A CLEARLY WORDED FORFEITURE CLAUSE IN A RESIDENTIAL LEASE MAY NOT BE ENFORCEABLE

An important question of law — whether a tenant’s breach of a residential rental contract, regardless of the breach’s materiality or impact on the landlord, justifies the landlord forfeiting the agreement and terminating tenancy – was recently decided by the Court of Appeal for the Second District of California, in Boston LLC v. Juarez, 2016 Cal. App. LEXIS 146 (Cal. App. 2d Dist. Feb. 25, 2016.

In that matter, Boston LLC had rented an apartment to Juan Juarez subject to the Los Angeles Rent Stabilization Ordinance (LARSO). The rental agreement contained a forfeiture clause for any failure of compliance or performance by Juarez and a provision which required Juarez to obtain insurance coverage for personal injury or property damage.  After having failed to obtain this insurance for 15 years, Boston gave Juarez a three-day notice to perform or quit.  Boston served its three-day notice to quit on Friday, February 14th, the beginning of a three-day weekend for President’s Day, a legal holiday, which was on Monday, February 17th.  Juarez obtained insurance on February 21st, shortly after the expiration of the three-day period.

Boston then sued Juarez for unlawful detainer in the Los Angeles Superior Court, contending that the forfeiture clause allowed it to terminate Juarez’s tenancy for any breach, regardless of the breach’s materiality.  Juarez argued, among other things, that the law requires a material breach to justify forfeiture and that he should be allowed to present evidence that his breach was immaterial.  The court agreed with Boston that the forfeiture clause made any breach, regardless of materiality, grounds for termination of tenancy.  The parties stipulated to a bench trial and the court ruled that Juarez’s failure to obtain insurance within the three-day notice period constituted a breach of the lease and thus Boston could forfeit the lease.  The trial court did not make a determination about the breach’s materiality.  Juarez appealed to the appellate division of the Superior Court, but it affirmed.

Juarez then appealed to the Appellate Court, arguing that a tenant’s breach must be material to justify a landlord’s forfeiture of a rental agreement.  The court agreed with Juarez, holding that a tenant’s breach must be material to justify forfeiture. In this case, the Court determined that, because the intended purpose of the insurance coverage was to protect the interests of Juarez, the tenant, not Boston LLC, the landlord, Juarez’s failure to obtain the coverage could not have harmed Boston and accordingly was not a material breach constituting grounds for forfeiture.

The Court did not address whether there are any circumstances under which a landlord can seek forfeiture of a rental agreement based on the tenant’s failure to obtain insurance.  Perhaps this is because this case is limited to a residential lease agreement subject to the LARSO, which imposes certain limitations and restrictions landlords are not otherwise subject to under usual freedom to contract purposes.  (L. A. Mun. Code. § 151.01).  However, in a commercial situation where a tenant fails to obtain insurance in compliance with the terms of its lease, the lack of such insurance could be problematic in the event of a loss which prevents the tenant from continuing its business and meeting its obligation to pay rent which could seemingly be construed to be a material and/or substantial breach.

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