The California Civil Code regulates the types of terms that a residential lease can include, and states that public policy renders certain provisions void. A recent ruling by the California Court of Appeals, Second District in Williams v. 3620 W. 102nd Street, Inc. held that an arbitration clause in a residential lease is unenforceable based on public policy. California real estate investors considering investments in residential properties should be aware of how California law can affect their rights and limit the types of provisions they may include in lease agreements. This includes a legal requirement that residential tenants have access to the courts.
Williams v. 3620 W. 102nd Street, Inc.
Arbitration Clauses in Contracts
Arbitration is a type of alternative dispute resolution in which a neutral third party, the arbitrator, reviews the arguments and evidence of each side of a dispute. The arbitrator then makes a recommendation or ruling. If the parties agreed in advance to binding arbitration, then the arbitrator’s decision is final. Otherwise, the arbitrator’s ruling is more like a recommendation that neither party is obligated to accept.
The main benefits of arbitration are that the process tends to be much faster and less expensive than taking a case to trial. While a court might not have room on their docket for months or longer, an arbitrator could hear the case much sooner. This saves both parties time and the cost of protracted litigation.
The main downside of arbitration, in the context of real estate and landlord/tenant disputes, tends to affect lessees much more than lessors. For real estate investors and property management companies, disputes with tenants are a regular part of business. They may develop long-standing relationships with certain arbitrators as a result. This can lead to concerns over bias, since an arbitrator might develop sympathy for the individual or business who routinely hires them. Since arbitrators usually operate as private businesses, they might worry that too many adverse rulings would cost them business.
None of this is to say that arbitration is inherently biased towards the side of a dispute that has the resources to use an arbitrator’s services on a regular basis. The concern over bias, however, has shaped California law in ways that affect real estate investors.
California Public Policy
The California Civil Code regulates the lessor/lessee relationship, providing remedies for both parties should the other party breach their duties. This might include a lessor’s right to evict a lessee that does not pay rent, or a lessee’s right to recover damages from a lessor that fails to maintain the property in a livable condition.
Section 1953 states that certain provisions in residential leases are “void as contrary to public policy.” This includes any clause that “modif[ies] or waive[s]” a tenant’s “procedural rights in litigation in any action involving his rights and obligations as a tenant.”
Arbitration Clauses in California Residential Leases
The recent decision from the California Court of Appeals considered whether arbitration clauses in residential leases go against public policy under § 1953. The lease agreements at issue in the lawsuit included a provision stating that the lessee and lessor agreed that any “dispute shall be submitted to Arbitration instead of litigated in Court.” It further stated that both parties “knowingly and voluntarily waive any constitutional right” to trial before a judge or jury.
The court held that the arbitration clause is void under § 1953. In making its ruling, the court cited two earlier California appellate court decisions from 2003 and 2020, which held that residential tenants cannot waive their right to a jury trial in a lease agreement.