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Lender is Responsible for the Condition of the Property Following a Foreclosure

Foreclosure Litigation and Landlord & Tenant Law by Peter N. Brewer, Esq.

Joseph Erlach rented a bedroom and bathroom in a house located in Monterey.  He entered into an agreement with the original owner, Mary Schwann, to rent the property for seven months with the lease ending in October.  In the middle of October, the parties agreed to extend the lease until the end of November.  However, at the end of October, Schwann turned off the utilities at the property because some of the other tenants were not paying rent.

Several weeks after turning off the utilities, the property was red-tagged because of the lack of utilities and Erlach was prohibited from occupying the property.  Four days after the property was red-tagged, the property was foreclosed by Defendant Sierra Asset Servicing, LLC.

After the foreclosure sale, Erlach talked to Sierra and they agreed to extend his lease until the end of December.  In November, Sierra began removing flooring, carpeting, and fixtures from the property over Erlach’s objection.  In early December, Sierra notified Erlach that the property was ready for him to live in, even though there were still substantial habitability problems and the red-tag had never been removed.  Because of these issues, Erlach sued Sierra.

In Erlach’s suit, he claimed that Sierra had constructively evicted him and had violated several habitability statutes.  In response to the suit, Sierra filed a demurrer alleging that there was no valid lease as the lease was with Schwann.  Further, if there had been a lease with Sierra, the lease would have been void because the property had been red-tagged and Sierra had begun renovations.  By making the renovations, Sierra had “destroyed” the property and therefore terminated the lease.  The court agreed with Sierra and granted the demurrer without leave to amend.

THE DECISION:

The Sixth Appellate District overturned the trial court’s judgment and overruled the demurrer.  In Erlach v. Sierra Asset Servicing, LLC, the appellate court held that a red-tag does not automatically terminate a lease.  The court noted that the relevant Health and Safety Codes all refer to the rights and responsibilities of tenants in the present tense and do not refer to them as “former” tenants.  Given that, the court found that the legislature must have intended for the lease to continue beyond the issuance of a red-tag.  Erlach had a valid lease.

Further, since he had a valid lease, under California law it continued beyond the foreclosure sale.  Since Erlach alleged that the property was uninhabitable, he had made sufficient allegations to support claims for violations of the warranty of habitability and related claims.

WHY THIS DECISION IS IMPORTANT:

This case clarifies that a tenant with a valid lease remains a tenant even after a property has been red-tagged.  Also, it would be nonsensical to allow landlords to just let houses get red tagged to get rid of unwanted tenants.  While the statute was clear that a tenant has certain rights against a landlord after a property is red-tagged, this decision helps clarify that a tenant may make claims relating to the breach of contract and other tort causes of action.

COMMENT:

This appellate decision seemed like the obvious conclusion after reading the rent ordinances.  The trial court’s decision led to a rather strange result – that a tenant who rented a red-tagged property had fewer protections than if a property never was red-tagged.  Further, the appellate court went out of its way to highlight that just because a contract may have been for an illegal purpose, it does not mean that it is necessarily unenforceable.

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