Monday, January 1, 2018

Between the rock and the hard place—a peculiar position of a master tenant

When we talk about a landlord-tenant relationship, we often imply the simplest pairing: that there is a landlord and there is that landlord's tenant, a straightforward exchange of promises and obligations going both ways (that those promises and obligations can go a wrong way or even entirely sideways is covered elsewhere in this blog).  But what if a tenant has own tenants, who sublease a portion of that tenant's whole tenancy? In San Francisco, it puts that main or "master" tenant in a position coupled with unique and nondelegable obligations.

A landlord-tenant relationship stems from the feudal principals of masters lending land to their vassals. (See e.g., Blackstone, Book III, "Private Wrongs," Ch. 15). This is the same principal flowing from anyone with a higher or fuller interest in the land to the one with a lesser claim to the same land. Which makes a tenant, when (s)he turns around and sublets portions of leased property to someone else, a "master," a landlord to those who rent from her or him. Glenn R. Sewell Sheet Metal, Inc. v. Loverde (1969) 70 Cal.2d 666. This does not change the relationship between the landlord and the tenant, but creates a new and separate relationship between the tenant (and not the owner) and the tenant's tenant (the subtenant). Boston Properties v. Pirelli Tire Corp. (1982) 134 Cal.App.3d 985, 992. In San Francisco, a recent case upheld the principle from the Rent Ordinance that enforcement of terms of subleasing is with the master tenant and his subtenant, not with the master tenant's landlord. Foster v. Britton (2015) 242 Cal.App.4th 920, 937.

So far, clear and easy. In the dense urban environments, like San Francisco, subletting is a very common, if not a prevailing, practice of renting residencies. What wrong could happen? Seems like nothing can, but check with Murphy first, and let us contemplate on some hypotheticals.

A Preamble—Have Insurance.

A strong suggestion to all master tenants out there—stay insured at all times. Rephrasing the Banker's Axiom, another Murphy principal (Mr. Murphy is highly relevant to all topics about leasing), we can say that, as long as you have an insurance policy, you more likely than not will end up never needing it.  (But don't do it the other way, needing it when you don't have it). Being insured may help with the situations noted below, and will may even be more of help with ones not mentioned here or anticipated at all.

Issue 1 - Split of Responsibilities.

It sure feels sweet for a master tenant to tell "back off" to the landlord, when that landlord tries to intermeddle with the master's contract with a subtenant. But that coin has a nasty other side: the split of responsibilities. A master tenant is still responsible to the landlord for the entire list of obligations, promises, covenants, conditions, and whatever else spelled out in the landlord's lease or required of the same tenant by law. Master tenants often pass some (or all) of those responsibilities to their subtenants, but they do remain responsible to the landlord, at a very least as "a surety for performance" of the original lease's conditions. Carma Developers (Cal.), Inc. v. Marathon Development California, Inc. (1992) 2 Cal.4th 342, 364.

How it comes to sting a master tenant in real life? First, by mere difference in the contracts, one the master tenant has with the landlord, and another same master tenant would have with a subtenant. In my limited experience, and I only observed a couple of hundreds of those, the sublease is usually executed on a proverbial back of a napkin with very few terms spelled out, with even those spelled carrying little to no enforceability as being stated wrong. And, of course, the terms in the sublease and the master-lease agreements rarely match and more often contradict each other.  Landlords' contracts tend to be made on specialized forms and be more accurate, although not always, but the danger lays mainly in the variations between the two documents, leaving the master tenant responsible on more points to the landlord than the subtenant responsible to the master.

Second, by virtue of some of responsibilities of a master tenant simply nondelegable to a subtenant. Either as written in the main lease (most often examples include obligations on paying the rent and holding a security deposit), or as applied by law, such as the nondelegable duty to provide safe premises (e.g., CACIs 1006, 3713). A master tenant may remain liable even when no longer an occupant of the place (e.g., liability for assignment, CCP § 1995.330(a)).

Issue 2 - One-Way Application of the Costa Hawkins Act.

Master tenants who rent a unit in a multiunit rent-controlled building may skip this section. For them, their landlord's ability to raise the master rent is as limited as their own ability to raise the rent to subtenants, under pretty much identical conditions.  All other master tenants, who are not lucky to be residing in the situation described above, should have some mint tea to relax the nerves before reading further. And have I mentioned, to have an insurance in place?

The Costa Hawkins Rental Act (Cal. Civ. Code 1954.50 et seq.) comes to bite master tenants in their subleasing sweet spot from an entirely unexpected angle, that is from the application of the San Francisco Rent Ordinance, an ordinance master tenants (them still being tenants) usually regard as their protector. (Other municipalities have very similar implications in their ordinances, so this danger is not confined to bother just the master tenants in the City By The Bay). Of course by now, since you diligently read this article from the top, you already know that a master tenant is more of a landlord than a tenant, but not everyone gets deep into those devilish details. The Rent Ordinance has little to offer to protect a master tenant from a subtenant's claim.

