Hello everybody. Four topics (other than COVID-19 laws) continue to be in the forefront of our legal news.  So instead of addressing one subject in depth as most of my articles in this column do, I will briefly discuss recent developments in four specific areas of law, namely: Arbitrations with Resident Managers, Arbitrations in Residential Leases, Jury Trials, and Attorney’s Fees, all in connection with the ownership or management of apartment buildings. 

Arbitrations with Resident Managers

At issue is whether an arbitration provision in an employment contract between an owner or management company and its resident manager is enforceable.  In other words, can the employer of a resident manager compel the manager to arbitrate, rather than litigate, an employment dispute arising between them if the written agreement requires arbitration?  

The answer is:  We are still waiting to hear from the federal court.

Here’s the background:  On October 10, 2019, Governor Gavin Newsom signed into law California Assembly Bill AB51.  That law prohibits employers from requiring employees to arbitrate employment claims, making California the first state to prohibit predispute mandatory arbitration of such claims.  

However, in February 2020, a federal court judge ruled that federal law preempts (i.e., supersedes and rejects) California law, and that, specifically, federal law permits employers to require, in their employment contract, that labor disputes are to be decided by arbitration rather than in court by a judge or jury.  That judge’s ruling is now on appeal before the federal 9th Circuit Court of Appeals.  

We expect a ruling by the federal Court of Appeals very shortly.  Regardless of how it rules, the losing side is likely to petition the United States Supreme Court to take up the case and issue a final determination.

The takeaway for AOA members is that the enforceability of a provision in an employment contract with a resident manager remains in limbo—but time will tell.

Residential Leases Can No Longer Require Arbitration

Recently, the California Court of Appeal ruled that public policy prohibits arbitration provisions from being included in residential leases or in month-to-month rental agreements.  The case is Williams v. 3620 W. 102nd Street Inc.  Per that case, landlords cannot compel their tenants to arbitrate any claims the tenants may have against the landlord.

Fortunately, AOA’s revised lease agreement (Form No.101), as well as its prior version, does not include any arbitration provision.  So, it is in conformity with the Williams ruling.  

Unfortunately, some rental agreements published by other organizations or drafted by attorneys do include a requirement that all landlord/tenant disputes (excluding, perhaps, Unlawful Detainer evictions) must be submitted to arbitration.  Those leases are contrary to California law.

The reason many owners and management companies prefer to arbitrate disputes with tenants rather than litigate them in court is that, as landlords, they expect that an arbitration award (particularly if it favors the tenant) will be more restrained, and award the tenant less damages, than if the same controversy is submitted to a courtroom jury for decision.  

That is apparently what the tenants thought in the Williams case.  There, five tenants sued for damages in connection with bed bugs, breach of habitability, negligence and other claims.  The landlord petitioned for arbitration, but the trial court and then the Court of Appeal denied arbitration even though the lease contained a 3-page arbitration agreement. 

The appellate court explained that it is against California’s public policy for either a landlord or a tenant under a residential lease to be compelled to arbitrate.

But, hope still remains for landlords under federal law.  Generally speaking, federal law preempts (i.e., overrides) California law if California law is inconsistent with rights guaranteed by federal law.  

In 1985 the United States Supreme Court held that the rental of real estate (which would include duplexes as well as multi-family apartment buildings) affects interstate commerce. (Russel v. U.S., 471 U.S. 858.) Then in 1987, the U.S. Supreme Court held that the Federal Arbitration Act (“FAA”) compels arbitration if a written provision in the contract affecting interstate commerce provides for arbitration. (Perry v. Thomas, 482 U.S. 483.)

Thus, it appears that if the arbitration agreement states that it is subject to the FAA, an arbitration provision in a lease would be enforceable under federal law.

Jury Trials Cannot Be Waived in Residential Leases

Many residential lease agreements provide that both the landlord and tenant waive any right to have their controversies tried by jury.  Wisely, AOA’s revised residential lease (Form No. 101, as well as its prior version) does not contain such a waiver.

Eighteen years ago, the California Court of Appeal first held that jury trials cannot be waived in disputes regarding the tenant’s rights as a tenant because the right to a jury trial is a “procedural” right.

Fast forward to the second half of 2020 when the Williams case reaffirmed that residential leases cannot lawfully compel a tenant to waive his/her procedural rights against the landlord, which includes the right to a jury trial.  Here is the one-sentence (but confusing) basis for that ruling:

“Any provision of a lease or rental agreement of a dwelling by which the lessee agrees to modify or waive…the following rights shall be void as contrary to public policy…[including] his procedural rights in litigation… involving his rights … as a tenant.”  California Civil Code Section 1953(a)(4).

Okay, wow!  That sentence is difficult to understand.  But in plain English, the statute says a residential tenant cannot waive his or her procedural rights against a landlord, and having a jury trial is a procedural right.  

