Rent for Unpermitted Units May Be Uncollectible

One of the things we can count on is that each season brings us court decisions that diminish the appeal of being a landlord. Today’s lesson comes from California’s Fourth District Court of Appeal in the case of Espinoza v. Calva.

In short the decision says this: "If you are renting out a unit that has not been permitted for occupancy, don’t count on being able to collect a judgment against a tenant who defaults on the rent."

Maria Espinoza had rented a unit to two tenants, Gudelia Calva and Jorge Soqui. After three months of non-payment of the $750 monthly rent, Espinoza had them evicted. In a court proceeding at Orange County Superior Court the eviction action was upheld and the landlord was awarded possession of the premises. As a defense, the tenants had raised various claims about the sub-standard conditions of the unit, including the fact that it had not been certified for occupancy.

There is a provision in California law (Code of Civil Procedure 1174.2) that provides for landlords to be able to collect some rent for premises even if it has been shown that the premises did not meet required standards for habitability. For example, suppose I rented a $1,200 a month unit, and that for an extended period of time there was no hot water available. If a dispute were to come to court, a judge might rule that I only owed $1,000 a month in rent, because of the condition. (Let me be clear: I am making up these numbers. There is no formula. This is simply to illustrate the principle that, depending on the condition, it can be ruled that the amount of rent due can be reduced, while still acknowledging that some rent is due.)

In the Espinoza case the Superior Court noted that the tenants by then owed $3,350, but, "because of the condition of the property", and for other reasons, the amount was reduced by $1,000.

On various grounds, the case went to appeal. The appellate court upheld the eviction, but disagreed with the Superior Court with respect to the amount due from the tenants. The court referred to the fact that the Santa Ana municipal code prohibits the use or occupation of a building "until the building official has issued a certificate of occupancy." Because no occupancy permit had been issued, the court held that "the occupancy was unlawful and the lease constitutes an illegal contract." It held that, therefore, it was incorrect for the Superior Court to have given an award of any rent at all. The appellate court ruled that no money was due.

Was this ruling a good thing or a bad thing? It depends, of course, on your point of view. Real estate attorney Harold Justman, successor editor of the California Real Estate Law Newsletter, thinks the ruling may have unintended consequences. He writes, "This case could result in the reduction of the number of affordable rental units in the State of California due to the fact that there are a significant number of unpermitted rental units in almost every large rental market in the State." This is not just a matter of completing some paperwork and paying some fees. Many of those units could never be permitted because of various zoning and building ordinances.

Justman thinks that "Many landlords of unpermitted units will take them off the market rather than run the risk of collecting nothing in an eviction action."

Would that be a bad thing? A question too large to be answered in this column.

Written by Bob Hunt for www.RealtyTimes.com Copyright © 2008 Realty Times All Rights Reserved.