North 7th Street Associates v. Constante: Rent Demand Notice Will Not Support an Unlawful Detainer Judgment for Possession of Non-permitted Units

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For decades, the Second District Court of Appeals case Gruzen v. Henry (1978) 84 Cal. App. 3d 515 has stood for the proposition that a landlord may not collect “rent” under a residential lease where the premises lacks a certificate of occupancy. These agreements are void, and landlords cannot enforce these void agreements, in the event the tenant stops paying rent, with an unlawful detainer lawsuit for recovery of the putative rental payment obligations. No rent can be owed on a void agreement.

Unfortunately, Gruzen, which reviewed entry of judgment for the plaintiff/landlord for past due rent and possession of the premises, only modified the judgment to strike the money damages. It otherwise allowed the landlord to recover possession. And this has led to some confusion, especially in San Francisco, where these “unauthorized dwelling units” are still somehow considered a valuable part of the City’s rental housing stock, despite their lack of permits or building code requirements to obtain permits.

North 7th Street Associates v. Constante thankfully clarifies the application of the ruling in Gruzen:

“[T]he court in Gruzen was never asked to decide – and did not decide – the issue we address here, namely, whether the three-day notice alleging past-due rent of $739.35 was fatally defective because defendant’s actual rent obligation was zero, and whether defendant was consequently entitled to summary judgment as a matter of law. It is axiomatic that an opinion is not authority for a proposition that was not considered in that appeal.”

In North 7th Street Associates v. Constante, a landlord issued a three day notice to pay rent or quit, based on the tenant’s failure to pay for several months of rent under the oral lease. When the tenant failed to cure the notice, the landlord filed an unlawful detainer lawsuit, demanding the past due rent and possession.

The tenant resisted the lawsuit, filing a motion for summary judgment and advancing “a January 29, 2015 housing inspector’s Notice of Abatement which found, inter alia, that defendant’s unit (in which he had lived for approximately 15 years) had been constructed without a building permit, that it was not authorized to be used as a dwelling, and that no certificate of occupancy was ever issued for it”.

On appeal, the landlord relied on Gruzen to argue that he was nonetheless entitled to possession (and that, essentially, that the tenant could keep the 800 bucks and get out). The Appellate Division of the Los Angeles Superior Court was not convinced:

“[I]f plaintiff could not collect any rent from defendant, then defendant had no obligation to pay any rent to plaintiff. Furthermore, if defendant did not owe any rent to plaintiff, the three-day notice claiming $739.35 in past-due rent was necessarily an overstatement of defendant’s rental obligation, which could only be properly calculated as zero. Since the three-day notice which was the basis for this unlawful detainer action failed to comply with the strict statutory requirements, it was invalid and could not support the action.”

It correctly noted that unlawful detainers are creatures of statute, and if you do not comply with the provision you invoke to get into court, you may not avail yourself of this summary proceeding for possession. Neither could the landlord simply terminate the tenancy, because – while it was not technically a “rental unit” – it is nonetheless covered by the Los Angeles Rent Stabilization Ordinance.

However, it does not follow that a tenant may live in an unpermitted unit, free from both evictions and the obligation to pay rent, indefinitely. In a footnote, the Appellate Division noted, “Plaintiff is, of course, not without a remedy in this circumstance since it may initiate an unlawful detainer to recover possession of the premises from defendant in order to comply with the January 2015 Notice of Abatement. (LARSO, § 151.09A, subd. (11).)”

Ultimately, the Appellate Division decision is only binding on other trial courts, but its interpretation of Gruzen is sound, and its ruling creates a common sense distinction between a tenant’s ability to resist obligations on a void contract and a landlord’s need to recover an unpermitted unit to either legalize it or demolish it.