What California Real Estate Investors Should Know About Residential Leases

Investing in real estate involves far more than just buying and selling land. A real estate investment can consist of a complicated web of assets, obligations, and contractual relationships. This latter category is crucially important for California real estate investors to understand, since the duties created by contracts can have far-reaching effects. Leases are a type of contract in which the owner of real estate (the “lessor”) allows someone (the “lessee”) to use that real estate as their home or for business purposes. A lessor has multiple duties under a typical lease agreement, and California law imposes numerous additional obligations on lessors in residential settings.

What Is a Lease?

A lease is a contract between a lessor and a lessee. According to the statute of frauds, a lease agreement must be in writing. It is possible—but generally not advisable—to have an enforceable oral agreement for a month-to-month lease.

The lessor provides the exclusive use of the leased property, and the lessee pays rent. If either party fails to fulfill their obligations, they may be liable to the other party for breach of the lease. California lawmakes a distinction between residential and commercial leases. It generally imposes more restrictions on lessors in residential lease agreements.

Common Features of Most Leases

A few features are common to most lease agreements:

– Rent:  A lessee is generally obligated to pay rent in some form to maintain a lease agreement.

– Security deposit:  Lessors often ask for a deposit, which they should hold in escrow to cover the cost of damage to the leased property by a lessee.

– Duty to maintain property:  Lessors generally have a duty to make all required mortgage and tax payments on leased property, and to make whichever repairs are their responsibility under the terms of the lease.

– Duty to mitigate damages:  If a lessee breaches the lease by moving out early and refusing to pay rent for the remainder of the lease term, the lessor must make reasonable efforts to find a new lessee before seeking to hold the original lessee liable for the full amount of rent owed. For example, if a lessee signs a one-year lease with a monthly rent of $1,000 but moves out after six months, the lessor cannot automatically hold the lessee responsible for the remaining six months of rent (i.e., $6,000) if they can easily re-let the property. The lessee’s liability, under the duty to mitigate, is for whichever portion of the remaining lease period the property cannot be re-let.

Residential Leases in Particular

Since residential leases involve a person’s or family’s home, California law imposes a substantial number of protections for lessees—and obligations for lessors.

State and federal laws, along with local ordinances in many California cities, prohibit discrimination in housing on the basis of factors like race, religion, or disability. This includes restricting the availability of rental properties to any protected category of people or refusing reasonable accommodations to a lessee with a disability.

California law also restricts how lessors may use a lessee’s security deposit. Acceptable uses include unpaid rent, reasonable cleaning after the lessee vacates the premises, and damages that exceed ordinary wear and tear. A lessor has 21 days after the lessee moves out to refund the security deposit or provide an itemized statement showing how it was spent.