion said that “the landlord’s obligation to provide a habitable residence to the tenants is independent of the tenants’ obligation to pay rent.” Like Roger, I was startled by this language, as it seems contrary to Green. “Independent” implies that the landlord’s breach of the implied warranty is no defense to an action for rent (or to an eviction for nonpayment of rent). Green, of course, held just the opposite. Once again, a court misspoke while ruling correctly.

Putting Green and Fairchild together, we come up with the following rule: The residential tenant’s duty to pay rent is dependent on the landlord’s prior compliance with the implied warranty of habitability (Green), but the landlord’s duty to comply with the implied warranty is not dependent on the tenant’s prior compliance with the obligation to pay rent (Fairchild). Announcing this rule by calling the covenants either “mutual” or “independent” will simply confuse the reader, and that is exactly what both Green and Fairchild did.

Fortunately, however, those words were “mere dicta.” Seldom has that rather derogatory term been more fitting. The judges got the results right, and neither they nor we should be bound by their rather casual misuse of words.

 



*ROGER BERNHARDT is the Editor of the Reporter. He is a Professor of Law at Golden Gate University. In this column he considers the practical implications of recent developments in the real property area.

*MYRON MOSKOVITZ is Professor of Law at Golden Gate University. He received his law degree from the University of California School of Law (Boalt Hall) and has served as law clerk to Justice Raymond E. Peters of the California Supreme Court, Director of Marysville Office of California Rural Legal Assistance, Chief Attorney of the National Housing Law Project, and Chairman of the State Commission of Housing & Community Development. He specializes in appellate practice and landlord-tenant law, subjects on which he has written several books and articles.