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Legal Column, March 2002
By Rosario Perry


YES, THIS IS FEBRUARY 2002

One of the most incomprehensible elements of residential rental property is time. No matter how well planned SMRR's anti-property laws and/ or other attacks on the American way of life are, SMRR cannot figure out this time thing. Time simply rushes by at such a fast rate that whatever scheme the SMRR minions come up with, by the time that they have it passed into law, everything changes and their law is ineffectual and outdated. Even their moratoriums are becoming obsolete as a weapon of oppression. A recent case just argued before the US Supreme Court, Tahoe-Sierra v. Tahoe Regional Planning Agency will decide just how long and how often a government may legally impose building moratoriums. The state of the law is moving ahead at a much faster pace than SMRR members can fathom. Indeed, SMRR has been caught flat-footed with a number of recent legal decisions, both federal and state. There is looming just around the corner the killer case that will cut away the very foundations of rent control and destroy the entire regulatory system once and for all. Where and when that case will be decided no one knows, but it is clear that it is coming and rent control is going. To keep up with events as they happen, ACTION encourages all of our members to go online to read recent events that occur between our publications. In this way, you will be up to date at all times.

BUDDY, CAN YOU SPARE A DIME

Well, 2002 has started with yet lower interest rates and worsening job opportunities. Everywhere one reads that people are losing their jobs and losing their apartments because they cannot pay their rent. We are clearly in a moment of great incongruity. On the one hand we have sale prices for Santa Monica apartment buildings going through the roof, and on the other hand we have tenants who cannot afford to pay their rent. What can be done to help? Clearly when ever possible Housing Providers (OWNER) should give as much help as possible to those in need. Extensions of time to pay rent, whenever possible, should be granted. However, extensions of time should be documented and signed by the tenant so that the tenant cannot claim that there was an oral agreement to waive rent for some such reason or another. Remember, if you do allow a tenant more than 30 days to pay rent, be sure that the rent check you receive is clearly marked to pay the first missed month, and not the current month's rent. There are so many horrible situations where Owners have allowed extensions of time to their tenants to pay rent, and when finally the tenant starts paying the rent, the tenant indicates on his/her rent check that it is payment for the current month's rent rather than the earliest month missed. In this way, the tenant hopes that the earliest month's rent will be overlooked and become uncollected. An owner can only demand rent for the last 12 months, any uncollected rent for a time period beyond 12 months cannot be the subject of a 3-day notice to pay rent or quit. This is the reward that many owners have received for their good works. A Good Samaritan needs Good Bookkeeping. Be sure that the tenant acknowledges on his/her late rent check that the payment is for the earliest month missed. Finally, don't allow a tenant to fall too many months behind in his/her payment of rent. If the tenant misses too many months' rents, it would be wise to have that tenant sign a move out agreement to leave within a certain date definite. The unkindest cut of all is when a tenant is given a few months to catch up in the rent, and then when the owner finally attempts to evict the tenant for non-payment of rent, the tenant responds with a bogus defense costing the owner more money and time in attorneys fees and court costs. Charity begins at home, but does not have to end there.

REAL ESTATE AND THE ECONOMY IN CALIFORNIA

As reported by the California Association of Realtors, home prices for November 2001 dropped somewhat from the sales for November 2000, but the average sales price of a single family home in November 2001 actually rose some 11% over the November 2000 sale price, and rose 2% over the October 2001 average sales price. Thus single-family home sales are seen to be increasing in value but decreasing in numbers. This column has been predicting that as soon as it is known that Osama bin Laden is dead or captured, the economy will spring to life and then watch out, real estate prices will go through the roof. The Conference Board predicts that the economy will recover in early 2002. The Conference Board stated that as of December 28, 2001 its Consumer Confidence Survey showed its Index to have rebounded to 93.7 up from 84.9 in November 2001. According to the Board: "The deterioration in current economic conditions appears to be reaching a plateau, led by a stabilizing employment scenario," says Lynn Franco, Director of The Conference Board's Consumer Research Center. "Consumers' short-term optimism is no longer at recession levels, and the upward trend signals that the economy may be close to bottoming out and that a rebound by mid-2002 is likely." Consumers' appraisal of current economic conditions was slightly more positive than last month. Consumers rating conditions as "good" increased from 16.8 percent to 17.0 percent. However, those rating current business conditions as "bad" rose from 20.7 percent to 21.7 percent. Those reporting jobs were plentiful edged up from 17.5 percent to 17.6 percent. Those claiming jobs were "hard to get" declined from 22.7 percent to 21.8 percent. Consumers are more optimistic about economic prospects six months from now. Those expecting an improvement in business conditions increased from 17.7 percent to 22.2 percent. Those anticipating conditions to worsen declined from 16.9 percent to 11.6 percent. The employment outlook was also more positive. Currently, 16.1 percent of consumers expect more jobs to become available in the next six months, up from 14.4 percent last month. Those expecting fewer jobs to become available decreased from 26.3 percent to 19.3 percent. Regarding income expectations, 20.7 percent of consumers anticipate a gain, down from 22.0 percent in November. What all this means is that real estate prices are just going up and up in 2002. If you want to sell, better to wait until 2nd or 3rd Quarter when prices will be even higher than they are now. If you are looking to purchase, waiting is not going to bring lower prices. However, the market in Santa Monica is not sane. Just because someone will pay outrageous prices for real estate does not mean that you should. Be careful when buying to study the property, its location, size, and potential income.

