DLI Properties, LLC v. Hill (2018): Post-Foreclosure Tenant Protection Statute Inapplicable To Successor Owners Who Create New Leases with Existing Tenants

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In DLI Properties, LLC v. Hill, the Appellate Division of the Superior Court of Los Angeles parsed a state statute requiring certain notifications by new landlords to their tenants, affirming an unlawful detainer judgment for the landlord.

DLI Properties, LLC acquired a property in foreclosure that was tenant occupied. Generally, foreclosing on an earlier interest (like a deed of trust) will eliminate interests that are later in time (like a lease). But California has specific statutory protections for tenants facing foreclosures. California also requires successor owners to notify existing tenants of information how they can pay rent and how they may serve notices relating to the tenancy and civil process. These requirements (found in Civil Code 1961, et seq.) are somewhat self-policing for successor owners, who cannot serve a rent demand notice to initiate an unlawful detainer, based on rent owed during any period of non-compliance.

DLI Properties, LLC purchased the subject property in foreclosure. It hired Strategic Property Management, Inc. to manage the property, and Strategic entered into a new lease agreement with the tenant (Hill) on the date of sale. Hill had become delinquent in the payment of rent, and DLI served a three-day notice to pay rent or quit, and then filed an unlawful detainer action. Before the jury returned a verdict in favor of DLI (finding that it complied with the unlawful detainer procedures and that Hill was not entitled to offsets for habitability issues), Hill moved for nonsuit, then directed verdict, then JNOV on a single issue: failure to comply with Section 1962, et seq.

Section 1962(c) provides: “The information required by this section shall be kept current and this section shall extend to and be enforceable against any successor owner or manager, who shall comply with this section within 15 days of succeeding the previous owner or manager. A successor owner or manager shall not serve a notice pursuant to paragraph (2) of Section 1161 of the Code of Civil Procedure or otherwise evict a tenant for nonpayment of rent that accrued during the period of noncompliance by a successor owner or manager with this subdivision. Nothing in this subdivision shall relieve the tenant of any liability for unpaid rent.”

The Appellate Division upheld the trial court ruling, noting the distinction between “owners” and “successor owners” under the statute. The California Legislature was understandably concerned about the treatment of existing tenants who do not necessarily know who succeeds to their lease contracts following foreclosure. (In fact, this concern guided the California Supreme Court’s recent analysis of post-foreclosure eviction notices in Dr. Leevil, LLC v. Westlake Health Care Center.)

While DLI purchased at foreclosure, its property manager executed a new lease, and this rendered them “owner” under the statute: “This disparate treatment of owner and successor owner/manager for the same dereliction of their statutory duty indicates the prohibition is meant to specifically target successor owners and their managers to address a danger posed by the change in ownership. There is a greater likelihood a tenant would not be aware of relevant information concerning a successor owner/manager rather than an owner with which he enters into a lease agreement. Therefore, the prohibition against evictions encourages and incentivizes a successor owner/manager to disclose such information.”

Ultimately, where the owner (via its property manager) entered a new lease with an existing tenant, it created a direct relationship with the tenant, which did not resemble any of the Legislature’s concerns in enacting the statute.

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