Thus, the California Court of Appeal has reaffirmed that residential leases are not allowed to include any provision by which a tenant waives the right to a jury trial.

The takeaway is that when signing new leases, be sure that there is no sentence waiving a jury trial.  If one is present, the landlord should delete it before presenting it to the tenant for signature.

Attorney’s Fees in Leases and in 

Resident Manager Employment Contracts

So far, no law restricts a landlord from including an attorney’s fees clause in a rental agreement which provides that the prevailing party in the litigation shall be awarded its reasonable attorney’s fees.  

In fact, current law even allows the agreement to set a cap on the amount of the fees that the landlord or tenant can recover from the other.  For example, AOA’s lease (Form No. 101) sets a limit at $500.00.  

On the other hand, in a resident manager employment contract where the employee sues for wages, current law allows only the manager to recover his or her fees in litigation or arbitration even if the employer wins.   

There is one tiny, but rare, exception to that general rule.  The exception is that if the court finds that the employee brought the lawsuit in “bad faith,” then the employer can be awarded attorneys’ fees against the employee. However, I hasten to say that in the 35+ years that I have represented employers of their on-site managers, I have never once seen a manager’s lawsuit brought in “bad faith.”

Of course, I have defended numerous claims and lawsuits in which the employee had a very weak case for the recovery of wages.  But “weak” and “bad faith” are worlds apart under the law.  

Always, if a lawyer is going to file suit on behalf of a manager for unpaid or underpaid wages, he/she will have some good faith belief that action is warranted.  That belief inures to the benefit of the manager and negates the manager’s “bad faith” in pursuing the lawsuit.  

Even a slim belief in the credibility of the case is sufficient to disallow attorneys’ fees to an employer even if the employer defeats all the manager’s claims for wage recovery.

The Legislature’s rationale for the general rule that allows only the employee to recover fees is that the State wants to encourage, rather than dissuade, employees to file suit for unpaid wages if they think they may have a claim.   If an employee believes he or she might have to reimburse the employer for the employer’s attorney’s fees if the employer wins, then the exposure for having to pay the employer’s substantial attorney’s fees if the employee loses may deter the employee from filing any suit for wages.

Incidentally, the law allows a prevailing employee to recover attorney’s fees from the employer even if no attorney’s fees clause is contained in the employment contract.  In other words, even without any attorneys’ fees provision in the contract, statutory law still allows the manager to recover his/her fees from the employer.

That law is different between a landlord and tenant.  In most instances (there are some exceptions), if no attorney’s fees provision is contained in the lease, then neither party, regardless of who is the prevailing party, can recover attorney’s fees for breach of the rental agreement

Suggestions

To conclude, here are my suggestions:

  • Generally, it is best not to include a provision in a residential lease compelling a tenant to arbitrate disputes arising out of the rental agreement.  (Note to AOA members who are attorneys: be mindful of the right to compel arbitration under Civil Code Section 1942.1.)
  • With respect to arbitrations with resident managers, until the federal court issues its decision as to whether California’s law barring an employment contract from compelling arbitration, it is probably best not to include such a provision in the contract.  And for many other reasons, arbitration with a resident manager might not be prudent, but my reasoning for that is beyond the scope of this article.
  • Definitely, it is best not to include a provision in any residential lease compelling a tenant to waive his or her right to a jury trial.  
  • Generally, it is best in a residential lease for the landlord to strike out any attorney’s fees provision, or at least limit the amount of damages the prevailing party can recover.  My reasoning is that if the landlord wins the case, the likelihood of the landlord being able to collect attorney’s fees from the tenant is very low.  Indeed, the tenant may be judgment proof or file bankruptcy.  On the other hand, if the tenant wins, almost always the tenant will be able to collect from the landlord, such as by recording the judgment so as to place a lien against the apartment building, followed by foreclosure.

 

Dale Alberstone is a prominent real estate attorney who has specialized in real property and resident manager law for the past 40+ years.  He also serves as a mediator of real estate disputes and is a former arbitrator for the American Arbitration Association.  

Mr. Alberstone has been awarded a 5-Star AV rating from Martindale-Hubbell, the 134-year-old national rating service of attorneys.  A 5-Star AV rating is the highest possible rating bestowed and reflects an attorney who has reached the heights of professional excellence and who is recognized for the highest levels of legal expertise, communication skills and ethical standards.

The foregoing article was authored on July 1, 2021.  It is intended as a general overview of California law only and may not apply to the reader’s particular case.  Readers are cautioned to consult a lawyer of their own selection with respect to any particular situation.

Questions of a general nature are warmly invited.  Address correspondence to Dale S. Alberstone, Esq., ALBERSTONE & ALBERSTONE, 269 S. Beverly Drive, Suite 1670; Beverly Hills, California 90212, or phone: (310) 277-7300.