INTEREST RATES ARE GOING LOWER

Freddie Mac's Primary Mortgage Market Survey found interest rates on 30-year, fixed-rate mortgages for single family homes averaged 6.83 percent for the week ended Jan. 18, down from 7.06 percent the week before. A year ago (January 2001), the 30-year, fixed- rate average was 7.02 percent. The average for 15-year, fixed-rates mortgages for January 18, 2002 was 6.31 percent, down from the prior week's 6.55 percent. A year ago, the 15-year, fixed-rate mortgage averaged was 6.63 percent. This leads us to highly recommend to OWNER that they refinance into a 15 year fixed rate mortgage rather than a 30-year fixed rate mortgage. The savings in the interest rate coupled with the savings in total interest paid over the life of the loan is staggering and not to be missed. Federal Reserve Chairman Alan Greenspan stated in a January 2002 speech that our economy is not out of the woods yet. This leads us to believe that another rate cut may be coming in late January or early February 2002. The interest rate on one-year U.S. Treasury-indexed adjustable-rate mortgages averaged 5.08 percent, down from last week's 5.26 percent. This time last year (i.e. January 2001), the one-year ARM averaged 6.65 percent. The 1-year ARM has not been lower since the week ending Nov. 16, when it averaged 5.06 percent.

THE BOARD HAS CHANGED SOME OF ITS REGULATIONS

On January 10, 2002, the Board in a 3 to 2 vote, adopted new regulations which will have major impact on Owners. The changes are as follows:

1. Unsold Condominiums are Now Controlled
This change deals primarily with TORCA units. If the developer still owns his/her TORCA unit (i.e. it has not sold for the first time as a condominium unit) then the owner many no longer raise the rent to the existing tenant and in addition must roll back the tenant's rent to the rent in effect on May 7, 2002 PLUS however, the general adjustment for September 1, 2001 and the pass throughs of approximately $19.00. Be sure to correctly calculate your property taxes that are included in the pass throughs so as not to mischarge your tenants. In addition, the owner must now start paying registration fees on these unsold condo units to the tune of $11.00 per month, starting January 1, 2002. At the January 10, 2002 hearing many owners and tenants spoke about the folly of re-controlling unsold condos, and predicting that this new regulation would lead to these units being sold by the current owners. Once sold, the new owner will either raise the rents or move into the unit, and the unit will be lost to the rental market forever. There are about 1,000 unsold condo units in the city, so the loss of these units will be a tragic loss for the rental stock. The Board, was divided on this issue, two of the commissioners voiced their desire to study the regulation further before adopting it. Three commissioners were ready to vote the SMRR party line and did. The Board was very generous with their time, however allowing all who wanted to speak ample time to do so. The Board's action is a reversal of their previous vote some four years earlier when they voted not to control unsold condo units. Since then however, the Board membership has changed. Staff was equally anxious for the Board to adopt these new regulations imposing control (i.e. registration and payment of fees). The Staff had already mailed out letters to the condo owners (on or about January 3, 2002) demanding the immediate payment of fees and the registration of the unsold units, just as if the Board has already adopted the regulations. Maybe Staff knew something about the Board's predisposition that the general public did not. The new regulations go into effect on or about January 28, 2002 (depending on when they are published). Therefore, the payment of January 2002 fees are clearly illegal. ACTION is considering the filing of a class action lawsuit to recover these illegally collected fees.

2. Redefinition of Market Rate Rent
The thing that the Board hates the most, is Owners making deals with tenants on the rent they need to pay. The Board has adopted a regulation which states in part: "If the rental agreement provides for a period of 'free' rent within its initial term, the base rent shall be reduced to account for the 'free' period." Not clear is what the "initial' term of a month to month agreement is, and what exact computation is to be done to "reduce" the base rent. Does this mean that the base rent will be the average of all rents called for in the rental agreement? Of course such a regulation violates the state Costa Hawkins law and will be held illegal by the courts, but the Board is counting on a year or two delay before that happens. The work around, even to the Board's adopted regulation, is as follows. Establish the first month's rent higher than the tenant wishes it to be, with the added provision that if the tenant vacates at any time within 12 months, the tenant will get a move out bonus which equals the sum of the monthly rent paid over the specific amount that the tenant wished to pay. If the tenant does not vacate, then the rent stays at the higher rate. If the tenant does vacate then the owner is allowed to set the new rent at market. The owner would then pay the bonus to the vacating tenant. In this procedure, there is no discount in the tenant's rent while the tenant is in possession, and thus nothing to "average" under the Board's new regulations.