In short, the problem is this: if the whole rental unit is exempt from the rent control under the Costa Hawkins, the landlord may raise rent on the master tenant without limitations imposed by the Rent Board (which promulgates maximum rent increase rates for each year, usually around 1-2%). Outside of the rent control, a landlord can, if acts in good faith, raise the rent by bringing it up to the market level rate, means the rent can double or triple, if the market so dictates. What a master tenant expects then to do? If you think the answer is to raise accordingly the rates for the subtenants, the answer is, not so fast. First thing to do is to determine, whether the subtenancy is also exempt from the rent-control, which more often isn't.

Keep on drinking that mint tea, you may still need it, and consider tat the master tenants may find themselves exposed to a virtually unlimited rent increase in several scenarios (i) the unit is a single rental unit on a parcel (a condominium, a single-family house, or a multi-unit building with just one rental unit in it); or (ii) the master tenant is a subtenant, exempt from rent-control protections when all original tenants had left, even though the rental unit is an otherwise rent-controllable apartment (see, Sec. 37.3).

Observe the rule covering exclusively the master tenants, Rule 6.15C. Even when the eviction-control limitations won't apply (a master co-resides with a single subtenant), that master tenant has to make a written disclosure of the exemption prior to subtenant's moving in (R. 6.15C(1)), while an owner-landlord does not have disclose it. And with regard to establishing the initial rent rate for a new subtenant, the Rule covers how it can be established and in what proportion to the total amount paid to the owner (R. 6.15C(3)). However, any subsequent adjustments may require a petition to the Board, and a subtenant also gains a right to petition against an unlawful rent increase. (Id.)

In short, it is possible for a master tenant, who does not have the rent-control protection, to be obligated for a market-level rent rate, while the subtenants who pay rent to that master may remain protected and need not to agree to an increase beyond Rent Board's established limits.

Issue 3 - Unsplittable Obligations, Security Deposit.

An agreement with the owner is often interpreted (CC §§ 1431, 1431.2), if not expressly written, as a contract holding original tenants jointly and severally liable for violation of the tenancy terms. In practice,  when one or more of the original tenants leave, it often translates to vastly different expectations of what's owed, by whom, and to whom.

Among all, the most popular item of contention is handling the security deposit. From the landlord's standpoint, a security deposit is made when tenants move in, and its return is to be handled in exchange for recovering possession of the unit, i.e. all tenants vacate. See that CC § 1950.5(f) speaks in terms of terminating the tenancy, and 1950.5(g) counts the timing from vacating the premises.

This position does not always seem obvious to the tenants. A moving-out tenant may want to receive his/her proportional share of what was contributed to the total deposit. The remaining-in-residency tenants may wish to avoid paying that portion out of pocket, and rather seek a replacement candidate first.

This situation along may create an unpleasant exchange of demands and even interfere with parties' plans on moving-in or out, because each party's planned financial ability becomes affected. Add to this scenario a possibility that a moving-out party is not one of the original occupants, but a subtenant, and the position of a corresponding master-tenant becomes even riskier, because the duty to return subtenant's deposit is time-specific (generally, 21 days, under CC § 1950.5(g)), while obtaining a new and approved replacement may take longer: the owner's approval alone may take 14 days, depending on the lease terms and conduct of parties, see the Rules 6.15A, B, D, and E.

Issue 4 - Being Responsible To An Eviction Lawsuit.

An owner-landlord does not need to serve subtenants with the papers to maintain an eviction lawsuit (called in California an "unlawful detainer") against the master tenant. Chinese Hosp. Foundation Fund v. Patterson (1969) 1 Cal. App. 3d 627, 632, citing Markham v. Fralick (1934) 2 Cal.2d 221, 223.   For an underlying eviction notice, the rule differentiates based on the kind of the notice, with the curable notices (e.g., "to pay or quit," or "to cure or quit") required to be served on subtenants, while incurable notices ("to quit") and termination notices (under CC §§ 1946, 1946.1) need not to be served on subtenants. Four Seas Investment Corp. v. International Hotel Tenants' Ass'n (1978) 81 Cal.App.3d 604, 611-612;  Briggs v. Electronic Memories & Magnetics Corp. (1975) 53 Cal.App.3d 900, 904; Kwok v. Bergren (1982) 130 Cal.App.3d 596, 600.

For its own practical needs, it is useful for owners to include all known occupants both in the eviction notice and the lawsuit, but it is not mandatory. Leading to yet another risk of liability for master tenants: to respond to the owner's lawsuit while having no counter-measure to pass the inconvenience on to subtenants. This becomes sensitive for all scenarios covered above—a master tenant is often left "holding a bag."  I hope this brief recital of some of the caveats and hidden issues of being a master tenant will help to have that bag not entirely empty.


More real property posts

If you are concerned about your rights and obligations in a landlord-tenant relationship, make your first step toward taking control over the circumstances, and call my office at (415) 987-7000. I will be glad to assist in guiding you through the jungle. The only thing you can't afford is to stay put and uninformed. My office provides a confidential assessment of your particular scenario, free of charge, and I will share with you the results of the analysis along with my thoughts on available solutions.

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