Court Holds that a “Red Tag” Does Not Terminate a Lease for the Property

In Erlach v. Sierra Asset Servicing, LLC, a California appellate court held that a County “red tag” Notice of Code Enforcement does not terminate a lease. In Erlach, Mary Schwann owned a residence in which she leased several rooms to various tenants. Plaintiff leased one bedroom, one bathroom and the common areas. A written agreement provided that plaintiff would pay Ms. Schwann a specified sum in advance for eight months. After seven months, Schwann had the gas and electric services cut off. She then cut off the water. The other tenants had not paid their rent. Thereafter, a code-enforcement inspector posted a “red tag” at the property because of the lack of utilities. Within days, Sierra Asset Servicing acquired the property at a foreclosure sale.

Sierra agreed to let plaintiff stay for one additional month beyond the lease term by applying his security deposit for that month. Nevertheless, Sierra removed carpets, flooring, and the kitchen and bathroom fixtures from the property. By the end of the extended term for which the tenant had paid rent, the defendant had not restored the property for occupancy. When the tenant left, the red tag was still posted at the property

Plaintiff filed a lawsuit against Sierra and Schwann alleging numerous claims. Defendant demurred to all of the claims. The court sustained the demurrer without leave to amend and dismissed the complaint finding that there was no landlord-tenant relationship because of the red tag. The court reasoned that when the defendant took over the property, the lease was void and therefore, plaintiff was a squatter with no legal rights. Plaintiff appealed. A court of appeals reversed and remanded holding that the red tag did not terminate the lease. The court noted that Health and Safety Code §17910, et. seq. uses the word “tenant” to set out tenant’s rights and remedies after a building is red tagged. Therefore, the court inferred that the legislature contemplated that a tenant still had rights when a building could not be occupied.

Shannon B. Jones, Partner, sbj@sbj-law.com