3. Requirements for Registration of New Market Rate Rents
The Board requires the registration of newly established market rents after vacancy. The regulations have been around for awhile. However, remember that the failure to register these newly established rents does not result in any major penalty. Thus if Owners decides that registering the newly established rents is not in their best interests then they should not register the rents at all. An example of when an owner may not want to register would be after coming back into the rental market after an Ellis. It appears that the Board's current position is to target returning post Ellised property owners with lawsuits when the owner first registers the market rate rent of the unit. The better move would be for owner to wait until the unit turns over two times before registering the new rent. Remember that Costa Hawkins preempts local Board regulations, and thus the Board cannot reduce the initial market rent even if the owner refuses to register that rent.

KEEPING UP WITH THE JONES AND OTHER CASES

Since last we wrote there have been a few interesting cases decided by our California Courts. Here they are:

Allen v. Smith, 2002 WL 4602 (Cal.App. 4 Dist. 1/2/02). This case is for the Real Estate Brokers amongst us. It holds that one cannot take a CAR form purchase agreement and modify it into a option to purchase agreement. In this case, the seller attempted to increase the 3% liquidated damages limitation on purchase of a single family home by calling the required $80,000 additional deposit as an "option." However, the court would not allow that modification because of the rest of the wording in the form purchase agreement. Everyone should be very careful when buying real property and using the CAR purchase agreement form that they read it very carefully and clarify any ambiguities that the pre- printed language might cause.

White v. Contreras (2nd District). The Court held that a landlord owes a duty to install screens or other protective devices to protect against a child tenant falling out of a window in the leased unit because the landlord stated he would replace a window screen, and also prohibited the tenant from making any repairs or alterations to his unit. Relying primarily on two decisions— Amos v. Alpha Property Management (1999) 73 Cal.App.4th 895 and Pineda v. Ennabe (1998) 61 Cal.App.4th 1403-defendants argued that (1) they did not have a duty to install window screens because as a matter of law screens are not intended for safety purposes; and (2) they did not owe plaintiff a duty to install a screen or prevent the accident and were not responsible for the accident because it occurred through his parents' carelessness. The court disagreed stating: The risk of small children falling out of windows is obvious and highly foreseeable. "Surely anyone familiar with young children, especially two-year-old, is aware of their propensity to climb and can appreciate the allurement of an open window to a toddler. If by the terms of the lease the landlord agrees to repair defective conditions he is, of course, obliged to do so. The failure to do so may result in tort liability, not just contractual liability. A special promise by the landlord to repair, either in the lease or otherwise supported by consideration, may make him liable for injuries to the lessee or the lessee' s invitees resulting from his negligent failure to repair. Whatever the purpose of window screens, it appears to defy reality to conclude that window screens offer no protection against a child' s fall from an otherwise uncovered window. What this means to all of us, is that it is incumbent upon owners to do routine inspections, be sure all windows have firmly installed screens or bars in place.

Ortega v. Kmart (California Supreme Court). While this case concerns commercial properties, it probably will soon be applied by other courts to residential properties. It holds that an owner needs to do inspections or suffer the consequences. Specifically, the court holds that the owner' s failure to inspect the premises within a reasonable period of time is sufficient to allow an inference that the unsafe condition was on the floor long enough to give the owner the opportunity to discover and remedy it. While the owner must have actual or constructive notice of the unsafe condition, if the owner fails to conduct reasonably frequent inspections, the owner will be held to have known about the condition and to be responsible for it. Owners must inspect their properties (common areas as well as inside tenant's apartments) on a routine basis. It is recommended that the owner establish a routine inspection schedule to walk inside and outside of all units on the owner's property looking for dangerous conditions.

Mellinger v. Ticor Title Insurance (First District). For all you owners who have had fights with your neighbors about encroachments onto your land or from your land onto your neighbors, this case may be a help. It holds that a title company is required to provide a defense and perhaps pay damages for loss of "marketable title" due to encroachments. Normally, the title company will refuse to defend any claim which is related to encroachments under the theory that said encroachment only reduces the value of the property, but does not effect the marketability of the title. Mellinger holds that Marketable Title "must be so far free from defects as to enable the holder, not only to retain the land, but possess it in peace, and, if he wishes to sell it, to be reasonably sure that no flaw or doubt will arise to disturb its market value." Under this test whether an encroachment effects the marketability of title is a question for the jury, and thus requires the insurance company to step in and protect the property owner. So the next time that back yard fence or tree becomes a problem, don't forget to call your title insurance company.

Toyota Motor v. Williams (US Supreme Court). This case redefines "disability" as that term is used in the Americans with Disabilities Act of 1990 (ADA), 42 U.S.C. § 12112(b)(5)(A). Under the new test to determine whether someone is disabled, one must ask if that person' s impairments prevent or restrict one from performing tasks that are of central importance to most people' s daily lives. This case applies to housing as well as to employment situations and is a positive step in protecting the rights of property owners. Many tenants attempt to avoid the no pet restrictions in their lease by stating they are disabled and they need the pet to help them cope with their illness. Under Toyota Motor, it will be harder for someone to show disability and to show that a pet is the cure.