Facts: A tenant enters into a residential lease agreement with a landlord for a bedroom in a single family residence (SFR), paying all rental fees in advance. Other rooms are leased to additional tenants individually. After the other tenants of the property fail to pay rent, the landlord shuts off utilities to the entire property. The local government red-tags the property and the tenant is forced to temporarily vacate. The property is sold at a foreclosure sale and the owner-by-foreclosure allows the tenant to occupy the unit for the remainder of their lease term after the owner-by-foreclosure restores the property to a habitable state. Before the property is completely restored and utilities are reactivated, the owner-by-foreclosure invites the tenant to return. Upon retaking possession, the tenant discovers the restoration is not complete and the property is still red-tagged.

Claim: The tenant seeks money losses from the owner-by-foreclosure, claiming the owner-by-foreclosure breached the warranty of habitability since, as the new landlord, the owner-by-foreclosure is required to maintain the property in a safe and habitable condition and failed to do so.

Counter claim: The owner-by-foreclosure claims they are not obligated to maintain or restore the property for the tenant since the tenant’s lease was terminated when the property was red-tagged by the local government.

Holding: A California court of appeals held the tenant was entitled to money losses from the owner-by-foreclosure since the tenant’s lease was not terminated when the property was red-tagged and, thus, the owner-by-foreclosure breached the warranty of habitability by failing to ensure the property was in a habitable condition for the tenant. [Erlach v. Sierra Asset Servicing, LLC (June 10, 2014)_CA4th_]

Editor’s note — An owner-by-foreclosure of a rental property needs to correct outstanding code violations caused by the previous landlord. Here, the owner-by-foreclosure was required to restore the property to a condition fit for occupancy, which includes functional utilities.