By Phillip Vermont
On July 15, 2011, California Code of Civil Procedures Section 580e was passed by the California Legislature. That section changes the law of short sales for residential properties in two significant ways. First, it expands the protection for a borrower in a short sale scenario, so that if all lenders whose loans are secured by the property approve the short sale, none of the lenders may seek a deficiency judgment against the former borrower.
Also, it adds an additional protection by stating that none of the lenders who approve the short sale may require the former borrower to pay any additional compensation, aside from the proceeds of the short sale, in exchange for the written consent of the sale.
Prior to July 15, 2011, in a short sale situation, the former borrower still had to address a second or third loan, or for that matter, an equity line, recorded against the property. Only the first lender was prohibited from seeking a deficiency judgment.
Next, a significant case was decided in 2011, protecting commercial landlords. In that case, Frittelli, Inc. v. 350 North Canon Drive LP, the California Court of Appeal enforced the landlord’s liability exemptions in a commercial lease at the summary judgment stage of a litigation brought by the tenant alleging that the landlord’s renovation of the shopping center destroyed the tenant’s business. Specifically, the exculpatory clause in the commercial lease had exempted the landlord from liability for breach of lease, breach of the implied covenant of quiet enjoyment, rescission, and ordinary negligence. The lawsuit had arisen from the landlord’s alleged interference with the tenancy in remodeling the shopping center; the clause at issue stated that the landlord had no liability under “any circumstances” for breaches of the lease, and/or negligence for damages or injury arising from any cause in the areas of the shopping center outside the leased premises, or for injuries to the tenant’s business.
The lease was a “net lease”, which the court found ordinarily signals that the parties intended to transfer from the landlord to the tenants the major burdens of ownership of the real property over the life of the lease.
The lease at issue was a standard form agreement entitled “Standard Retail/Multi-Tenant Lease-Net”. While the court’s decision did not specify which form lease was utilized, in the commercial leasing field, it is quite common to use form leases which often contain similar types of exculpatory language.
This is an excellent case for commercial landlords. It is highly unlikely though that these types of exculpatory provisions would apply in a residential lease context.
Conversely, however, a decision of the Court of Appeal in Avalon Pacific – Santa Ana LP v. HD Supply Repair and Remodel LLC reached a decision that was not favorable for the landlord. In that case, the court found that the landlord could not recover costs of repair damages for the tenant’s breach of maintenance and repair obligations when the lease had neither expired nor been terminated. Similarly, the court found that when the lease will be in effect for an extended term, the landlord may only recover waste damages before the lease expiration of termination or a showing of substantial and permanent damage resulting in a reduced market value.
In other words, the court found that the time for a landlord to raise maintenance and repair damages (arising from the condition of the property) is when the lease expired, or was terminated from some action of the landlord, such as in an eviction action.