Summary
After serving a 30-day notice to terminate a commercial lease and filing an unlawful detainer case, a landlord continued to bill a tenant for rent and common area maintenance (CAM) fees, and unconditionally accepted rent payments from the tenant for three months. In reversing the trial court’s judgment in favor of the landlord in Baca v. Kuang, the California Court of Appeal held that the landlord’s acceptance of rent without any objection (or returning the payments to the tenant) created a presumption that the landlord consented to a month-to-month renewal of the lease.
The Upshot
- Baca leased commercial space in Fremont, California to Kuang.
- Baca issued a 30-day notice to terminate Kuang’s tenancy. As of the termination date, Kuang was current on his rent obligations.
- After the termination date, Baca accepted a rent check from Kuang, and then filed an unlawful detainer case against Kuang.
- For three months after the unlawful detainer was filed, Baca (or someone at Baca Properties) continued to invoice Kuang for the rent. Baca accepted three additional rent payments from Kuang and never returned them.
- After a trial, the court entered judgment in favor of Baca, finding that (i) Baca never consented to Kuang’s continued possession of the premises, and (ii) Kuang was obligated to pay the rent as a holdover tenant.
- The Court of Appeal reversed, finding that Baca consented to a month-to-month tenancy by continuing to accept rent from Kuang.
The Bottom Line
A landlord intent on recapturing possession of commercial space cannot simultaneously sue to evict a tenant and continue to accept rent payments without running the risk of being deemed to have consented to the tenant’s continued use and occupancy of the premises.
The commercial lease between Baca and Kuang contained a number of common provisions addressing issues such as holdover (if the tenant remained in possession of the premises after the expiration of the lease term), non-waiver (the landlord’s acceptance of rent is not a waiver of any other breach of the lease by the tenant), and tenant obligations surviving expiration of the lease.
Baca served a 30-day notice to terminate Kuang’s tenancy effective January 31, 2023. As of January 31, 2023, Kuang was current on his rent and was not otherwise in breach of the lease.
Baca filed an unlawful detainer case against Kuang the day after accepting Kuang’s check for February 2023 rent. Baca continued to invoice Kuang for rent, and accepted rent checks from Kuang for March, April, and May 2023. Baca never returned or offered to return any of the rent payments made by Kuang after the termination notice expired. Nor does it appear that Baca sent any kind of “non-waiver letter” stating that the rent was being held without prejudice to Baca’s right to recapture possession of the premises. At trial, Baca testified that her “understanding of the law” was that she could accept rent payments from Kuang and still sue to evict him. Kuang argued that Baca’s acceptance of rent had created a presumption that the lease had been renewed under California Civil Code section 1945, and that Baca had failed to rebut the presumption. Civil Code section 1945 states: “If a lessee of real property remains in possession thereof after the expiration of the hiring, and the lessor accepts rent from him, the parties are presumed to have renewed the hiring on the same terms and for the same time, not exceeding one month when the rent is payable monthly, nor in any case one year.” In December 2023, the trial court entered a judgment awarding Baca possession of the premises and holdover damages.
The Court of Appeal reversed, finding that Baca’s acceptance of the four rent payments from Kuang after the termination notice expired created the presumption of a month-to-month tenancy under Civil Code section 1945. The Court noted that Baca neither returned (or offered to return) any of Kuang’s rent payments, nor informed Kuang that the rent payments were being retained as holdover damages.
The Court of Appeal found that Baca had failed to rebut the presumption of a month-to-month tenancy with Kuang, noting that her subjective intent (i.e., thinking the law allowed her to accept rent and still evict Kuang) was immaterial. The Court of Appeal held that the holdover and non-waiver provisions of the lease also did nothing to rebut the presumption of a month-to-month tenancy in light of Baca’s continued acceptance of rent from Kuang. Having accepted rent from Kuang, the Court of Appeal opined that the only way Baca could pursue an unlawful detainer against Kuang was by serving a new 30-day notice and (without explicitly stating so) not accepting any rent payments. Because she had not done so, the trial court’s judgment had to be reversed.
The Takeaway
The Baca decision is a stark reminder to commercial landlords of the risks associated with accepting rent payments from a tenant after the expiration of a default or termination notice. The use of bank lockboxes or third-party rent payment processors may make it even more challenging for a landlord to claim rent was not “accepted” for purposes of Civil Code section 1945, but if there is any doubt, the rent payments should be returned to the tenant with a non-waiver letter.
Commercial landlords should also be mindful of the lease termination notice requirements for a “qualified commercial tenant” which were created by California Senate Bill 1103, and effective as of January 1, 2025. For more information on SB 1103, see our legal alert here.
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