Failure of a Tenant to Obtain Rental Insurance Ruled a Material Breach of the Rental Agreement

In a recent appellate court decision (Boston LLC v. Juarez, 240 Cal.App.4th Supp. 28), the appellate court ruled that a tenant’s failure to timely obtain rental insurance following service of a three day notice to cure covenant or quit was a material breach and sufficient to evict the tenant.

Background of the Case

In 1999, Mr. Juarez rented an apartment unit from Boston LLC. The rental agreement provided at paragraph 11 that: “Insurance: Owner does not insure Renter for any personal injury or property damage including, but not limited to, that caused by the act or omission of any other renter or third party, or by any criminal act or activity, war, riot, insurrection, fire or act of God. Renter shall obtain and pay for any insurance coverage necessary to protect Renter or Renter’s property from any loss or expense that may be caused by such persons or events.” When the tenant failed to timely obtain rental insurance in 2014 following service of a three day notice to perform covenant or quit, the landlord filed an action for unlawful detainer.

Argument at Trial

At trial, Plaintiff relied on paragraph 11 but also on one of the opening clauses of the rental agreement, which provided, in relevant part, “Owner and Renter agree that Renter’s performance of and compliance with each of the terms thereof, … constitute a condition on Renter’s right to occupy the Premises and any failure of compliance or performance by Renter shall allow Owner to forfeit this agreement and terminate Renter’s right to possession.” Plaintiff argued that since, pursuant to this forfeiture clause, “any failure of compliance or performance” by defendant constituted grounds for eviction, the materiality of the breach or defendant’s substantial performance with the agreement was irrelevant. Judgment for possession was granted to the landlord.

The Appellate Court's Ruling

On appeal, Mr. Juarez contended the judgment should be reversed because he should have been allowed to present evidence that his breach of paragraph 11 of the agreement was not material.

The appellate court ruled that the unlawful detainer action in the present case was based on Code of Civil Procedure section 1161, subdivision (3), due to defendant’s “failure to perform … conditions or covenants of the lease or agreement under which the property is held….” Even though not specifically provided by this section, the court held that case law requires that a breach be material in order to justify an unlawful detainer action. The court held that whether a particular breach will give a plaintiff landlord the right to declare a forfeiture is based on whether the breach is material. “The law sensibly recognizes that although every instance of noncompliance with a contract’s terms constitutes a breach, not every breach justifies treating the contract as terminated. Following the lead of the Restatements of Contracts, California courts allow termination only if the breach can be classified as ‘material,’ ‘substantial,’ or ‘total.’”

In the present case, paragraph 11 of the rental agreement required that Mr. Juarez obtain rental insurance. If there had been no other provision regarding the materiality of breaches in the agreement, the question of whether the breach was material would have been one for the trier of fact to decide. But, the relevant part of the forfeiture clause in the parties’ rental agreement provided, “Owner and Renter agree that Renter’s performance of and compliance with each of the terms thereof, … constitute a condition on Renter’s right to occupy the Premises and any failure of compliance or performance by Renter shall allow Owner to forfeit this agreement and terminate Renter’s right to possession.” (Italics added.) The court rule that the clear and unambiguous terms of this clause permitted forfeiture of the agreement and termination of defendant’s right to possession based on any breach, regardless of the breach’s importance in relation to the entire agreement. Pursuant to the clause, evidence concerning the breach’s materiality was irrelevant; hence there was no need for a jury to be instructed on the issue, or have it render special verdicts.

Mr. Juarez also argued on appeal that the forfeiture clause was invalid because it violated public policy. Specifically, the tenant argued the forfeiture clause violates public policy because it would allow evictions based on breaches regardless of their severity, meaning tenants could be evicted for violating covenants such as annoying other tenants. Mr. Juarez claimed that allowing evictions for annoying conduct such as having a crying newborn or playing “displeasing music” would violate public policy, rendering the forfeiture clause invalid. The appellate court disagreed and held that the clause is not invalid as against public policy. “The present case did not involve a breach of the character or magnitude as those propounded by defendant. In evictions based on three-day notices to perform or quit, as in the present case, breaches would only constitute valid grounds for eviction if they were not cured within the notice period, meaning tenants could not be evicted based on single incidents of annoying their neighbors.”

Takeaway:

This case is relevant to remind landlords and property managers to review their form rental agreements and leases to confirm that they contain two important clauses that were the subject of the Boston LLC v. Juarez case: (a) the failure of compliance or performance by tenant will result in forfeiture; and (b) the obligation of the tenant to obtain and maintain rental insurance.

White and Bright's attorneys specialize in real estate and business litigation. Partner Michael Friedrichs often represents creditors in debt collection matters and parties in various forms of real estate litigation. Contact Mr. Friedrichs to find out more about cases like this or to obtain assistance with landlord/tenant issues.